McKinsey Global Energy and Materials 

July 2009 

Designed by New Media Australia 

Copyright © McKinsey & Company 

Download the report at: www.mckinsey.com/USenergyefficiency

83221_McKinsey_Cvr.indd 1 
July 2009

Hannah Choi Granade

Jon Creyts

Anton Derkach

Philip Farese

Scott Nyquist

Ken Ostrowski

Unlocking Energy 

Efficiency in the 

U.S. Economy

83221_McKinsey_US.indd 3 7/21/09 6:45
83221_McKinsey_US.indd 4 7/21/09 12:25
i

In 2007, during research on ways to abate greenhouse gas emissions in the United 

States,1

 we encountered the puzzle of energy efficiency: How is it that so many energysaving opportunities worth more than $130 billion annually to the U.S. economy can go 

unrealized, despite decades of public awareness campaigns, federal and state programs, 

and targeted action by individual companies, non-governmental organizations, and 

private individuals? 

Greater energy efficiency will almost certainly be an important component in 

comprehensive national – and global – strategies for managing energy resources and 

climate change in the future. For this reason, we launched an effort in 2008 to investigate 

opportunities for greater efficiency in the stationary (non-transportation) uses of energy 

in the U.S. economy. This research confirms what many others have found – that the 

opportunity is significant. The focus of our effort, however, has been to identify what has 

prevented attractive efficiency opportunities from being captured in the past and evaluate 

potential measures to overcome these barriers. Our goal is to identify ways to unlock the 

efficiency potential for more productive uses in the future. This report is the product of 

that work.

We hope this report will provide business leaders, policymakers, and other interested 

individuals a comprehensive fact base for the discussion to come on how to best pursue 

additional gains in energy efficiency within the U.S. economy.

Our research has been encouraged and challenged by contributions from many 

participants with many points of view and sometimes differing opinions. They have 

generously helped our team access data, test emerging findings and potential solutions, 

and prepare for the release of this report. We especially acknowledge our governmental, 

non-governmental, and corporate sponsors for sharing their expertise and co-sponsoring 

this report:

 Austin Energy

 Department of Energy 

 — Office of Electricity Delivery and Energy Reliability

 — Office of Energy Efficiency and Renewable Energy

 DTE Energy

 Energy Foundation

 Environmental Protection Agency

 Exelon Corporation

 Natural Resources Defense Council 

 PG&E Corporation

 Sempra Energy

1 Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost?, McKinsey & Company, 2007.

Preface

83221_McKinsey_US.indd 1 7/21/09 12:25
 Sea Change Foundation

 Southern Company

 U.S. Green Building Council

As part of this work, the team conducted several hundred interviews with representatives 

of government agencies, public and private companies, academic institutions and research 

foundations, and a number of independent experts. Though too many to mention by name, 

these individuals deserve our sincerest thanks for having shared their time and expertise 

so willingly.

While the work presented in “Unlocking Energy Efficiency in the U.S. Economy” has 

benefited greatly from these diverse contributions, the views this report expresses are 

solely the responsibility of McKinsey & Company and do not necessarily reflect the views 

of our sponsors or any other contributors.

83221_McKinsey_US.indd 2 7/21/09 12:25
iii

The efficient use of energy has been the goal of many initiatives within the United States 

over the past several decades. While the success of specific efforts has varied, the trend is 

clear: the U.S. economy has steadily improved its ability to produce more with less energy. 

Yet these improvements have emerged unevenly and incompletely within the economy. 

As a result, net efficiency gains fall short of their full NPV-positive potential. Concerns 

about energy affordability, energy security, and greenhouse gas (GHG) emissions have 

heightened interest in the potential for energy efficiency to help address these important 

issues.

Despite numerous studies on energy efficiency two issues remain unclear: the 

magnitude of the NPV-positive opportunity, and the practical steps necessary to unlock 

its full potential. What appears needed is an integrated analysis of energy efficiency 

opportunities that simultaneously identifies the barriers and reviews possible solution 

strategies. Such an analysis would ideally link efficiency opportunities and their barriers 

with practical and comprehensive approaches for capturing the billions of dollars of 

savings potential that exist across the economy.

Starting in 2008, a research team from McKinsey & Company has worked with leading 

companies, industry experts, government agencies, and environmental NGOs to address 

this gap. It reexamined in detail the potential for greater efficiency in non-transportation 

uses of energy,2

 assessing the barriers to achievement of that potential, and surveying 

possible solutions. This report is the product of that effort.

The central conclusion of our work: Energy efficiency offers a vast, low-cost 

energy resource for the U.S. economy – but only if the nation can craft a comprehensive 

and innovative approach to unlock it. Significant and persistent barriers will need to 

be addressed at multiple levels to stimulate demand for energy efficiency and manage 

its delivery across more than 100 million buildings and literally billions of devices. If 

executed at scale, a holistic approach would yield gross energy savings worth more than 

$1.2 trillion, well above the $520 billion needed through 2020 for upfront investment 

in efficiency measures (not including program costs). Such a program is estimated to 

reduce end-use energy consumption in 2020 by 9.1 quadrillion BTUs, roughly 23 percent 

of projected demand, potentially abating up to 1.1 gigatons of greenhouse gases annually.

Five observations are relevant to a national debate about how best to pursue energy 

efficiency opportunities of the magnitude identified and within the timeframe considered 

in this report. Specifically, an overarching strategy would need to:

1. Recognize energy efficiency as an important energy resource that can help meet 

future energy needs while the nation concurrently develops new no- and low-carbon 

energy sources

2. Formulate and launch at both national and regional levels an integrated portfolio of 

proven, piloted, and emerging approaches to unlock the full potential of energy efficiency

3. Identify methods to provide the significant upfront funding required by any plan to 

capture energy efficiency

2 Non-transportation uses of energy exclude fuel used by passenger vehicles, trucks, trains, airplanes, and 

ships, as well as transport energy used in agriculture, mining, and construction operations. For simplicity 

of expression, we sometimes refer to the energy covered by our analyses as “stationary energy.”

Executive summary

83221_McKinsey_US.indd 3 7/21/09 12:25
iv

4. Forge greater alignment between utilities, regulators, government agencies, 

manufacturers, and energy consumers

5. Foster innovation in the development and deployment of next-generation energy 

efficiency technologies to ensure ongoing productivity gains. 

In the body of the report, we discuss the compelling benefits of energy efficiency and 

why this energy resource warrants being a national priority. We then identify and “map” 

in detail the complex and persistent set of barriers that have impeded capture of energy 

efficiency at the level of individual opportunities. We also identify solution strategies, 

including those proven, piloted, or recently emerged, that could play a role in overcoming 

these barriers. Finally, we elaborate on the five observations noted above to outline 

important considerations for the development of a holistic implementation strategy to 

capture energy efficiency at scale.

We hope that our research and this report will help in the understanding and pursuit 

of approaches to unlock the benefits of energy efficiency, as the United States seeks to 

improve energy affordability, energy security, and greenhouse gas reduction.

COMPELLING NATIONWIDE OPPORTUNITY

Our research indicates that by 2020, the United States could reduce annual energy 

consumption by 23 percent from a business-as-usual (BAU)3

 projection by deploying an 

array of NPV-positive efficiency measures, saving 9.1 quadrillion BTUs of end-use4 

energy (18.4 quadrillion BTUs in primary energy). This potential exists because 

significant barriers impede the deployment of energy efficient practices and technologies. 

It will be helpful to begin by clarifying the size and nature of this opportunity; then 

we will describe the case for taking action to address the barriers and unlock the energy 

efficiency potential.

The residential sector accounts for 35 percent of the end-use efficiency potential (33 percent 

of primary energy potential), the industrial sector 40 percent (32 percent in primary energy), 

and the commercial sector 25 percent (35 percent in primary energy). The differences 

between primary and end-use potentials are attributable to conversion, transmission, 

distribution, and transport losses. We present both numbers throughout as each is relevant 

to specific issues considered. Capturing the full potential over the next decade would 

decrease the end-use energy consumption analyzed from 36.9 quadrillion end-use BTUs 

in 2008 to 30.8 quadrillion end-use BTUs in 2020 (Exhibit A), with potentially profound 

implications for existing energy provider business models.5

This change represents an absolute decline of 6.1 quadrillion end-use BTUs from 2008 

levels and an even greater reduction of 9.1 quadrillion end-use BTUs from the projected 

level of what consumption otherwise would have reached in 2020. Construction of new 

power plants, gas pipelines, and other energy infrastructure will still be required to 

address regions of growth, retirement of economically or environmentally obsolete 

3 The Energy Information Administration’s Annual Energy Outlook, 2008 represents our business-asusual projection; our analysis focused on the 81 percent of non-transportation energy with end-uses that 

we were able to attribute.

4 End-use, or “site,” energy refers to energy consumed in industrial, business, and residential settings, 

e.g., providing light, heating and cooling spaces, running motors and electronic devices, and powering 

industrial processes. By contrast, primary, or “source,” energy represents energy in the form it is first 

accounted (e.g., BTUs of coal, oil, natural gas) before transformation to secondary or tertiary forms (e.g., 

electricity). From the end-use viewpoint primary energy is lost during transformation to other forms and 

in transmission, distribution, and transport to end-users; these losses are an important energy-saving 

opportunity but one that is outside the scope of this report. Unless explicitly defined as primary energy, 

energy usage and savings values in this report refer to end-use energy.

5 We examine implications for energy provider business models in Chapter 5 of the full report.

83221_McKinsey_US.indd 4 7/21/09 12:25
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The left side of the exhibit 

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portions of each sector 

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energy efficiency potential 

were realized. The right 

side provides different 

views of the energy 

efficiency potential in 2020 

broken out by fuel type.

83221_McKinsey_US.indd 5 7/21/09 5:40
vi

actors. Thus we tested the resiliency of the NPV-positive opportunities by adjusting the 

discount rate (expected payback period), the value of energy savings (customer-specific 

retail prices), and possible carbon price ($0, $15, $30, and $50 per ton CO2e). We found 

the potential remains quite significant across all of these sensitivity tests (Exhibit B). 

Introducing a carbon price as high as $50 per ton CO2e from the national perspective 

increases the potential by 13 percent. A more moderate price of $30 per ton CO2e increases 

the potential by 8 percent. Applying a discount rate of 40 percent, using customer-classspecific retail rates, and assuming no future cost of carbon, reduces the NPV-positive 

potential from 9.1 quadrillion to 5.2 quadrillion BTUs – a reduced but still significant 

potential that would more than offset projected increases in BAU energy consumption 

through 2020. 

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Our methodology is based on detailed examination of the economics of efficiency potential 

and the barriers to capture of it. Using the Energy Information Administration’s National 

Energy Modeling System (NEMS) and Annual Energy Outlook 2008 (AEO 2008) as a 

foundation, for each Census division and building type, we developed a set of “businessas-usual” choices for end-use technology through 2020. Then, to identify meaningful 

opportunities at this level of detail, we modeled deployment of 675 energy-saving measures 

to select those with the lowest total cost of ownership, replacing existing equipment and 

building stock over time whenever doing so was “NPV-positive.”8 We disaggregated national 

data on energy consumption using some 60 demographic and usage attributes, creating 

roughly 20,000 consumption micro-segments across which we could analyze potential. 

By linking our models with usage surveys and research on user-related barriers, we were 

able to re-aggregate the micro-segments as clusters of efficiency potential according to sets 

of shared barriers and usage characteristics. The resulting clusters as shown in Exhibit C 

are sufficiently homogeneous to suggest a set of targeted solutions.

8 We modeled the energy-savings potential of combined heat and power installations in the commercial and 

industrial sectors separately from these replacement measures.

The height of each column 

represents the energy 

efficiency potential in 

2020 associated with 

non-transportation uses of 

energy under the conditions 

defined at the bottom of 

the exhibit -- energy price, 

discount factor, and carbon 

price. The height of each 

section corresponds to the 

efficiency potential in that 

sector, as labeled at the left, 

under those conditions.

83221_McKinsey_US.indd 6 7/21/09 12:25
vii

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Total (Trillion BTUs) Total (Trillion BTUs) Total (Trillion BTUs)

Percent, 100% = 9,100 trillion BTUs of end-use energy

Source: EIA AEO 2008, McKinsey analysis

Percent, 100% = 18,410 trillion BTUs of primary energy

N = 330,000 enterprises

Industrial Commercial Residential

27

8

32

33

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Total (Trillion BTUs) Total (Trillion BTUs) Total (Trillion BTUs)

Energy support

systems

Energy-intensive

industry processes

Non energyintensive industry

processes

3,650

33

43

24

N = 330,000 enterprises

Industrial

Existing private

buildings

Government buildings

New private buildings

Office and noncommercial equip.

Community

infrastructure

2,290

35

25

16

13 12

N = 4.9 million buildings,

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Commercial

Existing non-lowincome homes

Existing low-income

homes

New homes

Electrical devices &

small appliances

Lighting & major

appliances 3,160

41

19

10

19

11

N = 129 million homes,

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Residential

40

25

35

N = 4.9 million buildings,

~3 billion devices

N = 129 million homes,

2.5 billion devices

Energy support

systems

Energy-intensive

industry processes

Non energyintensive industry

processes

5,030

42

37

21

Existing private

buildings

Government buildings

New private buildings

Office and noncommercial equip.

Community

infrastructure

5,970

31

14

10

30

15

Existing non-lowincome homes

Existing low-income

homes

New homes

Electrical devices &

small appliances

Lighting & major

appliances 6,020

31

15

8

30

16

Exhibit C: Clusters of efficiency potential in stationary uses of energy – 2020

The pie charts show the

share (in percent) of energy

efficiency potential in 2020 in

each economic sector, with

end-use energy in the upper

chart and primary energy in

the lower one. Each column

chart shows the clusters

of potential that make up

each sector, with the total

potential in the sector (in

trillion BTUs) displayed at

the top of the column and

the share (in percent) in the

corresponding segment. 

Below each column are

numbers for relevant enduse settings.

83221_McKinsey_US.indd 7 7/21/09 12:25
viii

SIGNIFICANT BARRIERS TO OVERCOME

The highly compelling nature of energy efficiency raises the question of why the economy has

not already captured this potential, since it is so large and attractive. In fact, much progress

has been made over the past few decades throughout the U.S., with even greater results in

select regions and applications. Since 1980, energy consumption per unit of floor space has

decreased 11 percent in residential and 21 percent in commercial sectors, while industrial

energy consumption per real dollar of GDP output has decreased 41 percent. Though these

numbers do not adjust for structural changes, many studies indicate efficiency plays a role

in these reductions. As an indicator of this success, recent BAU forecasts have incorporated

expectations of greater energy efficiency. For example, the EIA’s 20-year consumption

forecast shows a 5-percent improvement in commercial energy intensity and 10-percent

improvement in residential energy intensity compared to their projections of 4 years ago.10

As impressive as the gains have been, however, an even greater potential remains due

to multiple and persistent barriers present at both the individual opportunity level and

overall system level. By their nature, energy efficiency measures typically require a

substantial upfront investment in exchange for savings that accrue over the lifetime of the

deployed measures. Additionally, efficiency potential is highly fragmented, spread across

more than 100 million locations and billions of devices used in residential, commercial,

and industrial settings. This dispersion ensures that efficiency is the highest priority for

virtually no one. Finally, measuring and verifying energy not consumed is by its nature

difficult. Fundamentally, these attributes of energy efficiency give rise to opportunityspecific barriers that require opportunity-specific solution strategies and suggest

components of an overarching strategy (Exhibit E).

10 AEO 2004 and 2008.

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Exhibit D: U.S. energy efficiency supply curve – 2020

The width of each column

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measures.

83221_McKinsey_US.indd 8 7/21/09 5:41
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Exhibit E: Multiple challenges associated with pursuing energy efficiency

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On the left, this exhibit 

summarizes the 

fundamental difficulties 

of pursuing greater 

energy efficiency and 

the opportunity-specific 

barriers that affect and 

help define clusters of 

efficiency potential. On the 

right, it shows opportunitylevel solution strategies 

to overcome barriers and 

suggests the essential 

elements of an overarching 

strategy for capturing 

energy efficiency potential.

83221_McKinsey_US.indd 9 7/21/09 12:25
x

SOLUTIONS AVAILABLE TO ADDRESS THE BARRIERS

Experience over the past several decades has generated a large array of tools for addressing 

the barriers that impede capture of attractive efficiency potential, some of which have been 

proven at a national scale, some have been “piloted” in select geographies or at certain times 

at a city-scale, and others are emerging and merit trial but are not yet thoroughly tested. 

The array of proven, piloted, and emerging solutions falls into four broad categories: 

 Information and education. Increasing awareness of energy use and knowledge 

about specific energy-saving opportunities would enable end-users to act more swiftly 

in their own financial interest. Options include providing more information on 

utility bills or use of in-building displays, voluntary standards, additional device- and 

building-labeling schemes, audits and assessments, and awareness campaigns.

 Incentives and financing. Given the large upfront investment needed to capture 

efficiency potential, various approaches could reduce financial hurdles that endusers face. Options include traditional and creative financing vehicles (such as on-bill 

financing), monetary incentives and/or grants, including tax and cash incentives, and 

price signals, including tiered pricing and externality pricing (e.g., carbon price).

 Codes and standards. In some clusters of efficiency potential, some form of 

mandate may be warranted to expedite the process of capturing the potential, 

particularly where end-user or manufacturer awareness and attention are low. 

Options include mandatory audits and/or assessments, equipment standards, and 

building codes, including improving code enforcement. 

 Third-party involvement. A private company, utility, government agency, or nongovernmental organization could support a “do-it-for-me” approach by purchasing and 

installing energy efficiency improvements directly for the end-user, thereby essentially 

addressing most non-capital barriers. When coupled with monetary incentives, this 

solution strategy could address the majority of barriers, though some number of endusers might decline the opportunity to receive the efficiency upgrade, preventing 

capture of the full potential. 

For most opportunities, a comprehensive approach will require multiple solutions to 

address the entire set of barriers facing a cluster of efficiency potential. Through an 

extensive review of the literature on energy efficiency and interviews with experts in this 

and related fields, we have attempted to define solutions that can address the various 

barriers under a variety of conditions. Exhibit F illustrates how we mapped alternative 

solutions against the barriers for a cluster. 

We do not believe it is possible to empirically prove that a particular combination of 

measures will unlock the full potential in any cluster, because the level of impact being 

considered has never previously been attained. However, we do believe that a holistic 

combination of solutions that address the full-range of barriers and system-level issues 

is a prerequisite for attaining energy-productivity gains anywhere near those identified 

in our analysis.

83221_McKinsey_US.indd 10 7/21/09 12:25
xi

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Exhibit F: Addressing barriers in existing non-low-income homes

ELEMENTS OF A HOLISTIC IMPLEMENTATION STRATEGY

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The left side shows

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impede capture of energy

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description of the specific

manner in which the barrier

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right. The far right side of the

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near right column describing

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into specific approaches

to overcome barriers in the

cluster. The colored lines

map specific solutions to

specific barriers.

83221_McKinsey_US.indd 11 7/21/09 12:25
xii

 2. Formulate and launch at both national and regional levels an integrated 

portfolio of proven, piloted, and emerging approaches to unlock the full 

potential of energy efficiency. There are multiple combinations of approaches 

the nation could take to support the scaled-up capture of energy efficiency. In 

addition to seeking the impact of national efforts, this portfolio should effectively and 

fairly reflect regional differences in energy efficiency potential. Any approach would 

need to make the following three determinations: 

— The extent to which government should mandate energy efficiency through the 

expansion and enforcement of codes and standards

— Beyond codes and standards, the extent to which government (or other publicly 

funded third parties) should directly deploy energy efficiency measures

— The best methods by which to further stimulate demand and enable capture of 

the remaining energy efficiency potential.

Exhibit H illustrates one example of a portfolio of solution strategies focusing on the 

most proven solution strategies deployed to date. Such a tool facilitates evaluation of 

a portfolio against the relevant parameters of cost, risk (i.e., experience), and return 

(i.e., size of potential). 

3. Identify methods to provide the significant upfront funding required by 

any plan to capture energy efficiency. End-user funding for energy efficiency by 

consumers has proved difficult. Partial monetary incentives and supportive codes and 

standards increase direct funding by end-users: the former by reducing initial outlays 

and raising awareness, the latter by essentially requiring participation. Enhanced 

performance contracting or loan guarantees are relatively untested but could facilitate 

end-user funding. Alternatively, the entire national upfront investment of $520 billion 

(not including program costs) could be recovered through a system-benefit charge on 

energy on the order of $0.0059 cents per kWh of electricity and $1.12 per MMBTU of 

other fuels over 10 years. This would represent an increase in average customer energy 

costs of 8 percent, which would be more than offset by the eventual average bill savings 

of 24 percent. Different solution strategies and policies would result in different 

administrative cost structures. For example, codes and standards have been shown to 

typically incur program costs below 10 percent, whereas low-income weatherization 

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Exhibit G: U.S. mid-range greenhouse gas abatement curve – 2030

This exhibit shows 

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report (2007), with energy 

efficiency opportunities 

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such emissions that could 

be abated per year. 

83221_McKinsey_US.indd 12 7/21/09 6:20
xiii

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Exhibit H: Portfolio representing cost, experience, and potential of clusters possible 

with specified solution strategies

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proportional to the potential. 

The position of the bubble’s 

center on the horizontal 

axis indicates the cost of 

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the measures modeled 

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per million BTUs per year. 

The center’s position on 

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the national experience 

with the approaches 

outlined for the cluster.

83221_McKinsey_US.indd 13 7/21/09 12:25
xiv

* * *

In the nation’s pursuit of energy affordability, climate change mitigation, and energy 

security, energy efficiency stands out as perhaps the single most promising resource. In 

the course of this work, we have highlighted the significant barriers that exist and must 

be overcome, and we have provided evidence that none are insurmountable. We hope the 

information in this report further enriches the national debate and gives policymakers 

and business executives the added confidence and courage needed to take bold steps to 

formulate constructive ways to unlock the full potential of energy efficiency. 

83221_McKinsey_US.indd 14 7/21/09 12:25
Executive summary iii

Introduction 1

1. A compelling nationwide opportunity 7

2. Approaches to greater energy efficiency in the residential sector 29

3. Approaches to greater energy efficiency in the commercial sector 55

4. Approaches to greater energy efficiency in the industrial sector 75

5. Developing a holistic implementation strategy 91

Appendices 111

A. Glossary 111

B. Methodology 115

C. References and works consulted 123

Acknowledgments 143

Sidebars

Indirect benefits of energy efficiency 13

Demand-side management 20

Whole-building design 32

Rebound effects 33

Clean-sheet redesign of select industries 82

Job creation 99

Electric vehicles 108

Contents

83221_McKinsey_US.indd 1 7/21/09 12:25
83221_McKinsey_US.indd 2 7/21/09 12:25
1

Energy has reemerged as an issue of national concern as the United States confronts the 

challenges of economic recovery, energy affordability, climate change, and energy security. 

In November 2007, McKinsey & Company published a report entitled “Reducing U.S. 

Greenhouse Gas Emissions: How Much at What Cost?” and produced what has become 

a well-recognized abatement curve illustrating the sources, potential magnitudes, and 

incremental costs of options to abate greenhouse gases (Exhibit 1).

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Exhibit 1: U.S. mid-range greenhouse gas abatement curve – 2030

The colored bars in this exhibit identify the potential impact of greater efficiency in 

stationary uses (i.e., non-transportation-related) of energy, the focus of this report. It 

is important to note that to achieve the aggressive goals being discussed nationally for 

greenhouse gas reduction (i.e., on the order of 3.5 to 5.2 gigatons CO2e by 2030), the nation 

will need a portfolio of options that includes and goes well beyond energy efficiency. 

While this report focuses on what has been referred to as the “left-side” of the abatement 

curve, no one should view energy efficiency as a complete substitute for the “right-side”: 

Introduction

This exhibit shows 

greenhouse gas abatement 

potential as depicted in 

the mid-range case in 

McKinsey’s greenhouse gas 

report (2007), with energy 

efficiency opportunities 

associated with stationary 

uses of energy highlighted. 

The height of each bar 

represents the incremental 

cost in dollars to abate one 

ton of carbon dioxide (or 

its equivalent); the width 

shows the gigatons of 

such emissions that could 

be abated per year.

83221_McKinsey_US.indd 1 7/21/09 12:25
2

sources of renewable energy, such as wind, solar, biomass, geothermal and hydroelectric 

energy, or low-carbon options like nuclear power and commercialization of carbon capture 

and storage. It would also be important to consider the transportation sector in detail, 

including the potential value of electric vehicles and alternatives for conventional motor 

fuels (gasoline, diesel) such as cellulosic biofuels, as a substitute for less carbon-efficient 

options. To achieve the nation’s goals of energy affordability, climate change mitigation, 

and energy security, we will need a combination of these energy initiatives. 

The reasons to focus on energy efficiency are as simple as the questions are puzzling: If 

the economics of energy efficiency are so compelling and the technology is available and 

proven, why has the U.S. economy not captured more of the energy efficiency available to 

it, particularly given the progression of efforts at federal and state levels, by government 

and non-government entities alike, over the past three decades? In other words, by what 

means could the United States realize a much greater portion of the energy efficiency 

available to it? A number of organizations asked us to examine this issue and consider what 

actions would enable greater success. 

Working with a range of major U.S. based companies and government organizations, 

industry experts, foundations, and environmental NGOs we designed our analytical 

approach with this problem in mind. Our methodology identifies important clusters 

of energy efficiency potential in non-transportation settings, drawing on knowledge of 

barriers that have impeded capture of this potential in the past. To make our assumptions 

and modeling more transparent, we relied heavily on publicly available sources of data. 

Using the Energy Information Administration’s National Energy Modeling System and 

Annual Energy Outlook 2008 (AEO) as a foundation, we developed a set of “business-asusual” (BAU) choices for end-use technology through 2020 in line with the AEO for each 

Census division and building type. Then, to identify meaningful efficiency opportunities 

at this level of detail, we modeled deployment of more than 675 energy-saving measures 

to select those with the lowest total cost of ownership, replacing existing stock over time 

whenever doing so was “NPV-positive.”1

 We then disaggregated national data on energy 

consumption using some 60 demographic and usage attributes, creating more than 

20,000 micro-segments of consumption to further granulate our findings. By linking 

our models with usage surveys and research on user-related barriers, we were able to 

re-aggregate the micro-segments as clusters of efficiency potential according to sets of 

shared barriers and usage characteristics. The resulting clusters (14 in all, five each in 

the residential and commercial sectors, three in the industrial sector, and combined heat 

and power (CHP) systems in both commercial and industrial settings) are sufficiently 

homogeneous to suggest a set of targeted solutions.

We focused our exploration of barriers and solutions on 2020 in order to identify nearterm opportunities relatively unaffected by technological uncertainty. Our modeling is 

based on a 2008 baseline, but we recognize that mobilizing to pursue energy efficiency on 

a national scale will likely take time. Therefore, references throughout this report to 2020 

represent the possible outcome of a decade of effort focused on energy efficiency, which 

would in reality depend on when significant initiatives are launched.

1 By “NPV-positive” we mean the present value of energy, operation, and maintenance cost savings that 

accrue over the life time of the measure are equal to or greater than the upfront investment to deploy that 

measure when discounted at an appropriate discount rate. We varied assumptions about the value of 

energy saved and discount rate to reflect different perspectives on the potential.

83221_McKinsey_US.indd 2 7/21/09 12:25
3

Unlocking Energy Efficiency in the U.S. Economy

Introduction

In defining opportunities within this near-term horizon, we use a stock-and-flow 

approach and allow accelerated deployment of energy efficiency measures, represented 

for example by substitution of building shell improvements or lighting prior to endof-life for the existing stock, whenever the measure minimizes total lifetime cost. By 

“minimizes total lifetime cost,” we mean the full cost of adopting a measure, be it 

improving a building or replacing an energy-consuming device before the normal end of 

its useful life, is more than offset by the associated savings over the measure’s lifetime.2

 

By contrast, the portfolio of opportunities mostly contains measures that generate 

only enough savings to offset their incremental cost relative to a business-as-usual 

alternative. These “end-of-life” NPV-positive opportunities represent the majority of 

the efficiency potential identified in the residential (50 percent) and commercial (70 

percent) sectors. In this way, our modeling uses both “accelerated” replacement and 

standard stock-and-flow “end-of-life” replacement to maximize the net present value of 

the total cost of energy consumption. This concept is not as applicable in the industrial 

sector, where we have assumed upgrades coincide with other needed maintenance 

schedules or deployment of new equipment or processes.

Our central result for energy efficiency potential used a 7 percent real discount rate and 

regional industrial energy prices to value the energy savings of reduced consumption. In this 

regard, the efficiency potential identified in this report is a variant of the “economic” potential 

described in the preexisting literature on energy efficiency and uses a cost test similar to but 

not the same as the Total Resource Cost test.3

 We have not evaluated a “technical” potential, 

which would derive from existing technology regardless of incremental technology cost 

and yield a higher potential. Nor have we identified an “achievable” potential, which would 

discount the amount of economic potential captured based on demographic, market, and 

regulatory factors used to approximate the behavior of various economic agents and estimate 

what could be realistically expected using current approaches.

Using existing literature, primary interviews, our modeling, the underlying data, and 

judgment, we synthesized and structured the barriers that impede deployment of energy 

efficiency measures, attributing to each cluster the most significant barriers. We then 

gathered available information on existing and past programs targeting energy efficiency 

in these clusters and evaluated their ability to overcome the associated barriers. Finally, 

we explored the system-level actions the nation would need to take to drive broad demand 

for and adoption of energy efficiency, analyzing the proposed trade-offs in various policies 

and market mechanisms.

2 Our analysis assigns no residual value to an existing energy-consuming device that is replaced prior to 

the end of its life. A less conservative calculation might subtract the residual (i.e., undepreciated) value 

of the existing device from the total cost of the accelerated device. As this requires resale of a piece of 

equipment that is not cost effective to use, we have taken the more conservative approach of assuming 

such equipment cannot be resold and assigned it zero residual value.

3 Our analysis does not include program administration costs, incentives paid to program administrators, 

costs or benefits of other resources (e.g., water), or non-resource costs or benefits (e.g., productivity) as are 

sometimes included in the Total Resource Cost test.

83221_McKinsey_US.indd 3 7/21/09 12:25
4

Importantly, there are aspects that differentiate this research from other reports on 

energy efficiency. We have focused on understanding how to pursue energy efficiency on 

a national scale by connecting the related activities of estimating potential, identifying 

barriers, reviewing solutions, and discussing policy implications in a single report. 

Specifically, we:

 Focused on end-use4 energy to facilitate the conversation among business leaders and 

policymakers, while noting the importance of primary energy, its technical match to 

efficiency topics, and making such numbers available where appropriate

 Included only those energy efficiency initiatives that could be “hard-wired,” 

as opposed to relying on sustained behavioral change among end-users (e.g., 

conservation efforts, such as turning off unnecessary lights)

 Assumed no material change in consumer utility5 or lifestyle preferences 

 Leveraged existing technologies and did not attempt to forecast future technology 

innovations or incorporate the most “extreme” forms of whole-building redesign, 

which can further reduce consumption. Accordingly, we have not presented a 

“technical” potential

 Attempted to identify the most significant barriers and solutions, but not necessarily 

be exhaustive of all possibilities

 Applied data wherever possible, but recognized that we could not quantitatively map 

solutions to every barrier in every cluster

 Avoided the temptation to predict how much of the available “economic” potential 

could or would be realized by adopting new, scaled-up approaches. Nowhere in this 

report do we calculate an “achievable” potential as is typically done using top-down 

estimates from an “economic” potential.

Our research suggests the net cost of achieving these levels of energy efficiency would 

produce energy savings that approximately double the upfront investment on an economywide basis. Although these savings are even more attractive for most participating 

consumers, issues of timing and allocation would likely lead various stakeholders to 

perceive the costs differently. It is likely that not all energy consumers would benefit 

equally from pursuit and capture of greater energy efficiency on a national scale. One 

outcome we discuss in this report is the inverse relationship between energy bills and 

electric rates: bills and total energy costs would decline, but the per-unit price (i.e., rate) 

would likely rise from current levels. The impact relative to business-as-usual is less 

certain, since in absence of energy efficiency investment, rates may rise due to other 

factors. Details of this effect on rates will vary throughout the country. 

4 End-use, or “site,” energy refers to energy consumed in industrial, business, and residential settings, 

e.g., providing light, heating and cooling spaces, running motors and electronic devices, and powering 

industrial processes. By contrast, primary, or “source,” energy represents energy in the form it is first 

accounted (e.g., BTUs of coal, oil, natural gas) before transformation to secondary or tertiary forms (e.g., 

electricity). From the end-use viewpoint primary energy is lost during transformation to other forms and 

in transmission, distribution, and transport to end-users; these losses are an important energy-saving 

opportunity but one that is outside the scope of this report. In addition, we focus on non-transportation 

uses of energy, excluding fuel used by passenger vehicles, trucks, trains, airplanes, and ships; in line 

with this focus, we have also excluded transport energy used in agriculture, mining, and construction 

operations. For simplicity of expression, we sometimes refer to the energy covered by our analyses as 

“stationary energy.”

5 By “consumer utility” we mean functionality or usefulness for end-users, including level of comfort; in this 

context, holding consumer utility constant would imply, for example no change in thermostat settings or 

appliance use; no downsizing of homes or commercial floor space. In a strict economic sense, maintaining 

constant consumer utility assumes a constant economic surplus for the consumer while delivering against 

a common benefit. We have not attempted to calculate potential changes in consumer utility that might 

result from energy price changes associated with pursuing the options outlined in our report.

83221_McKinsey_US.indd 4 7/21/09 12:25
5

Unlocking Energy Efficiency in the U.S. Economy

Introduction

The intention of this report is not to recommend particular policy solutions; rather, our 

hope is that this research will aid in the understanding and further pursuit of economically 

sensible and effective approaches to unlocking the potential of energy efficiency. This 

report presents the findings of our work in five chapters:

1. A compelling nationwide opportunity

2. Approaches to greater efficiency in the residential sector

3. Approaches to greater efficiency in the commercial sector

4. Approaches to greater efficiency in the industrial sector

5. Developing a holistic implementation strategy.

The report also contains boxed areas with brief treatments of a number of topics related 

to energy efficiency but not included directly in our analyses. Additional supporting 

material, covering technical terms and methodology, as well as works cited and consulted, 

are located in the appendices.

83221_McKinsey_US.indd 5 7/21/09 12:25
83221_McKinsey_US.indd 6 7/21/09 12:25
7

The United States faces an important opportunity to transform how it uses energy in its 

residential, commercial, and industrial sectors. Capturing energy savings across the U.S. 

economy, however, will be a daunting challenge for two reasons: first, each opportunity 

has meaningful and persistent barriers that have prevented it from being captured in the 

past, and second, a number of complex issues will have to be addressed at the level of local 

and regional energy markets – as well as at the national level – if the United States is to 

realize the full potential of its energy efficiency opportunity.

This chapter describes the NPV-positive efficiency potential the nation can pursue in an 

accelerated manner in the relative near term (through 2020) and explores the multi-level 

challenge presented by this attractive opportunity.

SIGNIFICANT POTENTIAL AVAILABLE IN THE NEAR TERM

The opportunity for greater efficiency in stationary energy use is substantial. It is less 

sensitive to discount factors, participant costs of capital, and carbon prices – and could be 

pursued more quickly – than is typically acknowledged, but only if the United States can 

find ways to address the associated barriers and unlock the potential. 

Business-as-usual (BAU) projections for 2020 suggest U.S. end-use energy consumption 

addressed in this report6

 will grow by 0.7 percent per year from 2008, reaching 39.9 quadrillion 

BTUs in 2020. If the nation can overcome the barriers and capture the full NPV-positive 

efficiency potential in 2020, the U.S. could consume some 23 percent less energy per 

year, saving more than 9.1 quadrillion BTUs of end-use energy (including 1,080 billion 

kWh of electricity) relative to the BAU forecast (Exhibit 2). This reduction would require 

an upfront investment of approximately $520 billion7

 and would yield present-value 

savings of roughly $1,200 billion. If deployed over 10 years, this annual spend of roughly 

6 Appendix B discusses the methodology of this report including the scope of energy uses addressed.

7 This amount includes $56 billion of upfront investment associated with deploying 50 GW of combined 

heat and power generation.

1. A compelling nationwide 

opportunity

83221_McKinsey_US.indd 7 7/21/09 12:25
8

$50 billion would represent a four- to five fold increase over current levels of spending on 

energy efficiency8 with corresponding annual energy savings valued at $130 billion.9

Measured in primary energy,10 savings would total 18.4 quadrillion BTUs, or 26 percent 

relative to a BAU baseline. If attained in its entirety, this efficiency potential would 

reduce annual U.S. GHG emissions in 2020 by 1.1 gigatons CO2e, some 15 percent of 2005 

greenhouse gas emissions and equivalent to 26 percent of non-transportation GHG 

emissions in the sectors that we modeled. 

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Exhibit 2: Significant energy efficiency potential in the U.S. economy

If the U.S. economy could realize the NPV-positive efficiency potential identified in 

this report, it would more than fully offset expected consumption growth, leading to an 

absolute decline in energy use over this period. The nation would see stationary energy 

use decline equivalent to a rate of 1.5 percent per year, decreasing from 36.9 quadrillion 

BTUs in 2008 to 30.8 quadrillion BTUs in 2020. This change represents an absolute 

decline of 6.1 quadrillion end-use BTUs from 2008 levels and an even greater reduction 

of 9.1 quadrillion end-use BTUs over the projected level of what consumption otherwise 

would have reached in 2020. This magnitude of change could have profound implications 

on existing energy provider business models.11 Construction of new power plants, gas 

pipelines, and other energy infrastructure will still be required to address selected pockets 

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9 Annual energy savings in 2020 would consist of 3.7 quadrillion end-use BTUs of electricity at 

$18.72 per MMBTU, 3.0 quadrillion end-use BTUs of gas at $6.88 per MMBTU, 1.5 quadrillion end-use 

BTUs of oil savings at $20.00 per MMBTU, and 0.9 end-use quads of other energy at $6.35 per MMBTU. 

