Energy Independence: The Efficiency Payoff

by Aaron Levitt | July 18, 2012 7:30 am

So far in InvestorPlace’s series on America’s rising energy independence[1], we’ve focused on the opportunities — and potential problems — that come from booming oil and gas production.

After all, the hydraulic fracturing and advanced drilling revolution is the key reason we can even begin to discuss the idea of energy self-sufficiency. These new techniques have helped exploration and production (E&P) firms unlock a virtual sea of oil and natural gas, which is transforming a wide range of U.S. industries and the economy as a whole.

However, there’s more than one way to skin a cat.

The flipside of producing more energy is to use less of it. Indeed, energy efficiency is equally critical to the long-term success of an energy-independent U.S. Mostly overlooked due to the natural gas/shale oil glut, energy efficiency measures will ultimately help prolong our newfound energy bounty and maybe even protect us during geopolitical strife.

Likewise, the cost savings available from energy-efficiency measures will be huge enough to support other areas of the economy.

Using less energy is the perfect complement to “Drill Baby Drill”[2] because both ideals will ultimately help strengthen America’s energy future. For investors, energy efficiency’s potential could be as great as the opportunities stemming from unearthing all of that oil and gas in the first place.

Higher Prices Ahead

There’s no denying that unconventional energy is expensive energy. While technological advances are pushing these costs lower every day, it’s still relatively expensive to frack a well or drill in deep water. In addition, growing global energy demand along with plans to begin exporting U.S. reserves[3], will certainly help drive prices higher over the long run. This specter of more expensive energy, and concerns about the environmental impact, underscores the need for smarter, more efficient ways to use our vast energy reserves.

We definitely could use the help.

In 2010, the U.S. used approximately 98 quadrillion Btus, or roughly 317 million Btus per person. However, according to Lawrence Livermore Laboratory[4], less than 40% of that energy is actually turned into useful work. The bulk of it is lost to waste. We can drill and pump all we want, but losing a huge percentage of that production seems irresponsible and downright reckless.

To that end, energy efficiency might be more of a slam dunk for both investors and the country versus these unconventional energy sources. At a bare minimum, efficiency can serve as a complement to the shale boom as a way of ensuring we use every last drop of energy we extract.

Sectors to Focus on

And investors can indeed find plenty of opportunities across a wide range of industries and sectors to help reclaim wasted energy.

The biggest of these lies within real estate. Studies conducted by The U.S. Department of Energy concluded that buildings are responsible for nearly 68% of the nation’s electricity demand and 40% of our natural gas requirements. Similarly, inefficient incandescent light bulbs cost businesses and taxpayers around $18 billion in energy bills each year.

With these facts firmly in tow, energy-efficient real estate solutions such as HVAC systems, lighting and building management software (BMS) will becoming ever more important. With less than 1 billion of the approximately 70 billion square feet of U.S. office space having undergone efficiency retrofits, the potential in the sector is huge.

Analysts estimate that by 2017, the U.S. market for commercial building efficiency will leap by more than 50% to more than $103.5 billion. That’s a lot of underlying revenue for the firms that produce these products and services.

Outsized efficiency gains can be made in transportation, too. Today’s standard internal-combustion engine is only around 25% to 30% efficient. Much of the energy potential is lost due to friction, heat and other inefficiencies. Small innovations[5], such as capturing energy from braking, can do wonders to improve fuel economy. Combine these measures with the potential of natural gas-powered vehicles[6], and you have a recipe for long-term success.

Overall, industry consultant and think-tank McKinsey & Co. estimates that over the next 10 years, the U.S. could reduce its annual energy consumption by 23% through an assortment of efficiency measures. This reduction would ultimately deliver savings to the tune of $1.2 trillion for the economy.

One Great Play

If you want to add a dose of efficiency to your energy portfolios, the PowerShares Cleantech ETF (NYSE:PZD[7]) remains my favorite broad way to play the sector. The fund tracks a wide range of clean-tech ideas including pollution control and smart grid implementation. More important, it’s also a play on the burgeoning energy efficiency market, with the bulk of its 59 holdings in electrical and industrial companies. This includes healthy weightings to firms with energy-efficiency products like Johnson Controls (NYSE:JCI[8]) and Schneider Electric (PINK:SBGSY[9]).

PZD’s expenses[10] run a relatively cheap 0.67%, and it currently has a 12-month yield of 1.65%. The only real drawback to the PZD is that it’s pretty anemic when it comes to trading. That can result in some wide bid and ask spreads. However, that might not matter if you plan on holding it long term.

Overall, the ETF provides a global play on the growing need for energy efficiency and can be a great way to get in on America’s strengthening energy independence.

As of this writing, Aaron Levitt doesn’t own any securities mentioned here.

Source URL: https://investorplace.com/2012/07/energy-independence-the-efficiency-payoff/

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