1 : Policy Issues in Promotion of Investments in Energy
Energy and sustainable development
2. Structure and trends of energy consumption in
3. Potentials for energy efficiency improvements
4. Barriers to energy efficiency investments
5. Policy options for promotion of energy efficiency
Energy and sustainable development
Affordable and clean energy is a precondition for all economic
activities and sustainable development. Ever since the industrial
revolution global energy production and consumption has been on
the rise. In 1996, global annual consumption of commercial energy
amounted to 8,380 mtoe. During the 1990s, global commercial energy
consumption was estimated to have grown on average by about 2.3
per cent per year, and there are all the reasons to project a
continued and perhaps accelerated rate of global energy consumption
growth in the future.
The energy resource endowment among continents and countries is
highly uneven. However, most of our energy systems predominantly
rely on fossil fuels, which contribute some 90 per cent to the
current primary energy supply.
There are great disparities in access to modern forms of energy,
in particular in access to electricity. Whilst in the industrialized
world per capita consumption of electricity reaches or exceeds
8000 kWh per capita per year, the same in the lesser and least
developed countries remains low, sometimes even below 400 kWh
per capita per year. This fact suggests that the average levels
of consumption between countries can differ by as much as a factor
Considering the large hitherto unmet demand for energy in general,
and electricity in particular, we ought to assume that global
and regional energy consumption will continue to grow in the near,
intermediate and longer term future.
This perspective thus shows the significance of the sustainability
question. The world still has ample supply of lignite, coal, oil
and natural gas, but these reserves are not infinite. For example,
some recent estimates indicate that at their current rates of
production, proven reserves of coal may last for another 218 years,
natural gas another 63 years, and oil reserves another 41 years.*
Our current fossil fuel based energy systems do not seem to be
viable in any longer term perspective.
Apart from the predictable resource constraints, the growing environmental
concerns also call for a stringent review of the present energy
systems and energy sector development policies. Energy production
and use has environmental impacts at different levels, local,
regional and global. At the local level, combustion of fossil
fuels creates air pollution and urban smog. Sulphur oxides can
lead to acid rains. Oil spills in national and international waters
can also be considered environmental impacts of energy trade.
At the global level, greenhouse gas emissions, including carbon
dioxide and methane, increase the risks of climate change.
Modern commercial energy supply systems include long chains of
energy conversions, and as shown by many studies, efficiency gains
and improvements are possible and necessary at almost all stages
of energy conversion, transmission and distribution. "Achieving
a sustainable energy future for all" is a universal goal, placed
on the agenda of United Nations organizations by international
consensus. To achieve this goal more and better integrated energy-environment
planning, increased use and contribution of renewable sources
of energy in overall energy supply and promotion of energy efficiency
are important elements to be incorporated into any energy-environment
1.1 Fossil fuel reserve/production (R/P) ratios at the end
BP Amoco Statistical Review of World Energy, June 1999.
Structure and trends of energy consumption in industries
Industries account for approximately 43 per cent of global energy
end use. Energy use in the industrial sector is dominated by the
industrialized countries, which account for about 45 per cent
of world industrial energy use. Developing countries and countries
with economies in transition use approximately 32 per cent and
23 per cent of world industrial energy respectively.
1.2 Global Energy Consumption in Industry (Estimated
at 1.34 exajoules)
Source : United Nations, Potential and Policy Implications
of Energy and Material Efficiency Improvement (1997)
The industrial sector is very diverse and involves a wide range
of activities including the extraction of natural resources, conversion
into raw materials and manufacture of finished products. Energy
intensity in manufacturing tends to differ from country to country
depending on indigenous resource endowment and local energy prices.
The five most energy intensive industrial sub-sectors include
iron and steel, chemicals, petroleum refining, pulp and paper,
and cement production. These sections account for approximately
45 per cent of all industrial energy consumption.
A summary overview of the industrial sector's energy consumption
in 1997 in some of the countries of the ESCAP region is given
1.1 Energy Consumption in Industry (in mtoe 1997)
and India have been experiencing a rapid expansion in energy-intensive
industries. Since the beginning of the 1990s China alone accounts
for nearly half of total developing country manufacturing energy
use. The rapid expansion of heavy industries has been the basis
for China's growing prosperity.
Thailand and Malaysia are among the countries which also have
a growing industrial sector. In the Philippines, Viet Nam and
Bangladesh consumption of energy in industry is comparatively
limited by international comparison, although at the local levels,
industrial sector energy use has grown considerably.
Potentials for energy efficiency improvements in industries
Energy efficiency measures may be implemented either as "efficiency
retrofits", in which existing installations are improved through
replacement with energy efficient components. Alternatively, energy
efficiency investments can occur at the design and planning stage
of new plants. At these stages the choice and installation of
energy efficient technologies is an option for investors.
In order to promote energy conservation or efficient use of energy
in industries, we may think of three different steps or levels:
...........Step 1: Active or efficient
in-house management of energy efficiency through maintenance and
housekeeping measures involves no or only very minimal investments.
...........Step 2: Replacement of
selected equipment, which may require medium-size investments.
...........Step 3: Modification of
entire manufacturing processes which may require large scale investments.
Active and efficient in-house energy management involves:
establishment of in-house energy management committees or
of energy managers;
safety issues; and
of operational efficiency.
of energy efficiency by replacement of selected equipment involving
medium-size investment costs may be through :
waste heat recovery;
control of furnaces;
of electricity and process heat; and
improvement of heat exchangers.
Major industrial process modifications involving large scale investment
or improvements in advanced process controls;
of gas pressure recovery generators (in the iron and steel
installation of waste heat recovery generators (in the cement
change from "wet" to "dry" process (in cement industry).
is a brief listing of some of the main energy efficiency technologies
In combustion equipment, fuel efficiency can be improved through
(a) automatic combustion control systems; (b) efficient burners;
(c) flue gas heat recovery.