The resulting total, 9.1 quadrillion end-use BTUs, has an average savings of $13.80 per MMBTU. CHP 

offers an additional $7.9 billion per year of energy savings. The total annual energy savings in 2020 of 

$133 billion has been rounded to $130 billion throughout this report.

10 Primary energy consumption savings for electricity have been calculated by converting end-use BTUs to 

primary BTUs at a multiple of 3.1, which includes conversion, transmission, and distribution loss. We 

convert end use gas consumption to primary use gas consumption by multiplying by 1.039 to include pump 

energy to move gas through pipelines, and storage and transportation leaks. Data for transport energy of 

other fuels is not readily available; therefore we use the same as end-use and primary use consumption 

though some small adjustment would likely be required.

11 We examine implications for energy provider business models in Chapter 5 of the full report.

The left side of the exhibit 

shows total energy 

consumption, measured 

in quadrillion BTUs, for the 

portions of each sector 

addressed in the report, 

plus the corresponding 

consumption if the identified 

energy efficiency potential 

were realized. The right 

side provides different 

views of the energy 

efficiency potential in 2020 

broken out by fuel type.

83221_McKinsey_US.indd 8 7/21/09 5:42
9

Unlocking Energy Efficiency in the U.S. Economy

1. A compelling nationwide opportunity

of growth, retirement of economically or environmentally obsolete energy infrastructure, 

and introduction of unaccounted-for consumption such as electric vehicles. However, 

energy efficiency could measurably reduce the total required investment for additional 

assets during this timeframe. 

The efficiency potential remains significant across scenarios

In modeling the national potential for greater energy efficiency, we calculated net lifecycle 

benefits less costs, regardless of who invests in measures or receives benefits. For our 

central result, we used industrial retail rates to value the energy savings and applied a 

7 percent discount factor as the cost of capital; we assumed there was no price on carbon. 

We tested the sensitivity of the NPV-positive opportunities by adjusting the discount 

rate (expected payback period), value of energy saved (sector-specific retail rates versus 

industrial retail rates)12, and possible carbon price ($0, $15, $30, and $50 per ton CO2e). 

Exhibit 3 shows the resulting NPV-positive potential beyond business-as-usual levels 

exploring sensitivity to these three factors:

 The perspective used to view costs and benefits. The total potential from a 

“participant” perspective (i.e., taking the perspective of an end-user with retail energy 

prices and a 20 percent discount rate)13 is 7.2 quadrillion BTUs, 21 percent less than 

potential from the national perspective (using industrial energy prices and a 7 percent 

discount rate to value the energy savings), indicating significant potential from either 

perspective. 

 Time-value of savings. Residential customers’ expectation of a 2 to 3 year payback 

period for household investments is an often-cited barrier to energy efficiency. 

This expectation of rapid payback limits potential, but still provides considerable 

opportunities across all sectors. A 40 percent discount rate across sectors with retail 

power prices reduces potential by 43 percent, but an economy-wide potential of 

5.2 quadrillion BTUs remains. By contrast, decreasing the real discount rate from a 

national perspective from 7 percent to 4 percent increases the potential 10 percent to 

10.0 quadrillion BTUs.

 Value of energy savings through a carbon price. Introducing a carbon price as 

high as $50 per ton CO2e from the national perspective increases the potential by 

13 percent. A price of $30 per ton CO2e would increase the potential by 8 percent. The 

direct impact of carbon pricing, namely the microeconomic expectation that increasing 

energy price should reduce energy consumption, is outside the scope of this report.

12 Industrial retail rates represent an approximate value of the energy saved as they include generation, 

transmission, capacity, and distribution costs in regulated and restructured markets. The bulk of the 

rate is composed of generation cost, with minor contribution from transmission, capacity, and negligible 

contribution from distribution costs. Though load factor in these rates underestimates the national 

average, and thus this rate represents a slightly conservative estimate of the value of the energy savings, 

the other components are closer to the likely savings if significant energy efficiency were to be realized. 

We computed the avoided cost of gas also using an industrial retail rate, which likewise is close to the 

wholesale cost of gas plus a small amount of transport. A more detailed discussion of the avoided cost of 

energy is available in Appendix B of the full report.

13 Twenty percent approximates the marginal cost of capital for many unsecured financing sources; though 

home equity lines or revolving credit lines are available at lower rates, they may be more difficult to obtain.

83221_McKinsey_US.indd 9 7/21/09 12:26
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Exhibit 3: Sensitivity of NPV-positive energy efficiency potential

Opportunities distributed throughout the economy

Because efficiency potential is present in nearly all energy-consuming devices and 

processes, it is highly fragmented with substantial opportunities in the residential, 

commercial, and industrial sectors. 

 Residential sector. The residential sector accounts for 29 percent of 2020 BAU 

end-use consumption and offers a slightly disproportionate 35 percent of the enduse efficiency potential. The residential opportunity is extremely fragmented, as it 

is spread across conditioning the space of 129 million households and energizing the 

dozens of appliances and devices in each household.14

 Industrial sector. The industrial sector offers the reverse proportion: the sector 

accounts for 51 percent of 2020 BAU end-use consumption but only 40 percent of enduse efficiency potential. The opportunity is, however, more concentrated: half of the 

potential is concentrated in 10,000 facilities, with the remainder distributed among 

320,000 small and medium-sized enterprises. The relatively smaller proportion of 

savings potential is likely driven by the sector’s historically greater focus (than the 

residential sector) on capturing energy efficiency opportunities.

 Commercial sector. The commercial sector consumes 20 percent of the 2020 

BAU end-use energy and offers 25 percent of the efficiency potential across 87 billion 

square feet of floor space, supporting functions as diverse as retail, education, and 

warehousing. Electricity represents a larger share of consumption in this sector; as 

such it offers the largest primary energy opportunity at 35 percent of the total when 

including commercial CHP opportunities. 

Opportunities are indeed scattered across a range of climates, users, end-uses, and fuels. 

Appliances, building shells, industrial processes, and a wide range of other end-uses offer 

substantial potential.

14 The number of homes, 129 million, is based on EIA’s number of occupied homes. In 2020, there will be 

an additional 10 million to 15 million unoccupied homes counted by the Census. Our analysis, and most 

products of the EIA, use only the 129 million occupied homes, because unoccupied homes consume little 

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The height of each column 

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efficiency potential in 

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energy under the conditions 

defined at the bottom of 

the exhibit -- energy price, 

discount factor, and carbon 

price. The height of each 

section corresponds to the 

efficiency potential in that 

sector, as labeled at the left, 

under those conditions.

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The bars at the left depict the

end-use energy efficiency

potential in the four Census

regions in 2020, by fuel type,

and measured in trillion

BTUs, with the total for the

region at the right end of the

bar. The table on the right

displays the potential energy

savings in the Census

region as a percent of BAU

consumption in 2020; the

total savings in percent is

a weighted average of the

savings in the three sectors

-- residential, commercial,

and industrial.

83221_McKinsey_US.indd 11 7/21/09 12:26
12

Total (Trillion BTUs) Total (Trillion BTUs) Total (Trillion BTUs)

Percent, 100% = 9,100 trillion BTUs of end-use energy

Source: EIA AEO 2008; McKinsey analysis

Percent, 100% = 18,410 trillion BTUs of primary energy

N = 330,000 enterprises

Industrial Commercial Residential

27

8

32

33

CHP

Total (Trillion BTUs) Total (Trillion BTUs) Total (Trillion BTUs)

Energy support

systems

Energy-intensive 

industry processes

Non energyintensive industry

processes

3,650

33

43

24

N = 330,000 enterprises

Industrial

Existing private

buildings

Government buildings

New private buildings

Office and noncommercial equip.

Community

infrastructure

2,290

35

25

16

13 12

N = 4.9 million buildings,

~3 billion devices

Commercial

Existing non-lowincome homes

Existing low-income

homes

New homes

Electrical devices &

small appliances

Lighting & major

appliances 3,160

41

19

10

19

11

N = 129 million homes,

2.5 billion devices

Residential

40

25

35

N = 4.9 million buildings,

~3 billion devices

N = 129 million homes,

2.5 billion devices

Energy support

systems

Energy-intensive 

industry processes

Non energyintensive industry

processes

5,030

42

37

21

Existing private

buildings

Government buildings

New private buildings

Office and noncommercial equip.

Community

infrastructure

5,970

31

14

10

30

15

Existing non-lowincome homes

Existing low-income

homes

New homes

Electrical devices &

small appliances

Lighting & major

appliances 6,020

31

15

8

30

16

Exhibit 5: Clusters of efficiency potential in stationary uses of energy – 2020

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Exhibit 6: Upfront cost of energy efficiency corresponding to $1.2 trillion savings

The pie charts show the

share (in percent) of energy

efficiency potential in 2020 in

each economic sector, with

end-use energy in the upper

chart and primary energy in

the lower one. Each column

chart shows the clusters

of potential that make up

each sector, with the total

potential in the sector (in

trillion BTUs) displayed at

the top of the column and

the share (in percent) in the

corresponding segment. 

Below each column are

numbers for relevant enduse settings.

The height of each column

represents the present value

of the cost of NPV-positive

energy efficiency measures: 

the four columns on the

left (the sectors, plus CHP)

total to the amount shown

in the fifth column. The total

upfront investment plus

the range of program costs

totals to the column on the

far right, which provides a

range for the total cost.

83221_McKinsey_US.indd 12 7/21/09 12:26
13

Unlocking Energy Efficiency in the U.S. Economy

1. A compelling nationwide opportunity

INDIRECT BENEFITS OF ENERGY EFFICIENCY

Improving energy efficiency in residential and commercial space offers a host of nonfinancial benefits. For example, in the residential sector, energy efficiency upgrades 

can help reduce exposure to volatility in energy prices, reduce basement water damage 

(estimated at $1.4 billion annually), decrease food spoilage, and extend clothing life.1

According to many home performance contractors, the non-financial benefits of 

efficiency-related upgrades may have greater value to many homeowners than the purely 

financial ones. Although increased energy efficiency may contribute to such auxiliary 

benefits as greater reliability and resilience in the electricity grid, this section describes 

three sets of indirect benefits associated with energy efficiency upgrades: enhanced 

health and comfort, improved productivity, and increased standard of living, particularly 

for low-income households. 

Impact on comfort and health. Energy efficiency upgrades, including proper insulation 

and sealing against air infiltration, can address a number of common residential 

problems, such as drafty rooms, cold floors in the winter, damp basements, dry air, musty 

odors, and mold. Because people spend up to 90 percent of their time indoors,2

 many of 

these issues can lead to health risks, contributing to chronic allergies and asthma, as well 

as periodic illness. Sick building syndrome (SBS), which is associated with poor indoor 

air quality, can manifest itself in building occupants as irritation of the eyes, nose, throat, 

or skin, as well as other ailments. Flaws in HVAC systems, emissions from some types of 

building materials, volatile organic compounds used indoors, and inadequate exhaust 

systems may be contributing factors. Severe problems with heating or cooling systems, 

for example, can result in dangerous concentrations of carbon monoxide or radon 

gas. Air and duct sealing and periodic maintenance of HVAC equipment can mitigate 

a number of these risks. While quantifying the impact of higher air quality on health is 

difficult, research suggests that the benefits are significant. Improved indoor air quality 

can reduce symptoms of SBS by 20 to 50 percent, asthma by 8 to 25 percent, and other 

respiratory illnesses by 26 to 75 percent.3

Impact on productivity. Efficiency-related upgrades in commercial buildings can 

increase worker productivity directly, as well as indirectly through reduced sick leave. 

SBS costs the nation an estimated $60 billion annually in sick days, medical costs, and 

reduced productivity.4

 A study by Lawrence Berkeley National Laboratory suggests 

higher indoor air quality itself can increase worker productivity by as much as 5 percent. 

Occupants of green buildings report themselves to be more satisfied with thermal 

comfort and air quality in the workspace than occupants of non-green buildings,5

 and 

may also benefit from the additional use of natural light.6

 Furthermore, worker productivity 

is higher at certain temperatures, which can be maintained more consistently throughout 

a building with higher-efficiency HVAC systems.7

 In all, improvements in worker health 

and productivity due to improved air quality may total $37 billion to $210 billion annually 

according to some sources.8

1 “Home Energy Saver,” LBNL, 2009. <http://hes.lbl.gov>.

2 “The Inside Story: A Guide to Indoor Air Quality,” EPA, April, 2009. 

3 William J. Fisk, “How IEQ Affects Health, Productivity,” ASHRAE Journal, May 2002.

4 William J. Fisk, “Health and Productivity Gains from Better Indoor Environments and their 

Implications for the U.S. Department of Energy”, LBNL, February 2002.

5 S. Abbaszadeh Fard et al. “Occupant Satisfaction with Indoor Environmental Quality in Green 

Buildings,” Proceedings of Healthy Buildings 2006, Lisbon, Vol. III, 365-370.

6 Joseph J. Romm., “Successfully Daylighting a Large Commercial Building: A Case Study of Lockheed 

Building 157,” Progressive Architecture, November 1990.

7 Olli Seppänen et al., “Effect of Temperature on Task Performance in Office Environment,” Helsinki 

University of Technology and LBNL, July 2006.

8 William J. Fisk, “How IEQ Affects Health, Productivity,” ASHRAE Journal, May 2002.

83221_McKinsey_US.indd 13 7/21/09 5:43
14

Deploying energy efficiency measures on a national scale will require a 

significant capital outlay

Deploying NPV-positive energy-saving technologies on a scale commensurate with the 

savings potential identified in this report, while generating benefits of $1.2 trillion, would 

require initial, upfront investments totaling $520 billion in present value terms through 

2020 (Exhibit 6), representing an investment of $50 billion per year (in present-value 

terms) for 

10 years. Some observers estimate that the U.S. invests $20 billion to $35 billion per year 

in energy consuming devices and building insulation to support a price “premium” to 

fund improved efficiency.15 To compare these investments to the incremental efficiency 

investments described in this report we subtracted the business-as-usual level purchases 

of building insulation to meet present building codes and the base cost of less efficient 

devices to obtain a market size of $10 billion to $12 billion.16 This implies that capturing 

the full efficiency potential identified in this report would require a sustained four- to fivefold increase in spending for efficiency improvements beyond today’s levels. Overhead and 

administration costs would be in addition to this amount and would vary by the policy or 

market mechanism used to capture the potential. Those costs are discussed in Chapter 5. 

The cost of the energy efficiency measures, expressed in dollars per million BTUs (MMBTU) 

saved over their lifetime, varies greatly. Exhibit 7 arrays the most economically attractive 

solution strategies in each of 49 energy efficiency measures in our central result from least to 

highest cost per MMBTU of end-use energy saved. The height of each bar shows the average 

cost per MMBTU saved; its width corresponds to how much energy in trillion BTUs could 

be saved annually with that strategy for its corresponding end-use in 2020. This chart 

highlights the diversity of end-uses that would provide savings, but demonstrates that there 

are few large and simple opportunities to pursue: capturing 80 percent of the opportunity 

would require deploying 58 percent of the upfront investment.17

15 Karen Ehrhardt-Martinez and John A. Laitner, The Size of the U.S. Energy Efficiency Market: 

Generating a More Complete Picture, ACEEE, May 2008. Expert interviews.

16	 Annual efficiency spend of $10 billion to $12 billion	includes	spending on utility programs ($2.5 billion),

ESCO efficiency ($3.5 billion), and incremental investment in insulation and devices ($4–6 billion),

but excludes business-as-usual insulation spend ($8–$10 billion) to satisfy building codes and

standard practices.

17 Alternatively, 35 percent of the investment would correspond to 60 percent of the energy 

efficiency potential.

Impact on poverty alleviation. While energy efficiency can result in substantial savings 

for the average household, these savings can have an even larger impact on the quality of 

life of low-income households. While the average household spends approximately 

5 percent of its income on energy bills, the average low-income household spends about 

15 percent, and some households on fixed incomes spend as much as 35 percent. 

After home weatherization, the average spending for energy drops to 10 percent among 

low-income households and 21 percent for fixed-income households. These savings 

materially increase the household standard of living and can be put to other uses, 

including setting the thermostat to more a comfortable temperature, as well as for food, 

clothing, or education.

83221_McKinsey_US.indd 14 7/21/09 12:26
15

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PREVIOUS EFFORTS HAVE IMPROVED ENERGY EFFICIENCY

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The width of each column

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found in that group of

measures, as modeled in the

report. The height of each

column corresponds to the

average annualized cost (in

dollars per million BTUs of

potential) of that group of

measures.

83221_McKinsey_US.indd 15 7/21/09 5:45
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Exhibit 8: Milestones in the pursuit of energy efficiency

A surge in the global oil supply in the mid-1980s, however, brought a sharp decline in oil 

and power prices, with relatively stable or declining fossil fuel and power prices following 

for more than a decade. In this environment, sustaining momentum at the national 

level for efforts to improve energy efficiency became increasingly difficult.19 At the same 

time, national energy policy shifted toward greater reliance on markets to better balance 

supply and demand of energy resources. Over the past 10 years, however, with an energy 

crisis in western states, supply disruptions from events overseas and natural disasters 

domestically, and rising concerns about the effects of climate change, interest in a 

coordinated approach to capturing energy efficiency has reemerged. 

In this period, various government agencies and contractors, non-government agencies, 

and academics have explored the potential for energy efficiency and the reasons it so often 

remains an untapped resource. As early as the late 1970s, academics and advocates began 

identifying the available efficiency potential and the barriers to the capture of that potential. 

Within the past decade, four efforts stand out at the national level, with more than 20 others 

at the regional or state level, that generally align with the methodology suggested in the 

“Guidelines for Conducting Energy Efficiency Potential Studies” published by the EPA. 

These studies report some subset of technical, economic, or achievable potential, with seven 

economic potential findings ranging from 10 to 30 percent, presenting an average (and 

median) value of 21 percent, broadly in line with the results of this report. This report is also 

in agreement with the finding of our previous work on greenhouse gas abatement in the 

United States, which identified “mid-range” efficiency savings of 1,284 TWh of electricity 

and 1,424 trillion BTUs of gas in 2030 with an estimated upfront outlay of $280 billion.20

Differences in baseline, timing, and nature (i.e., “mid-range” focus on GHG emissions versus 

focus on NPV-positive energy efficiency) of the reports account for the difference between 

19 Robert Bamberger, Energy Policy: Conceptual Framework and Continuing Issues, Congressional 

Research Service, March 2007.

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report’s 2030 result to obtain this report’s 2020 result include the following: baseline (-$27 billion, 

-264 TWh, -1,638 end-use TBTUs of gas), timing (-$75 billion, -249 TWh, -303 end-use TBTUs of gas), 

and methodology, including accelerated retirement (add $200 billion, 235 TWh, and 1,320 end-use 

TBTUs of gas) and penetration ($150 billion, 74 TWh, 2,210 end-use TBTUs of gas). 

The line chart across the 

upper portion of the exhibit 

shows fluctuations in retail 

power prices (2008 cents 

per kWh) and fossil fuel 

prices (2008 dollars per 

MMBTU) over the past 40 

years, with power prices 

tracking to the vertical 

axis on the left and fossil 

fuel prices tracking to the 

vertical axis on the right. 

The box across the lower 

part of the exhibit displays 

a timeline of key events 

that have affected the 

capture of energy efficiency 

potential in the United States 

over the same period.

83221_McKinsey_US.indd 16 7/21/09 12:26
17

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The three lines present 

indexed values of energy 

intensity for the three sectors 

in this report, with each 

year from 1981 through 

2005 compared to the 

value in 1980. Residential 

and commercial energy 

intensity are normalized 

based on BTUs per square 

foot of space, while industrial 

intensity is based on BTUs 

per real dollar of GDP output.

83221_McKinsey_US.indd 17 7/21/09 12:26
18

Some success stories highlight what is possible

Economic actors as diverse as utilities, government agencies, special purpose entities, 

and the private sector have driven equally diverse programs targeted at improving energy 

efficiency. These programs include appliance standards, building codes, financial 

incentives, financing, and direct installation, to name a few. Several examples of varying 

scope warrant discussion, as they represent the significant, documented impact of a subset 

of approaches, namely national mandatory standards, a state’s concerted effort, a national 

labeling program, and a special purpose entity: 

Federal Equipment Efficiency Standards. Since 1987, when President Ronald 

Reagan signed the National Appliance Energy Conservation Act, mandatory national 

efficiency standards have been an accepted and effective manner for the government to help 

consumers reduce their energy consumption in a range of household appliances. According 

to analyses done by the DOE and ACEEE, standards reduced U.S. electricity use by 88 TWh 

annually and total energy use by 1.2 quadrillion primary BTUs annually in 2000. These 

savings represent 2.5 percent and 1.3 percent reduction of total electricity and energy use 

respectively. From 1987 through 2000 appliance standards saved consumers approximately 

$50 billion in reduced energy bills at an incremental appliance cost of $15 billion. These 

savings are expected to grow to 250 TWh in 2010 as standards have become more strict since 

data were last available.22

State of California. From 1977 through 2007, per-capita electricity consumption in 

California remained nearly flat, growing at 0.07 percent annually, compared to 

1.3 percent in the nation overall. Adjusting for such structural differences as climate, 

demographics, and industry and commercial business mix, and incorporating 

measurement uncertainty,23 reveals that California consumes approximately 

11 to 19 percent24 less energy per capita than the U.S. average. One notable structural 

difference is that California’s lighter industry mix accounts for 38 percentage points of 

an apparent 60 percent lower per capita industrial consumption. The state’s strategy 

for energy resources has emphasized utility-led energy efficiency programs, significant 

building code and appliance standard initiatives, and a range of other innovative efforts. 

Some observers have identified benefits of this energy efficiency, including gross state 

product of approximately $1,000 per capita and reduced energy burden on the low-income 

population.25 It is worth noting that electricity prices in California are 35 percent higher 

than the national average, partly due to the public-benefit charge of $0.0054 per kWh 

(6 percentage points of the difference) to fund energy efficiency. This price difference 

may play a role in decreasing demand through microeconomic supply-demand dynamics, 

especially in the industrial sector.

ENERGY STAR®. The United States Department of Energy (DOE) and Environmental 

Protection Agency (EPA) jointly operate this nationwide voluntary standards and labeling 

program. Since its inception in 1992, ENERGY STAR has become a leading international 

brand for energy efficient products. It covers more than 60 product categories across 

nine broad product classes, including major appliances, office equipment, and consumer 

electronics. It also addresses new home construction, residential retrofit, and commercial 

and industrial energy management. Through 2007, the program has helped save 

1,790 trillion BTUs of primary energy (159 TWh). There is substantial opportunity, 

22	 “Appliance and Equipment Efficiency Standards: One of America’s Most Effective Energy-Saving Policies,”

ACEEE, 2009.

23 Anant Sudarshan and James Sweeney, Deconstructing the Rosenfeld Curve: Understanding California’s 

Low Per Capita Electricity Consumption, Stanford University, September 30, 2008.

24	 At first glance the relative per capita consumption of 11,900 kWh per capita for the U.S. vs.		6,400 kWh for

California shown in this report and the “Rosenfeld Curve” suggests California consumes approximately

40 percent less energy per capita than the U.S. average.

25	 Mark Bernstein, et al., The Public Benefit of California’s Investments in Energy Efficiency, RAND 

Corporation, March 2000.

83221_McKinsey_US.indd 18 7/21/09 12:26
19

Unlocking Energy Efficiency in the U.S. Economy

1. A compelling nationwide opportunity

however, with some new products added to the program, such as commercial food service, 

while many appliances and devices remain unaddressed. Furthermore, the program 

is only in the early stages of deploying program models to address sizeable needs in the 

commercial and residential retrofit segments.

Efficiency Vermont. The state legislature and Vermont Public Service Board created 

Efficiency Vermont in 2000 to help state residents save energy, reduce energy costs, and 

protect the state’s environment. Efficiency Vermont is the nation’s first state-wide “energy 

efficiency” utility. It is funded by a surcharge on customer electricity bills and is operated 

by an independent, non-profit organization under contract to the Public Service Board. In 

Efficiency Vermont’s first 8 years of operation, businesses and homeowners who worked 

with the organization saved approximately 398 GWh of electricity. In 2007, Efficiency 

Vermont’s energy savings were approximately 94 GWh, or 1.6 percent of the state’s 

5,865 GWh of retail sales, completely offsetting business-as-usual electric load growth 

forecasts in the state.26 Load-serving entities and other special-purpose and government 

entities have made similar efforts, notably, but not exclusively, in New England, New York, 

New Jersey, and the West Coast states. 

26 Year 2007 Annual Report, Efficiency Vermont, October 2008.

83221_McKinsey_US.indd 19 7/21/09 12:26
20

DEMAND-SIDE MANAGEMENT 

Opportunities in demand-side management (DSM) are prompting utilities to invest in 

smart grid and advanced metering infrastructure. DSM’s main goal is to reduce peak 

loads, which allows utilities to flatten their power demand curves, shifting load from 

expensive peaking units to lower-cost base-load plants. Reducing peak consumption 

increases reliability of the electric grid, reducing outages for customers and operations 

and maintenance costs for utilities. Furthermore, some DSM measures can decrease 

total energy consumption while delivering the same value to customers. 

Since the 1980s, DSM has focused primarily on commercial and industrial (C&I) 

customers, with more than 165 utilities in North America having programs for these 

customers, including direct load control (DLC) and tiered-pricing programs. However, 

emerging smart grid technology is shifting the focus in DSM from direct load control to 

dynamic pricing and making programs possible for residential and small-to-medium 

business segments. Residential DSM programs have so far achieved mixed results: 

pilots in California and Nevada have demonstrated strong potential, though other highprofile pilots, such as Puget Sound Energy in 2001, reported high implementation costs 

and insufficient peak reduction. Larger residential DSM deployments will be needed to 

better understand its actual savings potential. 

Four types of DSM programs warrant discussion:

 Direct load control and incentive-based programs. DLC programs are one of a 

range of incentive-based DSM approaches that include interruptible/curtailment 

rates, demand bidding/buyback programs, emergency demand response 

programs, and capacity market programs.1

 DLC programs allow utilities to control 

specific energy-intensive loads, such as air conditioners, in exchange for a billing 

discount to the customer. DLC programs are wide-spread; about one-third of utilities 

cycle residential air conditioners, with average participation rates of 15 percent, and 

roughly 60 percent of utilities offer load-management programs for C&I customers.2

DLC programs have proven cost effective and have yielded substantial savings: 

A survey of 24 programs showed average peak load savings of 29 percent for 

participating customers with minimal reduction in total energy consumed.3

 Con 

Edison, for example, offers its residential and small commercial customers a free 

programmable thermostat in exchange for the ability to cycle their air conditioning 

load, although the customer can override the decision if it occurs at an inconvenient 

time. Con Edison has installed more than 24,000 thermostats with a peak load 

reduction of 29 MW.4

 Furthermore, Con Ed’s DLC program appears to be cost 

effective, with costs estimated at $455 to 626 per KW saved,5

 compared to $500 to 

$1,400 per KW for additional peak generation capacity.6

1 “Assessment of Demand Response and Advanced Metering,” Federal Energy Regulatory Commission, 

Staff Report, August 2006.

2 “Utility Load Control Programs,” Chartwell, March 2006.

3 “Residential Electricity Pricing Pilots,” eMeter Strategic Consulting, July 2007.

4	 New York State Public Service Commission, “Energy Efficiency Portfolio Standard Working	Group	2	

– Program Summaries: Direct Load Control,” September 2005.

5 New York State Public Service Commission, “Consolidated Edison Company of New York, Inc’s Direct 

Load Control Program,” September 2005.

6	 According	to World Bank report on equipment prices in the power sector,	a	gas turbine simple cycle

plant costs $530/KW for	a	5	MW plant, $970/KW for	a	25MW plant and $1380 for	a	5	MW plant.		

“Study of Equipment Prices in the Power Sector.” The International Bank for Reconstruction and

Development, The World Bank Group.		2008.

83221_McKinsey_US.indd 20 7/21/09 12:26
21

Unlocking Energy Efficiency in the U.S. Economy

1. A compelling nationwide opportunity

Because DLC programs are used primarily for air conditioning loads in the residential 

sector and inductive loads in C&I, its potential is limited; other programs will be needed 

to reduce peak loads further. In addition, DLC programs are perceived to be heavyhanded, because they give control of devices inside homes and businesses to utilities. 

 Dynamic pricing. Dynamic pricing programs create energy prices that more closely 

reflect the utility’s actual cost of power at the time of consumption. Use of these 

programs has been limited mostly to large C&I customers; however, residential pilots 

have emerged recently in many states. Almost one-third of utilities offer dynamic 

rates,7

 including Time of Use, Critical Peak Pricing (CPP) and Real Time Pricing.8 Pilots 

show an average residential reduction in peak consumption due to price signals of 

approximately 22 percent, although results vary significantly by pilot, with overall 

consumption dropping by around 4 percent.9

 California’s 2,500-participant Statewide 

Pricing Pilot suggests CPP can reduce California’s peak load by 1,500 MW to more 

than 3,000 MW.10 Because results have varied significantly by pilot, more large-scale 

pilots and roll-outs will be necessary to better understand the energy savings potential.

 Consumption information and transparency. Other DSM programs provide 

customers with greater transparency into their consumption, thereby encouraging 

them to reduce demand. Methods include bill-related signals, in-home displays, 

and home automation. Bill-related signals provide more frequent and easier-tounderstand billing with clear indications of relative consumption levels. When done 

monthly, these programs can reduce consumption by up to 6 percent, while weekly 

or daily billing offers savings of 10 to 13 percent.11 Early pilots suggest that in-home 

displays, devices that provide real-time information on home energy consumption, 

could provide savings of 4 to 15 percent.12 Home automation, including 

programmable thermostats and smart appliances, are in the earliest development 

phase of all DSM programs; however, early results indicate peak reduction of up to 

46 percent, with reductions in total consumption of 11 percent.13

7 “Utility Load Control Programs,” Chartwell, March 2006.

8 Time of Use (TOU) rates: electricity rates are set in tiers for different times of the day and typically 

do not change more than twice per year. Many large commercial and industrial customers already 

have TOU pricing. Critical Peak Pricing (CPP): during times of extreme peak, prices will increase 

dramatically. Real-Time Pricing (RTP): prices change on an ongoing basis to reflect closely the utility’s 

cost of generating or purchasing electricity.

9 “Residential Electricity Pricing Pilots,” eMeter Strategic Consulting, July 2007.

10 Roger Levy, “California Statewide Pricing Pilot (SPP) Overview and Results 2003-2004,” 2005.

11 Sarah Darby, “The Effectiveness Of Feedback On Energy Consumption,” Environmental Change 

Institute, Oxford University, April 2006.

12 Sarah Darby, “The Effectiveness of Feedback on Energy Consumption, “Environmental Change 

Institute, University of Oxford, April 2006.

13 “Residential Electricity Pricing Pilots,” eMeter Strategic Consulting, July 2007.

83221_McKinsey_US.indd 21 7/21/09 12:26
22

THE CHALLENGE OF CAPTURING ENERGY EFFICIENCY

Although the U.S. economy has captured measurable and important amounts of energy 

efficiency since the oil crises of the 1970s, many attractive opportunities remain available. 

The fundamental challenge for the nation is, therefore, how to bring programs like these to 

scale and capture the full NPV-positive potential that exists today. 

Both the nature of energy efficiency and attributes of consumer behavior 

present challenges to efficiency capture

The nation’s mixed success in improving energy efficiency stems in part from the 

significant barriers that surround every cluster of potential and in part from systemlevel challenges associated with pursuing energy efficiency opportunities at scale in our 

economy. Four fundamental attributes of energy efficiency, some of them the legacy of how 

we have approached the opportunity over time, make the task of capturing these savings 

truly challenging: 

 Initial outlay. Energy efficiency measures will require upfront investment of 

capital with savings that will accrue over sometimes lengthy periods. Despite the 

NPV-positive nature of the investments identified in this report, behavioral barriers 

to upfront capital outlays and historically low savings rates have prevented consumers 

from capturing substantial amounts of efficiency. Issues of capital allocation and 

risk of business termination have challenged the commercial and industrial sectors. 

Access to capital remains an issue in all sectors.

 Fragmentation. As mentioned before, energy efficiency opportunities are scattered 

across the economy: no single industry, building type, population cluster, climate 

region, or end-use alone can unlock the opportunity nationwide. The dispersion 

means that while the NPV-positive energy efficiency potential is collectively large, 

individually each efficiency opportunity is of relatively low priority. The level of 

penetration needed to capture something approaching the full potential has rarely 

been achieved by any technological advancement in society, and even less frequently in 

as short a time frame as a decade.

 Low awareness and attention. Improving energy efficiency is rarely the primary 

focus or responsibility of any major agent in the economy: businesses have other areas 

of strategic focus, energy providers focus on reliability, and residential end-users 

typically face competing needs for their funds and attention. Few businesses targeting 

these opportunities have existed before, apart from the energy services company 

(ESCOs) industry which represent a small part of the energy industry. Additionally, 

energy efficiency is often a lower priority in the selection of energy-consuming devices 

than functionality, form, or reliability. 

 Difficult to measure. Reduced energy consumption is not a physical product 

and frequently difficult to measure. Given the diverse factors that affect energy 

consumption, including weather, economic activity, and consumer behavior, energy 

savings require measurement and verification methods more challenging than the meter 

reading required to accurately measure consumption. Furthermore, saving energy is a 

more abstract concept than consuming energy, because it expresses a difference relative 

to what would have happened had consumers made different choices. 

Since the late 1970s economists have tried to understand why consumers diverge from 

classical economic decision criteria through a better understanding of behavioral 

economics. Several heuristics have emerged which may explain from a behavioral 

standpoint how these attributes arise or why some of the barriers they present persist.

83221_McKinsey_US.indd 22 7/21/09 12:26
23

Unlocking Energy Efficiency in the U.S. Economy

1. A compelling nationwide opportunity

Given the volume of decisions consumers make daily and the time it would take to rationally 

analyze each and every one, consumers default to avoiding action on less interesting 

opportunities. This behavior (termed status quo bias) manifests as consumers hesitating to 

upset their current situation. For example, a study revealed most investors do not adjust the 

asset allocation of their retirement funds even in the face of significant market fluctuations.27

In a similar manner, consumers are unwilling to invest money in energy efficiency upgrades 

that are financially beneficial as it disrupts their current finances. 

When consumers do think about the economics of a decision though, there are other 

apparently “irrational” components to their decision making. Many consumers are 

prone to value current or short-term value much higher than longer-term value, and thus 

attach a higher discount rate to investments that pay back more slowly (termed hyperbolic 

discounting).28 This is likely one reason the slower payback of energy efficiency manifests 

as a high discount factor in customer behavior. In addition the context in which consumers 

make decisions (termed framing) can influence those decisions. Studies have shown that 

people are much more likely to act when confronted with a potential loss rather than a 

potential savings.29 Currently efficiency investments are typically framed as a savings 

and are thus prone to this effect. Representing them as avoiding a loss may make them 

more appealing.

Studies have also shown that when consumers must incur a loss to receive a potential gain, 

that gain must significantly outweigh the loss (termed loss aversion). For example, when 

placing a bet with even odds most gamblers demand a $200 reward to place a wager of 

$100.30 Thus, even if an energy efficiency measure is strongly NPV-positive, consumers 

may require the reward of future savings to more than double the upfront investment 

“wager” (i.e., a cost to benefit ratio of 2 or higher). However, this aversion to investing 

decreases when consumers have already decided to spend money. Consumers become 

much less sensitive to incremental costs as they become a smaller percentage of the total 

cost (diminishing sensitivity).31 The incremental cost of an efficient air conditioner, for 

example, appears more palatable to consumers when compared to the price of a new home 

than when compared to the price of an alternative air conditioner. 

The nature of energy efficiency and attributes of consumer behavior combine to create a 

series of opportunity-specific barriers that the market must overcome to unlock energy 

efficiency on a national scale (Exhibit 10). These barriers require comprehensive, 

opportunity-specific solution strategies to unlock the potential, as well as system-level 

actions to address regulatory barriers and enable broader market impact.

27 William Samuelson and Richard Zeckhauser, “Status Quo Bias in Decision Making,” Journal of Risk and 

Uncertainty, 1988.

28 George Ainslie, “Specious Reward: A Behavioral Theory of Impulsiveness and Impulse Control,” 

Psychological Bulletin, 1975.

29 Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” 

Science, 1981.

30 Amos Tversky and Daniel Kahneman, “Advances in Prospect Theory: Cumulative Representation of 

Uncertainty,” Journal of Risk and Uncertainty, 1992.

31 Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” 

Econometrica, 1979.

83221_McKinsey_US.indd 23 7/21/09 12:26
24

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Exhibit 10: Multiple challenges associated with pursuing energy efficiency

Opportunity-specific barriers pose significant hurdles to capturing clusters 

of energy efficiency potential

Achieving meaningful energy savings will require a variety of approaches tailored to 

the specific barriers that have inhibited capture of individual efficiency opportunities. 

Identifying and understanding these barriers has been a focus of energy efficiency 

research for decades; our investigation drew upon the considerable body of work on 

the topic. Most sources refer to a consistent set of barriers and point to the need for a 

comprehensive mix of policies, due to the presence of multiple, sometimes overlapping 

barriers. Our research additionally suggests that unlocking the potential of a given 

cluster requires addressing all major barriers that affect that cluster. Many traditional 

approaches (e.g., monetary incentives or awareness campaigns) have focused on removing 

the most significant or most addressable barriers, but have often fallen short of a holistic 

solution that comprehensively addresses all barriers.

