Executive Summary

The mission of the Energy Efficiency Working Group (EEWG) of the Energy Sector Sustainability Table (ESST) is to inform and advise governments on energy efficiency in Canada. The EEWG's Foundation Paper prepares the groundwork for this task by providing information about definitions, context, trends, institutions, barriers, and resource potential. The report is intended to serve as a knowledge base for the further work of the EEWG, which includes research papers on specific topics and a final report. The intended audience includes specialists and generalists. It is assumed that readers have some background in energy policy and analysis.

The Concept of Energy Efficiency

Energy efficiency is one of several important energy management concepts. "Energy efficiency" (EE) may be defined as the use of less energy for the same productive activity. "Activity" could be, for example, a household service, level of steel production or movement of freight. EE is measured as a ratio: "energy use per something". The meaning and value of the ratio depend on the definitions of both the numerator and denominator. Conventionally, the numerator is measured in terms of the energy content of fuels and electricity, without reference to environmental attributes. Except where the efficiency of the energy industry itself is being measured, energy content is that of secondary fuel or electricity, i.e. that sold to the end-user. The numerator is also weather-normalized and includes self-generation. Defining the denominator can be more challenging. All concepts are linked to a definition of "activity". The report describes how the process of defining the denominator creates the boundary between what is considered a structural change (i.e. a non-energy-driven shift in the composition of activity) versus what is considered true EE. Changes considered "structure" under one definition are considered "efficiency" under another.

Context

Contextual issues in EE include technology change, efficiency standards in other countries, energy prices, public policies and related cultural changes:

• Technology. In most end-use applications, energy efficiency has improved with new technology; that is technology has enabled equal levels of activity with less energy used. In some cases, the driver was energy cost itself, while in others the driver was product quality and higher EE was a beneficial side-effect. Understanding and advancing technology change is a key to unlocking EE potential. The most difficult barriers tend to occur with the first commercial applications.
• Standards. Efficiency standards can both help and harm EE - in the latter case when countries with relatively lax standards become repositories for equipment that would be substandard elsewhere. Conversely, there appears to be a "highest common denominator" effect when standards are harmonized, and this is key thrust of regulators in Canada, Mexico and the US.
• Prices. Prices of fuels and electricity affect energy consumption levels in the short, medium and long term. All else equal, a price increase drives energy conservation of all kinds including reduced activity levels, and substitution of other sources of energy, as well as increased EE. Price changes affect different sectors differently. In many industry applications, energy price is the strongest driver of decision-making, whereas price is usually a secondary driver for households and commercial users. In principle, energy prices should reflect environmental externalities, for example through environmental taxes on energy. Canada has tended to stay away from these instruments, although externality costs have been used to rank resource types in electricity utility resource acquisition processes. Most of Canada also prices electricity at the average cost of production, through cost-of-service regulation or explicit Heritage contracts. However, natural gas is priced at the market rate (marginal cost). This circumstance tends to create a bias towards electricity in end-uses where it competes directly with natural gas, notably space and water heating.
• Public Policy. EE lies within the convergence of many public policy priorities, including competitiveness, supply security and all environmental concerns, all of which are long term problems requiring a coordinated approach. However, government EE initiatives have tended to short term measures, not linked to necessary concurrent activities in other parts of the market or by other governments. One important area where government can show leadership is in natural gas and electricity utility regulation. The energy industry has urged governments to treat utility Demand Side Management (DSM) as a matter of policy and guide regulators accordingly.
• Culture. Underlying all policies are the values of individuals. In a few generations, environmental values have tended towards higher expectations for energy efficiency and the trend is expected to continue, driven in large measure by climate change. Education in schools, for business and for the public at large helps place into context the significance of any policy to save energy.

Trends

Energy use in Canada increased by 23 percent over the 1990-2004 period. The increase was driven by a 33 percent increase in economic output, offset by an increase in economy-wide energy efficiency of 13 percent over the same period. Sector results include:

• Households became smaller, but houses became larger, with an increasing number and variety of plug loads. The largest residential end-uses, space and water heating, are seeing improvement as more efficient equipment penetrates the stock. Large appliances have become substantially more efficient.
• There have been large efficiency gains in commercial lighting, auxiliary motors and office equipment.
• While all passenger transport modes except urban transit became more energy efficient, the relatively modest gains in automobile efficiency occurred primarily before 1995. The EE of the car/light truck fleet has been influenced by two trends: to greater EE from new vehicles replacing less efficient older vehicles of the same type, and to less EE from an increasing market share of heavier, more powerful, less efficient vehicle types. Transit ridership did not improve over the period on a national basis.
• Freight movement is a rapidly growing sector. Although vehicle efficiencies have improved, globalization has led to rapid growth in the distribution of goods, with most of the growth in trucking, rather than rail.
• Outside of the upstream fossil fuel and electricity sectors, overall output growth of 40% in industry was accompanied by structural shifts to less energy-intensive industries and by substantial efficiency gains within industries such as metal mining, chemicals, petroleum refining and 'other manufacturing'.
• Oil sands production grew so much over the period that its inherently higher energy intensity swamped all other effects within the upstream fossil fuel sector. Nevertheless the EE of oil sands production improved significantly over the period.