In heat utilization and heat recovery facilities, energy efficiency
can be improved through (a) high efficiency heat exchangers; (b)
improvement of heat insulation; (c) improved coating on the inside
of furnaces; (d) micro-wave heating; (e) heat pattern control; (f)
high efficiency steam traps; and (g) heat pumps. The use of co-generation
technology and absorption chillers are also important energy efficiency
improvement measures in industry.
1.2 Assessed Energy Efficiency Potentials
use of electricity in industry can be achieved through high-efficiency
motors, high-efficiency transformers; variable speed controls; automatic
power factor controls; and demand control. In some industries, modifications
or improvements in lighting also offer considerable energy savings.
Efficient lighting facilities include utilization of high pressure
sodium lamps; metal halide lamps and automatic lighting control.
Several recent studies that have assessed the technical potentials
of energy efficiency improvements in some of the energy intensive
sub-sectors concluded that energy savings of up to 30, 40 or even
50 per cent are technically possible in many industries and many
countries. Not all energy savings that are technically possible
are also economically viable. However, if it is assumed that approximately
half of the fore mentioned saving potentials are both technically
and financially sound, then comprehensive saving and conservative
potentials could be realized.
Barriers to energy efficiency investments
The fact that huge potentials for energy efficiency improvements
exist but remain unused obviously indicates that there are barriers
to the implementation of such measures.
The two major types of barriers include those that are related
to or have a bearing on the assessed profitability of an investment,
and other barriers, which may include barriers of a more of psychological
Some factors affecting the profitability of energy efficiency
investments are explained in detail below.
Pay-back period criterion
Considerable number of studies have dealt with the question of
how much profit investors are looking for before making an investment
decision. Most of such studies suggest that energy efficiency
investments that can be recovered in a short period of time are
likely to be supported and implemented by management. On the other
hand, investments which require five years or longer as a pay-back
period may get the approval of very few managers only. As it stands,
most energy efficiency retrofit projects require comparatively
longer period to recover the investment costs and are therefore
not regarded as "high priority" issues "requiring urgent action".
Subsidized energy prices
many countries, particularly in developing countries, energy prices
often do not reflect the real and full costs of energy, as energy
supply establishments are often quasi-government entities and
thus receive direct or indirect subsidization. Energy pricing
policies obviously have an immediate bearing on the viability
of energy efficiency investments. In countries, in which energy
prices are subsidized, under-investment in energy efficiency occurs.
Capital availability, capital costs, uncertainty and risks
availability, capital costs, uncertainty and risks are further
important factors, which directly determine the feasibility of
energy efficiency investments. Developing country investors procuring
equipment from industrialized countries may have to bear the foreign
exchange risks during any loan repayment period.
Information, transaction costs and limitations in access
to foreign currency
In many countries, access to and relative costs of external financing
are an important barrier preventing potential investments. Information
and transaction costs must also be taken into consideration as
they are often important impediments to energy efficiency investments.
In some countries, access to foreign currency is controlled or
restricted. In these countries the import of energy efficient
technologies may not be a viable option.
Possible disruption of production and the related "transition
Implementation of any measure of industrial manufacturing process
modification may imply a temporary halt to production. Factory
managers may prefer to avert such extra costs or complications.
Unstable economy with high inflation and unstable exchange
rates and taxation
In some developing countries direct or indirect taxation is sometimes
high, especially for imported goods. High taxes can increase the
first cost differentials between efficient and inefficient products,
and thus add further disincentive to energy efficiency investments.
Lack of skilled personnel or energy managers
Lack of human resources development in the area of energy efficiency
affects energy conservation related activities in industries,
especially in small scale industries of the developing countries.
"Invisibility" of the impacts of energy efficiency measures
The rate of return on energy efficiency investments is often seen
as too low and their influence on product cost or operational
expenses may be regarded as marginal. Investors are often observed
to prefer items that increase the quality of the product, increase
productivity or contribute to comfort. Vendors of energy efficient
technologies face the problem that energy savings cannot always
be easily measured. The "invisibility" of the impacts of energy
efficiency measures makes it sometimes difficult for vendors to
convince their potential clients in the industrial sector.
General aversion of perceived risks
Finally, there are also psychological factors affecting investment
decisions on energy efficiency. These aspects include 'general
aversion of perceived risks' involved in 'unknown', 'new' or 'not
yet sufficiently proven' technologies.
Policy options for promotion of energy efficiency investments
The main policy options to promote energy efficiency in general
and energy efficiency investments will include some of the following:
Markets are a powerful and fundamental force in wide-scale implementation
of energy efficiency. Subsidies that depress prices of energy
can provide a significant disincentive for energy efficiency investments.
The removal of this barrier can be seen as an important step towards
creating an investment climate in which energy efficiency can
Optional economic instruments
have at their disposal a variety of instruments such as tax credits
or subsidized or low-interest loans through which energy efficiency
improvements can be promoted. Part three of this publication presents
several country studies that demonstrate the use of economic instruments
for promotion of energy efficiency.
addition to the economic instruments, there are also a variety
of other tools for the promotion of energy efficiency. These other
tools include regulatory measures, such as energy conservation
laws, prescribing mandatory or voluntary minimum measures for
efficient energy management in industries and minimum energy efficiency
standards. Another tool to promote energy efficiency without mandatory
regulations are "voluntary agreements". Furthermore, emission
controls or environmental standards may also be found to "enforce"
some forms of energy efficiency investments.
Information and educational programmes
Programmes such as energy manager training or training in energy
audits have a leading role in promoting energy efficiency investments
the long term perspective.
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