Barriers to greater efficiency. To simplify the discussion, we have grouped wellknown barriers into the following three categories:

 Structural. These barriers arise when the market or environment makes investing in 

energy efficiency less possible or beneficial, preventing a measure that would be NPVpositive from being attractive to an end-user:

— Agency issues (split incentives), in which energy bills and capital rights are 

misaligned between economic actors, primarily between landlord and tenant 

— Ownership transfer issues, in which the current owner cannot capture the 

full duration of benefits, thus requiring assurance they can capture a portion of the 

future value upon transfer sufficient to justify upfront investment; this issue also 

affects builders and buyers

On the left, this exhibit 

summarizes the 

fundamental difficulties 

of pursuing greater 

energy efficiency and 

the opportunity-specific 

barriers that affect and 

help define clusters of 

efficiency potential. On the 

right, it shows opportunitylevel solution strategies 

to overcome barriers and 

suggests the essential 

elements of an overarching 

strategy for capturing energy 

efficiency potential.

83221_McKinsey_US.indd 24 7/21/09 12:26
25

Unlocking Energy Efficiency in the U.S. Economy

1. A compelling nationwide opportunity

— “Transaction” barriers, a set of hidden “costs” that are not generally 

monetizable,32 associated with energy efficiency investment; for example, the 

investment of time to research and implement a new measure

— Pricing distortions, including regulatory barriers that prevent savings from 

materializing for users of energy-savings devices.

 Behavioral. These barriers explain why an end-user who is structurally able to 

capture a financial benefit still decides not to: 

— Risk and uncertainty over the certainty and durability of measures 

and their savings generates an unfamiliar level of concern for the decision maker

— Lack of awareness, or low attention, on the part of end-users and decisionmakers in firms regarding details of current energy consumption patterns, 

potential savings, and measures to capture those savings

— Custom and habit, which can create an inertia of “default choices” that must 

be overcome

— Elevated hurdle rates, which translates into end-users seeking rapid pay back 

of investments – typically within 2 to 3 years. This expectation equates to a 

discount rate of 40 percent for investments in energy efficiency, inconsistent with 

the 7-percent discount rate they implicitly use when purchasing electricity (as 

embodied by the energy provider’s cost of capital). It is beyond the scope of this 

report to evaluate the appropriate risk-adjusted hurdle rate for specific end-users, 

though it seems clear that the hurdle rates of energy delivery and energy efficiency 

are significantly different.

 Availability. These barriers prevent adoption even for end-users who would choose 

to capture energy efficiency opportunities if they could:

— Adverse bundling or “gold plating,” situations in which the energy efficient 

characteristic of a measure is bundled with premium features, or is not available in 

devices with desirable features of higher priority, and is therefore not selected

— Capital contraints and access to capital, both access to credit for consumers 

and firms and (in industry and commerce) competition for resources internally 

within balance-sheet constraints

— Product (and service) availability in the supply chain; energy efficient 

devices may not be widely stocked or available through customary purchasing 

channels, or skilled service personnel may not be available in a particular market 

— Installation and use issues, where improper deployment or use 

eliminates savings. 

In practice, nearly all clusters reflect a mix of barriers, with “awareness and information” 

and “access to capital” the most frequently observed. In fact, 10 of our 14 clusters face both 

of these barriers. “Product or service availability” is the third-most common, with all three 

of these barriers impacting six of our 14 clusters. The relative importance of these barriers 

is broadly in agreement with other work.33 The mixture of barriers complicates the energy 

efficiency landscape enormously. We can draw several general conclusions from our 

analyses:

 Unlocking the full potential of energy efficiency requires a holistic 

approach. Such an approach would address all barriers within a given cluster. None of 

32 We have included direct transaction costs in our calculation of the NPV-positive potential where present 

and calculable (e.g., the cost of running a new connection to a gas pipeline, if a user switches from electric 

to gas heating and piping is not in place at that address).

33 Steve Sorrell, et al., The Economics of Energy Efficiency: Barriers to Cost Effective Investment, Edward 

Elgar, 2004.

83221_McKinsey_US.indd 25 7/21/09 12:26
26

the 14 clusters offers a simple one-step approach as all clusters face at least two barriers, 

11 clusters face three or more barriers, and eight clusters face four or more barriers.

 Agency issues, in the sense of landlord-tenant issues, are not as 

widespread as often thought. The industrial sector faces this barrier relatively 

little. Its effect is only somewhat prevalent in the residential sectors, with 8 percent of 

residential potential affected. Impact varies in the commercial sector, with roughly 

5 to 25 percent of the potential impacted in most commercial subsectors. However, 

agency issues are concentrated in a few commercial subsectors, with the retail, office, 

and food service subsectors having up to 75 percent of their energy efficiency potential 

affected. In total, approximately 9 percent of potential across all sectors is affected by 

this type of agency issue.

 Ownership transfer issues, sometimes considered a variant of agency 

issues, pose a more significant challenge. Though the benefits of energy 

efficiency measures in residential homes have an average lifetime of 17 years and 

pay back within 7 years, 40 percent of households will have moved in that time. This 

issue is less significant for commercial buildings that have longer tenancy periods, 

though in some commercial buildings, such as retail or food service, tenancies tend 

to be significantly shorter than the 15 year average lifetime of commercial-sector 

energy efficiency measures. Thus current owners are likely to capture only a portion 

of available savings; for many investments to make financial sense however, owners 

must be confident they can capture enough of the value of future savings at the time of 

building sale to warrant the upfront investment.

 Access to capital and elevated hurdle rates affect 43 percent of the NPVpositive efficiency potential. These issues tend to cover different segments and 

technologies than principal-agent issues. If hurdle rates are decreased from the 

40 percent typical of residential end-users (equivalent to a 2- to 3-year payback) to 

7 percent, 3.9 quadrillion end-use BTUs become NPV-positive. However, even the 

5.2 quadrillion end-use BTUs that remain available at a 40-percent discount factor 

represent an attractive and unseized opportunity.

Opportunity-specific solution strategies can overcome these barriers

Our review of previous and proposed programs designed to encourage greater energy 

efficiency suggest that four categories of measures can aid in unlocking the clusters 

of efficiency potential in the residential, commercial, and industrial sectors. To fully 

overcome the barriers that affect a single cluster of potential, a combination of solution 

strategies will likely be needed, though in some clusters a single targeted solution strategy 

may be sufficient.

 Information and education. Increasing awareness of energy use and knowledge 

about specific energy-saving opportunities would enable end-users to act more swiftly 

in their own financial interest. Options include providing more information on utility 

bills or through the use of in-building displays, voluntary standards, labeling schemes, 

audits, assessments, and awareness campaigns. Such solutions will likely prove 

insufficient to drive broad adoption on their own, but they represent a necessary part of 

most holistic solutions.

 Incentives and financing. Given the large upfront investment needed to capture 

efficiency potential, various approaches could reduce the financial hurdles that 

end-users face. Options include traditional and creative financing vehicles (such as 

energy efficiency mortgages), monetary incentives or grants, including tax and cash 

incentives, and price signals, including tiered pricing and pricing of externalities 

(e.g., carbon prices). 

 Codes and standards. In several clusters, some form of mandate may be 

warranted to expedite the process of capturing potential, particularly where enduser or manufacturer awareness and attention are particularly low. Options include 

83221_McKinsey_US.indd 26 7/21/09 12:26
27

Unlocking Energy Efficiency in the U.S. Economy

1. A compelling nationwide opportunity

equipment standards, building codes (including improving code enforcement), and 

mandatory audits or assessments. Such mandates can often yield high “adoption” 

because they bypass the consumer decision-making process, but they can face a 

challenging political process and must be kept up to date to capture the full potential.

 Third-party involvement. A private company, utility, government agency, or nongovernmental organization could support a “do-it-for-me” approach by purchasing and 

installing energy efficient improvements directly for the end user, thereby essentially 

addressing all non-capital barriers. When coupled with monetary incentives covering 

potentially the full cost, this solution strategy could address all barriers and unlock 

almost the entire potential, though some portion of end-users might opt out of such a 

program, thereby preventing full capture. 

The challenge with every cluster of efficiency potential is to identify appropriate solution 

strategies that will address existing barriers with sufficient force to unlock the savings. 

Through an extensive review of the literature on energy efficiency and interviews with 

experts in this and related fields, we have attempted to identify which solution strategies 

address which barriers within each cluster. Some solution strategies are “proven” to work 

at the national level; some have been “piloted” at the scale of large cities, counties, or even 

states but likely need further refinement before being scaled to a national effort; and 

others are “emerging” and seem plausible enough to warrant a trial or may have been tried 

on a sub-metropolitan scale. We categorize each of the 47 solution strategies by these three 

levels of historical experience relative to a nationally scaled deployment: proven, piloted, 

and emerging. 

In addition, continued progress against the full potential would require careful monitoring 

of strategies to identify unaddressed barriers, refining the approach to address those 

barriers, and determining when to discontinue a strategy once the NPV-positive potential 

is exhausted or is on a self-propelling trajectory to full capture. 

Our objective is to expose a promising range of solution strategies that could contribute 

to a more aggressive scaled-up pursuit of the national efficiency potential. In Chapters 

2 through 4 we will describe the potential in each cluster based on its distinguishing 

characteristics, outline the important barriers that challenge the capture of that potential, 

and map possible solutions against those barriers. We have attempted to quantify the 

impact of various measures wherever possible; however, that has not been feasible in 

every case, often due to the qualitative nature of persistent barriers (e.g., information). In 

Chapter 5 we discuss the importance of developing a holistic implementation strategy that 

incorporates five observations from this research.

* * *

If the U.S. were to progress through 2020 in line with the EIA’s projections for energy 

consumption – the nation would have expanded substantially the energy infrastructure, 

captured a relatively low level of energy efficiency above and beyond that legislated in the 

Energy Independence and Security Act of 2007, and constructed many more inefficient 

commercial and residential buildings and appliances. If this were to occur, the U.S. will 

have foregone a significant opportunity to improve its energy productivity and, thus, its 

international competitiveness. 

83221_McKinsey_US.indd 27 7/21/09 12:26
83221_McKinsey_US.indd 28 7/21/09 12:26
29

The residential sector will consume 29 percent of the

baseline energy in the United States in 2020, accounting

for 11.4 quadrillion BTUs of end-use energy (Table 1). 

These tables, present at the introduction to each sector

and cluster, show the end-use and primary energy

consumption in 2008 and 2020 and potential savings in

2020, each split out by fuel. We provide the same metrics

for GHG emissions and abatement. Finally, the boxes at

the bottom show the financial impact: the present value of

the investment, the present value of the savings, and the

annual savings. With an annual growth rate of 0.4 percent,

consumption is forecast to reach 11.4 quadrillion end-use

BTUs in 2020, driven by population growth, larger homes,

and more electronic devices in each household.34 Relative 

to the business-as-usual forecast, deploying all NPVpositive energy efficiency improvements in the residential

sector would reduce its energy consumption in 2020 by 

28 percent, saving the U.S. economy an estimated 

$41 billion in annual energy costs and avoiding some 

360 million tons of CO2e emissions in that year. Exhibit 11

illustrates energy efficiency measures of a typical household, ranging from improvements

in the house’s building shell to upgrading to more energy efficient electrical devices. The

upfront investment associated with this level of improvement – involving efficiency

upgrades for 129 million homes, their appliances and HVAC systems,35 and 2.5 billion

electronic devices – would necessitate some $229 billion in incremental investment and

provide present value savings of $395 billion.

Considering the dominant barriers to energy efficiency and selected attributes of energy

consumption, we organized the efficiency potential in the residential sector into five

clusters (Exhibit 12). Some 71 percent of the end-use potential (53 percent of primary

34 AEO 2008, NEMS.

35 We refer to home heating and cooling systems generically as HVAC systems (heating, ventilation, and

air conditioning), whether a home has a heating system, a cooling system, an air exchanger or all three

systems. We group changes to building shell and HVAC systems together because they work in tandem to

determine the conditioning of the living space.

2. Approaches to greater energy

efficiency in the residential sector

Table 1: Overview of energy use in the residential sector

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

10,880 11,410 3,160 28

 Electricity TWh 1,410 1,510 390 26

 Natural gas 4,960 5,200 1,460 28

 Other fuels* 1,130 1,060 370 35

PRIMARY ENERGY 

Trillion BTUs

21,190 22,480 6,020 27

 Electricity 14,910 16,010 4,130 26

 Natural gas 5,150 5,400 1,520 28

EMISSIONS 

Megatons CO2e

1,270 1,350 360 27

PV of upfront

investment – 

2009-2020: $229 billion

PV of energy savings 

– 2009-2020: 

$395 billion

Annual energy

savings – 2020: 

$41 billion

 * End-use energy is approximated as equivalent to primary energy

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 29 7/21/09 12:26
30

energy potential) resides in improving the building shell and heating and cooling

equipment, mostly in existing homes. The remaining 29 percent of end-use potential

(47 percent of primary energy potential) is split between electrical devices and small

appliances, and lighting and appliances. 

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Exhibit 11: Potential energy efficiency measure for a typical home

For each cluster, we will outline the energy efficiency potential, describe the barriers that

have prevented its capture in the past, and explore possible solution strategies.

1. Existing non-low-income homes (1,300 trillion end-use BTUs): Low

consumer awareness and demand, fast payback requirements, ownership transfer

issues, high transaction costs, and inconsistent installation practices pose the most

formidable and persistent barriers. Possible solution strategies to address these

barriers include home energy assessments, creative financing solutions, monetary

incentives, and mandatory upgrades. 

2. Existing low-income homes (610 trillion end-use BTUs):This cluster in

particular suffers from capital constraints, though the barriers that apply to the

previous cluster apply here as well. Low-income weatherization programs scaled up

from today’s levels are a potentially powerful measure to address all barriers in this

cluster, including the capital constraint.

3. New homes (320 trillion end-use BTUs):Potential in this cluster reflects the

lack of incentives for builders to construct high-efficiency homes. Solution strategies

to secure this potential include greater penetration of voluntary building labeling,

incentives to builders or home buyers, and improved, standardized, and enforced

building codes.

4. Electrical devices and small appliances (590 trillion end-use BTUs):

Potential is highly fragmented across 2.5 billion consumer electronics devices and

small appliances (e.g., computers, televisions, coffee makers, battery chargers). For

most device classes, energy efficiency has received little attention from consumers

and manufacturers. Promising solution strategies include voluntary labeling and

mandatory standards addressing both active and standby consumption.

Each of the callouts

represents some of the

measures that are modeled

to drive residential energy

efficiency in the report.

83221_McKinsey_US.indd 30 7/21/09 12:26
31

8QORFNLQJ(QHUJ\(I¿FLHQF\LQWKH86(FRQRP\

$SSURDFKHVWRJUHDWHUHQHUJ\HI¿FLHQF\LQWKHUHVLGHQWLDOVHFWRU

 Lighting and major appliances36 (340 trillion end-use BTUs):/LJKWLQJ

GRPLQDWHVWKHSRWHQWLDOLQWKLVFOXVWHUZLWKODFNRIFRQVXPHULQIRUPDWLRQDQGTXDOLW\

WUDGHRIIVUHSUHVHQWLQJWKHPRVWVLJQLILFDQWEDUULHUV6ROXWLRQVLQYROYHYROXQWDU\

VWDQGDUGVDQGODEHOLQJPRQHWDU\LQFHQWLYHVDQGPDQGDWRU\VWDQGDUGV

Building shell 

and HVAC

system

Electronics

and small

appliances

Major 

appliances

All

incomes 

New build

Low income

(<$30,000)

Non-low income

(>$30,000)

Replacement and surviving stock

4. Electrical

devices & small 

appliances

(590)

3. New homes

(320)

2. Existing lowincome homes

(610)

1. Existing nonlow-income 

homes

(1,300)

5. Lighting & major

appliances

(340)

Source: EIA AEO 2008, McKinsey analysis

Building shell 

and HVAC

system

Electronics

and small 

appliances

Major 

appliances

New build

Low income

(<$30,000)

Non-low income

(>$30,000)

Replacement and surviving stock

End-use energy, avoided consumption; total = 3,160 trillion BTUs

Primary energy, avoided consumption; total = 6,020 trillion BTUs

All

incomes 

Clusters

2020 potential (TBTU)

4. Electrical

devices & small 

appliances

(1,820)

3. New homes

(480)

2. Existing lowincome homes

(870)

1. Existing non-lowincome homes

(1,860)

5. Lighting & major

appliances

(990)

Exhibit 12: Clusters of energy efficiency potential in the residential sector

36 $SSOLDQFHVLQFOXGHZDWHUKHDWHUGLVKZDVKHUVFORWKHVZDVKHUVFORWKHVGU\HUVUHIULJHUDWRUVIUHH]HUVDQG

FRRNLQJHTXLSPHQW

The upper and lower charts 

break out the energy 

efficiency potential in 2020 

for the residential sector 

in end-use and primary 

energy respectively. Each 

area represents a cluster of 

efficiency potential: area is 

proportional to the relative 

share (of total potential 

in the sector) associated 

with that cluster, while the 

number next to the cluster 

name provides the efficiency 

potential, measured in trillion 

BTUs.

83221_McKinsey_US.indd 31 7/21/09 12:26
32

WHOLE-BUILDING DESIGN

By viewing a building as a system that can be optimized within a specific site – rather 

than as a set of independent end-uses – whole-building design achieves additional 

energy savings in a cost-effective manner. Though it requires a fundamental change in 

how end-users interact with energy, this approach offers four opportunities:

 Optimizing building design for the local environment. Design decisions, 

including building orientation, landscaping, and exterior design, can reduce 

demand for heating and cooling. For example, surface-to-volume ratio of the 

structure, awning use, day lighting, total window area, roof color and pitch, and 

even wall color and chemistry of the pigment used will affect a building’s energy 

needs. Optimal designs vary by climate and latitude but typically save 10 percent 

of energy use and as much as 40 percent in some cases.1

 This approach requires 

that energy use be included as a parameter in the design and construction 

processes. 

 Minimizing energy consumption. Energy consumption can be reduced by 

modifying the building size, shape, and interior layout, as well as by using passive 

means for heating, cooling, and water heating. The average size of a new single 

family home in the U.S., for example, increased from 1,500 square feet in 1970 

to 2,480 square feet in 20072

—a 65 percent increase—with a parallel increase in 

energy needed for space conditioning; over this period, the average household 

shrank from 3.0 to 2.6 persons.3

 

 Pursuing holistic designs. Due to specialization in education and building trades, 

contractors tend to design each mechanical system in isolation. Holistic system 

design would reduce energy consumption and capital investment by, for example, 

recovering furnace waste heat for water heating or upgrading the building envelope 

and using passive heating and cooling systems to reduce space conditioning load, 

enabling the HVAC system to be reduced by as much as half, or even eliminated.4

 

 Improving design and installation practices. Improper design and installation of 

HVAC equipment and building insulation can reduce their efficiency by as much as 

30 percent.

Though many of these measures qualify as NPV-positive, their deployment would 

require a shift in the way end-users interact with and think about energy use. In some 

cases, these measures could represent a tradeoff with aesthetics or building use that 

end-users might find unacceptable, leading to a change in utility.

1 Dianna Lopez Barnett and William Browning, A Primer on Sustainable Building, Rocky Mountain 

Institute, 2007.

2 “Housing Facts, Figures and Trends”, NAHB, 2008. <www.nahb.org>.

3 U.S. Census Bureau,.<www.Census.gov>.

4 Right-size heating and cooling equipment,” EERE, January 2002.

83221_McKinsey_US.indd 32 7/21/09 12:26
33

Unlocking Energy Efficiency in the U.S. Economy

2. Approaches to greater energy efficiency in the residential sector

REBOUND EFFECTS

Rebound effects explain why actual energy savings fall short of expected savings. 

Studies have confirmed the existence of four effects we classify as rebound:1

 Technical estimation. “Shortfall” occurs when actual savings fall short of 

engineering estimates. There are two potential causes: improper installation, 

which can reduce savings by 20 to 30 percent, and necessary simplifications in 

engineering models, which can result in overestimating savings by as much as 

50 percent, especially for space conditioning.

 Direct rebound effect. “Take-back” involves increased energy use concurrent 

with deployment of an energy efficiency measure. Studies have found average 

interior temperatures were reset 1 to 3 degrees Fahrenheit higher in homes 

receiving insulation upgrades, representing a 15 to 30 percent decrease in energy 

savings.2,3 This effect can be as much as 50 percent in some settings.

 Indirect rebound effect. If end-users redeploy money saved through energy 

efficiency to purchase (or consume) energy in another form, overall energy 

consumption will not decrease, though users clearly do more work or capture more 

utility with the same investment.

 Macroeconomic effect. Energy efficiency may paradoxically increase long-term 

consumption by improving access to energy among populations that previously 

had limited access to it and by increasing economic growth. Opinions are divided 

on this point and the impact of increased efficiency on energy prices in regulated 

and restructured markets remains uncertain.4

 

Our research addressed the issue of technical estimation by matching our building 

modeling output to consumer survey data. Direct and indirect rebound effects 

represent improvements in consumer utility (i.e., amount of work or comfort per-unit 

of energy) and by extension energy productivity. Finally, it is likely that legislative 

changes or regulatory dynamics will result in price adjustments that offset the potential 

downward pressure of efficiency on energy prices.

1 Steve Sorrell, “The Rebound Effect: An Assessment of the Evidence for Economy-wide Energy 

Savings from Improved Energy Efficiency,” UK Energy Research Centre, October 2007.

2 Chris Martin and Martin Watson, “Measurement of Energy Savings and Comfort Levels in Houses 

Receiving Insulation Upgrades,” Energy Monitoring Company for Energy Saving Trust, June 2006.

3 Geoffrey Milne and Brenda Boardman, “Making Cold Homes Warmer: The Effect of Energy Efficiency 

Improvements in Low-Income Homes” Energy Action Grants Agency Charitable Trust, 2000.

4 The effect is known as the Khazzoom-Brookes postulate. See, for example, Horace Herring, “Does 

Energy Efficiency Save Energy: The Implications of accepting the Khazzoom-Brookes Postulate,” 

EERU, 1998.

1. EXISTING NON-LOW-INCOME HOMES 

Heating and cooling the 55 million single family, 12 million multi family and 3 million 

manufactured existing non-low-income homes in the U.S. consumes 3.3 quadrillion 

end-use BTUs of energy in the 2020 reference case. This cluster offers the largest savings 

potential in the residential sector, accounting for 41 percent (1,300 trillion BTUs) of total 

residential end-use potential in 2020 (Table 2). The barriers in this cluster are among 

the most intractable in the residential sector, and the relevant solution strategies as a set 

are relatively untested at scale, suggesting that the cluster requires further development 

of solution strategies. Assuming solutions to the barriers are put in place, capturing this 

potential would require $153 billion of incremental capital and provide present value 

savings of $167 billion. 

83221_McKinsey_US.indd 33 7/21/09 12:26
34

Shell improvements can be either low- or

high-capital. Low-capital maintenance,

includes installing programmable

thermostats, sealing home air leaks and

ducts, and performing HVAC equipment

maintenance. These measures offer

60 percent of the potential in this cluster

for 49 percent of the cost. Higher-capital

improvements, including the remaining

measures listed in Exhibit 13, provide

40 percent of the potential for 51 percent of

the cost.37 Older homes have significantly

greater potential per household. Homes

built before 1940 have more than twice the

potential per household than homes built

after 1970. Sixty-four percent of the retrofit

opportunity resides in the 51 percent of

homes built before 1970.38

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Exhibit 13: Efficiency opportunities in existing non-low-income homes

Barriers to retrofitting building shells and HVAC systems in most homes

This cluster exhibits the most intractable set of barriers in the residential sector, because

it is deeply involved with homeowners’ decision-making processes. To organize the

discussion, we have divided the process into five stages: awareness, agency and ownership,

decision to pursue, ability to pursue, and savings capture:

37 The impact and cost of measures were developed and scaled nationally through Lawrence Berkeley

National Laboratory’s Home Energy Saver, EIA’s RECS 2005, RSMeans, U.S. Census, and other

publicly available data. These savings and cost estimates represent the average across all households,

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a per-home basis prior to deployment; these statistics draw on RECS and our modeling of potential as

described in Appendix A.

Table 2 Existing non-low-income homes

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY

Trillion BTUs

3,830 3,330, 1,300 39

 Electricity TWh 220 200 70 38

 Natural gas 2,410 2,100 820 39

 Other fuels* 670 550 230 41

PRIMARY ENERGY

Trillion BTUs

5,510 4,850 1,860 38

 Electricity 2,330 2,120 780 37

 Natural gas 2,500 2,180 860 39

EMISSIONS

Megatons CO2e

320 280 110 38

PV of upfront

investment –

2009-2020: $153 billion

PV of energy savings

– 2009-2020:

$167 billion

Annual energy

savings – 2020:

$14 billion

* End-use energy is approximated as equivalent to primary energy

Source: EIA, AEO 2008, McKinsey analysis

The bars represent the

energy efficiency potential

in 2020, in trillion BTUs,

for various measures to

improve the performance

of the building shell of nonlow-income homes, with the

savings associated with endof-life and/or accelerated

replacement for each of

the measures. The prices

on the right represent the

respective average cost in

dollars per million BTU saved

for each of the measures.

83221_McKinsey_US.indd 34 7/21/09 12:26
35

Unlocking Energy Efficiency in the U.S. Economy

2. Approaches to greater energy efficiency in the residential sector

 Awareness. Homeowners typically do not understand their home’s energy 

consumption and are unaware of energy-saving measures. Half of homeowners 

consider recycling and energy efficient appliances as ways to reduce GHG emissions, 

though only 15 percent indicated that improving insulation would be a preferred 

means.39 People also tend to underestimate retrofit savings. A recent survey asked 

how much consumers expect to save from projects such as adding insulation, caulking 

and sealing their homes. Although these measures provide savings of 10 to 25 percent 

nearly three-fourths of respondents underestimated their potential utility bill 

savings at 10 percent or less.40 Similarly, fewer than 2 percent of homes in the United 

States have had an energy efficiency rating or energy assessment to identify savings 

opportunities in their homes. 

 Agency and ownership. Both the principal-agent problem in the sense of landlordtenant issues, and the ownership transfer problem, affect this cluster. Ownershiptransfer arises when the payback period on an improvement is longer than the future 

period of home ownership, as the current owner will not capture savings commensurate 

with the upfront cost and would be unsure about the increase in home value from the 

measures implemented. This affects 40 percent of retrofit potential (520 trillion enduse BTUs).41 The landlord-tenant issue, which arises where renters pay the utility bills, 

affects 4 percent (50 trillion end-use BTUs) of potential in this cluster.42

 Decision to pursue savings. Two issues affect the decision itself:

— Competing uses for capital in homeowner budgets inhibit allocation of money 

to energy-saving investments. Core spending accounts for approximately 

90 percent43 of the average household’s budget, forcing retrofit spending to compete 

for the remaining 10 percent with other categories, including sometimes more 

appealing options like entertainment and more visible home improvements,44 such as 

kitchen and bathroom remodeling.45 A “typical” residential energy efficiency retrofit 

costs $1,500 for the average non-low-income single family household, representing 

approximately 27 percent of their annual discretionary spend (based on a median 

U.S. household income of $50,740). 

— Rapid payback, i.e., inconsistent discount rates, arise from elevated expectations 

on the use of personal funds. Empirical research suggests U.S. consumers typically 

expect payback within 2.5 years.46 This expectation affects 60 percent (780 trillion 

end-use BTUs) of the potential in this cluster. 

 Ability to pursue savings. Assuming homeowners decide to pursue the savings, 

two issues emerge that affect their ability to proceed. High transaction barriers 

arise as consumers incur significant time “costs” in researching, identifying, and 

39 2007 Business in Society Survey, McKinsey & Company, 2007. Number of respondents: 2,002.

40 “As Energy Costs Rise, Survey Finds Oklahoma Homeowners Are Concerned about Home Energy 

Efficiency – and Many Are Taking Action to Reduce Heating and Cooling Bills,” Johns Manville, Company 

News web site, October 7, 2008.

41 Inhibited potential includes that not NPV-positive for a home owner’s expected stay in their home. This is 

calculated for each year of expected stay then summed while weighting by the number of people who move 

after each duration of occupancy (as calculated by the National Association of Home Builders using data 

from the American Housing Survey) to find the total potential affected.

42 RECS 2001, NEMS.

43 Includes food, housing, transportation, health, apparel, education, and insurance (see Consumer 

Expenditure Survey 2007, Bureau of Labor Statistics, Table 2, “Income before taxes: Average annual 

expenditures and characteristics”).

44 Electrical equipment, kitchen equipment, hardware, painting and flooring provides 78 percent of Home 

Depot sales, implying that less than 22 percent of sales derive from insulation. “Home Depot 2009 Annual 

Report.” http://www.sec.gov/Archives/edgar/dta/354950/000095014409002875/x17422e10vk.htm#102.

45 “Special Remodeling Report,” NAHB, January 2007.

46 Energy Savings Potential of Solid State Lighting in General Illumination Applications: Final Report, 

Office of Energy Efficiency and Renewable Energy, Department of Energy, December 2006.

83221_McKinsey_US.indd 35 7/21/09 12:26
36

procuring efficiency upgrades, as well as preparing for, and enduring lifestyle 

disruption during the improvement process.47 In addition, the availability of 

credible, whole house contractors remains limited. Most contractors do not 

train in holistic building science, rather they specialize in a single construction 

procedure (e.g., HVAC or windows). Furthermore, the contractor market is highly 

fragmented; industry annual revenue of $75 billion is scattered across more than 

40,000 businesses consisting mostly of privately held companies with less than 

$2 million in annual revenue, making it difficult for homeowners to identify which 

contractors perform relatively well compared to others and have the capabilities to 

complete the full retrofit.48

 Savings capture. Even after committing to pursue the savings, challenges remain. 

Inconsistent quality of installation and infrequent retro-commissioning of 

equipment can increase space conditioning costs by 20 to 30 percent.49 Experts 

estimate that contractors install some 90 percent of HVAC equipment and insulation 

sub-optimally, reducing efficiency by 20 to 30 percent.50 Improper use of 

programmable thermostats, such as overriding their programming to hold a constant 

temperature, can reduce or eliminate their savings that, in total, represent 12 percent 

of retrofit potential.

Solution strategies to unlock potential

Most solutions in this cluster remain unproven, with the exception of financial incentives 

that have proven successful through tax credits. This suggests the need for more thorough 

pilots of innovative approaches including labeling, on-bill or property-tax linked 

financing, retrofit mandates, and whole building contractor training. Exhibit 14 depicts 

how each of these solution strategies addresses the barriers each cluster faces. Reading 

from left to right, the first column, “barriers”, depicts all barriers discussed in Chapter 

1 with the dominant barriers colored and bolded. The next column, “manifestation of 

barrier”, briefly describes how that barrier prevents capture of potential in this cluster. 

Next, reading right to left, the rightmost column, “solution strategies” depicts all general 

types of solution strategies discussed in Chapter 1. The boxes shaded and in bold are those 

most relevant to this cluster. The next column to the left, “potential approach” describes 

briefly how to apply that solution strategy to this cluster. Finally, the colored lines connect 

each potential approach to the barriers it can overcome. 

47	 Quantifiable transaction costs including those for refinishing walls after insulation or adding distribution

piping for natural gas lines are explicitly	included	in our efficiency potential calculations.

48	 “HVAC and Plumbing Contractors,” First Research, April 2009.		<www.firstresearch.com/IndustryResearch/HVAC-and-Plumbing-Contractors.html>.

49	 This is mostly in addition to the potential identified in this report; aside from	4	percent savings from

retro-commissioning of heating and cooling units our analysis assumes installation continues to proceed 

as customary practice today.

50	 “A Guide to Heating and Cooling Efficiently,” ENERGY STAR web site.		<www.energystar.gov>.

83221_McKinsey_US.indd 36 7/21/09 12:26
37

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The left side shows

categories of opportunityspecific barriers that can

impede capture of energy

efficiency potential, with a

description of the specific

manner in which the barrier

is often manifested in the

cluster extending toward the

right. The far right side of the

exhibit lists general solution

strategies for pursuing

efficiency potential, with the

near right column describing

how this might be combined

into specific approaches

to overcome barriers in the

cluster. The colored lines

map specific solutions to

specific barriers.

83221_McKinsey_US.indd 37 7/21/09 12:26
38

financing, or loans tied to property taxes, such as Long Island Green Homes in 

Babylon, New York or BerkeleyFIRST in Berkeley, California could overcome both 

the principal-agent and ownership-transfer barriers, high discount rate, and capital 

constraints. Despite promising local pilots, these mechanisms have not yet achieved 

high penetration rates or been broadly applied. Conventional forms of financing, such 

as energy efficient mortgages or home equity lines can also provide funding, however 

they do not address agency barriers and have not penetrated the market to a significant 

degree, despite 30 years of availability.

 Rebates and incentives (proven). Monetary incentives for energy assessments 

and upgrades to residential customers historically have come through tax incentives 

or utility-sponsored programs. Under the American Recovery and Reinvestment Act 

(ARRA), 2009, homeowners can access up to $1,500 – but no more than 30 percent of 

the total installed cost – in tax credits for energy efficient home improvements, covering 

a wide array of efficiency measures. If incentive and rebate programs were to be 

expanded dramatically to reach all homes on a national level and buy down all NPVpositive measures to a 2.5-year payback, the outlay would total approximately 

$105 billion. Another approach involves programs offered by utilities or other 

organizations to provide low-cost or no-cost energy assessments. These programs, 

however, have tended to be on a small scale, providing only gradual impact, due to low 

funding levels, measurement and verification challenges, and low participation rates. 

 Building mandates (emerging). Mandates can capture a large percentage of the 

potential, effectively removing all barriers; however, they would be a more significant 

intervention in the market. Authorities could require prescriptive or performancebased improvements at the point of sale, during a major renovation, or over a specified 

interval. The City of Berkeley, California’s Residential Energy Conservation Ordinance 

(RECO) mandates minimum energy efficiency upgrades at the point of sale and 

major renovation. RECO has been in existence since the 1980s and leads to upgrades 

in approximately 500 homes annually at a typical cost of $400 to $1,300, which is 

borne by the home seller.55 Because of changing ownership and inhabitant behavior, 

performance measurement and enforcement is challenging. 

A similar, but milder mandate would require home assessments, rather than 

improvements. The City of Austin, Texas, among others, is in the process of 

implementing such a mandatory assessment program. Such a program should 

recommend upgrades and provide referrals to approved contractors to address 

the service availability barrier; however, it would not guarantee savings. In fact, 

the success of the program would depend entirely on the rate at which participants 

choose to make the upgrades, because the amount of energy savings must justify 

the assessment cost, which typically runs between $300 and $600, given current 

operational scale, in addition to the cost of the energy efficiency measures themselves. 

In addition, about half of homes would not be covered by a point-of-sale audit by 2020 

because they will not have changed ownership.56 Covering all homes under such a 

program would likely require an additional mandated inspection within a specified 

time period. One important design aspect for a mandatory assessment program 

would be that it provide recommendations, not exact prescriptions, to minimize the 

possibility that differences in recommendations and savings estimates could cause a 

homeowner to defer or cancel the upgrade.57

55 Expert interviews. City of Berkeley, California website. <www.ci.berkeley.ca.us>.

56 Paul Emrath, “How Long Buyers Remain in Their Homes,” NAHB, February 12, 2009. 

<www.housingeconomics.com>

57 Interviews with contractors revealed that homes that have been already rated before an assessment 

by a contractor have a lower chance of being upgraded, likely due to homeowners’ confusion from 

conflicting assessments.

83221_McKinsey_US.indd 38 7/21/09 12:26
39

Unlocking Energy Efficiency in the U.S. Economy

2. Approaches to greater energy efficiency in the residential sector

 Larger market of home performance contractors (emerging). This solution 

strategy would overcome existing workforce constraints. Given the current pace 

of roughly 200,000 retrofits annually,58 capturing the full efficiency potential 

of 70 million homes within ten years would require a 30- to 40-fold increase in 

certified contractors, from approximately 40,000 to 1.5 million. To overcome the 

barrier of homeowner risk and uncertainty, contractors would likely need training 

and certification, in building science, potentially combined with certification and 

facilitated through government-funded training programs. Home Performance with 

ENERGY STAR (HPwES), where regional managers connect consumers with qualified 

Building Performance Institute (BPI)-certified contractors,59 completed 50,000 

upgrades from 2001 through 200860 and could serve as a potential model. A recent 

DOE summit recommended using HPwES as the preferred mechanism to deploy BPI 

certified contractors using RESNET certifications. This is a significant step toward 

deploying this solution strategy. 

2. EXISTING LOW-INCOME HOMES

With 24 million single family, 16 million multifamily, and 

5 million manufactured homes, low-income homes (building 

shells and HVAC) account for 1,540 trillion end-use BTUs 

of energy consumption in the 2020 reference case (Table 3). 

Capital constraints and a history of government and policy 

solutions distinguish this cluster,61 which represents 19 

percent of the residential energy savings potential in 2020 

(610 trillion end-use BTUs).62 Some 92 percent of the 

opportunity consists of shell upgrades, with the remaining 

8 percent in the HVAC system. Capital required to achieve 

this potential could total an estimated $46 billion and provide 

present value savings of $80 billion. Sixty-eight percent of 

the potential is in single family homes, with 23 percent in 

multifamily and 9 percent in manufactured homes.

