Once you know where to look, it's everywhere—dissipating, leaking away, drifting up in a puff of smoke. "When I see exhaust pipes and chimneys, I see wasted thermal energy," says Chris Nelson, president of Cyclone Power Technologies in Pompano Beach, Fla. Nelson, whose father, Richard, co-founded Cogenic Energy Systems, a pioneering combined-heat-and-power company, back in 1980, grew up hearing about squandered energy—and how to recapture it—over the dinner table. Now Cyclone is preparing to unveil a universal Waste Heat Engine that can generate electricity from the exhaust pipe of virtually any small-scale industrial engine or furnace. That may make the younger Nelson the first and only second-generation energy scavenger in America. If we're smart, he won't be the last.

How we'll fuel our future is often framed as a misleadingly simple, two-sided debate: We either have to produce more energy or use less. But that picture ignores a basic thermodynamic truth: For the same reason you should never pay cash for a perpetual motion machine, you can never make use of 100 percent of the energy you consume. Something is always lost in the conversion from fuel to work. While that may sound like bad news, it also introduces a third way to address future energy needs. Right now, our energy conversion is abysmal, nowhere near the theoretical limits of efficiency. But with smarter design and new technologies, we can get a lot closer to those limits.

Consider a simple action like walking down the street. The energy that fuels you originally comes from the sun and is stored by photosynthesis in the form of chemical bonds. "It turns out that food has about 100 times as much energy per unit mass as lithium batteries," says Max Donelan, head of the Locomotion Laboratory at Simon Fraser University in Vancouver, British Columbia. That means the average person can store as much energy as a 1-ton battery can. But the process of converting those chemical bonds into muscle contractions wastes much of the stored energy. The remainder is used to accelerate and decelerate your limbs—and that deceleration can be scavenged to generate power much like the regenerative braking in hybrid cars: Donelan has developed a lightweight knee brace that generates 12 watts of power from the simple act of walking—enough to give a cellphone 30 minutes of talk time after just 1 minute—with no extra effort.

The curse of inefficient conversions plagues everything from microchips to massive factories and power plants. When you boot up your laptop, the microprocessor inside is spewing heat that has to be dissipated by a heat sink and fan; the power brick that you plug into the wall is leaking energy in the conversion from AC to DC; and about 7 percent of the electricity generated at a distant power plant is wasted in transmission losses while traversing the grid before the juice ever reaches your home. The most common form of waste energy by far is heat, but power can also be squandered in unproductive motion (as in walking) or even in the millions of tons of edible food tossed into landfills. A 2010 University of Texas study estimated that discarded food contains more than 2000 trillion Btu of embodied energy each year.

No single solution can address all these different types of waste. Instead, we need to engineer creative approaches to fit each situation, as the University of New Hampshire learned after installing a gas-fired cogeneration plant in 2006. "The plant completely changed the way we think about managing energy on campus," says Paul Chamberlin, the university's assistant VP in charge of energy and campus development. The obvious gain was capturing excess heat that the turbine gave off while producing electricity and using it to heat campus buildings, boosting the generator's overall efficiency from 35 percent to a maximum of about 85 percent. Better yet, the university realized that landfill gas from a nearby dump, which otherwise would have simply flared into the atmosphere, could provide valuable extra fuel. Less obvious, though, was what to do with all that extra heat in the summer—"free steam," as Chamberlin puts it. The solution: The new UNH business school currently under construction will have steam absorption chillers instead of electric air conditioners, and other campus buildings will follow suit.

The biggest obstacles facing the quest for efficient energy conversion aren't just technical. We have an awareness problem. When it comes to curb appeal, a nearly invisible diode that converts AC to DC with virtually no loss can't compete with a shiny solar panel, even though the latter is less efficient. And, as a rallying cry, "Run your engine as close to the Carnot efficiency limit as possible without violating the second law of thermodynamics" will never replace "Drill, baby, drill!" So a philosophical shift is in order. Yes, we need to keep pursuing new energy resources, but we must also make the most of what we have now. "When it comes to solving our problems with fossil fuels and the environment, these technologies are really the low-hanging fruit," Nelson says. "They're available now; they just need to be pushed."