The highest-level picture is one of increasing technical efficiency combined with greater demand for movement of goods and people, for residential and commercial services and for industrial output of all kinds, including especially energy itself. That is, new machines, buildings, vehicles, and industrial processes tend to be more efficient than old ones, and average EE is increasing as old replaces new. However the energy consumption effect of greater output is greater than the effect of better technical efficiency and so total energy consumption continues to grow.

Institutional Landscape

Government bodies at all levels have substantial roles in EE policy and implementation. Natural Resources Canada is the lead federal agency. Other federal agencies include the Canada Mortgage and Housing Corporation, the National Research Council (CMHC), Transport Canada, Environment Canada, the National Round Table on the Environment and the Economy (NRTEE), and Sustainable Development Technology Canada (SDTC). Canada also belongs to international agencies, notably the International Energy Agency.

Provinces typically have a Ministry of Energy that develops overall policy and runs programs. British Columbia, Ontario, Québec, New Brunswick, PEI and Nova Scotia have energy efficiency standards for particular electrical and natural-gas fuelled appliances. Manitoba has an EE Act, but no regulations. Québec legislation includes an additional statute through which the province can regulate building energy standards, inspection procedures and penalties. Québec also has l'Agence de l'efficacité énergétique. Ontario has the Conservation Bureau of the Ontario Power Authority and requires compliance with the Model National Energy Code for Buildings. For natural gas, and in the Alberta electricity market, utility regulators are the primary agent for promoting energy efficiency. In provinces that maintain government-owned integrated electricity utilities, there is also a direct policy channel for integrated resource planning, which can include a focus on energy efficiency. For example, BC Hydro and Manitoba Hydro treat DSM as a form of resource supply within their system plans.

Potential

The potential for energy efficiency improvement may be measured in three ways: technical, economic and achievable. "Achievable" takes into account the existence of barriers to the full achievement of economic potential (see paragraph below). There have been a variety of studies estimating technical, economic and achievable potentials for different provinces, sectors and fuels. Results from these studies typically show economic potential reductions in the 10 - 20% range and achievable potentials at less than 10%. However, many of the energy efficiency potential studies are focused on current technology and traditional DSM methods. When future technologies, broader policies and potential changes in behaviour are taken into account, the potential could rise substantially.

Barriers and Opportunities

"Barriers (to EE)" refers to the reasons why individuals and companies invest in more energy-intensive buildings, equipment and vehicles than appears cost-effective, either for them or for the economy as a whole. Among the many barriers to EE are: lack of a long-term price signal for externalities, lack of information, lack of access to capital, misplaced incentives, flaws in market structure, performance uncertainties, transaction costs, and product unavailability. Some barriers are clearly "market failures", where a precondition for economically-efficient decision-making is absent. However, there is a range of views on the "real-ness" of other barriers, and therefore on the need for policies to overcome them. There are also different views on the effectiveness of programs that have been used to implement those policies.

Governments have a range of policy instruments to overcome barriers: regulation, program spending, market instruments, leadership and procurement policies, and information and suasion. Different types of instruments may be appropriate, depending on the maturity of technologies and practices.

Conclusions

The Foundation Paper provides some speculative conclusions about EE:

• Significant cost-effective new vehicle EE improvements are likely possible in the 10-15 year timeframe. These could be achieved through fuel economy regulations or other instruments (e.g. feebates).
• Increasing EE in freight movement would focus on increasing efficiency in each mode, especially trucking, rather than attempting to shift modes.
• The buildings sector has entrenched barriers. To overcome them, all three levels of government need to be involved in a coordinated fashion in a mix of regulation, incentives and institutional change. The sector is all the more challenging because of slow stock turnover.
• Governments' uncertainty about, or lack of attention to the role of DSM in restructured electricity markets has resulted in a lack of consistent direction to regulators. As a result, markets for commercial and residential end-use equipment are fractionated across the country.
• The next stage of demand-side management will require more emphasis on a "market transformation" approach that integrates activity: among jurisdictions; across instruments (e.g. standards, incentives); and in terms of the supply chain (manufacture to consumer).
• There are some areas where individual new technologies could make a large difference on their own. However, much of the cost-effective potential lies with technologies that have been available for a long time.
• No substantial GHG emission reduction target can be met without a strong emphasis on EE, in conjunction with fuel switching, non-emitting electricity generation, and carbon capture and storage.
• There remains a great deal of work to do to improve energy efficiency in the Canadian economy. That effort would have a positive economic value even without environmental benefits of greater EE, although greater EE is one of the cornerstones of an effective environmental policy.

Next Steps

The EEWG plans to provide guidance along three key policy tracks: (1) broad price signals that raise consumer costs of energy; (2) institutional reforms such as changes in regulated utility mandates and in principles of municipal planning and taxation; and (3) specific measures that address barriers in certain end-uses or technologies.

The EEWG will prepare and implement a research program to support its deliberations in the next phase of its work. The research and discussions will culminate in a final paper with recommendations. In its coming work, it is expected that the EEWG will emphasize regulation and energy pricing. This expectation is based on the views that information programs are low-cost and desirable, but are not likely to 'move mountains' on their own, and that incentives, while necessary in some targeted cases, cannot be funded adequately to move the full capital stock.