Per square foot, low-income homes have a higher 

consumption (29,000 end-use kBTUs per sq. ft) and higher 

potential (9 end-use kBTUs per sq. ft) than other homes 

(25 end-use kBTUs per sq. ft and 7 end-use kBTUs per sq. ft 

respectively). They are also on average smaller: 1,480 square 

feet compared to 2,462 square feet for the average non-low-income home, driving lower 

per house consumption.

58 Expert interviews.

59 The Building Performance Institute (BPI) certifies holistic home performance contractors. 

<www.bpi.org>.

60 “ENERGY STAR Overview of 2008 Achievements,” EPA Climate Protection Partnerships Division, 

March 2009.

61 In this report, low-income households are defined as households with less than $30,000 in annual income.

62 Public housing accounts for approximately 3 percent of all low-income homes and 3 percent of the lowincome energy savings potential. There are approximately 1 million public homes in the United States, 

making up less than 1 percent of total U.S. housing.

Table 3: Existing low-income homes

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

1,770 1,540 610 40

 Electricity TWh 100 90 30 37

 Natural gas 1,110 970 390 40

 Other fuels* 320 260 110 41

PRIMARY ENERGY 

Trillion BTUs

2,530 2,240 870 39

 Electricity 1,060 970 360 37

 Natural gas 1,150 1,000 400 40

EMISSIONS 

Megatons CO2e

150 130 50 39

PV of upfront

investment – 

2009-2020: $46 billion

PV of energy savings 

– 2009-2020: 

$80 billion

Annual energy

savings – 2020: 

$7 billion

 * End-use energy is approximated as equivalent to primary energy

Source: EIA, AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 39 7/21/09 12:26
40

Barriers to greater energy efficiency

The barriers to improving the efficiency of low-income homes are similar to those in other 

residential retrofits, though capital concerns are far more pronounced. Allocating capital 

to a typical shell retrofit, which would cost $910 for the average low-income home 

($1,820 for the average low-income single family home), would require spending roughly half 

of a household’s annual non-core budget,63 making funding through cash savings extremely 

challenging. Additionally, this cost compares poorly to the value of some older, poorly 

maintained homes64 and the savings expected from shortened occupancy. Debt financing, 

while available, is often at higher interest rates, especially for lower-income households. 

Financing a retrofit through credit cards, if those were even avaialble to this segment, with 

an average interest rate of 18 percent,65 would reduce the NPV-positive energy efficiency 

potential by 110 trillion end-use BTUs.

Solution strategies to unlock potential

Solutions suitable for the previous cluster (i.e., non-low-income homes) would also be 

relevant in the low-income retrofit cluster, given the consistency among most of the barriers. 

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Exhibit 15: Addressing barriers in existing low-income homes

The success of the government-sponsored Weatherization Assistance Program (WAP), 

however, warrants specific attention (Exhbiit 15). Traditionally, WAP has prioritized the 

lowest income homes with energy-savings potential: 66 percent of homes weatherized 

have annual household incomes below $8,000, with 90 percent having less than $15,000, 

but the program could be extended to focus on energy savings more broadly and address 

higher-income homes. WAP fully funds and deploys energy-saving measures in lowincome houses, effectively bypassing all barriers. These programs have weatherized more 

than 6.2 million homes over the past 32 years, generating annual savings of approximately 

100 trillion end-use BTUs. These retrofits typically reduce heating and cooling bills by 

63 Core expenses include housing, food, apparel, transportation, health care, education, insurance and 

pensions. Non-core expenses include entertainment, alcohol, tobacco, and miscellaneous expenses 

(Bureau of Labor Statistics website, <www.bls.gov/cex/2007/Standard/income.pdf>). 

64 In particularly troubled areas housing values can be highly depressed: currently there are several hundred 

homes available in Detroit for under $2,000 total cost.

65 “Historical Monthly Credit Card Tables,” Carddata Financial Surveillance, 2009.

The left side shows 

categories of opportunityspecific barriers that can 

impede capture of energy 

efficiency potential, with a 

description of the specific 

manner in which the barrier 

is often manifested in the 

cluster extending toward the 

right. The far right side of the 

exhibit lists general solution 

strategies for pursuing 

efficiency potential, with the 

near right column describing 

how this might be combined 

into specific approaches 

to overcome barriers in the 

cluster. The colored lines 

map specific solutions to 

specific barriers.

83221_McKinsey_US.indd 40 7/21/09 12:26
41

Unlocking Energy Efficiency in the U.S. Economy

2. Approaches to greater energy efficiency in the residential sector

32 percent and carry a fully loaded cost of approximately $3,200,66 which includes 

measures addressing appliance and lighting potential. As with retrofits for other 

residential buildings, large-scale WAP deployment is constrained by the availability of 

resources: capturing all cost-effective potential from 45 million homes by 2020 would 

require increasing the annual output – currently 100,000 homes – by a factor of almost 40. 

Under the ARRA, 2009, the plan is to weatherize 1 million homes per year – 10 times the 

current pace – but, even if sustained, this would not be enough to reach all homes by 2020. 

3. NEW HOMES

New buildings (i.e., constructed after 2009) are expected to 

consume 970 trillion end-use BTUs in 2020, representing 

10 percent (320 trillion end-use BTUs) of total residential 

potential (Table 4). The incremental capital associated with 

this level of improvement would total $16 billion through 2020. 

New residential buildings represent a modest portion of the 

2020 potential for two reasons: the 21.6 million new homes 

added to the national stock through 2020 are forecast to 

account for a relatively small share (17 percent) of all homes 

in 2020, and homes built after 2009 are expected to be more 

efficient, consuming only 19.7 end-use kBTUs per sq. ft. – 

25 percent lower than the average (26.2 end-use kBTUs per 

sq. ft) for existing homes. Despite its moderate size in 2020, 

this cluster is important for two reasons. First, its share of 

potential grows with time: from 2020 to 2030, the share of 

homes built after 2009 would grow from 17 to 28 percent 

of U.S. homes67 and the NPV-positive reduction potential 

offered correspondingly increases from 320 to 520 trillion 

end-use BTUs. Second, upgrades installed when a home 

is being built save energy at $4.30 per MMBTU, less than half the price of the $8.80 per 

MMBTU average for retrofit upgrades. This difference exists because all new-build 

potential comes at an incremental, rather than full deployment cost, unlike costs for many 

retrofit measures. 

Barriers to capturing efficiency potential in new buildings

The new building cluster faces three noteworthy barriers:

 Ownership transfer concerns between builders and future owners. 

Builders are often unsure about their ability to earn a return on efficiency investments. 

Because builders do not typically benefit from future energy savings, they must cover 

their incremental costs through a price premium on the efficient home. Home builders 

perceive high costs68 as the most important obstacle to building energy efficient homes. 

 Low consideration at time of purchase. Customers are typically unaware of the 

savings energy efficient homes offer and value other home attributes, such as location, 

school district, or home size, above energy efficiency, and it is unclear whether a large 

population of home buyers will consistently pay a premium for more efficient homes.

66 The amount of $3,200 includes approximately $2,500 of installation costs and $700 of administrative 

costs. Martin Schweitzer, Estimating the National Effects of the U.S. Department of Energy’s

Weatherization Assistance Program with State-Level Data: A Metaevaluation Using Studies from 1993

to 2005, Oak Ridge National Laboratory, U.S. Department of Energy, September 2005; 2005 dollars 

converted to 2009 dollars.

67 AEO 2008, NEMS.

68 Some industry experts indicate that if a builder redesigns his/her business model he or she could 

construct efficient homes at no additional cost.

Table 4: New homes

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

n/a 970 320 33

 Electricity TWh n/a 70 20 31

 Natural gas n/a 650 210 33

 Other fuels* n/a 80 30 37

PRIMARY ENERGY 

Trillion BTUs

n/a 1,510 480 32

 Electricity n/a 750 230 31

 Natural gas n/a 650 210 33

EMISSIONS 

Megatons CO2e

n/a 90 30 32

PV of upfront

investment – 

2009-2020: $16 billion

PV of energy savings 

– 2009-2020: 

$41 billion

Annual energy

savings – 2020: 

$4 billion

 * End-use energy is approximated as equivalent to primary energy

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 41 7/21/09 12:26
42

 Inconsistent installation quality. This issue applies as much to the new building 

cluster as it does to the existing residential homes cluster. Problems with installation 

quality stem from incorrect sizing, improper duct sealing and refrigerant charge, and 

low compliance with building codes, partly due to low code enforcement. 

 — Sizing: Properly sizing HVAC equipment for a home involves a trade-off between 

sufficient size to maintain the home at desired temperatures when facing climate 

extremes (i.e., the hottest and coldest days of the year) and energy savings that 

come with operating an appropriately sized system. A unit large enough to meet 

cooling needs in even the most extreme climates will repeatedly cycle on and off 

on more temperate days significantly reducing efficiency. Furthermore, larger 

air conditioners tend to be more expensive, more prone to maintenance problems, 

noisier, and less effective at removing humidity. Reducing air conditioner oversizing beyond maximum-efficient operation could yield 20-percent savings.69

The Air Conditioning Contractors of America and the Air Conditioning and 

Refrigeration Institute have jointly developed guidelines to help contractors 

properly size air conditioners and heat pumps.

— Duct sealing and refrigerant charge: As many as 90 percent of air 

conditioning units have incorrectly sized and/or sealed ducts, and 70 percent 

of homes have inadequate air flow. Over- or undercharging refrigerant can 

also reduce equipment efficiency: half to three-quarters of air conditioners are 

estimated to have improper charges.70 Improper air flow and refrigerant charge 

together can reduce efficiency by 12 to 32 percent. 

— Code compliance and enforcement: Code compliance varies significantly 

by type of measure, with full compliance ranging by state from 40 percent 

to 60 percent.71 Many consumer-advocates report that builders have limited 

incentive to ensure proper installation, and inspectors may lack proper training 

to evaluate energy efficiency, because their primary focus is on health and safety. 

Furthermore, building officials are typically paid less than the market rate for 

skilled efficiency assessors, making recruitment of the required skill set difficult. 

Other barriers affecting this potential include risk and uncertainty about the quality of 

construction, adverse bundling of efficiency features with uneconomic “green” measures, 

such as more expensive insulation products with a lower lifecycle carbon content or 

claims of auxiliary benefits, and unavailability of green homes. Sixty-three percent of 

homebuyers report that green homes are not available in areas they want to live.72

Solution strategies to unlock potential 

Three principal solution strategies appear suitable for the new building cluster. 

Developing and adopting higher performance standards in building energy and HVAC 

codes on a national scale would raise the floor for energy efficiency in new buildings 

(Exhibit 16). Voluntary specifications, such as ENERGY STAR and LEED, enable 

developers to differentiate buildings that exceed the code. However, it has not been 

fully proven that customers will pay the commensurate price premium necessary to 

increase builder confidence in the ability to earn a return on the incremental investment. 

Incentives for builders and HVAC manufacturers or prospective home buyers could 

stimulate the market for these higher-efficiency buildings. 

69 Chris Neme, et al., “National Energy Savings Potential from Addressing Residential HVAC Installation 

Problems,” ACEEE, February, 1999.

70 “Energy Savings Impact of Improving the Installation of Residential Central Air Conditioners,” Cadmus 

Group, 2005.

71 Expert interviews.

72 “The Green Homeowner: Attitudes and Preferences for Remodeling and Buying Green Homes,” McGraw 

Hill Construction, 2007.

83221_McKinsey_US.indd 42 7/21/09 12:26
43

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efficiency potential, with a

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exhibit lists general solution

strategies for pursuing

efficiency potential, with the

near right column describing

how this might be combined

into specific approaches

to overcome barriers in the

cluster. The colored lines

map specific solutions to

specific barriers.

83221_McKinsey_US.indd 43 7/21/09 12:26
44

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Exhibit 17: Inconsistency of residential building codes

Two interesting options could be used to drive larger code adoption. The first

focuses on education for state officials and building departments, e.g., through such

mechanisms as the Building Codes Assistance Project (BCAP)74 or utility-funded

code assistance projects. The second method would employ incentives to encourage

adoption, such as having the federal government make the accessibility of certain

funds contingent on building code stringency. This approach has worked in the past

in other contexts: when changing the legal drinking age to 21, the federal government

linked highway funding to adoption of that limit, and all fifty states complied within

three years.75 The federal government enacted a similar measure in the February

2009 American Recovery and Reinvestment Act under the State Energy Program; it

provides $3.1 billion in grants for state energy efficiency programs on the condition

that the state plans to adopt residential and commercial codes that meet or exceed the

2009 IECC and ASHRAE Standard 90.1-2007 and comply with these codes in

90 percent of new and renovated residential and commercial buildings within

8 years.76

— Raising efficiency levels in current codes:Most of the recent improvements

in the IECC code – which is updated every three years – have resulted in 1 to 3 percent

improvements; from 1992 to 2006 code efficiency increased approximately

8 percent.77 However, the 2009 IECC code is estimated to provide a 12 to 16 percent

efficiency improvement compared to the 2006 IECC code.78 In addition, the DOE

and others are seeking to improve efficiency in the 2012 IECC code a further

74 BCAP was established in 1994, as a joint initiative of the Alliance to Save Energy, ACEEE, and the Natural 

Resources Defense Council. BCAP is largely funded by the DOE and the Energy Foundation.

75 “Sanctions are effective,” Advocates for Highway and Auto Safety, 2009. <http://www.saferoads.org/

sanctions-are-effective>.

76 “2009 Recovery Act and State Funding,” EERE, DOE, 2009. <http://apps1.eere.energy.gov/state_energy_

program/recovery_act.cfm>.

77 3(QHUJ\(I¿FLHQF\7UHQGVLQ5HVLGHQWLDODQG&RPPHUFLDO%XLOGLQJV ́'2(2FWREHU

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SHUIRUPDQFHFRGHLVHVWLPDWHGWREHSHUFHQWPRUHHI¿FLHQW,&)DQDO\VLVVXJJHVWV,(&&FRXOG

save roughly $235 in energy costs per household per year compared with IECC 2006. “Energy and Cost

6DYLQJV$QDO\VLVRI,(&&(I¿FLHQF\,PSURYHPHQWV ́,&),QWHUQDWLRQDO6HSWHPEHU

The map displays the

variation in residential new

building codes in place

across the United States. 

In general, darker shades

indicate higher standards,

and lighter shades indicate

less stringent standards, in

line with the legend in the top

right of the exhibit.

83221_McKinsey_US.indd 44 7/21/09 12:26
45

Unlocking Energy Efficiency in the U.S. Economy

2. Approaches to greater energy efficiency in the residential sector

15 percent beyond 2009 IECC. This level is very close to the NPV-positive value for 

new residential buildings calculated in this report.79 If IECC 2009 were adopted 

through 2011 and a 30 percent improved code were adopted in 2012, 250 trillion enduse BTUs could be saved in 2020.80

— Improving code compliance: To increase enforcement of building codes, states 

and municipalities could consider four complementary measures: 1) managing 

performance of building inspectors with third-party verifiers to spot-check 

buildings;81 2) hiring more building officials; 3) increasing the pay of building 

officials and requiring training in building science to attract those with building 

assessment skills; and 4) increasing the objectivity of performance-based code 

compliance, particularly for energy modeling. 

The Building Codes Assistance Project estimates that improving code compliance 

significantly above current levels would cost $210 million per year: $75 million for 

local building departments to hire and train building officials and $135 million 

for state governments to increase education and compliance.82 Other experts 

have estimated the cost required to increase building code compliance, for new 

residential and commercial buildings, at a higher level of $1 billion per year.83 

This estimate includes hiring and training officials; adding equipment; creating an 

inspected building database; training contractors, plumbers, and electricians on 

code compliance and best practices; and re-inspecting 2 percent of buildings. Even at 

this higher annual cost, which (if incurred for 10 years and divided equally between 

commercial and residential sectors) adds $3.5 billion present value to the cost of 

capturing the new building potential, the energy efficiency potential of the cluster 

remains over $21 billion NPV-positive (in fact providing a roughly 20 percent rate of 

return).

 Voluntary building standards, home labeling, and benchmarking

(proven). Labeling can address builder-buyer agency issues by fostering a market 

premium for energy efficiency due to increased awareness of efficient buildings. If 

installation quality receives continued attention, labeling could also circumvent the 

installation and inspection challenges. While no large-scale study of price premiums 

for efficient homes has been conducted to date, a number of regional analyses suggest 

that efficient homes are beginning to command a premium in some markets. In 

Portland, Oregon and Seattle, Washington, for example, new homes that were certified 

to be energy efficient were selling at a 3- to 5-percent premium and 10-percent faster 

rate.84 (Note: this research was conducted prior to the recent collapse in the housing 

market). Voluntary standards could also drive builder training and increase use of 

best practices, indirectly increasing energy efficiency. There are various labeling 

mechanisms in use today that could address these concerns, if brought to scale:

 — The current ENERGY STAR specification covers total home energy use, including 

space conditioning and appliances, and is 20 to 30 percent more efficient than 

79 It should be noted that very few retrospective studies on the energy savings impact of building codes 

exist and ones that do exist were conducted at the state or local level. Making the case for improving and 

funding building codes will likely require retrospective studies measuring the energy savings impact on a 

nationwide level.

80 Expert interviews.

81 This could be through utility or federally led programs (such as Austin Energy’s), where funding is 

contingent on documentation of a proper inspection.

82 “Code Enforcement Cost Estimates,” BCAP, 2009. Expert Interviews.

83 David Goldstein and Cliff Majersik, “NRDC/IMT Proposal for Improved Building Energy Code 

Compliance through Enhanced Resources and Third-Party Verification,” NRDC, 2009. $1 billion is across 

both residential homes and commercial buildings.

84 “Green Certified Homes Sell for More in Portland Real Estate Market,” Earth Advantage Institute and the 

Green Building Value Initiative, May 6, 2008.

83221_McKinsey_US.indd 45 7/21/09 12:26
46

the average new home.85 ENERGY STAR homes had a 17 percent share of the new

home market in 2008 and together save 2 TWh of electricity and 15 trillion BTUs of

natural gas per year.86

 — The U.S. Green Building Council developed the LEED building certification system

that targets energy savings, water efficiency, greenhouse gas emissions reduction,

and improved indoor environmental quality. The system allows trade-off between

these goals but sets the minimum efficiency level for LEED certification at 15 percent

more efficient than the latest IECC code.87

 — The Energy Efficient Codes Coalition is making its comprehensive package, called

“The 30 Percent Solution,” available to state and local governments as a code.88

 Builder incentives (piloted). There are various tax incentives for builders written

into law, such as those in the Federal Energy Policy Act of 2005. Certain programs

run by utilities or other organizations can accelerate adoption of these incentives. 

Efficiency Vermont, for instance, in its new residential housing program, provides

builder training and assistance in securing incentives. For a total cost of $2.8 million

in 2007, this program helped 35 percent of all homes qualify for ENERGY STAR rating,

double the national average.89 Incentives to builders are more likely to drive efficiency,

because they directly offset incremental costs without requiring buyer awareness.90

4. ELECTRICAL DEVICES AND SMALL APPLIANCES

Electrical devices and small appliances,

sometimes loosely called “plug load,” consist

of hundreds of smaller electricity-consuming

devices and represent an area of sustained

consumption growth: the U.S. consumer

electronics industry, for example, grew from

revenues of $94 billion in 2001 to $162 billion

in 2007.91 In 2008, the average household

spent $330 on energy for these devices, with

the expenditure growing at an annual rate

of 2 percent. EIA forecasts that increased

penetration of electronic devices will drive

consumption from 500 TWh of electricity in

2008 to 630 TWh by 2020, rising from 

35 percent of end-use residential electricity

consumption to 40 percent in 2020. By

2020, there will be 2.5 billion devices

consuming power in residential homes. TVs,

DVD players and PCs made up 32 percent

of electrical device and small appliance

consumption in 2008, while another 9 categories tracked by the EIA made up an additional

85 “Methodology to Calculate Energy Savings for ENERGY STAR Qualified New Homes,”

ENERGY STAR, 2007.

86 “ENERGY STAR market share,” EPA, April 2009.

87 The energy efficiency portion of	a	LEED certification is based on ENERGY STAR.		A	new residential

building must earn an 85 or lower on the ENERGY STAR scale, which is indexed at 100 to the IECC 2006

code and each percent below 100 indicated	1	percent savings.		LEED specifications focus on sustainability

of the home, including energy efficiency as well as water and sustainability, and it is therefore difficult to

determine the exact efficiency improvement of	a	LEED home compared to the average home.

88 “Energy and Cost Savings Analysis of 2009 IECC Efficiency Improvements,” ICF International, 2008.

89 Year 2007 Annual Report,	Efficiency Vermont, 2008.

90 One challenge brought on by the recent economic downturn is that tax credits are effective only if builders

have taxes to pay.

91 “Consumer electronics market research reports,” CEA, April 2006 and 2008.

Table 5: Electrical devices and small appliances

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

1,690 2,140 590 27

 Electricity TWh 500 630 170 27

 Natural gas n/a n/a n/a n/a

 Other fuels* n/a n/a n/a n/a

PRIMARY ENERGY 

Trillion BTUs

5,270 6,640 1,820 27

 Electricity 5,270 6,640 1,820 27

 Natural gas n/a n/a n/a n/a

EMISSIONS 

Megatons CO2e

330 410 110 27

PV of upfront

investment – 

2009-2020: $3 billion

PV of energy savings 

– 2009-2020: 

$65 billion

Annual energy

savings – 2020: 

$11 billion

 * End-use energy is approximated as equivalent to primary energy

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 46 7/21/09 12:26
47

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83221_McKinsey_US.indd 47 7/21/09 12:26
48

 Limited technology availability and low manufacturer mindshare. Lack of

demand for energy efficient devices and an absence of mandatory efficiency standards

for consumer electronics lead manufacturers to make efficiency improvements a low

priority during product development. Because consumer electronics is a competitive

market with low margins, manufacturers generally choose to minimize costs over

developing features for which they are not sufficiently rewarded.

 Failure to use efficient settings. Many consumer devices, such as PCs and TVs,

have energy-saving features, for example, entering standby after a period of disuse. 

A study in 2007 showed that only 15 percent of computers in home offices had power

management enabled, as manufacturers don’t necessarily enable settings at the

point of sale, and consumers sometimes disable settings.96 Technologies for power

management are improving, becoming more user-friendly and less likely to interfere

with consumer utility, thus helping to reduce the frequency at which people disable

the functions.

 Agency issues in rented homes. Where the property owner pays a tenant’s

utility bill, the tenant has no incentive to choose energy efficient devices, which

impedes capture of 19 percent of this cluster’s potential.

Solution strategies to unlock potential

Particularly low attention to electrical device and smaller appliance energy consumption

among consumers and manufacturers points to solution strategies that either increase

consumer awareness of potential savings or bypass consumer and manufacturer

awareness and decision-making requirements (Exhibit 19). 

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 Mandatory standards (proven). Mandatory standards would bypass consumer

and manufacturer decision-making, offering a high certainty of capture.

— Specific product standards. For the largest categories, it may be feasible to

create specific standards (as there are for battery chargers and power adapters),

though other factors including product differentiation and incremental cost are

important to consider. As an example, setting mandatory standards at the NPV96 K. Roth and K. McKenney, “Residential consumer electronics electricity consumption in the United

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83221_McKinsey_US.indd 48 7/21/09 12:26
49

Unlocking Energy Efficiency in the U.S. Economy

2. Approaches to greater energy efficiency in the residential sector

positive level identified in this report for the five largest plug-load categories97

would save 210 trillion end-use BTUs (36 percent of this cluster’s potential). To 

go beyond the most energy-consuming categories and create standards for the 

hundreds of remaining product classes would be difficult and costly.

 — Standby standard. A cross-cutting “standby” standard could capture a large 

portion of the potential across a range of devices, both high consumption devices 

that have specific product standards and devices that have too little consumption 

to warrant a specific standard of their own. Standby power consumes an 

estimated 6 to 8 percent of residential electricity,98 equivalent to 

130 to 170 TWh per year. Standby power accounts for 10 to 90 percent of a device’s 

total consumption, depending on the product.99 A standby standard could 

reduce standby consumption by roughly two-thirds,100 yielding 90 to 110 TWh in 

savings. Such a standard could produce an additional savings of 80 to 100 TWh 

in commercial office equipment, which chapter 3 discusses further. In addition, 

because the U.S. makes up 34 percent of the global consumer electronics 

market,101 a U.S. standby standard has the potential to stimulate significant 

change in global electronics manufacturing. Finally, anecdotal evidence suggests 

that reducing standby consumption may stimulate design changes that reduce 

active mode energy consumption.102 The Federal Energy Management Program 

(FEMP) is tasked to implement the “1-Watt Standby” plan requiring federal 

agencies to select products with low-standby energy consumption and has 

released the FEMP Standby Levels for agencies to follow.103 While direct impact 

of this mandate is difficult to measure, it did raise manufacturer awareness of 

standby power. There are a number of examples from outside the U.S. of standby 

standards that drive energy savings:

□ Japan’s Top Runner program, which reduced annual per-household standby 

consumption from 437 kWh in 2002 to 308 kWh in 2005.104

□ Korea’s 1-Watt Program, which will progress from a voluntary program to a 

mandatory standard in 2010. Average standby power per device is projected 

to decline from 3.66 Watts in 2003 to 1.54 Watts in 2020, saving 6.8 TWh per 

year (more than $70 million in electricity cost) by 2020.105

□ Australia’s standby power regulation, which covers a number of devices, is 

expected to introduce cross-category regulations for all electric appliances 

by 2012.

Standby standards do present some concerns: 

□ Manufacturers may oppose a standby standard, owing to the incremental 

cost to their products. However, many plug-load devices could meet a standby 

standard with little incremental cost, likely to be less than 50 cents per unit.106

97 The five largest electricity consuming categories in National Energy Modeling System are TVs, PCs, 

microwaves, ceiling fans, and DVD players.

98 The majority of the 6 to 8 percent estimate for standby power consumption is from plug-load devices, but 

it includes some from other appliances. Expert interviews.

99 “2006 ACEEE Summer Study on Energy Efficiency in Buildings,” ACEEE, 2006.

100 Expert interviews.

101 “Consumer Electronics Global Statistics,” Growth from Knowledge, 2008.

102 Benoit Lebot, et al., “Global Implications of Standby Power Use,” IEA, 2000. Expert interviews.

103 “U.S. Executive Order 13221 – ‘1-Watt Standby’ Order,” Power Integrations, 2001. 

<www.powerint.com/node/201>.

104 Joakim Nordqvist, “Evaluation of Japan’s Top Runner Programme,” Energy Intelligence for Europe 

Program, 2006.

105 “Korea’s Market Transformation Plan,” Korea Energy Management Corporation, October 2008.

106 Expert interviews.

83221_McKinsey_US.indd 49 7/21/09 12:26
50

At that level, the cost of avoided power for all devices would be $2.10 per 

MWh.107

□ Standards must balance energy savings with delivered functionality, often 

making it difficult to craft a policy that adequately captures savings while 

preserving consumer appeal. As a result, there will likely need to be multiple 

standby standards, because certain devices require higher power levels than 

others. Set-top boxes, for example, require greater functionality and energy use 

while in standby and may require a higher minimum level than other products. 

 Voluntary standards and labeling (proven). Voluntary standards can reduce 

transaction “costs” associated with identifying efficient devices and raise awareness 

of plug-load consumption. ENERGY STAR has created voluntary standards for nine 

device categories that fall into residential electrical devices, among them TVs, DVDs, 

and PCs, which saved 63 TWh of electricity in 2007.108 Voluntary standards would 

facilitate implementation of future mandatory standards by developing testing 

procedures and building manufacturer relationships. Voluntary standards can 

also be developed and updated faster than mandatory standards, allowing greater 

flexibility in a rapidly changing marketplace.

 Education and awareness (piloted). Programs to educate the public about plugload consumption and how individuals can reduce it could overcome transaction 

and usage barriers. A representative campaign could 1) encourage people to unplug 

unused devices and turn off devices when not in use, 2) increase awareness of 

efficiency settings and passive controls, such as smart switches and power strips, 

and 3) generate demand for efficient consumer electronic devices. Research shows 

that 22 percent of residential PC users leave their computers running at night109 and 

64 percent of office PCs run overnight;110 changing these behaviors alone could 

unlock significant savings.

5. LIGHTING AND MAJOR APPLIANCES 

Lighting and major appliances, which include water heaters, refrigerators, freezers, 

clothes washers, clothes dryers, dishwashers, stoves and ovens, constitute 30 percent 

(3,420 trillion end-use BTUs ) of 2020 residential consumption (Table 6). Consumption is 

expected to decline at 0.3 percent over the next ten years, which reflects provisions in EISA 

2007 that address lighting consumption, effectively phasing out today’s incandescent 

bulbs in 2012 for more efficient lighting.

The lighting and major appliances cluster accounts for 11 percent of total residential 

potential in 2020 (340 trillion end-use BTUs). Ninety-six percent of appliance potential are 

from replacement purchases, with four percent driven by new appliance purchases. Total 

incremental capital required to purchase higher-efficiency appliances between 2009 and 

2020 would be $11 billion and provide present value savings of $42 billion at an average perMMBTU cost of $4.50 (Table 6).

107 Calculated as $0.50 for each of 2.5 billion consumer electronic devices divided by the energy savings of 

approximately 100 TWh over an average 8-year lifetime.

108	 “Table 8, Consumer Electronic, Residential	&	Commercial Office Equipment,” 2007 Annual Report, 

ENERGY STAR, 2007. 

109 K. Roth and K. McKenney, “Residential consumer electronics electricity consumption in the United 

States,” European Council for an Energy Efficient Economy Summer Study, June 2007.		

110	 Judy Roberson, et al., “After-hours power status of office equipment and energy use of miscellaneous plugload equipment,” Lawrence Berkeley National Laboratory, LBNL-53729 Rev, May 2004.

83221_McKinsey_US.indd 50 7/21/09 12:26
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Table 6: Lighting and major appliances

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY

Trillion BTUs

3,540 3,420 340 10

 Electricity TWh 580 520 90 17

 Natural gas 1,380 1,490 40 2

 Other fuels* 180 160 10 6

PRIMARY ENERGY

Trillion BTUs

7,770 7,230 990 14

 Electricity 6,150 5,520 940 17

 Natural gas 1,430 1,550 40 2

EMISSIONS

Megatons CO2e

470 430 60 14

PV of upfront

investment –

2009-2020: $11 billion

PV of energy savings

– 2009-2020:

$42 billion

Annual energy

savings – 2020:

$6 billion

* End-use energy is approximated as equivalent to primary energy

Source: EIA AEO 2008, McKinsey analysis

The two columns break

out energy consumption

and efficiency potential

in 2020 for the listed

appliance categories

modeled in the report.

83221_McKinsey_US.indd 51 7/21/09 12:27
52

Barriers to capturing appliance efficiency potential 

Lighting and major appliance efficiency faces barriers common to both electrical devices 

and new building potential. The most relevant barriers are:

 Lack of awareness and certainty of savings. Knowledge of efficient appliances 

is relatively high among consumers – 93 percent for lighting, 86 percent for kitchen 

appliances, 84 percent for clothes washers and dryers, and 74 percent for water 

heaters.113 However, consumers seem to be less clear about the potential monetary 

savings. For instance, 75 percent of consumers believed that CFLs had longer than a 

one year payback or did not know what the payback was.114

 Quality trade-offs. End-users retain preconceived and often inaccurate ideas about 

differences in functionality that limit the acceptance of certain products. Forty-two 

percent of consumers, for example, believe that CFLs have significantly lower-quality 

light than incandescent bulbs.115

 Supply chain availability. Sixty-eight percent of water heaters fail before they 

are replaced, and more than 50 percent are emergency replacements, leaving these 

consumers dependent on the stock of water heaters available on contractors’ trucks. 

When given purchasing options, however, consumers place the highest importance 

on energy efficiency, followed by unit size; surprisingly, price ranks fifth of nine 

possible responses.116 Thus, if given the time and selection often denied by emergency 

replacement, consumers would likely select more efficient devices than they are 

currently able to select.

Other minor barriers include allocation of capital for more costly appliances; adverse 

bundling in some appliances, such as clothes washers where manufacturers bundle higher 

efficiency with sophisticated options and cycle settings; ownership transfer issues as 

home builders have unclear ability to recover their investment in efficient devices; and to 

a lesser extent transaction barriers associated with identifying efficient devices, which is 

significantly mitigated by the prevalence of labeling. 

Solution strategies to unlock potential 

Solutions to capture the energy efficiency potential in appliances include education, 

voluntary standards and labeling, codes and standards, and incentives and grants 

(Exhibit 21).

113 2007 Business in Society Survey, McKinsey & Company; Number of respondents: 2,002.

114 2007 Business in Society Survey, McKinsey & Company; Number of respondents: 995.

115 Note that technologies with real, rather than perceived, quality differences are excluded from substitution 

in our analysis; we consider CFLs interchangeable for most lighting, as they have overcome most 

challenges (e.g., slow start up). 2007 Business in Society Survey, McKinsey & Company; Number of 

respondents: 2,002.

116 “Residential Water Heater Market,” KEMA, July 2006.

83221_McKinsey_US.indd 52 7/21/09 12:27
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The left side shows

categories of opportunityspecific barriers that can

impede capture of energy

efficiency potential, with a

description of the specific

manner in which the barrier

is often manifested in the

cluster extending toward the

right. The far right side of the

exhibit lists general solution

strategies for pursuing

efficiency potential, with the

near right column describing

how this might be combined

into specific approaches

to overcome barriers in the

cluster. The colored lines

map specific solutions to

specific barriers.

83221_McKinsey_US.indd 53 7/21/09 12:27
54

specification, ENERGY STAR aims to set it to a level that 25 percent of the products 

on the market can meet, guaranteeing a high level of efficiency but also ensuring that 

consumers have a variety of products from which to choose. While many factors drive 

updates in ENERGY STAR specifications, including technological innovation and 

regulatory changes, having 40 to 50 percent of the market compliant with ENERGY 

STAR specifications triggers an update of the specification. One factor driving success 

of ENERGY STAR may be its simple messaging. Finally, voluntary standards can 

be particularly cost effective: according to National Renewable Energy Laboratory, 

ENERGY STAR has saved energy at a cost of roughly $0.09 per end-use MMBTU. 121

 Monetary incentives and rebates (proven). While incentives to consumers 

primarily address barriers in capital availability and ownership transfer (i.e., 

appliances in new buildings), incentives to suppliers can overcome the product 

availability barrier as well. A number of utilities and other organizations offer 

rebates, or even free efficient appliances, and the government has offered tax 

incentives. Many such programs have focused on lighting, due to its high energysavings potential. For example, the Illinois Department of Commerce and Economic 

Opportunity Residential ENERGY STAR Lighting Program (2003 to 2004) 

partnered with over 140 retailers to provide 164,000 instant rebates on CFLs and 

60,000 mail-in rebates on ceiling fans and CFLs in the 2 years of the program. In 

Efficiency Vermont’s CFL buy-down program, consumers purchased 580,000 

CFLs in 2007 – 74 percent of all CFLs sold in the state. The program reported a cost 

of about $1.0 million, with savings of approximately 263 GWh, for a per-kWh cost 

of $0.004.122 One consumer incentive includes refrigerator and freezer “swap out” 

programs, where utilities bear the cost of extracting old equipment and replacing 

it with a new unit, thus encouraging people to accelerate adoption of efficient 

technology. Providing a financial rebate to contractors to stock efficient water 

heaters can overcome the technology availability barrier for that appliance.

 Retailer’s role in energy efficiency (piloted). Retailers could play an important 

role in driving adoption of energy efficient appliances. A flagship example is WalMart’s focus on CFLs, with 100 million bulbs sold in 9 months, helping double CFL 

penetration from 5 percent to 10 percent. ENERGY STAR has effectively partnered 

with retailers to leverage their relationships with consumers, providing information 

and advertising material for stores for ENERGY STAR products, as well as promoting 

efficiency incentives. While still largely unproven, retailers’ strong position with 

consumers make retailers a natural partner for this type of energy efficiency measure.

121	 “Estimates of Administrative Costs for Energy Efficiency Policies and Programs,” NREL, 2000.		

<www.nrel.gov/docs/fy01osti/29379.pdf>. The ENERGY STAR 2007 Annual Report indicates even higher 

cost effectiveness recently, with primary energy savings of $0.023 per MMBTU.

122 Year 2007 Annual Report,	Efficiency Vermont, 2008.

83221_McKinsey_US.indd 54 7/21/09 6:22
55

The commercial sector will consume 20 percent of the 2020

baseline end-use energy in the United States, equivalent

to 8.0 quadrillion BTUs of end-use energy (Table 7).123

Consumption is forecast to grow by 1.5 percent per year,

from a base of 6.7 quadrillion BTUs of end-use energy in

2008, driven by increases in commercial floor space and

consumption intensity of end-use energy per square foot.

Relative to the business-as-usual baseline for 2020,

deploying all NPV-positive efficiency improvements in

the commercial sector would reduce energy consumption

in 2020 by 29 percent, require $125 billion in upfront

investment, and provide present-value savings of 

$290 billion in energy costs while avoiding some 

360 million tons of GHG emissions that year. 

Although most of the efficiency potential exists in buildings

(87 percent, 2,010 trillion end-use BTUs), 13 percent 

(290 trillion end-use BTUs) is in such community

infrastructure as water purification and treatment,

water distribution, street and traffic lighting, and

telecommunications. The opportunity in the commercial

sector is diverse, characterized by 10 types of buildings

(4.9 million in total), multiple ownership structures,

governmental and private tenants, and more than 100 enduse applications (Exhibit 22). 

123 This excludes natural gas and distillate fuel oil consumption (1,350 trillion BTUs in 2020) attributed to

miscellaneous load and unspecified sources in AEO 2008 due to lack of information about the sources of

consumption and the efficiency opportunities.

