Speech by Dave Cote, Chairman and CEO, Honeywell Policy Network Climate Change Conference The Politics of Climate Change London School of Economics and Political Science June 5, 2009 Thank you, Mr. Prime Minister and good afternoon. Honeywell is a $34 billion U.S. dollar company with about 50% of our portfolio delivering energy efficiency. If the U.S. and Europe just aggressively used existing Honeywell technologies (nothing that we would have to invent, just existing products and services), they could save 15-20% of current energy consumption 15-20%! Those existing technologies include: The Avionics that allow planes to fly more efficient flight profiles saving 5-10% of fuel used while safely doubling capacity of the skies. Building controls that allow building owners to reduce energy usage in the range of 20% while still keeping their tenants comfortable. Energy Savings Performance Contracts (or ESPCs) where our experts go into a facility, analyze energy use, implement the savings plan and get paid ONLY from the resulting savings. ESPCs are a cornerstone of the Clinton Climate Initiative. We have one going on that involves 22 facilities at Transport for London that will cut costs by 760 000 pounds annually and reduce CO 2 by an amount equivalent to 570 cars. Turbochargers for automobiles that allow an engine 1/3 smaller to produce the same power as a full-size engine.but with 25% less fuel and emissions. While European adoption far outpaces the US with 51% to 5%, both regions still have further to go. Programmable thermostats that allow homeowners to reduce their energy usage by 25-30% while staying comfortable. Foam insulation that creates R-30 values, saving considerable energy. Energy savings packages for older airplanes that can save 3-5%.
Updated Process Control Systems for any manufacturing process facility (generally big users) that can save up to 10%. It s a very big energy efficiency portfolio that can save the world a lot of energy. While adoption and the individual savings contribution of these technologies will differ by region, the overall forecasted energy savings is 15-20% for both the U.S. and Europe. SO WHY ISN T THE WORLD USING THEM? All of these technologies are available today, which raises the question, if this is all so great, how come not everybody is using it today? I d like to do my best to answer that question with Six constraints or impediments and then Seven suggestions on what to do about it. The First impediment is Consumer behavior. Consumers are also called voters. They act as individuals and for the same reason they don t all vote, there s oftentimes a feeling that their personal behavior won t make that much of a difference. The first cost of any purchase still generally means more to them than any projected energy savings. Despite how they respond to surveys, when it s their money they will consider their personal lifestyle first. They generally don t want to be warmer in the summer, colder in the winter, or spend 15,000 pounds on a car that doesn t take off like the old one did. And given all the other demands on their time, they don t want to buy products that require them to spend time learning about how to achieve the energy efficiency inherent in the product. They won t be responsive if it means reducing their standard of living. The Second is that, for existing facilities or buildings, companies generally invest using a criterion of a one-year payback meaning whatever the first cost amount, it needs to be recovered in savings during the first full year after implementation. Most energy savings projects, even when oil was $150 a barrel, fell into the 3 year payback range. Still a good investment, but below the one-year payback threshold. With the huge installed base of buildings that needs to be retrofitted, that s a big hurdle. 2
The Third is that in many buildings the benefit of a retrofit accrues to the condo owner or apartment renter and not to the building owner who would have to pay for the equipment. Business Week magazine covered this well in an article a couple weeks ago. The Fourth is the Accounting for Energy Savings Performance Contracts that require private companies to count it as debt on their balance sheets, making any CFO or CEO more reluctant to do it. It doesn t apply to Government owned facilities who generally use cash based accounting, so ESPCs are more prevalent in the Government sector. The Fifth is the inertia that exists even within Government to do something about their own facilities, given all the other demands on their time. For example, the U.S. has issued 3 separate Executive Orders in 1994, 1999, and 2007 requiring significant energy use reductions in federal buildings with some result but it is not until now they are finally getting traction. The Sixth impediment concerns utilities. Utilities are in the business of selling more electricity, not less. And more power is generally needed to support the growth in regional, state, or country economies needed to drive increased standards of living. They have little ability to increase revenue or earnings by supporting growth through energy efficiency. These are real impediments. I m not suggesting that any of the groups mentioned or the perspectives that drive them are inherently bad. None of them are. But we do need to acknowledge what the behaviors and incentives are today and we have to find a way to work with them, not against them. Appeals to altruism or to just be good, while having some effect, won t have the pervasive comprehensive effect we d all like to see. SO WHAT DO WE DO ABOUT IT? There are a number of impediments, but there are also actions we can take to make it a lot better. We have Seven suggestions on what Government can do to get the results we re all looking for. 3
