Horse, meet water: getting efficiency to market

In the ivory towers of academic economics (from which I mostly escaped years ago), markets are the heroes of many a mythical story. As the theory goes, wherever there is a need and a way to meet it at a profit, and so long as nasty things like governments don’t interfere, a market will materialize, as though from thin air. It will swoop in, make sure the need is met, and everyone involved will be better off.

According to this view, all we have to do is make sure that prices can be set without interference and then stand back and watch the magic.

Not that this is entirely wrong. Whenever it snows in my neighborhood the local teenagers appear with shovels, ready to clear my driveway for a fairly reasonable fee. There are always a few people on my street who prefer paying a few dollars to doing it themselves. And since no one forced anyone to shovel snow or to pay someone to do the shoveling, I think we have to conclude that everyone involved is better off as a result. When they work well, markets can be pretty impressive.

This view, taken to its logical extreme, leads to some skepticism when people say that energy efficiency is low-hanging fruit. To an economist, statements like this make us ask: If it’s hanging so low, why hasn’t anyone picked it already? If efficiency is so cheap, why isn’t everyone doing it?

Not long ago, I toured some strip mines in Wyoming. They operate at unimaginable scale with machines the size of small apartment buildings. They use hundred of millions of dollars’ worth of equipment and scrape away hundreds of feet of dirt to get at the coal in a process that runs 24 hours a day every single day. I left wondering, among other things, how low does fruit have to hang to be cheaper than this?

To be fair, coal fired electricity is cheap, or at least cheap enough. Despite the massive effort, we can get it to your house for about 10 cents a kilowatt hour. You might argue that the price of that electricity doesn’t include the cost of the environmental damages it causes, and you would be right. But as Mark Cooper of the Consumer Federation of America points out: Electricity costs 10 cents a kwh, while saving a kwh through efficiency only costs 4 cents, but even with such a large cost advantage, efficiency is not being deployed at nearly the scale it could. Putting a price on carbon to  make electricity cost 12 cents per kwh is not going to change this dynamic.

Efficiency at 4 cents per kwh is not happening for a reason. The economic conclusion is that it must actually cost more than 4 cents, and we’re just not counting it right.

But here is where economic rationale starts to fail. The idea that “if you build it, they will come” only works in textbooks and movies. Markets don’t spring up by magic, they are created by people. One of the conditions required for markets to work well is that people have all the relevant information they need to make the right decision. The teenagers in my neighborhood can look out the window and see snow. It’s about all they need know for their little market to work right.

In Wyoming, everyone knows what it takes to move coal to market and how much they’ll get paid to get it there.

But, how do ordinary consumers — or, better, large scale investors — see the cutting-edge science that’s leading to efficiencies? This is where the market isn’t working as yet.

For many in the investment world, it’s an entirely new class of investments, and they don’t yet have the capacity or experience to find and exploit these opportunities. There are fascinating technologies out there that can deliver heating and cooling, transportation, lighting, and most any other energy service you can imagine at lower cost and higher efficiency than the state of the art, and many of them are not penetrating the market at anything like the scale that they warrant. This is due in large part to the fact that the connective tissue that links opportunities to execution is still being developed.

It’s not so much about leading a horse to water as it is about introducing the concept of drinking.

In this space, I’ll be talking about various attempts to get efficiency into the market, from a technological and investment standpoint. Policy will also play a prominent role in this discussion, and like everyone else inside the beltway, I’m also an amateur political analyst, so it would be pointless to claim that politics wont crop up on a fairly regular basis.