3. Approaches to greater energy

efficiency in the commercial sector

Table 7: Overview of energy use in the 

commercial sector

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

6,680 8,010 2,290 29

 Electricity TWh 1,330 1,660 510 31

 Natural gas 1,930 2,140 510 24

 Other fuels* 200 220 50 23

PRIMARY ENERGY 

Trillion BTUs

16,330 20,010 5,970 30

 Electricity** 14,110 17,570 5,390 31

 Natural gas 2,010 2,220 530 24

EMISSIONS 

Megatons CO2e

990 1,220 360 30

PV of upfront

investment – 

2009-2020: $125 billion

PV of energy savings 

– 2009-2020: 

$290 billion

Annual energy

savings – 2020: 

$37 billion

 * End-use energy is approximated as equivalent to primary energy

** Does not include CHP savings of 490 trillion BTUs

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 55 7/21/09 12:27
56


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Exhibit 22: Efficiency potential in commercial subsectors – 2020

We organized the potential into five clusters, based on shared barriers and attributes 

(Exhibit 23). Although specific barriers manifest themselves within commercial subsectors (e.g., the relative importance of agency in the food service subsector), we have focused 

on cross-cutting solutions that can apply with minor modification across subsectors. 

For continuity, we will discuss clusters that involve the building shell and HVAC systems, 

which together provide habitable and conditioned space, then we will examine commercial 

energy use inside and outside those spaces.

1. Existing private buildings (810 trillion end-use BTUs): Notable barriers 

include split agency, expectations of short payback period, upfront capital 

constraints, and lack of awareness or information. Solution strategies to address 

these barriers include requiring energy benchmarking for buildings, establishing 

a public-private partnership through a government loan guarantee fund, enabling 

creative financing solutions, and/or introducing mandatory assessments and 

upgrades.

 2. Government buildings (360 trillion end-use BTUs): This cluster faces 

barriers in access to capital, lack of awareness, and regulatory challenges. Possible 

solution strategies include requiring energy benchmarking for buildings, setting 

binding energy efficiency targets for state and local jurisdictions, and adjusting 

regulations to expand access to performance contracting. 

 3. New private buildings (270 trillion end-use BTUs): Barriers resemble those 

in new residential buildings: lack of incentives for developers to construct highefficiency buildings, ineffective installation, and limited commissioning. Relevant 

solution strategies also resemble those for new residential buildings: improving 

efficiency levels in building codes and greater use of those standards, increasing 

penetration of voluntary specifications, and linking incentives to developers or 

buyers through voluntary specifications. 

4. Office and non-commercial devices (570 trillion end-use BTUs): Potential 

is spread across a variety of electronic equipment and miscellaneous commercial 

load, for which energy efficiency has historically been of relatively little concern 

among both users and manufacturers. As with residential plug-load, the primary 

The exhibit displays energy 

consumption in 2020 

associated with various 

building types in the 

commercial sector with and 

without energy efficiency 

measures implemented.

83221_McKinsey_US.indd 56 7/21/09 12:27
57

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equipment

Appliances

Distributed

end-use

Misc. load

Building

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HVAC

system

Lighting

1. Existing private 

buildings

(810)

3. New private

buildings

(270)

2. Government

buildings

(360)

5. Community

infrastructure

(290)

4. Office and noncommercial

devices

(570)

Misc. load

Building

shell and

HVAC

system

Lighting

Appliances

Office

equipment

Distributed

end-use

Primary energy, avoided consumption; total = 5,970 trillion BTUs

New

buildings

Private

Existing buildings

Existing & new

buildings

Government

New

buildings

Private

Existing buildings

Existing & new

buildings

Government

Clusters

2020 potential (TBTU)

1. Existing private

buildings

(1,840)

3. New private

buildings

(620)

2. Government

buildings

(860)

5. Community

infrastructure

(890)

4. Office and noncommercial 

devices

(1,760)

End-use energy, avoided consumption; total = 2,290 trillion BTUs

Source: EIA AEO 2008, McKinsey analysis

Exhibit 23: Clusters of energy efficiency potential in the commercial sector

The upper and lower charts 

break out the energy 

efficiency potential in 2020 

for the commercial sector 

in end-use and primary 

energy respectively. Each 

area represents a cluster of 

efficiency potential: the area 

is proportional to the relative 

share (of total potential 

in the sector) associated 

with that cluster, while the 

number next to the cluster 

name provides the efficiency 

potential, measured in trillion 

BTUs.

83221_McKinsey_US.indd 57 7/21/09 12:27
58

1. EXISTING PRIVATE COMMERCIAL BUILDINGS

Existing privately owned commercial

buildings account for 2,860 trillion end-use

BTUs of energy consumption in the 2020

reference case (Table 8). These buildings

cover a range of types, including educational

facilities, office buildings, assembly, retail

and service facilities, warehouses, lodging,

healthcare, and other buildings. Floor space

in this cluster totals approximately 57 billion

square feet. This cluster’s end-uses include

heating, cooling, ventilation, lighting, and

water heating, as well as building-related

electrical devices including elevators and

transformers.124

This cluster offers NPV-positive energy

efficiency potential of 810 trillion enduse BTUs, representing 35 percent of the

potential in the commercial sector. Retail

and office buildings together constitute 

44 percent of consumption in this cluster and

offer 48 percent of the efficiency potential. Capturing the potential in this cluster would

require an investment of approximately $73 billion and provide present-value savings of

$104 billion. 

Barriers to greater energy efficiency

Capture of NPV-positive potential in existing private buildings is constrained by a wide

range of barriers. While different barriers exert themselves to different degrees depending

on the context, we have identified several dominant barriers whose removal is essential.

 Agency issues. Agency issues affect approximately half (420 trillion end-use BTUs)

of the cluster’s potential. In leased buildings, financial incentives for the owner to

invest in energy efficiency are uncertain, because the owner will likely not capture the

energy savings. Owners may benefit from efficiency investments, if lower operating

costs increase the rate of tenant renewals and/or command a rental premium.125

 Elevated hurdle rate. The average payback period expected by commercial

customers is 3.6 years.126 This expectation creates a hurdle for deeper retrofits that

typically have longer payback periods. This barrier affects an estimated 170 trillion

end-use BTUs or 21 percent of this cluster’s potential.

 Capital constraints. Capital constraints exist for energy users and their upstream

lenders. For the energy end-user, raising and allocating capital for efficiency projects

is often confounded by a desire not to increase debt, concern about the opportunity

cost of this capital against alternative uses (particularly projects that impact revenue

growth), and a reluctance to outsource energy solutions to companies that may charge

a financing premium. Upstream financiers may incur increased credit risk when

providing capital to privately owned buildings compared to the municipal-universityschool-hospital (MUSH) market, because of elevated default risk. In all markets

they face difficulty in establishing collateral for the loan, as projects often involve

124	 We discuss the energy efficiency potential in lighting and appliances in the cluster consisting of new

privately owned buildings, though the solutions are equally applicable for lighting and appliances in this

and the government buildings clusters.

125 Based on interviews with commercial building operators.

126	 “Energy Efficiency Indicator, North America,” Johnson Controls, March 2008.

Table 8: Existing private buildings

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

3,560 2,860 810 28

 Electricity TWh 560 450 140 31

 Natural gas 1,520 1,230 300 24

 Other fuels* 140 110 30 27

PRIMARY ENERGY 

Trillion BTUs

7,630 6,110 1,840 30

 Electricity 5,920 4,730 1,500 31

 Natural gas 1,580 1,280 310 24

EMISSIONS 

Megatons CO2e

460 370 110 30

PV of upfront

investment – 

2009-2020: $73 billion

PV of energy savings 

– 2009-2020: 

$104 billion

Annual energy

savings – 2020: 

$11 billion

 * End-use energy is approximated as equivalent to primary energy

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 58 7/21/09 12:27
59

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 Mandate efficiency at time of retrofit (emerging)./RFDOVWDWHRUIHGHUDO

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The left side shows

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impede capture of energy

efficiency potential, with a

description of the specific

manner in which the barrier

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cluster extending toward the

right. The far right side of the

exhibit lists general solution

strategies for pursuing

efficiency potential, with the

near right column describing

how this might be combined

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cluster. The colored lines

map specific solutions to

specific barriers.

83221_McKinsey_US.indd 59 7/21/09 12:27
60

In addition, point of sale standards do not create a natural opportunity for retrofits, as 

change in building ownership does not always accompany turnover of tenants; further, 

some stakeholders are concerned that point of sale regulation could slow transactions. 

Hence, variants of this approach that link enforcement to changes in tenancy (rather 

than ownership) may prove more effective. Enforcement of the regulations presents 

additional concern and would incur added costs.

 Create value with voluntary standards (emerging). Buildings meeting an efficiency 

standard show a 6 percent premium in effective rent and a 16 percent premium in valuation 

over similar non-energy efficient buildings.131 The benefits provided by adherence to a 

voluntary standard, applied to both buildings and commercial equipment, could help 

manage agency issues by offering financial returns for investments through increased rent 

and raising awareness of the benefits of efficient buildings. 

 Finance through a public-private partnership (piloted). Interviews132 suggest 

that creating a credit-enhancement fund that, for a modest premium, shares the 

risk of default with the lender could enable private capital to flow into the energy 

efficiency market. Such an approach has proven successful in other markets, 

namely student loans and mortgages. According to the Congressional Budget Office, 

federal credit guarantees on student loans cost the government approximately 3 to 

5 percent of the capital deployed.133 At similar subsidy rates, it would cost $2 billion 

to $4 billion to provide credit guarantees for the $73 billion of capital needed for this 

cluster. Furthermore, combining this approach with alternative financing solutions, 

such as on-bill or tax-district financing, would also overcome agency barriers and 

provide a vehicle for monetary incentives through tax cuts or offsets to the principal 

amount. Load-serving entities and local distribution companies and utilities may 

face challenges internally with billing systems and with regulatory involvement in bill 

design, and it may not be appropriate in all service territories.

 Provide monetary incentives (proven). Government and non-government 

entities could provide monetary incentives to owners in several forms – tax credits, 

tax deductions, rebates, or accelerated depreciation. The federal government offers a 

tax deduction of up to $1.80 per square foot for new or renovated commercial buildings 

that are 50 percent more efficient than the ASHRAE 90.1-2001 standard.134 Providing 

tiered incentives – a greater percent of initial investment for deeper retrofits – would 

help make the economics of deeper retrofits more attractive to building owners. 

Incentives for commercial equipment should be easy to access contemporaneously 

with building incentives given the connectedness of the decision process.

Incentives may be effective within an organization as well. The retail chain 

JC Penney has begun communicating each store’s energy performance rating across 

the management chain. The company ranks each store and region by energy use, 

sharing this information with store and regional managers, as well as corporate 

managers. The company has also begun to link management incentives to energy 

performance.135

A number of additional solution strategies could supplement the approaches outlined 

above but are not proven to work at scale in the market. Benchmarking would increase 

awareness by revealing relative performance of buildings of similar type, age, and 

131 Program on Housing and Urban Policy, University of California, Berkeley, January 2009.

132 Expert interviews.

133	 “Subsidy Estimates for Guaranteed and Direct Student Loans,” Congressional Budget Office (CBO),

November 2005. “Estimating the Value of Subsidies for Federal Loans and Loan Guarantees,” CBO, 

August 2004.

134 Energy Policy Act of 2005, subsequent legislation in 2008 extended the tax deduction until 2013.

135 The Power of Information to Motivate Change: Communicating the Energy Efficiency of Today’s 

Commercial Buildings, EPA, February 2009.

83221_McKinsey_US.indd 60 7/21/09 12:27
61

Unlocking Energy Efficiency in the U.S. Economy

3. Approaches to greater energy efficiency in the commercial sector

geography, as well as indicating sources of energy loss. Tools exist that can provide 

voluntary or mandatory ratings with or without public disclosure. For example, the 

EPA provides a free-of-charge benchmarking tool called the Portfolio Manager, which 

allows building owners or managers to track and benchmark several types of commercial 

buildings. Several utilities have also developed capabilities to directly upload building 

energy consumption information into the Portfolio Manager to enable benchmarking.136

The District of Columbia and California currently require benchmarking and public 

availability of the results.137

Establishing policies or business models that encourage ESCOs to aggregate small 

building retrofits (i.e., less than 5,000 square feet) could address a particularly 

challenging 10 percent of overall commercial space. Commercial costs (e.g., 

administration, sales, EM&V) associated with performance contracting for small projects 

can be high, as much as 20 to 30 percent of project costs.138 Aggregating smaller buildings 

under a single performance contract and/or verifying impact with random sampling 

across a portfolio rather than directly measuring all improved buildings could reduce 

these expenses to 5 to 10 percent of project costs139 for MUSH-market or government 

owners. This approach might face additional challenges with small privately owned 

buildings due to disparate ownership. Direct-install programs managed by utilities or 

other third-party providers, for example, could provide a channel for this aggregation. 

2. GOVERNMENT BUILDINGS

With 21.2 billion square feet of floor space, government 

buildings account for 1,180 trillion end-use BTUs of energy 

consumption in the 2020 reference case (Table 9). Offices and 

educational facilities together make up 63 percent of the space 

and 53 percent of total consumption in the cluster. 

The incremental efficiency potential is greatest in locallevel government buildings (260 trillion end-use BTUs), 

principally because local government buildings, which 

include a subset of schools, libraries, and administrative 

offices, hold 62 percent of government floor space. State 

buildings contain 100 trillion end-use BTUs of efficiency 

potential (Exhibit 25). Federal buildings, by contrast, offer 

the least efficiency potential, because they are the smallest 

in overall size and because the reference case includes 

a 30 percent reduction in their energy consumption by 

2020, as mandated for all federal buildings by The Energy 

Independence and Security Act (EISA, 2007).140 Unlocking

the potential in local buildings would require $19 billion 

of upfront investment and provide present value savings of $36 billion. Unlocking the 

potential in state buildings would require $7 billion of upfront investment and provide 

present value savings of $13 billion.

136 Utility Best Practices Guidance for Providing Business Customers with Energy Use and Cost Data, EPA, 

November 2008.

137 The State of California’s AB 1103, 2007 legislation: <www.info.nse.ca.gov>. District of Columbia’s Clean 

and Affordable Energy Act of 2008: <www.dccouncil.washington.dc.us>.

138 Expert interviews.

139 Expert interviews; based on aggregating 100 buildings of 5,000 square feet each in one contract.

140 Energy Independence and Security Act of 2007. Though several state and some local governments have 

set energy efficiency targets, the reference case does not reflect those targets.

Table 9: Government buildings

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

1,080 1,180 360 31

 Electricity TWh 180 190 70 35

 Natural gas 420 450 120 26

 Other fuels* 70 70 10 22

PRIMARY ENERGY 

Trillion BTUs

2,360 2,590 860 33

 Electricity 1,870 2,050 730 35

 Natural gas 430 470 120 26

EMISSIONS 

Megatons CO2e

140 160 50 33

PV of upfront

investment – 

2009-2020: $26 billion

PV of energy savings 

– 2009-2020: 

$49 billion

Annual energy

savings – 2020: 

$5 billion

 * End-use energy is approximated as equivalent to primary energy

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 61 7/21/09 12:27
62

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Barriers to greater energy efficiency

Though significant efficiency potential exists in state and local government buildings, a 

few dominant barriers have limited the achievement of this potential:

 Access to capital. Public facilities often suffer from inadequate capital budgets 

for infrastructure improvements.141 In some cases, demand for capital from state 

agencies can outweigh the ability of state governments to raise debt.142 In other cases, 

administrators refuse to access debt due to concerns about debt ratings, because rating 

agencies may not provide credit for the savings generated through energy efficiency 

measures. 143 To warrant such treatment rating agencies require assurance that 

savings flow to the credit market rather than increased spending.

 Impediments to performance contracting. Many states limit the use or 

effectiveness of building retrofit solutions through performance contracting due to 

inconsistent regulatory support. Challenges range from constraints on the financial 

treatment of lifecycle benefits – which can inhibit capture of the full potential,144, 145

to accounting rules that limit debt payments from operational savings, to inadequate 

administrative support or expertise to evaluate or manage pursuit of the opportunity.

 Lack of awareness. Many facility managers are unaware of current energy 

consumption, because centralized departments often pay utility bills. Furthermore, 

they often possess limited knowledge of energy efficiency measures and ways to deploy 

them within their facilities.146

141 Nicole Hopper, et al., Public and Institutional Markets for ESCO Services: Comparing Programs, 

Performances and Practices, LBNL, March 2005.

142 Ranjit Bharvirkar, et al., 3HUIRUPDQFH&RQWUDFWLQJDQG(QHUJ\(I¿FLHQF\LQWKH6WDWH*RYHUQPHQW

Market, LBNL, November 2008. 

143 Expert interviews.

144 Nicole Hopper, et al., Public and Institutional Markets for ESCO Services: Comparing Programs, 

Performances and Practices, LBNL, March 2005.

145 Ranjit Bharvirkhar, et al., 3HUIRUPDQFH&RQWUDFWLQJDQG(QHUJ\(I¿FLHQF\LQWKH6WDWH*RYHUQPHQW

Market, LBNL, November 2008. In a sample of 12 states, 8 had maximum contract periods less than the 

federal maximum allowed length of 25 years.

146 Ranjit Bharvirkar, et al.

The height of the columns 

represents energy 

consumption associated

with local, state, and federal 

government buildings in 

2020. The left column in 

each pair shows the BAU 

consumption forecast for 

2020, and the right column 

displays the possible energy 

efficient consumption in 

2020.

83221_McKinsey_US.indd 62 7/21/09 6:26
63

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The left side shows

categories of opportunityspecific barriers that can

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efficiency potential, with a

description of the specific

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specific barriers.

83221_McKinsey_US.indd 63 7/21/09 12:27
64

14 percent.150 A second model, effectively used by the U.S. Department of

Transportation with highway funding, could make the receipt of federal funding 

(e.g., Weatherization Assistance Program) contingent on state or local action on

efficiency targets for government buildings.

 Address regulations that inhibit performance contracting (emerging). In

capturing the full potential of energy efficiency available, state and local governments

will benefit from effectively partnering with the private sector. Potential actions

include developing a streamlined process for performance contracting, allowing

aggregation of multiple buildings in a single contract, clarifying accounting rules, and

creating an approved list of eligible service providers. Details of this approach lie in

the above cluster’s description. In addition, state and local governments could require

procurement departments to evaluate bids based on lifecycle costs rather than initial

costs. Finally, they could designate champions of performance contracting to provide

strong executive support, an approach proven to increase penetration of energy

efficiency solution strategies.151

Additional solution strategies could play an important enabling role. Collaborating with

rating agencies to convey the impact of debt incurred for energy efficiency improvements

on the credit ratings of participating governments could facilitate allocation of capital, as

would earmarking capital for energy efficiency projects. Further opportunities exist to

leverage federal allocations (e.g., State Energy Plan and Energy Efficiency Conservation

Block Grants) to maximize the impact of collective funding. Finally, federal matching

grants could reduce capital requirements and enable state and local governments to

pursue this opportunity.

3. PRIVATELY OWNED NEW BUILDINGS

New buildings (i.e., constructed in 2009 and

later) will add an average of 1.3 billion square

feet per year to the stock of privately owned

commercial floor space, representing 

27 percent of all privately owned commercial

floor space in 2020 and 41 percent in 2030. 

Privately owned new buildings offer NPVpositive energy efficiency potential of

270 trillion end-use BTUs (Table 10). The

incremental capital cost of capturing this

potential is $15 billion but would provide

present-value savings of $35 billion. 

This cluster offers only 12 percent of the

commercial-sector efficiency potential

in 2020, because buildings constructed

between 2009 and 2020 are forecast to

account for only 27 percent of all floor space

in 2020 and are expected to be more efficient

than existing buildings. Nonetheless, new

construction will be an increasingly important opportunity through 2030 and beyond,

as the share of building stock constructed after 2009 grows. Furthermore, incorporating

150 Half the subdivisions showed an increase in energy consumption and half showed a decrease. Median

value was an increase in consumption of 3 percent; weighted average value was a decrease in consumption

of 14 percent; range in percentage change in consumption was +1,514 percent to -77 percent. These results

were not normalized for floor space or other changes.

151 Ranjit Bharvirkar, et al., Performance Contracting and Energy Efficiency in the State Government 

Market, LBNL, November 2008. 

Table 10: New private buildings

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

n/a 1,060 270 25

 Electricity TWh n/a 160 50 30

 Natural gas n/a 460 90 21

 Other fuels* n/a 40 10 25

PRIMARY ENERGY 

Trillion BTUs

n/a 2,260 620 28

 Electricity n/a 1,750 520 30

 Natural gas n/a 470 100 21

EMISSIONS 

Megatons CO2e

n/a 140 40 28

PV of upfront

investment – 

2009-2020: $15 billion

PV of energy savings 

– 2009-2020: 

$35 billion

Annual energy

savings – 2020: 

$4 billion

 * End-use energy is approximated as equivalent to primary energy

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 64 7/21/09 12:27
65

Unlocking Energy Efficiency in the U.S. Economy

3. Approaches to greater energy efficiency in the commercial sector

energy efficiency measures into new buildings during initial design is attractive as it costs 

five times as much ($3.83 per square foot compared to $0.76 per square foot) to 

incorporate the same measures as a retrofit. If the nation ignored the opportunity to 

capture efficiency potential in “new” buildings through 2020, retrofitting the buildings 

after they are built, capturing the same potential would cost an additional $48 billion and 

would likely not be cost effective.

Deployment of more energy efficient lighting and appliances accounts for 110 trillion 

end-use BTUs of potential in this cluster. Though such building codes as ASHRAE 90.1 

specify the range of code-compliant HVAC and lighting equipment, developing federal 

standards for such equipment would facilitate the capture of energy efficiency potential 

in two ways: it would address the new-build market in states with no building codes and 

address the replacement (natural end-of-life or accelerated replacement) in existing 

buildings in all states.

Barriers to capturing efficiency potential in new buildings

There are two noteworthy barriers that solutions must address:

 Lack of incentives for developers to build energy efficient buildings. 

Because developers do not receive the future energy savings from energy efficient 

buildings and are often unaware or uncertain of the market premium energy efficient 

buildings can command, developers have little financial incentive to invest in energy 

efficiency above the required minimum level.152 As a result, inclusion of energy efficient 

options in new buildings may be undermined by tradeoffs in favor of more visible 

features (e.g., granite flooring, upgraded facilities).

 Ineffective installation and lack of commissioning. Developers have little 

incentive to ensure that contractors install equipment optimally or commission 

buildings properly. As a result, some buildings perform below the levels called for 

in building codes: research has found that as many as 20 to 30 percent of buildings 

designed to meet the ASHRAE 1999 standard did not meet building shell and lighting 

requirements. However, most buildings designed to meet 1989 standards met or 

exceeded those specifications.153 Similarly, non-compliance rates in California for 

more stringent codes have been reported to be greater than 40 percent.154

A range of minor barriers can also inhibit capture of these opportunities. Limited market 

information to help inform equipment purchasing decisions or floor space selection, 

concerns over quality of building practices, and limited supply of efficient commercial 

floor space represent the most encountered minor barriers.

Solution strategies to unlock potential in new buildings

Given the relative cost-benefit of capturing energy efficiency in the design and 

construction phases and the perishability of these options, this cluster is among the 

most important for near-term action (Exhibit 27).

152 Jens Lausten, Energy Efficiency Requirements in Building Codes, Energy Efficiency Policies for New 

Buildings, International Energy Agency, March 2008.

153 Eric Richman, et al., “National Commercial Construction Characteristics and Compliance with Building 

Energy Codes: 1999-2007,” Summer Study on Energy Efficiency in Buildings, ACEEE, 2008.

154 M. Sami Khawaja et al., “Statewide Codes and Standards Market Adoption and Noncompliance Rates,” 

Southern California Edison, May 2007.

83221_McKinsey_US.indd 65 7/21/09 12:27
66

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 Mandatory building codes (proven). As is true within the residential sector,

mandatory codes for new buildings can overcome all barriers by circumventing the

end-user’s decision-making process. Three complementary actions would increase

building code impact:

— Adopting the latest energy efficiency building codes. Only two states

have adopted the latest commercial building code, while 13 states have either

not adopted a statewide code or continue to use codes that are three or more

generations behind (Exhibit 28).155 The 2007 ASHRAE standard represents a

32 percent efficiency improvement over the 1980 level. States adopting the most

recent ASHRAE Standard, 90.1-2007, would reduce energy consumption in

new buildings by 11 percent relative to current code levels. In 2020, capturing

this improvement would produce 110 trillion end-use BTUs of energy savings,

5 percent of the annual commercial-sector potential that year. Furthermore,

if ASHRAE Standard 90.1-2007 were adopted through 2011 and a 30 percent

improved code were adopted in 2012, 270 trillion end-use BTUs could be saved

in 2020, or 12 percent of annual commercial-sector potential that year.156 As

discussed in the residential section, two options emerge that can overcome

the challenge of getting states to adopt the latest codes. Focusing on education

for state officials and building departments, and making accessibility of some

federal funds contingent on building code stringency could enable increased state

adoption of the latest building codes. 

155 “Building Energy Data Book, Table 5.1.5,” EERE, March 2009. < http://buildingsdatabook.eren.doe.gov>.

156 Expert interviews.

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83221_McKinsey_US.indd 66 7/21/09 12:27
67

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83221_McKinsey_US.indd 67 7/21/09 6:33
68

standards would yield energy savings of 260 trillion end-use BTUs in 2020, some 

11 percent of overall commercial-sector potential that year.160

 Provide education and monetary incentives (proven). Builder subsidies

would overcome agency issues by allowing builders to recover costs other than

through the buyer. The incremental cost of constructing energy efficient buildings is

approximately $1.08 per square foot, a 0.5 percent increase over standard practices. 

Educating developers on the actual incremental costs and the associated building

techniques could increase the rate of adoption at relatively low cost. Alternatively,

if the government or another agent provides an incentive of $1.08 per square foot to

developers, it would cost $1.9 billion annually to capture the full potential.

4. OFFICE AND NON-COMMERCIAL DEVICES

Electricity consumption from office and 

non-commercial devices is growing at a

rate of 3.6 percent per year. This cluster is

forecast to consume 1,980 trillion end-use

BTUs in 2020, consisting entirely of 

580 TWh of electricity (Table 11). 

The efficiency potential in this cluster is

highly fragmented across hundreds of device

categories. At $2.70 per MMBTU of end-use

energy, however, the opportunity is among 

the most cost effective. This cluster could

contribute 570 trillion end-use BTUs of NPVpositive potential, assuming an estimated

upfront investment of $8 billion and

provide present-value savings of $57 billion. 

Equipment groups fall into three broad

categories: office equipment, miscellaneous

commercial load, and data centers:

 Office equipment includes dozens of device categories, in broad terms, PCs (including

desktop computers, laptop computers) and non-PCs (such as servers, printers, fax

machines, multi-function devices, and phones). 

 Miscellaneous commercial load includes some 100 equipment categories, with two

broad sub-groups:

 — Commercial equipment including specialized devices such as MRI machines,

X-ray machines, other medical and laboratory equipment, cash registers and

surveillance systems.

 — Residential devices present in commercial settings including equipment categories

such as refrigerators, coffee makers and water coolers.

 Data-centers consist of servers, auxiliary data equipment, and supporting power

systems (e.g., uninterruptable power supplies); potential associated with energy

efficient cooling and lighting is contained in the private and government building

clusters. However they bear special attention as data center energy use is expected to

160 ENERGY STAR labeled buildings perform on average 35 percent better than the average building in

CBECS 2003 from expert interviews. New buildings are better than CBECS average by 13 percent from

B. Griffith et al., Assessment of the Technical Potential for Achieving Net Zero-Energy Buildings in the

Commercial Sector, NREL, 2007. This leads to net benefits of 24 percent.

Table 11: Office and non-commercial devices

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

1,290 1,980 570 29

 Electricity TWh 380 580 170 29

 Natural gas n/a n/a n/a n/a

 Other fuels* n/a n/a n/a n/a

PRIMARY ENERGY 

Trillion BTUs

4,010 6,160 1,760 29

 Electricity 4,010 6,160 1,760 29

 Natural gas n/a n/a n/a n/a

EMISSIONS 

Megatons CO2e

250 380 110 29

PV of upfront

investment – 

2009-2020: $8 billion

PV of energy savings 

– 2009-2020: 

$57 billion

Annual energy

savings – 2020: 

$11 billion

 * End-use energy is approximated as equivalent to primary energy

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 68 7/21/09 12:27
69

Unlocking Energy Efficiency in the U.S. Economy

3. Approaches to greater energy efficiency in the commercial sector

grow 9.6 percent per year from a base of 200 trillion end-use BTUs in 2008 to 

600 trillion end-use BTUs in 2020.161

Barriers to capturing efficiency potential 

The energy consumed by each device in this cluster is small and therefore of relatively 

little concern to consumers and manufacturers. While there are necessarily many 

barriers of lesser importance that impact this cluster, we have elevated three for 

particular consideration: 

 Low awareness. This cluster may account for as much as 25 percent of total 

electricity consumption in the commercial sector in 2020; however, each category 

of devices represents a tiny share of an enterprise’s overall electric bill. As a result, 

the efficiency potential in this cluster receives little attention, as discussed in the 

section on residential plug-load. Lack of attention is compounded by insufficient or 

buried information about the energy consumption of these devices, often making the 

transaction “cost” of identifying lifecycle benefits prohibitively large relative to the 

savings. Additionally, proper usage of energy efficiency settings presents a minor 

barrier similar to that facing the electrical devices and small appliances cluster in the 

residential sector.

 Manufacturer limitations. Consumers and businesses tend to value other 

attributes (e.g., price, screen resolution, print quality) above energy efficiency, thus 

affecting end-user purchasing processes.162 This makes manufacturers’ ability to 

receive compensation for energy efficient devices unclear (a type of ownership transfer 

barrier), which impacts design decisions.

 Practical availability. Restricted procurement selection, consumer focus on 

acquisition rather than lifecycle costs, and distributed budget responsibility within an 

organization (e.g., separation of upfront purchasing concerns from long-term energy 

budget responsibility) limit availability of efficient technology. Adverse bundling of 

efficiency with other features can also present a barrier for some devices.

Data centers face a similar set of barriers. Low awareness of energy usage (and the 

expertise to capture substantial efficiency potential) persists among operators of smaller 

data centers, though operators of enterprise-class centers are increasingly focusing on 

managing power consumption.163 Furthermore, data centers tend to focus on acquisition 

cost rather than total lifetime cost, and they may be concerned about perceived quality 

trade-offs, such as concerns about reliability, due to risk aversion. With this mind-set, 

developers and data center operators tend to over-invest in servers, resulting in low server 

utilization, with as many as 30 percent of servers consuming electricity but serving a 

limited useful business purpose with less than 3 percent average daily utilization.164

161 “Report to Congress on Server and Data Center Energy Efficiency Public Law 109-431”, EPA, Aug 2007. 

Expert interviews.

162 “Going Green: An Examination of the Green Trend and What it Means to Consumers and the CE Industry,” 

Consumer Electronics Association, 2008.

163 Expert interviews.

164 “Revolutionizing Data Center Energy Efficiency,” McKinsey & Company, 2008.

83221_McKinsey_US.indd 69 7/21/09 12:27
70

Solution strategies to unlock potential in office and non-commercial devices

Capturing the potential opportunity from a distributed group of actors where energy

efficiency is only a minor factor in the decision-making process may require a certain degree

of intervention, but it may be supplemented by harnessing competitive market forces to drive

improvements over time. Several solutions emerge as possibilities (Exhibit 29). 

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 Introduce or expand mandatory minimum standards (proven). Expanding

the equipment categories for which the DOE sets standards would enable greater

energy efficiency. Within this cluster, three equipment categories have federal

mandatory standards, leaving most categories unaddressed.165 It is important to note

that technology in this area advances rapidly, making the task of setting standards

without stifling market innovation quite challenging. It is worth noting that a standby

standard for electric devices used in residential settings would have further impact in

this cluster. However, due to extremely limited data on commercial office equipment, it

is difficult to determine impact of such a standby standard.166

For data centers, one potential approach is to set Corporate Average Data-Center

Efficiency (CADE) or Power Usage Effectiveness (PUE) standards. In addition,

creation of cross-cutting standby standards, as discussed in the residential section,

would have a spillover effect to this cluster. 

 Voluntary standards (proven). ENERGY STAR currently covers 12 product

categories in this space and reported energy savings in 2008 of 52 TWh.167 The EPA

is developing a benchmarking tool for data centers through its Portfolio Manager.168

In addition, the impact of solution strategies considered in residential lighting and

appliances and electrical devices would also increase potential in this cluster. 

165 Expert interviews.

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167 Expert interviews.

168 “ENERGY STAR Data Center Infrastructure Rating,” EPA, 2008.

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83221_McKinsey_US.indd 70 7/21/09 12:27
71

Unlocking Energy Efficiency in the U.S. Economy

3. Approaches to greater energy efficiency in the commercial sector

Additionally, supporting solution strategies could include providing manufacturers or 

distributors incentives to decrease the incremental cost of producing energy efficient 

equipment or providing procurement departments with more information on lifetime costs.

5. COMMUNITY INFRASTRUCTURE

In 2008, 11 percent (750 trillion end-use BTUs) of 

commercial-sector energy consumption occurred in 

community infrastructure (Table 12) – settings not normally 

associated with buildings: street and other outdoor lighting, 

water services, and telecom infrastructure (including mobile 

phone base stations).169 Overall consumption in this cluster is 

forecast to grow at an annual rate of 1.8 percent. 

Community infrastructure could provide 290 trillion enduse BTUs of NPV-positive potential in 2020; unlocking this 

potential would require upfront investment of $4 billion and 

provide present-value savings of $45 billion. The potential 

resides in several sub-categories: street/other lighting 

(43 percent), water services (12 percent), telecom network 

(25 percent), and other electricity consumption (20 percent). 

End-uses and facilities managed by local governments 

account for 200 trillion end-use BTUs of the potential, while 

end-uses and facilities managed by private-sector entities 

make up 90 trillion end-use BTUs of the potential. 

Barriers to capturing the efficiency potential

The prevailing barriers in this cluster vary by ownership category. Local governments 

typically own water service facilities and often (but not always) own street lighting, while 

private-sector entities own telecom infrastructure. Water service facilities and street 

lighting (when owned by government) face barriers typical of government buildings, 

namely capital availability and inconsistent regulatory support for performance 

contracting. Street lighting, when owned by the utility, may encounter agency issues. 

Common barriers affect all three categories of community infrastructure:

 Risk aversion. Many operators are risk averse and put a premium on reliability; 

they may not be inclined to pursue energy efficiency activities for fear of disrupting 

essential services.170

 Lack of performance awareness or accountability. Water operators typically 

manage to such metrics as discharge level and water quality; energy efficiency is not 

usually a metric for which they are accountable.171 Similarly, telecom infrastructure 

is geographically dispersed and budget ownership within an organization is often 

fragmented, both of which introduce management challenges. As a result, operators 

often do not have a consolidated view of the energy consumption they manage.172

Finally, other considerations, such as equipment features (e.g., flexibility, backward 

compatibility, vendor compatibility), may take precedence over energy efficiency.173

169 We have excluded natural gas and distillate fuel oil consumption (1,350 trillion end-use BTUs in 2020) 

attributed to community infrastructure and miscellaneous load in AEO 2008 due to lack of information 

about the sources of consumption and the efficiency opportunities.

170 Expert interviews.

171 Expert interviews.

172 Expert interviews.

173 Expert interviews.

Table 12: Community infrastructure

Energy

use

– 2008

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

750 930 290 31

 Electricity TWh 220 270 80 31

 Natural gas n/a n/a n/a n/a

 Other fuels* n/a n/a n/a n/a

PRIMARY ENERGY 

Trillion BTUs

2,320 2,890 890 31

 Electricity 2,320 2,890 890 31

 Natural gas n/a n/a n/a n/a

EMISSIONS 

Megatons CO2e

150 180 60 31

PV of upfront

investment – 

2009-2020: $4 billion

PV of energy savings 

– 2009-2020: 

$45 billion

Annual energy

savings – 2020: 

$5 billion

 * End-use energy is approximated as equivalent to primary energy

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 71 7/21/09 12:27
72

 Competing uses for capital. Energy efficiency projects may compete for

capital with core business projects, such as upgrades to the next-generation mobile

technology174 or new lighting capacity additions. 

Solution strategies to unlock potential in community infrastructure

Several solution strategies can address one or more of the barriers affecting community

infrastructure efficiency potential (Exhibit 30). The relative emphasis for each measure

may differ based on the type of community infrastructure addressed. 


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Exhibit 30: Addressing barriers in community infrastructure

 Benchmark energy consumption(piloted). Expanding existing benchmarking

tools, such as the EPS’s Portfolio Manager, to include water distribution facilities,

street lighting, and distributed telecom infrastructure would help provide a voluntary

standard for 230 trillion end-use BTUs of potential or 79 percent of total potential

in this cluster. Such benchmarks should normalize for differences, especially if

addressing telecom base stations where technology generation, supported bandwidth,

voice and data usage, encryption level, and geographical spread of consumers served

could significantly impact benchmark definition. 

 Set binding targets (piloted). State and local governments could mandate energy

efficiency targets for water services and street lighting, by expanding existing

programs.175 Energy efficiency measures in water services could yield savings of 10 to

30 percent and would include retrofitting facilities with more efficient pumps and

motors, incorporating variable frequency motors, installing dissolved oxygen sensors for

the aeration process, and installing a system for overall plant monitoring and control.176

 Enable performance contracting (emerging). Water treatment and street

lighting would benefit from regulatory changes that would facilitate performance

contracting, as discussed for government buildings.

