Energy supply is critical but business must also reduce energy demand

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The writer is executive chair of Santander and chair of the International Business CounciI

In a volatile world, governments face a range of challenges. How can they support ageing populations, finance the green transition and higher defence spending, or service sizeable debts? The list is long and differs from country to country, but there is one common theme: all will rely on financing from economic growth.

This growth relies in part on affordable and reliable energy. Demand for energy is set to rise by up to a third between now and 2050 to support a global economy that will be twice as large and a population of 2bn more people. This surge in population and productivity will be most concentrated in emerging markets, which makes the energy transition even more challenging.

We have to change the very nature of our energy system, from a predominantly fossil fuel-based economy to one based on low-carbon energy sources. Crucially, we must do so while ensuring energy remains affordable and secure for all. The conversation has concentrated on the supply-side. Governments and energy companies are rightly focusing on how to increase the supply of low-carbon energy sources and boost transmission infrastructure. Despite this, we are nowhere near reaching our climate goals.

And there is another side of this debate that has received far less attention. Energy supply is critical, but what about energy demand? Demand is something everybody — individuals, businesses and governments alike — can take action on. By reducing the intensity of our energy demand (by one definition, the energy used per unit of gross domestic product generated) we can do more with less. But we are not doing nearly enough on this front. The International Energy Agency estimates that the world needs to improve energy intensity by more than 4 per cent a year between 2020 and 2030, and almost 3 per cent annually thereafter, to reach net zero by 2050. Last year, we only managed 1.3 per cent.

Although many companies are working hard to close that gap, there’s more to be done, by both business and governments. A group of over 130 of the world’s largest businesses, including those with long supply chains, are now shifting up a gear. At Davos next week, we will discuss three areas we’ve identified where action can be taken to reduce energy demand intensity. First, we need to find ways to save energy. For instance, artificial intelligence innovations in heating, ventilation and air conditioning of offices could achieve a 25 per cent drop in consumption.

Second, we need to focus on energy efficiency: using less energy to perform the same task or produce the same product. For instance, retrofitting buildings can reduce energy consumption by 45 per cent.

Finally, we have to find value chain collaborations. That means different businesses along the value chain working together to drive change in the wider energy system. Recovering heat from industrial plants, for example, could reduce energy consumption by around 25 per cent, as seen in the use of waste heat from sulphuric acid production in Sweden. These technologies are available, scalable and affordable today. 

For businesses, there is a clear commercial benefit in taking action. Energy that was previously wasted can instead be redirected to more productive uses. This will help companies reduce overall energy use — without reducing output — lowering cost and boosting profitability and competitiveness. In other words, energy demand and costs down, productivity up. By using these levers, which are already available, we can reduce current energy usage by up to a third, without decreasing output. If this were to happen by 2030, it would save up to $2tn each year, at today’s energy costs, and pay back within 10 years.

Yet this opportunity is not being realised. Companies are held back by a lack of awareness of what they can achieve and nervousness about how quickly they can expect payback. To help realise the opportunity, governments need to develop national energy transition plans that factor in demand-side action as much as supply-side. They have already started down this road. At COP28, more than 120 countries pledged to double the rate of energy efficiency improvement by 2030. Now we need to turn pledges into action. Without deliverable transition plans, these worthy aims will remain just words.

Businesses, working together with governments, are crucial to supporting and realising these plans. They should be encouraged to consider their current energy use, research best practice and partner with the public and private sectors to overcome barriers to action. By doing this, we can reduce energy intensity and help the world’s economy to grow faster. Both are needed to deliver the Paris climate goals.