This essay by student Kent Truckor, MEM/MBA Class of 2013, was selected to represent Fuqua School of Business in the TIME/Fortune 2011 “Energy for Tomorrow” competition. As the winner of Fuqua’s essay competition, Kent earned the opportunity to join EDGE, Pop!Tech, and Reuters for an upcoming invitation-only energy salon in NYC. Read Kent’s essay below.
“Finance and Market mechanisms that can liberate the intrinsic value of energy efficiency to global markets will drive the transformation to a sustainable urban environment.”
by Kent Truckor, Candidate for MEM/MBA Class of 2013, Duke University
The success of the sustainable urban environment we seek to create will be determined by what we do with our current urban environment that we live in today: the aging building stocks, transit systems and urban infrastructure that stand before us. Therefore, the sustainable urban environment of tomorrow, by and large, will be a direct descendant of the actions we take with what we currently have and how efficient these environments utilize energy. Energy efficiency or the displacement of demand for energy, in our current urban environment provides a feasible pathway to a sustainable urban environment. End use energy efficiency provides the greatest opportunity to reduce energy demand and subsequent energy generation supply needs due to the inherent inefficiencies of our energy infrastructure. Amory Lovins illustrated that the reduction of one unit of energy consumed downstream can save on the order of ten units of primary energy input upstream in our current electricity infrastructure.
History supports the potential of energy efficiency. Since 1970, energy efficiency (and energy productivity) gains have met 75% of new energy service demands in the U.S. through 2008, while new energy supplies will have contributed only 25% of all new energy service demands. Despite energy efficiency’s impressive historical performance and tremendous potential, society and markets have yet to fully embrace end use energy efficiency due to market failures. Therefore, the most effective energy innovations to facilitate the transformation to a sustainable urban environment will be market and financial mechanisms that can overcome these market failures liberating markets to demand and capitalize the enormous value energy efficiency holds. To fully appreciate this point, one must consider why energy efficiency make sense, what is stopping markets from fully embracing and capitalizing energy efficiency, and subsequently what can be done to overcome these barriers thereby driving the development of the sustainable urban environment that is vital to the success of our economy, society, and world.
Energy efficiency is the most cost effective, secure, environmentally benign, time sensitive means to facilitate the development of sustainable urban environments. The pathway to a sustainable urban environment is confronted by inefficient, historical infrastructure financed and built to last decades or centuries. This realization poses significant burden when global energy demand growth, energy markets, geo-political structures, climate change, conventional energy resource depletion and environmental degradation estimates change by the day. Despite our inability to control global events, we do have the distinct ability to control how much energy we demand. Therefore, we must make our current infrastructure more energy efficient closing the gap between the impending issues and subsequent solutions. Energy efficiency can provide these solutions in the time frame required. The cheapest, most secure, environmentally benign, time sensitive source of energy is the one not needed. ACEEE estimates that energy efficiency investments and measures can reduce the United States energy consumption by 25-30% or more over the course of the next 20-25 years to the level consumed in 1996-1997. The capital saved from not having to invest in developing energy supplies domestically and internationally can be invested in other parts of the energy sector and the greater domestic economy generating wealth, rather than transferring wealth.
Saving consumer end-users energy and the money they spend on energy, provides value to that individual, and subsequently, the market. However, market failures like asymmetric information, myopia, high transaction costs and split incentives prohibit energy efficiency from realizing its full potential. Energy efficiency benefits can be dis-aggregated, difficult to measure or “see” and split amongst end users. However, mechanisms like PACE loans and loan riders on property leases can help realize the value of energy efficiency upgrades for all respective stakeholders involved. Yet, these mechanisms have not reached the scale of market penetration that the value of energy efficiency warrants. This is where innovations in finance and market mechanisms are needed and will be handsomely rewarded when liberating the value stream of energy efficiency to global markets. Finance mechanisms that can aggregate the low risk, annuity like, energy efficiency value streams implemented by home owners, business owners, municipalities or any other energy user can create a market product worthy of investment. Institutional investors and endowments that seek consistent, steady returns may find the low risk, relatively high return performance of energy efficiency very appealing in light of growing market volatility and uncertainty. As the market begins to appropriately value these investments, consumer behavior regarding energy efficiency will transform through the realization one can “grow” a market value stream by seeking out more energy efficient ways to operate within the urban environment. Thereby, consumers will demand greater energy efficiency technologies, processes and innovations facilitating the transition to a sustainable urban environment.
End-use energy efficiency provides the most viable and effective path for the transformation to a sustainable urban environment given the physical, financial and institutional barriers to overcome. Market and finance mechanism innovations that fully liberate the market potential of energy efficiency will be the most effective energy innovations because they transform the market and consumer perception regarding the intrinsic value of energy efficiency, thereby driving the transition to a sustainable urban environment. Thus, aligning the power of markets, consumer behavior and energy efficiency will drive the transformation to a sustainable urban environment in the most time efficient and cost effective manner – something capitalists and environmentalists alike can seek value in.
 Laitner, 2008. The Size of the U.S. Energy Efficiency Market: Generating a More Complete Picture. ACEEE May, 2008. Report Number E083