174 Expert interviews.

175 See, for instance, EPA ENERGY STAR Challenge for water systems. <www.energystar.gov>.

176 5LFKDUG%URZQ3(QHUJ\(I¿FLHQF\DQG5HQHZDEOH(QHUJ\7HFKQRORJLHVLQ:DVWHZDWHU0DQDJHPHQW ́

testimony before House Subcommittee on Water Resources and Environment, 4 February, 2009.

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categories of opportunityspecific barriers that can

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83221_McKinsey_US.indd 72 7/21/09 12:27
73

Unlocking Energy Efficiency in the U.S. Economy

3. Approaches to greater energy efficiency in the commercial sector

Other enabling solution strategies include capturing available funds177 and improving 

training by including efficiency within existing EPA guidelines for periodic training and 

certification. To support these solution strategies, fund regulators could make full access 

to available funds contingent in part on fulfillment of a training requirement. 

177 Water treatment facilities can access existing funds for energy efficiency improvements, including State 

Energy Program, Energy Efficiency Conservation Block Grant, Drinking Water State Revolving Fund, and 

Clean Water State Revolving Fund.

83221_McKinsey_US.indd 73 7/21/09 12:27
83221_McKinsey_US.indd 74 7/21/09 12:27
75

The industrial sector will consume 51 percent of the 2020

baseline end-use energy in the United States, equivalent to

20.5 quadrillion BTUs of end-use energy. The industrial

sector offers 3,650 trillion end-use BTUs of NPV-positive

energy efficiency potential, equivalent to 18 percent of

its forecast energy consumption in 2020 (Table 13).178

Capturing this potential would save $47 billion per

year in energy costs, though between 2009 and 2020 it

would require present value investment of $113 billion

yielding total present-value savings of $442 billion.179 It is

noteworthy that energy consumption and potential in the

industrial sector remains considerably more regionalized

than in the residential or commercial sectors: the South, 

for instance, contains 50 percent of consumption and 

49 percent of the efficiency potential.

Energy consumption in the industrial sector (as examined

in this report) is forecast to grow by 0.5 percent per year,

reaching 20,530 trillion end-use BTUs in 2020. This rate is

slower than expected GDP growth because of 3 to 14 percent

improvements anticipated in energy-intensive industries

(i.e., cement, chemicals, iron and steel, pulp and paper, and

refining).180

The energy intensity of production in industrial subsectors varies widely, from 52.3 enduse BTUs per dollar of value added in cement production to 0.4 end-use BTUs per dollar in

178 The industrial sector as a whole is projected to consume 25,820 trillion BTUs of end-use energy in 2010. 

We excluded transport fuel (1,380 trillion end-use BTUs) and asphalt consumed by the construction sector

(1,080 trillion end-use BTUs), as well as chemical feedstock (4,080 trillion end-use BTUs), identifying

potential efficiency in the remaining 19,290 trillion BTUs of end-use consumption.

179 This does not include primary energy potential of 1.4 quadrillion BTUs from industrial and commercial

CHP, which is discussed later in the chapter.

180 For the purposes of this report energy-intensive industries include those requiring intensities above 

10 BTUs per dollar of value added: cement, bulk chemicals, refining, iron and steel production, and pulp 

and paper. See Exhibit 28 for a list of sectors. We excluded aluminum and glass products due to their low

total consumption and mining as its consumption is primarily driven by transportation.

4. Approaches to greater energy

efficiency in the industrial sector

Table 13: Overview of energy use in the industrial sector

Energy

use

– 2010***

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

19,290 20,530 3,650 18

 Electricity TWh 1,090 1,050 190 18

 Natural gas 5,370 5,850 1,040 18

 Other fuels* 10,200 11,090 1,970 18

PRIMARY ENERGY 

Trillion BTUs

27,320 28,320 5,030 18

 Electricity** 11,540 11,150 1,980 18

 Natural gas 5,580 6,080 1,080 18

EMISSIONS 

Megatons CO2e

1,660 1,710 300 18

PV of upfront

investment – 

2009-2020: $113 billion

PV of energy savings 

– 2009-2020: 

$442 billion

Annual energy

savings – 2020: 

$47 billion

 * End-use energy is approximated as equivalent to primary energy

** Does not include CHP savings of 910 trillion BTUs

*** 2010 is used throughout this chapter due to data availability

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 75 7/21/09 12:27
76

computer assembly. We found that opportunities for energy efficiency are highly fragmented 

across subsector-specific process steps (e.g., pulping and bleaching in pulp and paper, 

clinker production in cement, and secondary hot rolling in iron and steel), which represent 

67 percent of the potential. Cross-cutting energy support systems, such as steam systems, 

motors, and buildings, represent the remaining 33 percent of the potential. Sixty-one 

percent of the total opportunity resides in energy-intensive sectors, with 39 percent in nonenergy-intensive sectors. In addition to these energy efficiency initiatives, NPV-positive 

deployment of combined heat and power systems could increase from 85 GW in 2008 to 

135 GW in 2020, representing a substantial opportunity to increase efficiency in primary 

energy and drive 1,390 trillion BTUs of primary-energy savings, reduce facility-level energy 

costs by $77 billion, and abate greenhouse gas emissions by 100 megatons of CO2e.

We have divided the industrial sector into four clusters (Exhibit 31). Unlike the residential 

and commercial sectors, the three end-use clusters in the industrial sector share similar 

barriers and solutions, while CHP, which generates electricity and thermal energy from a 

single fuel source, stands apart. Therefore, we will group the three energy-use clusters into 

a single discussion and address CHP separately.

Processes

Waste heat

recovery

Waste heat

recovery

(steam)

Steam

Buildings

Motors

Energy-intensive industries Non-energy-intensive

industries

Energy

support 

systems

Process

energy

Energy

support 

systems

Process

energy

Processes

Waste heat

recovery

Waste heat

recovery

(steam)

Steam

CHP*

Motors

Buildings

Enduse energy, avoided consumption; total = 3,650 trillion BTUs

Primary energy, avoided consumption; total = 6,420 trillion BTUs

Iron &

Steel

Large

estab.

Pulp &

Paper

Chemicals

Cement

Refining

Small

estab.

Iron &

Steel

Large

estab.

Pulp & 

Paper

Chemicals

Cement

Refining

Small

estab.

26.7 

GW

1. Energy support 

systems

(1,220)

2. Energyintensive 

industry

processes

(1,550)

3. Non-energyintensive 

industry

processes

(870)

Energy-intensive industries E i i id i Non-energy-intensive N i en i

industries

1. Energy support 

systems

(2,130)

4. Combined heat 

and power

(1,390)

2. Energyintensive 

industry

processes

(1,830)

3. Non-energyintensive 

industry

processes

(1,070)

* CHP also includes 490 TBTU of potential from CHP in commercial uses

Source: EIA AEO 2008; McKinsey analysis 

Clusters

2020 potential (TBTU)

Exhibit 31: Clusters of energy efficiency potential in the industrial sector

The upper and lower charts 

break out the energy 

efficiency potential in 2020 

for the industrial sector 

in end-use and primary 

energy respectively. Each 

area represents a cluster of 

efficiency potential: the area 

is proportional to the relative 

share (of total potential 

in the sector) associated 

with that cluster, while the 

number next to the cluster 

name provides the efficiency 

potential, measured in trillion 

BTUs.

83221_McKinsey_US.indd 76 7/21/09 12:27
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Energy support systems

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position on the horizontal 

axis corresponding to the 

energy intensity (measured 

in BTUs of end-use energy 

consumed per dollar of value 

created) for the industry 

and its position on the 

vertical axis corresponding 

to its total end-use 

energy consumption in 

2008. Industries having 

a dot (as opposed to a 

square) within the shaded 

area were modeled in 

detail for this report.

83221_McKinsey_US.indd 77 7/21/09 12:27
78

 Steam systems. These systems (e.g.,

steam generation [boilers], distribution,

and condensate-recovery systems) are

projected to consume 5,360 trillion enduse BTUs of energy and provide 

460 trillion end-use BTUs of potential

in 2020, with petroleum accounting

for 35 percent of the potential, natural

gas 35 percent, and other fuels 30 percent. 

Efficiency measures include waste

heat recovery (i.e., from boiler exhaust

and waste gases and liquids), which

would provide an additional 150

trillion end-use BTUs of potential,

steam trap maintenance, insulation of

distribution systems, and valve and fitting

improvements.

 Motors systems. Motor-driven

systems are projected to consume 

2,330 trillion end-use BTUs of energy,

all of it electricity, totaling 680 TWh,

which represents 65 percent of total

industrial electricity consumption. 

These systems (e.g., pumps, fans, air compressors and motor-driven industrial process

systems) provide 250 trillion end-use BTUs (70 TWh) of potential in 2020. Efficiency

improvements include matching component size with load requirements, using speed

control, and improving maintenance; together, these improvements represent 77 percent

of this potential. Motor-drive upgrades beyond EISA 2007 standards182 and improved

motor management offer the remaining 

23 percent. 

 Buildings. Buildings consume energy for HVAC, lighting, and other support

functions. By 2020, buildings are projected to consume 1,110 trillion end-use BTUs,

including 160 TWh of electricity, 190 trillion end-use BTUs of natural gas, and 

360 trillion end-use BTUs of other fuels. Upgrades to lighting and appliances, plus

retro-commissioning of HVAC systems and building shells, would provide 360 trillion

end-use BTUs of potential.

182	 More strict motor efficiency standards	included	in EISA 2007 address efficiency	upgrades	for new motors;

some potential exists in motors maintained beyond the end of their useful life that should be replaced. 

Table 14: Energy support systems

Energy

use

– 2010**

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

8,540 8,800 1,220 14

 Electricity TWh 870 850 120 15

 Natural gas 1,920 2,040 280 13

 Other fuels* 3,650 3,870 520 13

PRIMARY ENERGY 

Trillion BTUs

14,870 14,960 2,130 14

 Electricity 9,220 8,970 1,320 15

 Natural gas 2,000 2,120 290 13

EMISSIONS 

Megatons CO2e

900 910 130 14

PV of upfront

investment – 

2009-2020: $34 billion

PV of energy savings 

– 2009-2020: 

$164 billion

Annual energy

savings – 2020: 

$17 billion

 * End-use energy is approximated as equivalent to primary energy

** Table 14, 15 and 16 include a double-count of steam systems

of approximately 5,520 trillion BTUs of 2010 consumption due

to difficulties in accuately seperating this consumption into each

cluster

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 78 7/21/09 12:27
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Energy

use

– 2010**

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY

Trillion BTUs

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 Natural gas 3,300 3,490 490 14

 Other fuels* 6,260 6,610 940 14

PRIMARY ENERGY

Trillion BTUs

10,810 11,290 1,830 16

 Electricity 1,120 1,060 380 36

 Natural gas 3,340 3,620 510 14

EMISSIONS

Megatons CO2e

650 680 110 16

PV of upfront

investment –

2009-2020: $51 billion

PV of energy savings

– 2009-2020:

$182 billion

Annual energy

savings – 2020:

$19 billion

* End-use energy is approximated as equivalent to primary energy

** Tables 14, 15 and 16 include a double-count of steam systems

of approximately 5,520 trillion BTUs of 2010 consumption due

to difficulties in accuately seperating this consumption into each

cluster

Source: EIA AEO 2008, McKinsey analysis

On the left side of the

exhibit, the height of each

segment and the column

itself represent the amount

of potential in the industrial

support systems modeled,

measured in trillion BTUs,

with the total at the top of

the column and the values

for each system in their

corresponding segment.

The right side of the exhibit

displays the amount of

potential in select industries

for each of these systems.

83221_McKinsey_US.indd 79 7/21/09 12:27
80

Measures to capture this potential would require upfront investments of $51 billion, but

would generate present value savings of $182 billion; 42 percent of the potential would pay

back in less than 2.5 years.

Non-energy-intensive industry processes

Non-energy intensive industry processes (e.g., food products, plastics, electrical

equipment) are expected to consume 6,300 trillion end-use BTUs in 2020.184 Savings

measures available in this cluster include improved maintenance, process energy

monitoring, and waste heat recovery.185

This cluster contains 870 trillion end-use BTUs of efficiency potential, offering $96 billion

in present-value savings with an expected upfront investment of $28 billion (Table 16). 

This opportunity is highly fragmented across some 330,000 plants in 14 industries. The

largest 3 percent of plants (9,500), however, consume 41 percent (2,590 trillion end-use

BTUs) of the energy and offer 38 percent (330 trillion end-use BTUs) of the efficiency

potential, suggesting that these sites would be the most attractive to pursue first. 

Barriers to capturing energy efficiency

The industrial sector faces five major

barriers that together affect the bulk of the

available energy efficiency potential:

 Low awareness and attention. 

Energy typically represents a relatively

small fraction of operating costs (less

than 5 percent), leading to low levels of

awareness and attention from senior

management at industrial companies.186

Opportunities often require technical

analysis that on-site employees rarely

perform because of insufficient training,

awareness, or management concern. The

savings potential varies considerably

by site, ranging from 10 to 40 percent,

even for sites within the same subsector,

highlighting the need for site-specific

analysis.187 This issue is exacerbated by

the lack of focus on energy efficiency

by top management, leading to underprioritization of energy as an important

strategic lever or metric to manage,

resulting in limited investment in developing the required technical expertise. 

184 Given the many processes used in these sub-sectors, we created top-down models to identify the key

characteristics of the opportunities based on our extensive experience serving these industries.

185 See the “ENERGY STAR Guide for Energy and Plant Managers” (2008), a series of papers by LBNL’s

International Energy Studies exploring “Energy Efficiency Improvement and Cost Saving Opportunities” 

for many industries, including Pharmaceuticals, Wet Corn Milling, Fruit and Vegetable, and Vehicle 

Assembly; available at <http://ies.lbl.gov/publications>.

186 Refining (13 percent total savings, 5 percent process energy savings) and to a lesser extent chemicals, 

(19 percent total savings, 11 percent process energy savings) often represent an exception to this rule.

187 Expert interviews.

Table 16: Non-energy-intensive industry processes

Energy

use

– 2010**

BAU

energy use

– 2020

Savings

due to EE

– 2020

Savings

Percent

END-USE ENERGY 

Trillion BTUs

6,330 6,300 870 13

 Electricity TWh 110 110 30 24

 Natural gas 2,050 2,050 270 13

 Other fuels* 3,900 3,890 520 13

PRIMARY ENERGY 

Trillion BTUs

7,220 7,130 1,070 15

 Electricity 1,200 1,120 270 24

 Natural gas 2,130 2,130 280 13

EMISSIONS 

Megatons CO2e

430 430 60 15

PV of upfront

investment – 

2009-2020: $28 billion

PV of energy savings 

– 2009-2020: 

$96 billion

Annual energy

savings – 2020: 

$11 billion

 * End-use energy is approximated as equivalent to primary energy

** Tables 14, 15 and 16 include a double-count of steam systems

of approximately 5,520 trillion BTUs of 2010 consumption due

to difficulties in accuately seperating this consumption into each

cluster

Source: EIA AEO 2008, McKinsey analysis

83221_McKinsey_US.indd 80 7/21/09 12:27
81

Unlocking Energy Efficiency in the U.S. Economy

4. Approaches to greater energy efficiency in the industrial sector

 Elevated hurdle rate. Industrial sites generally receive very tight operational 

budgets, and plant managers are encouraged to maximize production while keeping 

near-term quarterly costs low. Furthermore, management tends to focus on quarterly 

targets, potentially at the expense of projects that pay back over longer periods. Fortythree percent of energy managers indicate that they use a payback period of less than 

3 years for energy efficiency projects,188 while under difficult economic conditions 

anecdotal evidence suggests many companies require a payback period of 18 months 

or less on all investments.189 Requiring a 2.5-year payback would reduce identified 

industrial potential by 46 percent or 1,690 trillion end-use BTUs. 

 Capital allocation and elevated hurdle rate. Capital allocation from internal 

sources faces strict capital budget constraints with non-core projects (e.g., energy 

efficiency) competing for funding against core projects on unlevel ground. Often 

energy efficiency projects face an elevated hurdle rate compared to core projects. 

Furthermore, corporations often separate plant operations and maintenance budgets 

from capital improvement budgets, creating an organizational challenge for energy 

efficiency efforts, because the costs reside in one budget while the savings reside in 

another. Finally, even if projects are attractive by internal standards, corporations 

may remain reluctant to raise debt for energy efficiency projects for fear of adversely 

affecting their balance sheets and credit ratings.190

 High transaction “cost.” Transaction “costs”191 associated with implementing 

efficiency-related process improvements include space constraints, invested resource 

time, process disruptions, potential effects on product quality, and safety concerns 

associated with system integration and energy support system maintenance.192

 Procurement and distributor availability constraints. Lack of product 

availability can occur within an enterprise’s procurement system, with the distributor, 

or in the marketplace. Many procurement systems contain limited inventory, typically 

focus on upfront cost rather than total cost of ownership, and require special processes 

and additional time to procure non-pre-approved parts. Distributor limitations 

primarily affect replacement of equipment during urgent situations because inventory 

carrying costs restrict distributors’ ability to respond to immediate needs with the 

most efficient solutions. Marketplace limitations arise from the risk aversion of plant 

managers: despite continued ability of manufacturers to improve technology, risk 

aversion frequently creates demand for in-kind rather than more efficient replacements.

188 “Johnson Controls Energy Efficiency Indicator, North America,” Johnson Controls and the International 

Facility Management Association, 2008.

189 Expert interviews.

190 Expert interviews.

191 Quantifiable transaction costs including costs for engineering time and system integration are included 

in the investment sum; transaction costs considered barriers include those with uncertain incremental 

financial impact given challenges regarding allocation of marginal employee time, and unclear or 

misperceived impacts on product quality and safety.

192 Expert interviews.

83221_McKinsey_US.indd 81 7/21/09 12:27
82

CLEAN-SHEET REDESIGN OF SELECT INDUSTRIES 

Recent studies indicate that the technical potential for efficiency reductions in many 

energy-intensive industries range from 35 to 71 percent with existing – but not 

necessarily cost-effective – technology. The “theoretical” potential for efficiency 

reductions (i.e., as limited by thermodynamics) range from 43 to 95 percent.1

Capturing this technological potential, however, would require a clean-sheet redesign 

of operations, because retrofitting these measures into existing facilities would be 

too costly. Greenfield industrial projects are rare in the U.S., and plants are longlived assets; as a result, experts have not detailed costs of these measures. Many 

measures, however, would likely be NPV-positive, if designed into greenfield facilities. 

The range of technical to thermodynamic potential for each industry analyzed includes:

 Chemicals: 71 to 88 percent, mostly through process-specific changes

 Mining: 60 to 95 percent, mostly related to on-site transportation, reducing what is 

transported and increasing efficiency of how it is transported 

 Pulp and paper: 39 to 43 percent, mostly in paper drying

 Refining: 38 to 73 percent, mostly in improving crude distillation processes

 Steel: 35 to 43 percent, mostly in reducing heating temperatures.

While it would be difficult to achieve the technical limits within the next 5 to 10 years, 

clean-sheet redesign would enable manufacturers to gradually achieve world-leading 

levels of energy efficiency as they develop new assets. A long-term industry vision for 

greater energy efficiency would help direct research and development efforts.

1 Pulp and Paper Industry Energy Bandwidth Study, prepared by Jacobs Greenville, South Carolina, 

and Institute of Paper Science and Technology (IPST) at Georgia Institute of Technology Atlanta, 

Georgia, August 2006; Energy Bandwidth for Petroleum Refining Processes, prepared by Energetics 

Incorporated, for the U.S. Department of Energy Office of Energy Efficiency and Renewable Energy 

Industrial Technologies Program, October 2006; Steel Industry Energy Bandwidth Study, prepared 

by Energetics, Inc., for the U.S. Department of Energy Office of Energy Efficiency and Renewable 

Energy Industrial Technologies Program, October 2004; McKinsey analysis

Solution strategies to unlock the potential

Solution strategies to address these barriers cut across consumption clusters and fall into 

four groups: promoting energy management, providing energy assessments and training 

tools, offering monetary incentives, and establishing efficiency target agreements or 

equipment standards (Exhibit 34). 

83221_McKinsey_US.indd 82 7/21/09 12:27
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impede capture of energy

efficiency potential, with a

description of the specific

manner in which the barrier

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of the exhibit lists general

solution strategies for

pursuing efficiency potential,

with the near right column

describing how this might

be combined into specific

approaches to overcome

barriers in the cluster. The

colored lines map specific

solutions to specific barriers.

83221_McKinsey_US.indd 83 7/21/09 6:35
84

 — Plant certifications, similar to OSHA safety programs, can encourage adoption of 

energy-management programs. Energy-management certification protocols, such 

as the emerging ISO 50001 standard,197 will likely strengthen energy-management 

practices. 

 Providing energy assessment and training tools (proven/piloted).

198

Subsidized assessments and distribution of training materials can increase awareness 

of energy-saving opportunities:

 — The DOE Industrial Technology Program “Save Energy Now” represents a national 

initiative to drive a 25 percent reduction in industrial energy intensity in 10 years. It 

has already helped 2,100 U.S. manufacturing facilities save an average of 8 percent 

of total energy costs. They have performed 200 assessments of steam systems and 

process heat systems across 40 sites in 2006, 257 sites in 2007, and 301 sites in 2008. 

Surveys 6 months after the assessment showed participants had implemented or 

were in the process of implementing 60 percent of the recommendations. More 

than 90 percent of participants found assessments played an influential or highly 

influential role in their implementation of energy-saving projects.199 Significant 

resource requirements would make enlarging programs like this challenging. 

Assessment of a single establishment costs approximately $10,000, including 2 FTE 

weeks. Assessing the top 10 percent would require an investment of $300 million, 

including more than 1,000 FTE-years.

 — EPA’s ENERGY STAR Industrial Partnership (through Lawrence Berkeley National 

Laboratory) and other organizations have created subsector- and technology-focused 

guidebooks that highlight operational best practices and provide tools for conducting 

energy-savings assessments. Wisconsin’s public benefits program, Focus on Energy, 

serves as one example of impact: an independent evaluation revealed that their pulp 

and paper guidebook achieved 67 percent market awareness; 75 percent of those 

aware of the report consulted the guidebook and 11 percent of those aware of the 

report implemented identified practices.200

 Monetary incentives (piloted/emerging).

201 Monetary incentives can address 

capital allocation and availability concerns, shorten payback times, and help overcome 

product availability barriers by reducing procurement challenges. There are multiple 

examples of innovations in this area:

 — Companies that have a strong relationship with end-users can improve the energy 

efficiency of related businesses by requiring greater energy efficiency from 

them and others in their supply chain. Wal-Mart’s “supply chain of the future” 

initiative, for example, is targeting 20 percent energy savings in its supplier base 

by 2012, focusing on energy and emissions in seven product categories.202 WalMart provides suppliers incentives and support (e.g., subsidized energy audits) for 

197	 A consortium of companies and governments (including the U.S. Council for Energy Efficient

Manufacturing) are currently developing ISO 50001, in order to make energy management an 

integral part of industrial operating practices on par with safety, quality, waste reduction and 

inventory management.

198 Proven in two clusters (energy support systems and process improvement in energy-intensive industries) 

and piloted in one cluster (process improvements in the non-energy-intensive industries).

199	 Donald Kazama et al., “California’s Industrial Energy Efficiency Best Practices Technical Outreach and

Training Program,” California Energy Commission, 2007. John Nicol, “Market Impact of the Pulp and 

Paper Best Practices Guidebook,” Science Applications International Corporation, 2007; survey size: 

19 customers.

200 John Nicol, “Market Impact of the Pulp and Paper Best Practices Guidebook,” Science Applications 

International Corporation, 2007; survey size: 19 customers.

201 Piloted in two clusters (energy support systems and process improvement in energy-intensive industries) 

and proposed in one cluster (process improvements in the non-energy-intensive industries).

202 “Supply Chain Sustainability: Wal-Mart’s Commitment to the Future,” SIF International Working Group, 

October 2008. <www.socialinvest.org/projects/iwg/documents/Anderson_Presentation_10-08_v2.pdf>.

83221_McKinsey_US.indd 84 7/21/09 12:27
85

Unlocking Energy Efficiency in the U.S. Economy

4. Approaches to greater energy efficiency in the industrial sector

energy-saving projects. Similarly, a few manufacturers provide energy efficient 

equipment at reduced upfront cost, which they finance through shared savings.

 — Direct incentives from manufacturers, distributors, government, or utilities 

would accelerate the adoption of new technologies. Support system and process 

system upgrades remain rare, because of the large perceived risk of early adoption. 

Supporting pilots and providing incentives could help address this problem. 

 Establishing efficiency targets or equipment standards(piloted/emerging).

203

Agreements tailored to a subsector can be effective in raising awareness of energy 

efficiency among top management. Such agreements can increase capital allocations, 

lengthen allowed payback times, build awareness at the line level, and increase product 

availability as management drives the organization to meet targets. 

— Voluntary agreements. A variety of commitments are possible with voluntary 

agreements,204 including industry covenants, negotiated and long-term agreements, 

codes of conduct, benchmarking, and monitoring schemes. In return, participants 

may receive compensation, potential regulatory exemptions, avoidance of stricter 

regulations, and/or financial rewards. The flexibility, speed of implementation and 

ease of adjustment appeal to regulators, though concerns over recourse regarding 

non-compliance persist. Sweden’s 2005 program launching 5-year agreements205

and the Netherlands long-term agreements (“LTA1” and “LTA2”) with the chemical 

industry to implement approved energy-management systems together drove 

23 percent energy efficiency improvement from 1998 to 2006.

— Efficiency standards for support-system equipment. Setting high 

efficiency standards for support-system equipment can help address technology 

availability by increasing demand (and therefore supply) of efficient equipment. 

The benefits of standards have to be balanced against implementation challenges 

arising from system customization, high engineering costs, limited speed 

of deployment, and long equipment life: for example, of 43,000 industrial, 

commercial and institutional boilers with heat input greater than 10 million BTUs 

per hour, 70 percent were more than 40 years old as of 2002,206 limiting the impact 

of standards on new equipment. Standards are even more difficult, and possibly 

not cost-effective, to impose on specialized process equipment given the low 

volume and case-specific usage characteristics of such equipment.

203 Piloted in one cluster (process improvement in energy-intensive industries) and proposed in two clusters 

(energy support systems and process improvements in the non-energy-intensive industries).

204 Though participation is usually voluntary, once industry members and regulators reach an agreement, 

non-compliance typically leads to penalties.

205 Sweden requests companies to implement an accredited energy management system, carry out an energy 

audit and implement all identified measures with a payback period less than 3 years. In return the 

company receives a tax exemption on process-related electricity consumption, dependent on compliance.

206 “Industrial Boiler MACT Analysis,” EPA, 2002.

83221_McKinsey_US.indd 85 7/21/09 12:27
86

INDUSTRIAL AND COMMERCIAL COMBINED HEAT AND POWER 

Combined heat and power (CHP) systems generate electricity and thermal energy in a 

single, integrated system. The result is significantly higher overall energy efficiency: 

engine-driven CHP systems can achieve total thermal efficiencies of 70 to 80 percent. 

This compares favorably to a net thermal efficiency of 45 percent from the combination 

of a conventional power plant and an on-site boiler providing comparable benefits.207

Eliminating transmission and distribution losses and recycling waste heat produce this 

efficiency improvement.

Industrial CHP typically involves the use of steam or natural gas turbines for electricity 

generation, with capacities as high as 100 MW or more. Commercial CHP typically 

uses smaller systems providing some or all on-site thermal and electricity using natural 

gas reciprocating engines (capacities range from 800 kW to 5 MW). The United States 

has approximately 75 GW of on-site industrial CHP and 10 GW of installed commercial 

capacity. Installations are highly concentrated geographically, with 24 GW (28 percent 

of U.S. capacity) along the Gulf Coast in Louisiana and Texas, 5.8 GW in New York, and 

9.2 GW in California.208 It is worth noting that both California and New York have higher 

than average energy prices and spark spreads, and stringent air quality requirements, 

demonstrating that it is possible to achieve high levels of penetration to meet economic and 

compliance goals. 

An additional 50.4 GW of CHP are NPV-positive for deployment by 2020, involving 

upfront investment of $56 billion (Exhibit 35) and providing a present value savings of 

$77 billion and an annual savings of 100 million tons of CO2e emissions. The potential 

varies markedly by region, system capacity, and sector:

 The South (mostly industrial) and East (mostly commercial) Census regions offer 

70 percent (approximately 35 GW) of the NPV-positive potential. Further variation of 

the potential by region depends on local power prices, space conditioning loads, and 

the cost and availability of primary fuels, typically natural gas. 

 Large CHP systems (greater than 50 MW) represent some 70 percent of the NPVpositive potential in the industrial sector. 

 Sectors like chemicals and iron and steel, which together consume 20% of the total 

industrial end-use energy represent a disproportionate share of the opportunity 

with 47% of the total industrial CHP potential, owing to their large steam energy 

requirements. 

 Opportunities in the commercial sector represent 24 GW of NPV-positive potential 

distributed among small-scale installations in thousands of buildings across the 

country. Large office buildings (14 GW), healthcare facilities (6 GW), and universities 

(4 GW) comprise the largest opportunities. 

Although some additional attractive opportunities may exist in residential or other 

commercial settings, substantial cost reductions would be necessary to create a broader 

market for CHP in these applications.

207 Lauren R. Mattison, “Technical Analysis of the Potential for Combined Heat and Power in Massachusetts,” 

University of Massachusetts, Amherst, May 2006.

208 “CHP Installation Database,” ICF International/EEA, accessed June 2009. < www.eea-inc.com/chpdata/

index.html >.

83221_McKinsey_US.indd 86 7/21/09 12:27
87

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Barriers to greater energy efficiency

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and industrial sectors.

83221_McKinsey_US.indd 87 7/21/09 12:27
88

ensure safety and reliability of self-generators, grid operators typically need to 

grant approval for new generation systems prior to interconnection. The current 

lack of uniformity in interconnection standards makes it difficult for equipment 

manufacturers to design and produce modular packages;211 gaining approval can, 

therefore, be complicated, time consuming, and costly.

— Standby rates and exit fees. Facilities with CHP systems usually require 

standby or back-up service from the utility to provide power when the CHP system 

is down for routine maintenance or unplanned outages. The utility must therefore 

bear a maintenance cost associated with the generation, transmission and 

distribution capacity (depending on the structure of the utility) required to supply 

backup power when requested (sometimes on short notice). The level of these 

charges is often a point of contention between the utility and the consumer, and 

can, without proper oversight, create unintended and important barriers to CHP. 

Furthermore, customers that leave the grid may be charged an exit fee to allow a 

utility to recover future costs already allocated to the support of that customer. 

In some cases, the charges are prohibitively high, undermining the case for 

CHP installation. 

— Site permitting and environmental regulations. Input-based emissions 

standards penalize CHP systems that increase on-site emissions while decreasing 

overall grid emissions. Twelve states have adopted output-based environmental 

regulations. Output-based regulations are expressed as emissions per unit of 

useful energy output (e.g., pounds per megawatt-hour [lb/MWh]), and promote 

clean energy by accounting for the benefits of reduced air pollution effects from 

energy efficiency in the compliance computation.212 CHP in ozone non-attainment 

areas in the 38 states where these regulations have not been enacted may require 

additional pollution-control equipment and emissions-offset purchases that can 

affect project economics.

Solution strategies to unlock potential 

Overcoming the barriers to CHP deployment would likely require a mix of awareness 

campaigns, regulatory support (including provisions to align utility and ESCO incentives), 

and financing support (Exhibit 36).

 Create CHP-supportive regulations (proven). The United States has used 

regulations effectively to encourage CHP installation. Installed CHP capacity has 

increased from about 12 GW in 1980 to more than 52 GW in 1999. The lessons learned 

from previous legislation can inform development of a new model with similar aims, 

such as:

 — Target high-efficiency CHP systems that are designed to meet the thermal needs 

of the site. If this approach to a thermal base-loaded project produces excess 

electricity, it is important to then ensure means for a reasonable return on this 

excess electricity

 — Focus on balancing transaction and regulatory barriers, including standby 

charges, and interconnection requirements, with the need for overall efficiency, 

reliability, long term planning, and customer costs

 — Assure grid reliability for utilities and market clarity for would-be CHP installers 

 — Consider output-based emissions standards and simplified environmental 

permitting procedures.

211 “CHP Effective Energy Solutions for a Sustainable Future,” DOE, December 2008.

212 “Output-based Environmental Regulations Fact Sheet,” EPA, 2007.

83221_McKinsey_US.indd 88 7/21/09 12:27
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83221_McKinsey_US.indd 89 7/21/09 12:27
83221_McKinsey_US.indd 90 7/21/09 12:27
91

Although the U.S. economy has improved energy productivity in important ways over 

the past three decades, significant opportunities remain. The intent of this research 

effort is to help inform discussion about ways to unlock opportunities for greater energy 

efficiency, as the nation considers how to ensure energy affordability, promote energy 

security, and address the issue of climate change. This report does not advocate a specific 

strategy or set of policies for capturing additional energy efficiency potential, rather it 

attempts to delineate issues and choices the nation will face. We hope that this report may 

provide business leaders, policymakers, and other interested parties with a solid fact base 

and some perspectives on possible approaches for economically sensible strategies for 

pursuing greater energy efficiency in the U.S. economy. 

The central conclusion of our work: Energy efficiency offers a vast, low-cost 

energy resource for the U.S. economy – but only if the nation can craft a comprehensive 

and innovative approach to unlock it. Significant and persistent barriers will need to 

be addressed at multiple levels to stimulate demand for energy efficiency and manage 

its delivery across more than 100 million buildings and literally billions of devices. If 

executed at scale, a holistic approach would yield gross energy savings worth more than 

$1.2 trillion, well above the $520 billion needed through 2020 for upfront investment 

in efficiency measures (not including program costs). Such a program is estimated to 

reduce end-use energy consumption in 2020 by 9.1 quadrillion BTUs, roughly 23 percent 

of projected demand, potentially abating up to 1.1 gigatons of greenhouse gases annually.

In 2008 the nation spent an estimated $10 billion to $12 billion on efficiency-related 

investments;214 capturing the full efficiency potential identified in this report would 

require an additional investment of roughly $50 billion per year (in present value 

terms, four- to five-times this value, sustained over a decade. Even the fastest-moving 

technologies of the past century that achieved widespread adoption, such as cellular 

telephones, microwaves, or radio, took 10 to 15 years to achieve similar rates of scale-up. 

Without an increase in national commitment it will remain challenging to unlock the full 

potential of energy efficiency. 

214	 Spending on energy efficiency in 2008	included	$2.5 billion in utility-sponsored programs, $3.5 billion

on energy efficiency in the $5-billion ESCO market, and $4 billion to	$6	billion for incremental investment

in insulation and efficiency devices.		We excluded approximately $8 billion in spend on insulation because

it represents standard building practice rather than incremental spend targeted solely at improved 

energy efficiency.

5. Developing a holistic 

implementation strategy

83221_McKinsey_US.indd 91 7/21/09 12:28
92

Accomplishing such an increase in scale will require a comprehensive strategy for 

pursuing opportunities and a coherent approach to system-level issues. Our research 

suggests five important observations are critical to consider when developing such a 

comprehensive strategy. Both national and regional strategies will need to:

1. Recognize energy efficiency as an important energy resource that can help meet 

future energy needs, while the nation concurrently develops new no- and low-carbon 

energy sources

2. Formulate and launch at both national and regional levels an integrated 

portfolio of proven, piloted, and emerging approaches to unlock the full potential 

of energy efficiency

3. Identify methods to provide the significant upfront funding required by any plan to 

capture energy efficiency

4. Forge greater alignment between utilities, regulators, government agencies, 

manufacturers, and energy consumers

5. Foster innovation in the development and deployment of next-generation energy 

efficiency technologies to ensure ongoing productivity gains.

1. RECOGNIZE ENERGY EFFICIENCY AS AN IMPORTANT ENERGY 

RESOURCE THAT CAN HELP MEET FUTURE ENERGY NEEDS, 

WHILE THE NATION CONCURRENTLY DEVELOPS NEW NO- AND 

LOW-CARBON ENERGY SOURCES

Energy efficiency is an important resource that is critical in the overall portfolio of energy 

solutions. Likewise, as indicated in our prior greenhouse gas abatement work, new sources 

of no- and low-carbon generation are also important components of the portfolio. While it 

may seem counterintuitive initially given the magnitude of the energy efficiency potential 

available over the next decade, there are important reasons for continuing to develop new 

no- and low-carbon options for energy supply. First, as described in our original report on 

U.S. greenhouse gas (GHG) abatement (Exhibit 37), energy efficiency in stationary uses 

of energy represents less than half of the potential abatement available to meet any future 

reduction targets. Additionally, some areas of the country will continue to experience 

growth and some may need to retire and replace aging existing assets. The uncertain 

growth of electric vehicles could further these requirements. Finally, pursuing energy 

efficiency at this scale will present a set of risks related to the timing and magnitude of 

potential capture. As such there remains a strong rationale to diversify risk across supply 

and demand resources.

83221_McKinsey_US.indd 92 7/21/09 12:28
93

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2. FORMULATE AND LAUNCH AT BOTH NATIONAL AND REGIONAL 

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EMERGING APPROACHES TO UNLOCK THE FULL POTENTIAL OF 

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This exhibit shows the 

mid-range greenhouse 

gas abatement potential 

as depicted in McKinsey’s 

greenhouse gas report, 

with the energy efficiency 

opportunities from 

stationary sources 

highlighted. The height of 

each bar is the cost in dollars 

to abate a ton of carbon; 

the width is the gigatons 

of carbon emissions 

equivalent abated per year.

