On electricity, price, efficiency and innovation

On electricity, price, efficiency and innovation

2 Oct 2017

 

 

Original article published on Medium.

 

Energy efficiency of nations, and more importantly, of firms can be related to price, which in turn can also be related to the nature of the energy source. We see that nations with high ratio of renewable energy in their energy grid mix also tend to use more for every unit of economic output than countries with a more conventional grid mix consisting of fossil fuels. We can safely assume that higher energy prices push firms towards improved efficiency, as they want to minimize energy costs [1,2].

 

When looking at worldwide data for energy used in the production of 1 dollar of economic output, we see that considerable improvements have taken place throughout the world. When looking at aggregated data, we see that on average, nations are using approximately 5–7 MJ for every dollar produced within their economies. The trend has furthermore been downwards, and efficiency has been improving [3]. This is beautiful.

 

Figure 1. Energy used per dollar output from various regions [3].
What about Iceland?

Why then, are Icelanders using somewhere between 15 and 20 MJ per dollar produced (see again Figure 1)? An easy, and common answer to that question is because of the abundant, cheap, renewable energy availability within the country. This is true, as Icelanders use mostly renewable energy domestically.

 

Why are Icelandic industries, and the nation in general less energy efficient in the production of goods and services than other nations? Photo by Tobias A. Müller on Unsplash

 

But so do the Norwegians! So why do Norwegian industries perform so much better than their Icelandic counterparts, even with all this abundant energy (mostly hydro in Norway)?

 

The Norwegian industries are using renewable energy, while at the same time improving energy efficiency. Is this something Icelandic industries can not do. The Danish also have a larger portion of renewable energy in their energy grid mix than most countries in the world, but efficiency has also been increasing.

 

By studying Figure 1, you can see that energy efficiency in the world has mostly been improving, also in countries such as Norway and Denmark with their very high renewable energy ratios. Iceland is a strong outlier.

Economic benefits of sustainable behavior

In collaboration with two leading scientists, I have looked into the relation between product innovation performance and strategic environmental goals of roughly 150 Danish firms [4]. Where, in short, a positive correlation was found. This simply means, that Danish firms who have an environmental strategy, also seem to be more likely to have innovations that perform well on the marketplace. This is a key link, which often has been preached, but here we show it black on white.

 

Improved environmental performance = Improved economic performance

 

I mentioned in the beginning of this article that price for electricity is a crucial factor here, and essentially the deciding factor. In Iceland, the price per kWh is around 5.5 US cents, in Norway the price is triple that (around 15 US cents per kWh) and in Denmark around 6 times that (33 cents per kWh).

 

This correlates nicely with Figure 1, where Denmark is performing the best out of these three nations, then Norway and finally Iceland. This leads us to the possibility that electricity in Iceland may be underpriced, at least when comparing to similar countries such as Norway and Denmark.

 

But even if firms want to improve performance, despite low prices, how do they do it?

How do firms reach their goals?

An essential way to reach a goal, is to simply have it. Firms then must document relevant flows of raw materials, waste and energy which is used in their operations. However, knowing the flows only gives a firm partial information whereas knowing the associated environmental impact is much more useful.

 

Knowing the associated environmental impact allows firms to take relevant measures where they really count. For example, if a firm wants to increase energy efficiency, it is simply crucial to know where most energy consumption takes place within the operation.

 

So, in conclusion. Despite low electricity prices, increased efficiency is very much possible within multiple regions. Your firms should set a quantifiable environmental goal, document flows and emissions while outperforming commercial competition.

References

 

[1] Ito, K. (2014). Do consumers respond to marginal or average price? Evidence from nonlinear electricity pricing. The American Economic Review, 104(2), 537–563.
[2] Gillingham, K., Rapson, D., & Wagner, G. (2016). The rebound effect and energy efficiency policy. Review of Environmental Economics and Policy, 10(1), 68–88.
[3] World Bank. (2017) Energy intensity level of primary energy (MJ/$2011 PPP GDP) https://data.worldbank.org/indicator/EG.EGY.PRIM.PP.KD?view=chart
[4] Gerstlberger, W., Pedrosa, A., & Atlason, R. S. (2017). The relation between product innovation and strategic environmental goals. In Innovation and Product Development Conference.

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