The First... is a recognition that we have to achieve BOTH energy efficiency AND economic growth. Achieving energy efficiency by telling people they have to live less well than they did or that their children won t have the prospect of a better life than they did is just unsustainable. Increased standards of living are driven by increases in productivity. It requires more output per cost input. It means products that deliver energy efficiency while improving people s lives. In my younger days I referred to this as the Any Ninny theory. As in, Any Ninny can do just one task. Success comes from achieving two seemingly competing tasks at the same time. In this case, energy efficiency while also achieving the growth and productivity needed to improve standards of living. And economic growth will require power. The Second human nature requires both sticks and carrots. We can never rely on just one of those. Another way to say it, is it requires mandates and incentives. And another, is to call it Cap and Trade. It needs to be reasonably rigorous of course. But it needs to be done soon. The longer Government waits, the longer companies sit on the sidelines waiting to see what s going to happen so they don t get caught up on the wrong side of legislation. The Third is to make economic and energy security more a part of the discussion. Using less energy reduces economic risk AND helps the environment. With economic recovery, oil and gas prices are very likely to go up again, imperiling that same recovery. Another squeeze is very likely coming. Given the historic lack of investment for a variety of reasons, supply has not changed much. And enough of that supply is in relatively unstable parts of the world, meaning that small disruptions can have disastrous consequences. I m not suggesting an us against them mentality but rather a recognition and discussion of the facts. The Fourth that Government needs to stay technology neutral whenever possible. Picking winners based on what we know today is a loser s game. It doesn t harness the ingenuity and creativity of the human spirit. It doesn t harness the strengths of capitalism or the inevitability of creative destruction. We never know how technologies will develop so why preclude the possibility, for example, that someone will figure out how to achieve 4
clean coal. We should pick outcomes desired and not prescribe technologies. We had a great example in our own company with something we call Green Diesel which is not to be confused with biodiesel, a product that is very corrosive to pipelines, engines, and dispensing devices and has to be blended with 80-90% petro diesel to mitigate those corrosive properties. Green Diesel is made from non-edible oils derived from many feedstocks like camelina and jatropha and soon from algae. And it is a complete 100% replacement for petro diesel and jet fuel it doesn t need to be blended with anything and we ve already flown commercial airplanes and conducted ride-and-drives with cars in Washington D.C. for regulators and legislators to demonstrate its effectiveness. Clearly a great and a better product but in the original U.S. alternative energy tax legislation, biodiesel was specifically incentivized and Green Diesel was excluded because a biodiesel technology had already been selected. We should always encourage human ingenuity to flourish. The Fifth find a way to incentivize utilities for what s been termed Negawatts. Rewarding utilities for supporting economic growth while reducing the energy required to achieve it. The Economist ran an article a few months back about California s experiment with it. I wouldn t say the concept has been perfected yet but I would say it has promise. The Sixth consider creation of an E-ARPA (Energy Advanced Research Projects Agency) modeled on the DARPA organization used in the US to support Defense Department technologies. They effectively partner with industry in a highly focused and relatively non-bureaucratic way (which is always a danger of course) to develop new products and technologies that have greatly benefited the Department. The Seventh is to not let the perfect be the enemy of the good. A 20% reduction, rigorously applied and enforced, that actually happens and supports growth is infinitely preferable to a 30% reduction that never gets there. It s important to just get started. 5
SUMMARY Overall, there are clearly a lot of impediments but there s also a lot we can do about it. Reducing energy intensity while improving energy and economic security is a huge issue. The difficulty is that there are millions of touch points to achieve it actually we could probably say there are about 6 billion. We won t get there unless we address the behaviors inherent in the system. We also have to keep in mind that we need to accomplish two seemingly competing things at the same time. We need to support economic growth and productivity so people continue to see increases in their standard of living at the same time we achieve energy efficiency and security. The Government role in creating the environment required to allow capitalism and human ingenuity to flourish in solving these issues is substantial and essential. It is all very doable we just have to get started. 6