83221_McKinsey_US.indd 93 7/21/09 12:28
94

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Exhibit 38: Portfolio representing cost, experience, and potential 

of clusters possible with specified solution strategies

In addition to seeking the impact of national efforts this portfolio should effectively and 

fairly reflect regional differences in energy efficiency potential. Any approach would need 

to make the following three determinations: 

 The extent to which government should mandate energy efficiency through the 

expansion and enforcement of codes and standards

 Beyond codes and standards, the extent to which government (or other publicly 

funded third parties) should directly deploy energy efficiency 

 The best methods by which to further stimulate demand and enable capture of the 

remaining energy efficiency potential.

Use of codes and standards

Codes and standards have proven effective at capturing potential at national and state 

levels. Codes and standards have advantages over other solution strategies in that 

they match the incremental investment directly to those users who enjoy the reduced 

consumption benefits; they offer a high level of certainty about execution; and their cost 

of execution, at $0.15 to $0.30 per MMBTU,215 is typically lower than other approaches. 

There would be some disadvantages to codes and standards: these would include costs 

for effective enforcement; the difficulty of gaining agreement on the level and design of 

the code, which could slow implementation and reduce impact; and, if not well designed, 

a forcing of uneconomic measures in some regions or specific situations, even if measures 

were economic on average. Additionally, some observers have reservations about 

government intervention, and the corresponding sacrifice of personal liberty, leading 

them to favor more market- or voluntary-based approaches.

To the extent that legislators pursue codes and standards to capture the full potential 

in areas where codes and standards currently apply (new buildings, lighting and major 

appliances, electric devices and small appliances, and office and non-commercial 

equipment), they would address 2,090 trillion end-use BTUs (23 percent) of the potential 

energy savings. The required upfront incremental investment associated with deployment 

215 Scenarios for a Clean Energy Future, Interlaboratory Working Group, ORNL/CON-476 and LBNL-44029, 

November 2000.

The bubbles depict the 

NPV-positive efficiency 

potential in each cluster, 

measured in primary energy, 

with the area of the circle 

proportional to the potential. 

The position of the bubble’s

center on the horizontal 

axis indicates the cost of 

capturing this potential with 

the measures modeled 

in this report (excluding 

program costs) in dollars 

per million BTUs per year. 

The center’s position on 

the vertical axis represents 

the weighted average of 

the national experience 

with the approaches 

outlined for the cluster.

83221_McKinsey_US.indd 94 7/22/09 3:01
95

Unlocking Energy Efficiency in the U.S. Economy

5. Developing a holistic implementation strategy

of efficiency measures prompted by these codes and standards would total $53 billion and 

produce approximately $240 billion of present value in energy savings. 

There are, however, additional areas where codes and standards could apply. For example, 

if a broader approach were taken to place codes and standards on government buildings and 

energy-intensive industries where such measures have been piloted, these figures would 

grow by an incremental $77 billion in upfront investment, which would yield an additional 

1,910 trillion end-use BTUs (21 percent of total potential) in energy savings and offer 

$231 billion of present-value benefits. An even more expansive application of codes and 

standards would apply them to existing commercial enterprises and residential buildings. 

This would offer 2,110 trillion end-use BTUs (23 percent of total potential) of energy savings, 

requiring an incremental upfront investment of $226 billion and providing an associated 

$271 billion in present-value savings. This approach would be analogous to requiring 

emissions inspections on existing vehicles and requiring owners to pay for bringing vehicles 

up to standard if they fail the emissions test; however, these energy efficiency upgrades 

would be NPV-positive, returning the owners more savings than the upfront cost. 

The design of building codes would need to balance the benefits of uniformity with those of 

regionality. Uniform codes enable manufacturers to capture economies of scale, reducing 

the total cost of implementation to society. Regionality allows customization to account for 

such factors as climate or local energy prices. In addition, administration and enforcement 

at the state, regional, and federal levels each have advantages and challenges. Codes and 

standards set at a national or regional level would establish the “floor” for efficiency going 

forward. Once the strategy for codes has been developed, other aspects of a comprehensive 

strategy could be layered into place. 

Role for government (or other publicly funded third parties)

Select clusters, including low-income existing homes, government buildings, and 

community infrastructure, may warrant government (or other publicly funded third 

party) intervention. These clusters present a social imperative or represent a shared 

resource potentially justifying public intervention.

The DOE’s Weatherization Assistance Program (WAP) has been effective with existing 

low-income homes. Over the past 32 years WAP has retrofitted 6 million of the existing 

45 million low-income homes, with an average pace in recent years of approximately 

100,000 homes per year. With recent economic stimulus funding of approximately 

$5 billion, the program is projected to address some 1 million homes per year for the next 

3 years, a 10-fold increase in pace. Capturing the full efficiency potential of 610 trillion 

end-use BTUs available in 2020, however, would require a further eight fold increase in 

spending to fund the unaddressed approximately $40 billion of upfront investment in this 

cluster. Government intervention could be expanded in clusters where it is appropriate but 

less proven, namely government buildings, and community infrastructure. Addressing the 

entire potential in these clusters, as well as non-low-income homes, offers 1,260 trillion enduse BTUs (14 percent of total potential) with an upfront cost of $76 billion and present value 

savings of $174 billion. Alternatively, limiting this approach to homes while deepening it to 

address all households with annual incomes under $50,000 would address 1,090 trillion 

end-use BTUs (12 percent of total potential) and require $94 billion in upfront investment.

Other means to stimulate demand

Any portfolio of solutions will require approaches for stimulating demand for greater 

efficiency beyond codes and standards and government intervention. Exhibit 39 outlines 

six commonly discussed tools for stimulating demand and comments on their relative 

merits against five criteria. Either market participants or policymakers could use these 

tools. Manufacturers or distributors, for example, often launch an awareness campaign 

when marketing products; load-serving entities could approach regulators about adjusting 

83221_McKinsey_US.indd 95 7/21/09 12:28
96

recovery mechanisms to provide more accurate price signals to power customers. A 

balanced portfolio would seek to capitalize on the strengths of all market participants in 

the context of activities by other participants. Though these additional approaches may be 

helpful in pursuing efficiency potential in clusters where codes, standards, and third-party 

deployment are used (as described above), these additional approaches may be especially 

useful in the remaining clusters. These otherwise underserved clusters include existing nonlow-income homes, existing commercial enterprises, energy support systems, non-energyintensive industry processes, and combined heat and power which together represent 

4,200 trillion end-use BTUs (46 percent of total potential) and have an associated 

$344 billion in upfront investment providing present value savings of $608 billion. 

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Exhibit 39: A wide portfolio of approaches will be necessary to 

capture the full efficiency potential

 Education and awareness. Options for improving awareness include expanded 

labeling of devices and buildings; benchmarking; building audits and disclosures; 

annual reporting requirements (e.g., an annual energy “10K” from businesses); and 

education campaigns. Increased education and awareness is widely viewed as a 

necessary-but-not-sufficient component of a holistic approach, because it relies on 

end-user activity and provides savings of unclear durability. However, it can be highly 

cost effective, even at low capture ratios, if well designed.

 Transparency of consumption information. A variety of tools would improve 

transparency of consumption information and relative energy performance, including 

in-home displays of energy use, similar to a “miles-per-gallon” display in cars; 

availability of consumption on-line, similar to usage counters for mobile phones; and 

building control systems that allow for real-time tracking of consumption for major 

pieces of equipment. Studies in multiple countries have shown that transparency into 

real-time consumption (e.g., through in-home displays) can result in long-term 4- to 

15-percent reductions in demand, while delayed feedback provides lower savings.216

It seems important to include the context of any numbers provided such as relative 

performance compared to similar buildings or efficient products currently available 

commercially. This approach suffers from limitations similar to education and 

awareness, but represents a policy of limited market intervention.

216 Sarah Darby, “The Effectiveness of Feedback on Energy Consumption,” Environmental Change Institute, 

University of Oxford, April 2006.

A portfolio of strategies will 

be necessary for the full 

energy efficiency potential 

to be realized. Each of the 

strategies is described 

across a range of factors.

83221_McKinsey_US.indd 96 7/21/09 6:36
97

Unlocking Energy Efficiency in the U.S. Economy

5. Developing a holistic implementation strategy

 Price signals. There are several options for price signals, including tiered pricing 

(e.g., higher rates for higher levels of consumption), general rate increases, and rate 

adders, such as a cost for carbon. These could increase the price of energy and enhance 

the financial attractiveness of energy efficiency. While there is undoubtedly some price 

level that would drive wide-spread adoption of efficiency measures, the challenge will 

be the political acceptability of achieving – and sustaining – a high enough price to 

induce significant adoption. Based on EIA estimates of price elasticity, energy prices 

would need to increase by approximately 20 percent for industrial customers and 

approximately 50 percent for residential and commercial customers for consumption 

to decline by the amount identified as NPV-positive potential in this report.217 There is, 

however, no guarantee that customers will seek efficiency solutions to reduce demand.

 Energy Efficiency Resource Standards (EERS) and targets. Business 

leaders and policymakers could stimulate demand more directly by establishing 

energy efficiency targets at the national, state, or local levels. Targets should be set 

against a forecast consumption that includes growing and emerging applications 

(plug-load devices, data centers, and electric vehicles, for example) and is regularly 

re-evaluated to assure accuracy. Targets could also apply to specific segments; for 

example, new federal government buildings must reduce energy consumption by 

30 percent, as mandated by the Energy Independence and Security Act of 2007. 

Targets should incorporate an assessment of the efficiency potential within a region, 

with careful attention to differences in climate, energy cost, and prior efficiency 

measures. California, for example, has made measured progress at capturing energy 

efficiency for decades and benefits from a mild climate. As such, it may require a 

different target than regions with less well-established efficiency efforts and different 

consumption profiles. Some approaches to capturing energy efficiency may result 

in funds collected in one customer class to be invested for the benefit of another. 

Regulators may want to make provisions to align funds and investments within a 

customer-class. EERS offers the advantage of clearly articulating an expected pace 

and magnitude of efficiency improvements, while leaving the choice of specific actions 

open. Furthermore, the managers of targets remain responsible for developing a 

portfolio of solutions to capture the potential. 

 Energy efficiency credits (EEC) and markets. A market for efficiency 

could take several forms, though the central objective would be to enable market 

participants to compete for savings to meet an energy efficiency target. To some 

extent, this approach operates today in two forward-capacity markets (New England 

and Pennsylvania-New Jersey-Maryland power markets). Energy efficiency bids 

captured 26 percent of the 2,550 MW of new and existing demand resource capacity in 

the ISO New England’s February 2008 auction. Ideally, such markets would attempt 

to deliver the most cost-effective efficiency to meet targets. These markets, however, 

are relatively untested, potentially complex and expensive at scale, and require welldeveloped evaluation, measurement and verification (EM&V) systems. Creating an 

efficiency market at scale would require development of rules to define tradable credits 

and could be challenging to administer. If pursued such a market would need to be 

tested thoroughly to understand all implications before being deployed at a national 

level. Finally, an EEC market requires a target (e.g., EERS) and faces the challenges 

discussed under that mechanism (above). 

 Financial incentives. Utilities and governments offer diverse financial incentives 

in the form of rebates, price subsidies, and tax incentives to participants in the 

industrial, commercial, and residential sectors. Though a proven method, incentives 

do rely on end-user participation and are limited to addressing capital barriers, 

217 AEO 2003 price elasticity study incorporated into the National Energy Modeling System (NEMS) suggests 

residential price elasticities of -0.41 to -0.60 and commercial elasticities of -0.39 to -0.45 for different 

fuels; industrial of -1.0. Energy Information Administration: price responsiveness in the AEO 2003 

NEMS residential and commercial building sector models.

83221_McKinsey_US.indd 97 7/21/09 12:28
98

including elevated discount rates and access to capital. Further, administrative costs 

(see below) vary with approach, program maturity, and administrative effectiveness. A 

scaled-up program should identify the most cost effective channel and administrative 

structure to drive impact.

The magnitude of the effort implied by pursuing such an extensive integrated 

portfolio should not be underestimated. The pace of deployment will be a significant 

consideration, given challenges with the legislative process, manufacturing constraints, 

and human resources.

 Legislative process. Crafting legislation, understanding its impact on stakeholders, 

and moving through the public process to law and rule-making can consume 

significant time and often require substantial compromise. Codes typically take 

3 years to institute, while new legislation takes an unknowable but considerable 

amount of time and resources (for example, carbon pricing legislation was first 

introduced in the U.S. Congress in 1998 and is still under consideration in 2009). 

Creating the necessary administrative structures will also require considerable time.

 Manufacturing constraints. Producing hundreds of billions of dollars of 

merchandise needed for deployment will be challenging. Nonetheless, some 

manufacturers have indicated that – if demand signals are clear – they can produce 

the required products within a few years. For example, SEER-13 air conditioners grew 

from 5 percent of sales to 90 percent in only 3 years with the introduction of a new 

standard.218 Others remain concerned about having capacity to increase output to 

required levels if the nation were to pursue the full savings identified in this report. 

 Human capital requirements. Limitations in the available workforce and skill 

base will likely present a significant challenge. Despite a national appetite for new jobs 

– especially green jobs – identifying, training, and deploying contractors, inspectors, 

manufacturers, managers, and administrators within the timeframe envisioned in this 

report represents a considerable effort. Capturing the full potential could require a 

workforce of roughly 600,000 or more active over the next decade to develop, produce, 

deploy, administer, and verify efficiency measures. 

218 Expert interviews.

83221_McKinsey_US.indd 98 7/21/09 12:28
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Unlocking Energy Efficiency in the U.S. Economy

5. Developing a holistic implementation strategy

JOB CREATION 

Energy efficiency has been much discussed for its potential to create jobs, particularly 

in an economic downturn. A full economic analysis of energy efficiency (i.e., general 

equilibrium analysis) is beyond the scope of this work; however, research suggests that 

the employment benefits of increased national energy efficiency could be significant. 

The number of jobs created by unlocking the full efficiency potential identified in this 

report is difficult to forecast, but research suggests that on a national level jobs created 

through labor intensive retrofits could total 600,000 to 900,000 on-going jobs that 

persist through the decade covered by this report. This total includes jobs created 

though two major initiatives:

 Labor intensive retrofits. Assuming roughly $290 billion is invested in deployment 

of labor-intensive efficiency measures in the residential and commercial sectors 

between 2009 and 2020, energy efficiency retrofits could generate between 

500,000 and 750,000 direct, indirect, and induced jobs through 2020: 

— Direct jobs. Physical deployment of efficiency measures would involve 

construction workers (≈60 percent), trade professionals (≈25 percent), and 

their managers (≈15 percent), with an average salary of $36,000 to $41,000. 

In weatherization programs direct jobs represent 30 to 40 percent of the jobs 

created.1

— Indirect jobs. Suppliers of materials used in energy efficiency measures, such 

as insulation or appliance manufacturers, in the United States and overseas, 

would see 25 to 40 percent of the jobs created, depending on the measures 

deployed and country where the jobs are located,2

 with an average salary of 

$26,000. 

— Induced jobs. Local jobs generated by a larger workforce (i.e., where direct 

workers spend their paychecks, such as grocery stores) represent the 

remaining 25 to 40 percent of jobs created.3

 Energy efficiency programs and codes and standards. Other energy efficiency 

programs could create a range of jobs as well. Improved building codes and 

equipment standards, plus various other efficiency programs, such as rebate 

or awareness initiatives, would likely create a range of jobs in manufacturing, 

engineering, program management, and government roles.4

 Increasing 

enforcement of building codes nationwide – currently at about 50 percent 

compliance – would also likely require adding building officials in municipalities 

across the country. In total these jobs are likely to exceed 100,000.

1 Economic Opportunity Studies, “How Many Workers Does the Weatherization Assistance Program 

Employ Now? What Jobs Will the Recovery Act Offer?”, 2009.

2 Indirect jobs include jobs created in other countries at manufacturers, which research suggests may 

be even larger than the domestic job creation; Robert Atkinson, “The Digital Road to Recovery: A 

Stimulus Plan to Create Jobs, Boost Productivity and Revitalize America,” Information Technology 

and Innovation Foundation, January 2009. David Swenson and Liesl Eathington , “Determining 

the Regional Economic Values of Ethanol Production in Iowa Considering Different Levels of Local 

Investment,” Iowa State University, July 2006; Josh Bivens, “Updated Employment Multipliers for 

the U.S. Economy,” Economic Policy Institute, August 2003.

3 Economic Opportunity Studies; Robert Atkinson; David Swenson and Liesl Eathington; Josh Bivens.

4 Natalie Hildt, “Appliance and Equipment Efficiency Standards: New Opportunities for States,” 

Appliance Standards Awareness Project, December 2001; David Roland-Holst, “Energy Efficiency, 

Innovation and Job Creation in California,” Center for Energy, Resources and Economic 

Sustainability, October 2008.

83221_McKinsey_US.indd 99 7/21/09 12:28
100

3. IDENTIFY METHODS TO PROVIDE THE SIGNIFICANT 

UPFRONT FUNDING REQUIRED BY ANY PLAN TO 

CAPTURE ENERGY EFFICIENCY

Defining a portfolio of policies and mechanisms will require trade-offs among the 

five characteristics defined in Exhibit 39 – experience to date, speed of deployment, 

complexity of implementation, source of investment, and administration and other 

costs. Identifying appropriate and sufficient funding for the upfront investment will be a 

particular challenge, for which there are two broad approaches. “End-user funding” refers 

to occasions when end-users pay for energy efficiency investments directly (upfront or over 

time), even when driven by a building code or appliance standard. “Public funding” refers 

to monies that are provided through any third-party channel (e.g., state, federal, or local 

tax revenues, CO2e allowance receipts, utility rates, or system-benefit charges).

 End-user funding methods. End-user funding by consumers has proved 

difficult for capital-intensive measures, due to the multitude of barriers described 

in Chapters 2 through 4. Partial monetary incentives and supportive codes and 

standards increase direct funding by end-users by encouraging participation: the 

former by reducing initial outlays and raising awareness, the latter by essentially 

requiring participation.219 Performance contracting represents another method, 

one that has begun to find acceptance in commercial and industrial markets. ESCOs 

fund the upfront investment for efficiency improvements or connect customers with 

a financier, in order to share in the energy and maintenance savings generated by the 

investments, while the resulting cash flows remain positive for the end-user at all 

times. The risk of business failure among ESCO clients, as well as ordinary business 

churn, and the corresponding repayment exposure presents a significant challenge 

to ESCOs and has limited their effectiveness to date. With a blend of public and enduser funding mechanisms, a loan guarantee program could help overcome this issue; 

loan guarantees potentially requiring 3 to 6 percent of the invested amount, could help 

enable the upfront investment needed.220 

 Public funding sources. Load-serving or government entities typically raise 

funding for energy-supply requirements, such as new power generation, new power 

and gas delivery infrastructure, or other public goods, by spreading the costs across 

all consumers. When pursuing energy efficiency utility or third-party programs 

typically “stimulate” demand through incentives for only a portion of the investment, 

because much of the benefit flows to participating end-users through lower bills. As an 

alternative, programs such as the WAP fully fund and execute efficiency improvements 

with public funds. Utilities or third parties typically gather program funds through 

system-benefit charges, though less conventional means, such as proceeds from a 

carbon price, have been discussed. Funding the entire deployment cost of $520 billion 

would require a system-benefit charge of $0.0059 per kWh across 4,250 TWh of 

electricity and $1.12 per MMBTU across 24.5 quadrillion end-user BTUs of other fuel for 

a period of 10 years, the anticipated implementation period. Alternatively, 10 years of a 

carbon price of $12.50 per ton on 4.2 gigatons of CO2e emissions could fund the upfront 

investment as well. These costs would add approximately $120 to the average annual 

homeowner’s energy bill as well as $2,400 and $75,000 to the average commercial and 

industrial building annual energy bill. However, as mentioned below, average energy 

bill reductions would more than offset these investment costs. Savings of 24 percent in 

average customer energy bill from the efficiency savings would more than offset the 

8-percent increase in bills to fund the upfront investment.220

219 It is worth noting that appliance standards and building codes may reduce the premium required 

for efficiency measures as manufacturers drive down cost through increased scale; this effect is not 

incorporated in our analysis.

220 The student loan model represents the basis of this approach. The insuring agent charges 1 to 2 percent 

of the credit issuer to guarantee the loan amount and bears the default risk, typically 5 to 6 percent. 

Applying this model to performance contracting yields a net cost of 3 to 6 percent of the loan amount.

83221_McKinsey_US.indd 100 7/21/09 12:28
101

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Exhibit 40: Program cost ranges by program type

4. FORGE GREATER ALIGNMENT BETWEEN UTILITIES, 

REGULATORS, GOVERNMENT AGENCIES, MANUFACTURERS, 

AND ENERGY CONSUMERS

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Overcoming regulatory barriers in utility ratemaking

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The height of the columns 

on the chart represent the 

range of administrative 

costs of different program 

types, as a percentage of 

the total upfront costs.

83221_McKinsey_US.indd 101 7/21/09 12:28
102

Financial challenge. The financial challenge stems from legacy regulatory practices in 

rate-making, which base utility revenues on the number of units of energy sold. The price 

of each unit of energy typically covers the variable costs as well as a significant portion of 

the fixed costs of generating or producing and delivering the unit of energy, on the basis of 

projected sales volume. If more units are sold than projected, earnings will be higher as 

the utility over-recovers its investment; if fewer units are sold, earnings will be lower and 

the utility will not be compensated for its investment. Rates are periodically “trued up,” 

that is, adjusted to more accurately provide for recovery of and return on investments, but 

in the time between these “rate cases” utilities face both positive and negative exposure to 

sales volume fluctuations. Variations in volume can result from many factors, including 

changes in weather, economic activity, increased penetration of devices, and reductions 

associated with more efficient devices. Under traditional rate mechanisms, utilities 

typically under-recover on their investments and see a decrease in earnings when 

electricity load declines due to energy efficiency initiatives. This erosion in finances 

becomes an even greater concern if utilities are expected to concurrently provide power 

purchase agreements (PPAs) to developers for renewable energy or undertake significant 

construction of renewable assets themselves, because constructing new assets, for 

example, requires balance-sheet strength and the ability to raise capital. Several options 

can help overcome this potential disincentive to pursue energy efficiency and address the 

financial risk associated with other energy goals:

 Decoupling revenues from units sold. Decoupling is a system of periodic 

true-ups in base rates that separates the recovery of authorized fixed-cost revenue 

from sales volume. While units of energy are still priced above their variable cost, 

decoupling both restores to the utility costs that are under-recovered, and returns 

to customers costs that were over-recovered. This is because the revenue collected 

from unit sales is reconciled to an alternative method for determining target 

revenue. While addressing the concern energy efficiency raises regarding recovery 

of existing investments, decoupling raises several concerns for utilities, customers, 

and regulators. First, utilities may be concerned that decoupling carries unknown 

regulatory exposure. Furthermore, customers may be concerned that decoupling 

shifts normal business risks such as weather or slumps in economic activity to 

ratepayers, rather than leaving them with utilities. However, some regulatory 

mechanisms exist to shift these risks, especially weather, back to the utility. Finally, 

regulators may be concerned that decoupling does not provide incentive for a utility 

to actively pursue energy efficiency; at best, it removes a portion of the disincentive 

associated with lower sales. In high-growth markets, there is also resistance to 

decoupling, because it could work against the benefit to utilities of regulatory lag; 

whereas in declining markets, decoupling works against the benefit to customers of 

regulatory lag. Thus, while decoupling offers some benefits in mitigating the volume 

exposure faced by utilities, it may not be the best approach in all areas, and may be 

insufficient on its own to drive energy efficiency. 

 Migrate to true fixed/variable rate structures. An alternative approach would 

involve reducing the per-unit cost of energy to the true variable cost and assessing 

a flat fixed-cost charge to each customer. Incremental sales up or down would not 

impact utility profits. Some raise a concern that very low unit prices may work against 

consumers’ desire to reduce consumption. However, prices could be set to accurately 

reflect the intermediate- or long-term costs of investing in fixed infrastructure and 

potential climate impact. Such a price signal could reduce consumption to levels 

appropriate to the “real” cost of energy. There is a practical challenge with this 

mechanism: migrating from the prevailing approach to a true fixed-variable structure 

could benefit heavy electricity users relative to others within a rate category (and, for 

example, might increase the burden on low-income and fixed-income populations). 

Again, this approach does not in itself create an incentive for utilities to pursue energy 

efficiency. 

83221_McKinsey_US.indd 102 7/21/09 12:28
103

Unlocking Energy Efficiency in the U.S. Economy

5. Developing a holistic implementation strategy

 Modifications to traditional regulation. Modifications to the traditional 

volumetric approach to revenue offer an additional set of options. These modifications 

could include ROE caps or sharing mechanisms to distribute “excess” profits back to 

customers, more frequent rate true-ups, test cases incorporating projected energy 

efficiency impact, and/or special trackers to capture costs and lost revenues due to 

energy efficiency. These modifications can reduce – but will likely not fully 

remove – the alignment challenge associated with volumetric recovery, though they 

can overcome some of the other disadvantages cited above.

These mechanisms and others might reduce the disincentive for utilities, but they do not 

create a positive incentive to pursue energy efficiency at scale. There remains a risk that 

utilities might choose to remain neutral toward energy efficiency, rather than commit 

and aggressively pursue the full potential. Regulators will likely need to assure utilities 

of timely cost recovery of program expenses. Additionally, a number of incentives and 

modifications to existing recovery mechanisms could motivate utilities to promote energy 

efficiency. Regulators and legislators have proposed or implemented a number of these 

mechanisms already:

 Shared savings. Similar to the ESCO model for the end-user market, this approach 

allows for the stream of energy savings to be shared with the utility. Generally, the 

amount expended on energy efficiency is recovered in the same year, minimizing the 

utility’s risk of recovery. This incentive structure links utility compensation to the 

savings provided for the customer, and requires a clearly defined methodology for 

calculating the savings.

 Performance incentive. This mechanism is typically linked to program spending 

or the allocated budget, providing a payment based on performance against energy 

efficiency spending targets. With this approach as well, utilities recover the costs 

of energy efficiency programs within the year. This incentive structure links utility 

compensation to the scale of programs undertaken. 

 Capitalization. This method links energy efficiency with traditional utility 

earnings-growth mechanisms by allowing capitalization of actual upfront investments 

for energy efficiency, which are then recovered over future years on a set depreciation 

schedule. Some markets provide a higher return on equity – a “bonus ROE” – for 

energy efficiency-related capital to promote the allocation of capital to energy 

efficiency projects. Capitalization approaches allow for a customer-owned asset to 

appear on the utility’s books. A key risk of the capitalization model, is the ability of 

a regulator to eliminate one of these “virtual” (regulatory) assets from the utility’s 

balance sheet, destroying cost recovery in the process.

 Virtual power plant. This approach links energy efficiency with traditional 

utility investment mechanisms by allowing the utility to substitute energy efficiency 

investments for avoided power plant investments. The utility has responsibility for 

producing an equivalent level of “capacity” from energy efficiency at a reduced cost 

relative to construction of new supply, plus an incentive to most effectively deploy that 

capital. The virtual power plant model faces the same risk of regulatory elimination 

though as the capitalization model.

These incentive mechanisms can provide a wide range of compensation, depending on the 

specific values chosen and the level of energy efficiency targeted. It is important to note 

that the incentives are “exchangeable” in value: for any set of incentives, there are values 

that will make them equivalent in payout for a specific utility. The primary differences 

relate to both the nature and degree of the risks borne by utilities and ratepayers. The 

design and selection of the appropriate incentives and regulatory mechanisms should be 

based on careful analysis of the unique situation in each regulatory jurisdiction.

In summary, various mechanisms could improve the alignment between the utilities’ 

financial incentives and the challenge of aggressively pursuing energy efficiency. There 

83221_McKinsey_US.indd 103 7/21/09 12:28
104

is not one best answer that will work for all utilities, given the differences in markets, 

regulatory practices, customer preferences, and utility risk profiles. However, in general 

we find across rate-making mechanisms and the wide range of potential incentives, that:

 To fully align load-serving entities and local distribution companies or utilities with 

the goals of energy efficiency, they must recover the revenue associated with their lost 

load, receive timely recovery of program costs, and earn incentives on energy efficiency 

to assure their financial health.

 Single solutions are generally not enough to make an energy provider financially 

whole in the face of energy efficiency. Most shareholder-incentive programs do not 

fully compensate investor-owned utilities. Neither decoupling nor true fixed/variable 

structures, though they can reverse the effect of energy efficiency on short-term 

returns, can by themselves compensate an energy provider for long-term growth in 

many scenarios.

 A combination of shareholder incentives and fixed-cost recovery mechanisms can make 

energy providers financially whole in most market structures. The appropriate level of 

incentive and choice of fixed-cost recovery mechanism will vary based on the market 

structure, growth environment, initial market position, and mix of chosen mechanisms.

Cultural challenges. Beyond the financial challenge of achieving full alignment 

with greater energy efficiency, many consumers and energy providers will also need to 

overcome cultural inertia brought on by years of promoting consumption of energy. This 

mindset is a natural byproduct of the customary business practices, and for many years the 

growth of energy consumption has brought substantial comfort and benefits to customers. 

The fundamental challenge will be to change the mindsets and behaviors of employees 

throughout the energy providers’ organizations. The U.S. economy, however, offers many 

stories of comparable transformations in other industries, be it around such topics as 

quality control, lean production, innovation, or customer-service mindsets.

Understanding the relationship between bills and rates

One of the most perplexing challenges associated with energy efficiency in the electricity 

sector is that although it clearly will drive down average energy bills, the integrated effect 

on rates (i.e., the cost per unit of electricity) can vary across the U.S., based on how various 

elements in the rate-setting process are treated. It is certain that rates will increase from 

where they are today as energy efficiency is incorporated into legacy ratemaking structures. 

It is also possible that under some circumstances these rate increases will outpace rate 

increases expected in the business-as-usual scenario even though in the energy efficiency 

case the overall bills paid by ratepayers would decrease. The relative importance of six 

effects will drive this uncertainty and will cause rates in some areas of the country to increase 

compared to business-as-usual while other areas experience a decrease:

 Reallocation of fixed costs. Reallocation of existing fixed costs across fewer 

units of consumed energy puts upward pressure on rates. This effect will depend on 

the market mechanism that determines how those costs are recovered.221 This effect 

occurs, however, regardless of who drives energy efficiency programs or funds the 

costs, and regardless of any utility incentive payments. Fixed-cost reallocation is 

an effect of legacy systems of rate-making that charge fixed costs on a variable basis; 

decoupling and proposed rate designs other than true fixed/variable will not address 

this issue, as discussed above.

221 Fixed costs include generation, transmission, distribution and other non-variable support costs. In 

regulated markets, prudent fixed costs would be reallocated over remaining sales though there could be 

a timing lag. In restructured markets, generation costs are recovered through market prices and would 

likely not be recovered resulting in effectively a transfer of value from merchant generators to rate payers.

83221_McKinsey_US.indd 104 7/21/09 12:28
105

Unlocking Energy Efficiency in the U.S. Economy

5. Developing a holistic implementation strategy

 Avoided new generation and load-serving infrastructure. Reducing or 

avoiding investments in additional generation and distribution capacity would place 

downward pressures on future rates relative to the increases that would have occurred, 

because energy efficiency is a lower-cost alternative to building new assets. The 

relative importance of this effect compared to the reallocation effect depends on the 

size of the existing rate base and the scale of planned new investments.

 Improvements in the marginal dispatch cost of generation. Though much 

more complex, this factor is likely to put downward pressure on rates, particularly in 

restructured markets. Two effects drive the downward pressure: first is the potential 

to reduce output from marginally less-efficient generation units (i.e., improve system 

heat rates); and second is the change in the marginal fuel being burned (e.g., less gasfired generation and more coal-fired generation as the price-setting mechanism). 

Though coal-fired generation would set the price more often, carbon output would not 

increase (as coal generally runs already when gas is setting the price). Carbon prices 

would dampen this second benefit, because they tend to bring the generation costs 

of coal closer to generation costs of gas. Potential upward price impacts that could 

partially offset the downward pressure on rates would include any loss to efficiency 

of baseload assets with increased cycling, as well as in the near-term, the delayed 

construction of more efficient assets that could displace older, less-efficient ones.

 Commodity fuel prices. Fuel prices could decline due to reduced overall demand 

(e.g., reduced natural gas or coal consumption). We estimate, however, that the overall 

impact on rates is likely negligible relative to the range of other factors beyond energy 

efficiency that impact commodity prices. 

 Carbon prices. Similarly, if legislators put a price on carbon emissions, deploying 

energy efficiency could place downward pressure on that cost. This effect will depend 

on many unknown factors including the price setting mechanism, targets, and 

allowances.

 Upfront energy efficiency investments and program costs. If these outlays 

are recovered through a public-benefit charge or other rate-based mechanism, they 

will likewise put upward pressure on rates. Incentive payments to load-serving entities 

or special-purpose energy efficiency entities would also be included, though they are 

typically a fraction of the program cost. 

Assessing the net impact of these factors requires detailed modeling of load 

characteristics, economics, and regulatory treatments region by region. In addition, 

numerous other market effects would occur simultaneously, such as responses 

to renewable portfolio standards or other environmental requirements, which in 

combination could lead to very different results. In general, our models suggest that 

regions with higher levels of purchased and passed-through generation would tend to see 

decreases in rates, because value would transfer from generators to ratepayers. Regions 

with higher levels of full-cost recovery on generation assets, and with little or no projected 

need for capital investment in generation, would see an increase in rates relative to the 

business-as-usual approach. 

Establishing responsibility in currently unaddressed areas

Certain elements of a program will have natural owners, such as government entities for 

designing and legislating codes and standards. A key issue, however, will be deciding who 

should have responsibility (i.e., the authority and accountability) for deploying energy 

efficiency measures with less clear ownership. The right choice will likely be a topic of 

debate within each state, involving trade-offs of strengths and weaknesses of different 

entities against a number of attributes, as illustrated in Exhibit 41. Expertise in the 

economics of energy consumption, for example, would be important so that the design 

of a program accounts for such factors as regional climate, rates, existing building stock, 

prior programs, and the cumulative effect of initiatives. Local energy brand recognition 

83221_McKinsey_US.indd 105 7/21/09 12:28
106

and trust would foster acceptance of programs. An integrated view and responsibility 

for supply and demand would help ensure coordinated planning and accountability for 

overall reliability of the energy system. This responsible party would also need a proven 

ability to organize and manage large-scale programs. Ideally they could be held financially 

accountable for the delivery of results on time and on budget. 

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Exhibit 41: Overview of entities managing comprehensive energy efficiency programs

Based on these attributes, three likely candidates emerge: utilities, special-purpose 

entities, such as Efficiency Vermont and Oregon’s Energy Trust, and government entities, 

such as NYSERDA and those used in other countries. For completeness, we also profiled 

ESCOs and product manufacturers against these criteria, though their likely roles will be 

to support implementation of energy-service programs that they initiate directly with endusers or as part of a larger program coordinated and to some extent funded through the 

party with overall responsibility. Utilities emerge with the strongest starting position 

because they have the natural information-gathering, management, and delivery systems 

in place through metering and billing functions. Furthermore, their extensive experience 

managing energy delivery provides skills that will facilitate management of programs and 

integrated resource planning. They do, however, face several challenges: principally, there 

are substantial concerns that most current regulatory structures encourage utilities to 

increase electricity sales and build new assets rather than aggressively pursue a strategy of 

reducing consumption as discussed above. Additionally, in many service territories, 

homes with multiple fuels are served by different utilities, complicating delivery of energy 

efficiency measures.

By contrast, it would be straightforward to align special-purpose and government entities 

against the goal of driving efficiency and enable them to address all fuels and energy users 

in a region. Creating special-purpose entities, however, would separate the responsibility 

for demand- and supply-side planning and accountability. Load-serving entities would 

retain responsibility for system reliability and likely be reluctant to trust aggressive 

promises of demand reduction asserted by another organization. Also, this split 

responsibility would likely adversely impact coordination of energy-pricing and metering 

technologies needed to reinforce behaviors and monitor consumption. 

For each type of entity that 

might lead comprehensive 

energy efficiency programs, 

the coloration of the circles 

represents an estimated 

starting position relative 

to various attributes. More 

color indicates a relatively 

higher starting position.

83221_McKinsey_US.indd 106 7/21/09 12:28
107

Unlocking Energy Efficiency in the U.S. Economy

5. Developing a holistic implementation strategy

If governments choose to designate special-purpose or government entities as responsible 

parties, they should take care to properly design incentives, regulations, and management 

structures to foster efficient and effective operation. Doing so would be a reasonably 

straightforward procedure, because it could be a clean-sheet exercise and well worth the 

time invested to address these issues. 

Achieving appropriate evaluation, measurement, and verification

The difficulty of measuring energy efficiency requires effective evaluation, measurement 

and verification (EM&V) to provide assurance to stakeholders that programs and projects 

are achieving the savings claimed for them. EM&V can also provide feedback for program 

and project design, and assist in attributing savings to participants. If significant levels of 

energy efficiency are to be pursued and supported by significant levels of public funding, 

the need for a clear, consistent, and widely accepted EM&V system will be even more 

important than it is today. 

Energy efficiency is hard to measure because it focuses on avoiding consumption rather 

than on actively producing something; verifying savings is an intrinsically difficult task. 

Actual consumption may be affected by weather, customer growth, usage differences, 

device penetration, and economic growth; all of these issues must be considered in 

determining actual savings impact.

Measuring these attributes exactly and providing a “perfect” EM&V system is not possible; 

instead, a “sufficient” EM&V system should reflect three key qualities: 

 Consistency. If investments are to be made with the expectation of future returns 

that are contingent on the EM&V system, it will be critical that the rules for EM&Vassociated rewards and penalties are internally consistent and remain fairly stable 

over time. This consistency is important for all parties, if they are to plan investments 

in energy efficiency.

 Simple in design. While a more complex EM&V system might permit more precise 

and accurate measurements and approximations of energy savings, as well as more 

detailed ways to attribute the drivers of those energy savings, the value of such a system 

must be considered in the context of the complexity and cost it will drive. 

 Address both inputs and impact. Measurement methods should incorporate the 

activities undertaken by the responsible party, to ensure that activities are undertaken 

in an appropriate manner, and the measurement of energy consumption to determine 

the impact of those activities.

As California’s efforts to improve energy efficiency have shown, even in a state that 

has taken a relatively aggressive approach to capturing energy efficiency, the issues 

surrounding attribution can be complex. Detailed EM&V programs that cause a slowdown 

in the pursuit of energy efficiency are unlikely to merit their expense. For example, in 

some California programs, discussions of attribution sought to resolve differences of 

$70 million in incentives, of a total program spend of $2.1 billion – with benefits that 

exceed $4 billion. A detailed EM&V program that risks disrupting the pursuit of energy 

efficiency is unlikely to deliver savings equal to the opportunity cost. For example, slowing 

the capture of the $4 billion in benefits by four months decreases their present value by 

$70 million.

The International Performance Measurement and Verification Protocol (IPMVP) provides 

a basis for analyzing project-level savings from energy efficiency measures. Though the 

IPMVP primarily addresses project savings in commercial and industrial sectors, it could 

provide the basis for broader measurement of energy efficiency programs. Development 

of this protocol has been supported by the Department of Energy and provides the basis for 

measurement in federal Energy Services Performance Contracts. A shared foundation for 

EM&V of this sort might provide the consistent methodology upon which energy efficiency 

program managers can build.

83221_McKinsey_US.indd 107 7/22/09 3:05
108

EM&V of this sort might provide the consistent methodology upon which energy efficiency 

program managers can build.

ELECTRIC VEHICLES

Electric vehicles (EVs) hold the potential to offer U.S. consumers a practical alternative 

to gasoline-powered vehicles by 2020. A variety of electric vehicles, including electriconly vehicles (or battery electric vehicles, BEVs), as well as plug-in hybrid electric 

vehicles (PHEVs), due to reach the market in the next several years could offer a 

battery-only driving range sufficient for many urban and suburban commutes. 

Vehicle electrification impact3

Electrical vehicle 

penetration 

Percent of fleet

Load 

increase 

TWh

1% 8

5% 41

10% 84

15% 126

20% 168

100% 840

If electric vehicles reach significant penetration levels, 

electric load levels could increase substantially. The 

table at right shows the impact that various levels of 

electric vehicle penetration could have on the total 

load levels in the economy.

Challenges

Even at relatively low levels of market penetration, electric 

vehicles will pose a challenge to the electricity grid. 

Highly localized energy assessments will be needed to 

ensure that peak and non-peak generation capacity 

and the transmission and distribution system can meet 

expected load requirements of PHEVs and BEVs. 

Although generation capacity available during non-peak hours could accommodate 

electrification of up 73 percent of the current vehicle population,1

 vehicle charging would 

have to be timed to avoid peak usage; otherwise, additional generation capacity will be 

needed. If EV charging were not timed around the peak in California, for example, peak 

load could increase by 10 percent (3,700 MW).2 Requirements for charging points, such 

as the build out of infrastructure and the actual power demand of each charging point 

(220-volt/60-amp versus 120-volt/15-amp), could strain local power grids and require 

changes to distribution capacity. This requirement could limit the creation of “rapid 

charging” stations and restrict the number of cars that can be charged at any one time.

Beyond the challenges posed to utilities and the electricity infrastructure, end-users 

will need to learn new behaviors, such as remembering to plug in their car for charging, 

limiting use of other vehicle options (e.g., the air conditioner or radio) to optimize range, 

and perhaps learning a different way of interacting with their cars (e.g., swapping 

batteries). Consumers will also need to be aware of the availability of charge points during 

daily trips, with competition for these charge points arising if demand outstrips supply. 

Approaches

Emerging smart grid technologies are expected to increase the connectivity, 

coordination, and automation of the electricity grid, addressing some of the energy 

usage and capacity concerns, though new capacity for generation, transmission, and 

distribution will eventually be required. Smart grid applications could allow utilities 

to increase the price of electricity at peak hours, for example, encouraging off-peak 

charging. A smart grid may eventually have the ability to precisely reduce load, 

notifying a customer that charging will not occur or will take longer, perhaps allowing 

the customer to opt-in or opt-out, depending on the price they are willing to pay. Local 

dynamics in power markets will affect the degree to which new generation comes 

from renewable sources and what T&D investments are needed (especially relevant for 

isolated parts of the electricity grid). 

In addition to changes in the energy infrastructure, building out the charging 

infrastructure and ensuring consumer acceptance will need attention. Possible 

solutions could include municipality-built public charging stations, addition of batteryswap stations to gasoline stations, and marketing campaigns by public and private 

entities to educate the public and promote EVs to potential customers.

1	 Pacific	NorthWest National Lab/U.S. DOE; Wirtschaftswoche.

2	 Cal	ISO website, McKinsey.

3	 Estimated	impact to load based on 12,000 annual miles per vehicle, 280 million vehicles in the U.S.

passenger and	light	truck fleet by 2020, and	4	miles traveled per kWh.

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Unlocking Energy Efficiency in the U.S. Economy

5. Developing a holistic implementation strategy

5. FOSTER INNOVATION IN THE DEVELOPMENT AND DEPLOYMENT 

OF NEXT-GENERATION ENERGY EFFICIENCY TECHNOLOGIES 

TO ENSURE ONGOING PRODUCTIVITY GAINS

Technology development plays a small role in the potential identified in the near term 

targets of this report. However, we expect that innovative and cost-effective energy-saving 

technology will continue to emerge. It will likely be cost effective to fund its research and 

development in order to accelerate its path to market.

The Inventions and Innovation (I&I) Program run by EERE demonstrates that fostering 

innovation can be cost effective and have substantial impact. I&I was established in 1976 

as the Energy-Related Inventions Program (ERIP); through 2000, it received cumulative 

funding of $117 million. More than 25 percent of I&I grantees successfully entered the 

marketplace, delivering a cumulative 973 trillion end-use BTUs of energy savings since 

I&I’s inception. The $117 million investment has saved $4.92 billion in cumulative energy 

costs to date. As of 1995, administrative costs represented $2.20 per MMBTU of end-use 

energy savings and grants represented $1.40 per MMBTU.222 A challenge in evaluating 

impact arises from the inability to know how such technology would have emerged without 

assistance. Nonetheless, the attractive leverage and cost structure of this program 

suggests that fostering innovation warrants ongoing investment.

* * *

In the nation’s pursuit of energy affordability, climate change mitigation, and energy 

security, energy efficiency stands out as perhaps the single most promising resource. In 

the course of this work, we have highlighted the significant barriers that exist and must 

be overcome, and we have provided evidence that none are insurmountable. We hope 

the information provided in this report further enriches the national debate and gives 

policymakers and business executives the added confidence and courage needed to take 

bold steps to formulate constructive ways to unlock the full potential of energy efficiency.

222 Scenarios for a Clean Energy Future, Interlaboratory Working Group, ORNL/CON-476 and LBNL-44029, 

November 2000.

83221_McKinsey_US.indd 109 7/22/09 10:12
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A. Glossary

Abatement. The purposeful reduction of greenhouse gas emissions or their rate 

of growth.

Accelerated deployment. The deployment of new technologies before the end-of-life of 

the existing stock. Accelerated deployment is NPV-positive when the lifetime cost savings 

of the more efficient technology more than exceed the present value of the total (rather 

than incremental) upfront investment. See also “Stock and flow methodology.”

ASHRAE. The American Society of Heating, Refrigerating and Air Conditioning 

Engineers, which publishes a series of standards for heating, cooling, and ventilation 

systems in commercial buildings that often serve as the basis for commercial building codes.

BTU. British Thermal Unit, the quantity of heat energy required to raise the temperature 

of one pound of water from 60° to 61° Fahrenheit at a constant pressure of one atmosphere. 

BTUs are used throughout this report as a standardized measure of energy output and 

consumption.

Building shell. The exterior structure of a building that protects the interior space, 

facilitating control of the interior climate. The shell consists of the roof, exterior walls, 

exterior windows and doors, the foundation, and the basement slab or lowest level floor. 

BAU baseline. The reference-case forecast for U.S. energy consumption in 2020, 

used in this report as a standard against which incremental energy efficiency potential 

is calculated. The business-as-usual forecast derives from the U.S. Energy Information 

Administration’s Annual Energy Outlook 2008 and other public sources. Although the 

AEO baseline contains some energy efficiency improvement, the baseline projects energy 

consumption in future years without a concerted, economy-wide effort to improve energy 

efficiency.

CHP. Combined heat and power, also known as “co-generation,” is the use of a heat engine 

or a power station to generate electricity and useful heat energy from a single fuel at a 

facility near the consumer.

Appendices

83221_McKinsey_US.indd 111 7/21/09 5:47
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CO2e. Carbon-dioxide equivalent, a standardized measure of greenhouse gas emissions 

developed to account accurately for the differing global warming potentials of various 

gases. Emissions are measured in metric tons of CO2e per year, usually in millions of tons 

(megatons) or billions of tons (gigatons). 

Consumer utility. Functionality, such as a level of comfort, garnered from a specific 

energy end-use. Adjusting a thermostat or reducing the number of hours an electronic 

device is used in a day represent changes in utility. In a strict economic sense, maintaining 

consumer utility assumes a constant economic surplus for the consumer while delivering 

against a common benefit. Modeling of efficiency potential and energy use in this report 

assumed no change in consumer utility. 

Community infrastructure. Energy-consuming devices not directly associated with 

a specific building. These end-uses would include municipal infrastructure (e.g., water 

treatment and distribution systems) and telecommunications infrastructure.

EISA. Energy Independence and Security Act (2007), passed by Congress to move the 

United States toward greater energy independence principally through greater energy 

efficiency and increased use of renewable fuels. It also directs the federal government to be 

a model in its own energy usage. 

Energy intensity. The number of BTUs of energy consumed for each dollar of economic 

value created.

EM&V. Steps to evaluate, measure, and verify that implementation of an energy efficiency 

measure has produced the expected energy savings. It may include ensuring those savings 

are properly attributed.

ESCO. An energy services company is a for-profit or not-for-profit entity dedicated to 

providing energy solutions to business and/or residential customers, including such 

services as energy efficiency audits, implementation of efficiency measures, evaluation of 

the performance of measures, or leading energy conservation efforts. 

Existing stock. Technologies in use in the business-as-usual baseline at the beginning 

of 2009, which serves as a starting point for all modeling. See also “Stock and flow 

methodology.”

Gt. Gigaton, a unit of weight equivalent to 1 billion metric tons or 2.2 trillion pounds.

GW. Gigawatt, a unit of electrical power equivalent to 1 billion watts.

GWh. Gigawatt hour, a unit of electrical energy equivalent to the work done by 1 billion 

watts acting for 1 hour.

Heat rate. Efficiency of a power plant, measured by calculating the number of BTUs of 

energy input per kilowatt-hour of power output.

HERS. Home Energy Rating System, measurement of a home’s energy efficiency that 

provides a score of 0 (net zero energy building) through 100 (based on the 2006 IECC) and 

higher. A 1-point decrease in score represents a 1 percent decrease in energy consumption. 

HVAC. Heating, ventilation, and air conditioning, also known as space conditioning; 

end-uses of energy to heat, cool, and circulate the air of the interior of a building. This 

report uses the term “HVAC” generically to refer to space conditioning systems, whether 

a building has a heating system, a cooling system, an air exchanger or one, two or three of 

those systems. 

KWh. Kilowatt hour, a unit of electrical energy equivalent to the work done by 1 thousand 

watts acting for 1 hour. Standard unit of residential electricity pricing; for example, a 100-

watt light bulb burning for 10 hours would consume 1 kilowatt hour.

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Unlocking Energy Efficiency in the U.S. Economy

Appendices: Glossary

Load-serving entity. Load serving entities provide electricity to end users, and include 

investor-owned utilities, municipal utilities, cooperatives, among other entities. 

LEED. Leadership in Energy and Environmental Design, a widely recognized 

certification given to buildings for excellence in sustainable building design. Based on 

a whole-building approach, different tiers of LEED certification are granted by the U.S. 

Green Building Council, based on the performance of the building in various areas of 

human and environmental health, with energy efficiency an important criterion.

Life-cycle benefits. The energy savings of an energy efficient device that accrue over 

the useful life of the device. This does not include energy to create the device.

MUSH. Municipal, university, school, and hospital; these public-sector buildings are 

typically able to realize the potential of attractive energy efficiency measures, because they 

do not change ownership at the rate of private enterprises and thus do not need accelerated 

payback of the capital invested in energy efficiency measures.

MMBTU. 1 million BTUs. 

MWh. 1 megawatt hour, a unit of electrical energy equivalent to the work done by 1 million 

watts acting for 1 hour.

NPV-positive. Net-present-value-positive, in which the discounted future cash flows 

from future energy savings outweigh the initial upfront capital investment needed to 

implement the measure. 

PAYS. Pay-as-you-save, a loan made or administered by an energy provider to cover an 

upfront investment in energy efficiency measures. The end-user repays via the utility 

bill with money saved through reduced energy usage such that no initial investment is 

required of the end user. 

Performance contracting. An agreement between an energy services company 

(ESCO) and another entity in which the ESCO assumes responsibility for reducing energy 

consumption on the premises in specified ways for the period of the contract. The ESCO 

installs agreed-on energy efficiency measures and recoups its investment through 

contracted payments, which represent a portion of the energy savings that the entity 

receives from the efficiency measures. 

Plug load. Energy consumed by electrical devices that plug into the wall, typically 

various electronics products and small appliances. Examples include TVs, PCs, 

hairdryers, coffee machines, and thousands of other similar products. Consumption in 

this category is highly fragmented across an average of 20 devices per household.

PBC. Public benefit charge, a fee added to energy bills to pay for public goods.

RPS. Renewable Portfolio Standards, a government mandate requiring that a certain 

amount of energy generated or sold in a given area, or a certain amount of energy capacity 

in a given area, derive from renewable energy sources, such as geothermal, wind, biomass, 

or solar.

Retro-commissioning. Process by which HVAC and other building systems are 

tested and adjusted to ensure proper configuration and operation for optimal efficiency. 

This may involve installing correctly sized motors, sealing ducts, repairing leaks in and 

recharging the refrigeration system, among a wide variety of measures.

Retrofit. Changes made after initial construction and before the expected end-of-life of 

the asset, typically the building shell. 

Space conditioning. Energy consumed in the heating, cooling and ventilation of 

interior spaces in buildings. 

83221_McKinsey_US.indd 113 7/21/09 5:48
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Standby losses. Energy consumed by electrical devices while plugged in to a socket but 

not in active use.

Stationary use of energy. Energy consumed by the U.S. economy in a year, except for that 

used in transportation (i.e., the movement of vehicles, including transportation in mining, 

construction, and agriculture) and in the production of asphalt or chemical feedstock. This 

report analyzed approximately 81 percent of the stationary energy consumed in the U.S.

Stock-and-flow model. This methodology calculates energy savings potential relative 

to the business-as-usual (BAU) case. The model projects BAU energy consumption for 

future years by replacing equipment stock according to current customer preferences. 

In calculating the efficient scenario it substitutes energy efficiency measures for those 

technologies when it is NPV-positive to do so. These substitutions include upgrades in new 

buildings, as well as replacement of technologies contained in existing buildings. 

 Accelerated deployment. The deployment of new technologies before the end-of-life of 

existing stock. Accelerated deployment is NPV-positive when the lifetime cost savings 

of the more efficient technology more than exceed the present value of the total (rather 

than incremental) upfront investment.

 NPV-positive choice. Technology in a specific building-Census division category that has 

the lowest annualized cost, taking into account such factors as energy cost, annualized 

capital cost (over the lifetime of the technology), and other operating expenses.

 Existing stock. Technologies used in the BAU case at the beginning of 2009, which 

serves as a starting point for efficiency modeling.

TBTU. Trillion BTUs. 

TW. Terawatt, a unit of electrical power equivalent to 1 trillion watts. 

TWh. Terrawatt-hour, a unit of electrical energy equivalent to the work done by 1 trillion 

watts acting for 1 hour.

Waste heat recovery. Capturing and using heat for productive work that is a byproduct 

of energy-intensive processes or steam systems that would otherwise be ejected into the 

environment.

Weatherization. Modifying a building to increase its energy efficiency, usually through 

measures to decrease infiltration of outside air and minimize the loss of heated or cooled 

interior air.

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Unlocking Energy Efficiency in the U.S. Economy

Appendices: Methodology

B. Methodology

The purpose of our research has been to evaluate the barriers that impede capture of 

energy efficiency today and to provide perspectives on how potential solutions map to 

individual and broader system-level barriers to unlocking the potential available in 

the U.S. economy. We have analyzed a multitude of energy efficiency opportunities to 

determine how much of the potential is NPV-positive, thereby providing a fact base for our 

assessment of barriers and potential solutions. 

This research differs from other reports on energy efficiency in a number of important 

ways. Specifically, we would like to note four points about our scope:

 We did not attempt to conduct a technical analysis on future energy efficiency 

technologies.

 We do not predict how much energy efficiency potential can or will be achieved.

 We attempted to be comprehensive – but not necessarily exhaustive – of all barriers 

and solutions.

 We did not assess second-order effects (e.g., impact on natural gas prices) or broader 

GDP impacts.

As noted previously, we focused on stationary uses of energy. We, therefore, excluded 

energy used in all modes of transportation, such as motor vehicles, trains, ships, and 

aircraft; with this focus, we also excluded energy used in agriculture, construction, and 

mining operations. 

This appendix covers three aspects of our methodology: 

1. Assumptions and methodology for calculating NPV-positive energy efficiency 

potential, including the micro-segmentation process and subsequent re-aggregation of 

micro-segments into addressable clusters of potential

2. Our approach to structuring the barriers and attributing them to clusters 

3. Means of mapping solutions to address the major barriers in these clusters.

1. CALCULATING NPV-POSITIVE POTENTIAL

Data sources for the National Energy Modeling System (NEMS) served as the foundation 

of our residential and commercial potential analysis. The Annual Energy Outlook 2008, 

Table 2, supplemental tables 24-34, and unpublished AEO data serve as the foundation 

for the industrial potential analysis. Where insufficient data were available, we drew on 

public or private sources to supplement the NEMS database and provide the necessary 

resolution for our analysis.1

 In aggregate, this analysis addresses 36.9 quadrillion of the 

45.5 quadrillion BTUs (81 percent) of end-use energy in 2008. 

There are six essential components to our analysis of NPV-positive potential: 

 Baseline consumption

 Stock and flow methodology 

 NPV-positive selection criteria

 Technology characteristics

 Bursting of data into micro-segments

 Re-aggregation of data into addressable clusters.

1 In the commercial sector, 2.1 quadrillion BTUs of consumption rely on other public sources; in the 

industrial sector, 15.3 quadrillion BTUs of consumption rely on public sources and 4.0 quadrillion BTUs 

rely on private sources.

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Baseline consumption

Our baseline consumption matches the Annual Energy Outlook 2008 for 2008 and 2020 

to within 1.2 percent. Furthermore, these data match the AEO 2008 when cut by fuel or 

Census division (Census region, in the case of industrial, represents the finest degree 

of geographic resolution). Note that this baseline incorporates no price for carbon and 

includes only legislation that has passed into law (i.e., the Energy Independence and 

Security Act of 2007, but not the American Recovery and Relief Act of 2009).

Stock and flow methodology

We used slightly different methodologies across the sectors, depending on the availability 

of data and the nature of the opportunities. 

Residential and commercial sectors. Our residential and commercial modeling 

considered almost 500 technologies deployed against 24 end-uses. Each technology is 

characterized by a working life time, upfront capital spend, annual maintenance spend, 

and energy efficiency impact. Current energy consumption by end-use is provided by 

NEMS through the Renewable Energy Consumption Survey (RECS) and Commercial 

Building Energy Consumption Survey (CBECS). We further characterized this 

consumption by the ratio of technologies deployed in the existing equipment stock.

We modeled the deployment of newer, more energy efficiency technologies in two ways: at 

end of life and on an accelerated basis. 

 End-of-life replacement. As each technology reaches the end of its useful life, 

our model calculates the total levelized cost of all equivalent technologies that could 

replace it. The “NPV-positive,” potential is calculated based on deployment of the 

technology with the lowest levelized cost. 

 Accelerated replacement. To more accurately calculate the opportunity in 

retrofitting buildings, we also considered accelerated deployment. If the total levelized 

cost of a new technology is less than the levelized energy cost of an existing technology 

in the current stock, then the model replaces the current stock with the new technology 

immediately. This occurs in two ways: when technological advances reduce the 

levelized cost of a technology (as is the case with general-use LED lighting in 2017) or in 

the first year of the calculation (as is the case with a number of technologies that could 

be retrofit into buildings remain undeployed today).

Industrial sector. Such detailed data is unavailable for the industrial sector. Instead 

our model evaluates opportunities using an internal rate-of-return (IRR) calculation 

for potential measures available in a given year, adjusted to avoid double counting 

opportunities incorporated in the baseline assumptions through 2020. We separated out 

the five largest energy-intensive industries – those with 10 or more BTUs of energy input 

per dollar of output (pulp and paper, cement, refining, chemicals, and iron and steel) – 

and, using expert interviews and more than 15 secondary industry resources, analyzed 

in detail the efficiency potential in these industries. To accurately assess the efficiency 

potential in their manufacturing processes, we calculated the NPV-postitive efficiency 

potential for more than 150 measures across these five industries. The savings percentage 

for each industry was calculated against its consumption, and these percentages were 

averaged (11 percent across the five industries). We used the resulting savings percentage 

as a baseline to identify the energy efficiency potential for process energy in non-energyintensive industries. Interviews with industry experts revealed that on a percentage basis, 

the opportunity to improve efficiency was greater in these industries, varying by business 

size (large businesses, 13 percent; medium-sized businesses, 14 percent; small businesses, 

15 percent), because less attention has been paid to energy efficiency in these businesses. 

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Unlocking Energy Efficiency in the U.S. Economy

Appendices: Methodology

We calculated most of the potential in energy support systems (i.e., waste heat recovery, 

steam systems, electric motors) for each energy-intensive industry using more than 50 

measures that the team had identified through expert interviews and industry reports. 

We determined the savings potential, as well as capital costs, identifying the NPV-positive 

potential for these meausres. Waste heat recovery measures, which do not consume 

energy but decrease the energy required system-wide by helping to pre-heat fuel, provide 

incremental energy for other processes or supply energy to support systems. The team 

calculated the average energy efficiency savings potential across the energy-intensive 

industries and used this to calculate the efficiency potential for non-energy-intensive 

industries by multiplying it by the energy consumed in these industries for energy support 

systems. For building systems, the team used the more detailed commercial model and the 

savings rate calculated across appropriate commercial building types to find the efficiency 

potential across all industrial building systems (those pertaining to the building itself, 

rather than its industrial functions), both for energy- and non-energy-intensive industries. 

Combined heat and power. We modeled industrial and commercial combined heat 

and power (CHP) applications separately, primarily because a CHP system increases 

on-site fuel consumption while increasing the efficiency of system-wide heat and 

electricity production (including off-site generation).

 Industrial applications. We estimated the potential for industrial CHP based 

on the EIA’s projected steam demand supplied by “non-CHP” sources, by region and 

industry. We grouped this potential into five sizes of CHP systems (from less than 

1 MW to greater than 50 MW) based on plant sizes and steam demand, across six 

industry groups and the four Census regions of the country. Each of the modeled CHP 

systems were sized to the thermal load and matched to the power-to-steam ratio of 

the specific industry. We cross-checked these results against estimates for generation 

potential from Oak Ridge National Laboratory and the Department of Energy. By 

comparing the economics of a CHP system to the installed traditional system using 

AEO 2008 supplemental data, we calculated the total potential for CHP for each region 

and industry subgroup. 

 Commercial. There has been limited use of CHP in the commercial sector to date, 

with roughly 10 GW of generation capacity installed. Our model, therefore, looked at 

the full potential of expanding CHP in this sector. We analyzed each building type for 

CHP suitability (based on expert interviews, case studies, and cost analysis) across 

three sized-based building groups: 1,000-10,000 sq feet, 10,000-100,000 sq feet, 

and more than 100,000 sq ft. If a building type was suitable for CHP, we calculated 

opportunities for retrofit CHP systems against the full replacement cost of central 

energy plants, taking into consideration thermal heating, water heating, cooling and 

electrical capacity and demand. For new buildings, we compared these costs to the 

incremental cost of installing a CHP system in place of a standard boiler. Drawing on 

information from NEMS for capacity factors (the ratio of annual equipment output 

to output of the equipment at 100 percent utilization) for each building system (e.g., 

water heating, HVAC, miscellaneous electricity demand) in each type of building, we 

calculated the full economic potential for energy generation for each building type subgroup by Census division.

NPV-positive selection criteria

We used three criteria to define the “NPV-positive” energy efficiency potential of each 

efficiency measure: 

 Technology costs. These include incremental capital (or in the case of accelerated 

depreciation, total capital cost), installation, and additional operation and 

maintenance cost. This report uses the DOE’s Technology Report as used by NEMS. 

It specifies for each end-use a set of available technology-vintage combinations that 

define these parameters (discussed in greater detail below). 

83221_McKinsey_US.indd 117 7/21/09 12:28
118

 Value of energy saved. The value of energy saved is more challenging to quantify. 

A full treatment of avoided energy costs would require detailed consideration of 

primary energy savings and lies beyond the scope of this report. There is, however, 

a range of energy values to draw on. Each unit of energy saved will draw from this 

range as specified by end-use, supply assets for the selected geography, the regulatory 

environment, timing, and business-as-usual forecasts. This report values energy 

saved at Census-division industrial retail rates from AEO 2008, because it serves as a 

central value that is publically available and well understood. The full range of avoided 

costs, from lowest to highest, includes:

 — Cost of generation. This cost attempts to identify the variable component of 

generation cost through fuel and operations of impacted plants and early plant 

retirements (with or without regulated asset recovery). It does not capture impact 

of energy efficiency on capacity, transmission, or distribution.

 — Wholesale price. The wholesale price represents the average generation price, 

including utility cost recovery, of existing assets. It serves as a useful proxy for 

the average value of existing energy, but it does not capture the impact of energy 

efficiency on capacity, transmission, or distribution.

 — Industrial retail rate. The industrial retail rate includes the benefits of the 

wholesale price approach while also attributing system value of avoided capacity, 

transmission, and distribution. It is worth noting the industrial load factor underestimates the system load factor. 

 — Customer-specific retail rates. These rates serve as the best tool for applying a 

participant “lens” to the efficiency potential, when attempting to understand when 

a retail customer should act to reduce their energy bills. These rates may overvalue 

the savings from transmission and distribution, because many fixed costs are 

embedded in customer-specific retail rates.

 — Least-cost avoided new build. This value presents an attractive option, 

because unlocking energy efficiency is likely to defer or eliminate construction of 

some new assets. Given the uncertainties in the business-as-usual forecast and 

the amount of efficiency unlocked, however, calculating scenarios accurately is a 

significant challenge, which could call into question the accuracy of results relying 

on the necessary assumptions.

 — Avoided carbon-free build. This option resembles least-cost avoided new 

build, except that it focuses on carbon-free sources of energy. It suffers from 

similar modeling challenges. 

 Discount factor. The discount factor (or rate) represents the relative value of savings 

over time. Similar to discounted cash flow analysis, future energy savings in a given 

year, “Y,” are discounted to present-day values by the amount (1+ DF)-y where DF is the 

discount factor in percent.

By selecting a cost of avoided power and a discount factor from among the available 

options, it possible to construct a cost test to determine whether – and for whom – energy 

efficiency potential is NPV-positive. Specifying industrial retail rates and a 7-percent 

discount factor creates a total-resource cost test (provided all deployment and program 

costs are included, regardless of funding source). Alternatively, combining customerspecific retail rates and a customer’s discount factor (which many argue can be as high as 

20 percent) create a participant-focused cost test.

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Unlocking Energy Efficiency in the U.S. Economy

Appendices: Methodology

Technology characteristics

The technology characteristics derive from the DOE’s Technology Reports, as used by 

NEMS. This set of characteristics includes limited innovation, an issue that could become 

a concern when attempting to model efficiency potential over longer timeframes. The 

characteristics do include expected technology improvements and cost compression in 

existing technologies. We further tested the sensitivity of our results to these assumptions 

by considering the more aggressive scenario in the Technology Report.

Characteristics of building shell technologies came from other sources. Lawrence 

Berkeley National Laboratory’s Home Energy Saver provides publicly available energyconsumption modeling for homes, with recommended cost-effective upgrades. This 

report categorizes all 4,822 residential homes in the RECS survey by their energy use 

per square foot into five or six classes for each of five climate zones, depending on the 

climate zone, in order to understand likely characteristics of existing stock and identify 

cost-effective upgrades. It includes such relevant variables as square footage, resident 

income, and year of construction, to further identify these opportunities. We also drew 

upon work by the National Renewable Energy Laboratory (NREL) on zero-net-energy 

building potential and retro-commissioning to understand commercial existing and 

new build opportunities.2

Bursting of data into micro-segments 

Bursting of data into micro-segments to identify and address barriers drew upon 

the EIA’s energy consumption surveys, Census data, and other sources to generate 

tens of thousands of consumption segments across the three sectors. While not 

statistically significant at this level of resolution, the data allowed us to identify relevant 

characteristics to multiple levels of depth that, when combined, produced samples 

that drove key findings in this report and could be used for further research. Our 

modeling accomplishes this by “bursting” the demographic characteristics into the 

lower resolution data (similar to an outer product of two vectors). This does represent an 

approximation of energy consumption within such a “micro-segment” of the population, 

provided that data remain aggregated at a high enough level of depth to remain 

statistically significant as discussed above. 

Exhibit B-1 shows characteristics that we used to burst the residential, commercial, 

and industrial sectors into micro-segments. The result was 75,000 micro-segment and 

end-use combinations in the residential sector, which allowed us to see the important 

differences across regions, and across different building types, as well as understand 

the potential agency barriers, and conduct other important analyses. We burst the 

commercial sector into 39,000 micro-segment and end-use combinations, which 

enabled comparisons between public and government micro-segments and the split 

across the multiple types of buildings, each with very different energy needs. Our microsegmentation in the industrial sector was less detailed, due to limited availability of data; 

the industry and geographic splits proved to be the important factors for identifying 

efficiency potential in the sector.

2 B. Griffith et al., “Assessment of the Technical Potential for Achieving Net Zero-Energy Buildings in the 

Commercial Sector”, NREL, December 2007. Evan Mills et al., “The Cost-Effectiveness of CommercialBuildings Commissioning: A Meta-Analysis of Energy and Non-Energy Impacts in Existing Buildings and 

New Construction in the United States,” LBNL, Portland Energy Conservation Inc, Texas A&M University, 

December 2004.

83221_McKinsey_US.indd 119 7/21/09 12:28
120

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Exhibit B-1: Segmentation of energy use

Re-aggregation of data into addressable clusters

In re-aggregating data into addressable clusters of efficiency potential, we used available 

consumption characteristics and/or demographics to organize the micro-segments 

into clusters that solutions could address. Fourteen clusters of consumption emerged 

as relevant, as described in the body of this report. The most significant traits used to 

define these clusters represent an amalgamation of criteria that reflect the existence of 

similar barriers, responsiveness to particular solutions, and/or common traits relevant for 

consumption or efficiency potential. The most relevant characteristics that define these 

clusters include home owner income, building age (i.e., new versus retrofit buildings), 

specific end-uses or opportunities (e.g., electrical devices, community infrastructure, 

waste heat recovery), private versus government ownership structure, and energy 

intensity. 

83221_McKinsey_US.indd 120 7/21/09 12:28
121

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83221_McKinsey_US.indd 121 7/21/09 12:28
122

3. MAPPING OF SOLUTIONS TO CLUSTERS AND BARRIERS

We conducted an extensive survey of measures that would unlock energy efficiency in

the residential, commercial, and industrial sectors. These solution measures broadly

fall into three categories: those that have proven successful on a national scale, those

piloted and promising but not yet proven at national scale, and those emerging but not yet

thoroughly tested. We used available empirical evidence or descriptions to understand

which solutions could address which barriers. For example, on-bill financing can address

ownership-transfer issues, inconsistent discount rates, and capital constraints by

transferring unpaid investment and benefits to future owners while providing necessary

capital at a discount rate consistent with other options for energy consumption. Though

the barriers addressed by each measure can vary among clusters, Exhibit B-3 provides an

example of how we mapped measures to barriers in one cluster in the residential sector, in

this case the existing non-low-income homes cluster. 


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Given the limited quantitative data on the barriers and the impact of solutions, this

approach faces some limitations: it cannot quantitatively map solutions to every barrier,

and it cannot evaluate the relative strength of different solutions. Furthermore, we did

not attempt to ascertain what fraction of the potential is achievable with a given measure. 

However, the approach can highlight what portion of the potential is addressable with a

given measure. Our research suggests that a measure or combination of measures will be

needed to address all major barriers affecting a cluster, if the efficiency potential is to be

captured fully. For example, the limited penetration of on-bill financing in the residential

retrofit cluster is likely because this approach fails to address transaction barriers, lack

of awareness, contractor availability, and installation concerns. A combination of on-bill

financing with a home labeling or awareness campaign, plus direct referrals to qualified

contractors could address all barriers and unlock the potential of this cluster.

83221_McKinsey_US.indd 122 7/21/09 12:28
123

Unlocking Energy Efficiency in the U.S. Economy

Appendices: References and additional works consulted

C. References and additional works consulted

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“Unlocking Energy Efficiency in the U.S. Economy” is the product of a year-long effort 

by McKinsey & Company in close collaboration with 13 leading U.S.-based companies, 

government agencies and environmental NGOs. It is not the aim of this report to put 

forward any policy recommendations, rather we hope that the research and perspectives 

presented here will enable the development of thoughtful strategies for improving the 

energy productivity in the U.S. economy.

In addition to thoughtful suggestions and expertise from our sponsor group, we have been 

aided in our work by numerous individuals and organizations from across the country, who 

in the course of more than 100 interviews generously shared data, expertise, and insights. 

Many of these contributors, while they helped us in the development of our thinking, have 

not seen the findings of our report prior to publication and, therefore, do not necessarily 

agree with our findings. Nonetheless, they deserve our thanks for sharing their perspectives 

freely with us. The following is a partial list of organizations that we consulted during the 

research for this report, not including those that declined to be mentioned:

 American Council for an Energy efficient Economy (ACEEE)

 The Building Codes Assistance Project

 Building Owners and Managers Association (BOMA) International

 California Energy Commission: Program Manager, Water-Energy Efficiency

 Carrier Corporation

 Catalyst Financial Group, Inc.

 City of Berkeley, Office of Energy & Sustainable Development

 City of Chicago

 — Department of Environment

 — Department of General Services

 Consortium for Energy Efficiency (CEE)

 Curtiss Engineering, Inc.

 Cushman & Wakefield

 Department of Energy, Energy Information Administration

 Dow Chemical Company

 Earth Advantage Institute

 EcoBroker International

 eMeter

 Energetics Incorporated

 Fannie Mae

 Green Star Energy Solutions

 The Goldman Sachs Group, Inc.

 Hannon Armstrong

 ICF International

 Institute for Market Transformation

Acknowledgments

83221_McKinsey_US.indd 143 7/21/09 6:38
144

 Intel Corporation, Global Director, Environment and Energy Policy

 International Energy Agency

 Johnson Controls, Inc.

 Johnson & Johnson

 JPMorgan Chase & Co.

 KB Home

 Lawrence Berkeley National Laboratory (LBNL)

 National Association of Energy Service Companies (NAESCO)

 National Renewable Energy Laboratory (NREL)

 Panasonic Corporation

 Recycled Energy Development

 Renewable Funding

 Residential Energy Services Network (RESNET)

 State Energy Conservation Office, Texas

 Sustainable Spaces

 University of California, Berkeley

 University of Pennsylvania

 Vermont Energy Investment Corporation

 Wells Fargo

 Yahoo! Inc.

 Yale New Haven Hospital.

The report has also benefited greatly from the guidance and perspectives of a large group 

of McKinsey practice leaders, including Anjan Asthana, Doug Haynes, Stefan Heck, Eric 

Kutcher, John Livingston, Lenny Mendonca, Suzanne Nimocks, Jeremy Oppenheim, 

Thomas Seitz, Humayun Tai, and Luis Troyano-Bermúdez. The report has also benefited 

from the work of many other colleagues, including Shannon Bouton, Sean Brazier, 

Jenny He, Kshitij Kohli, and Vishal Makin. Additional thanks go to colleagues who have 

provided invaluable support to this project in their various roles, including Carol Benter, 

Jenny Bloodgood, Dana Glander, Michael Helton, Sally Lindsay and Sandi Strickland.

The project team was led by Philip Farese. The team included Peter Buttigieg, Felicia 

Curcuru, Kumar Dhuvur, David Mann, Jim O’Reilly, Apoorv Saxena, Thomas Shaw, and 

Douglas Weiss.

We emphasize that, while the organizations listed in the preface and in this section have 

provided valuable insights to the team, the perspectives, analyses and views expressed in 

this report are the sole responsibility of McKinsey & Company.

Hannah Choi Granade – Principal, Stamford 

Jon Creyts – Principal, Chicago 

Anton Derkach – Associate Principal, Houston 

Scott Nyquist – Director, Houston 

Ken Ostrowski – Director, Atlanta

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NOTES

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