mgi developing country energy perspective

8/8/2019 MGI Developing Country Energy Perspective

1/45

MKie G Iie

Fueling sustainable development:The energy productivity solution

October 2008


2/45

MKie G Iie

The McKinsey Global Institute (MGI), ounded in 1990, is McKinsey &

Companys economics research arm. MGIs mission is to help business

and government leaders develop a deeper understanding o the evolution

o the global economy and provide a act-base that contributes to decision

making on critical management and policy issues.

MGIs research is a unique combination o two disciplines: economics and

management. By integrating these two perspectives, MGI is able to gain

insights into the microeconomic underpinnings o the broad trends shaping

the global economy. MGI has utilized this micro-to-macro approach in

research covering more than 15 countries and 28 industry sectors, on topics

that include productivity, global economic integration, oshoring, capital

markets, health care, energy, demographics, and consumer demand.

MGIs research is conducted by a group o ull-time MGI ellows based inoces in San Francisco, Washington, DC, London, and Shanghai and led

by MGIs director, Diana Farrell. MGI project teams also include consultants

drawn rom McKinseys oces around the world and are supported by

McKinseys network o industry and management experts and worldwide

partners. In addition, MGI teams work with leading economists, including

Nobel laureates and policy experts, who act as advisors to MGI projects.

MGIs research is unded by the partners o McKinsey & Company and not

commissioned by any business, government, or other institution. Further

inormation about MGI and copies o MGIs published reports can be ound

at www.mckinsey.com/mgi.

Copyright McKinsey & Company 2008


3/45

Fueling sustainable development:The energy productivity solution

Diana Farrell

Jaana RemesDominic Charles

McKinsey Global Institute

October 2008


4/45

4

Executive summaryEnergy is a mounting policy and business concern in many developing countries

today. Economic growth is boosting demand and imposing strain on existing

energy-supply inrastructures, leading to brownouts and blackouts as witnessed

recently in South Arica, Brazil, and Venezuela. High uel prices are putting

pressure on consumers and businesses and widening trade decits among

energy importers, causing political turbulence and economic uncertainty.

Governments are struggling to nd ways to secure sucient energy supplies

to meet growing demand, to nance the construction o capacity to deliver that

supply, and to contain the rising cost o uel subsidies.

The most cost-eective way to address these energy supply concerns is on

the demand side: through improving energy productivitythe level o output an

economy can achieve rom the energy it consumes. Research by the McKinsey

Global Institute (MGI) nds that by adopting existing energy-ecient technologies

that pay or themselves in uture energy savings, developing countries could

reduce their energy demand growth by more than halrom 3.4 to 1.4 percent

annually in the next 12 yearsand reduce their energy consumption in 2020by 22 percent rom the projected levels. Because o its positive returns, energy

eciency is the cheapest orm o new energy we have, as Chevron CEO David

OReilly has remarked.

Higher energy productivity is a win-win or developing economies and their

households and businesses. By improving demand-side eciency, countries

can cut down uel imports and scale back the expansion o the energy-supply

inrastructure that will otherwise be necessaryreleasing resources to spend

elsewhere. Higher eciency would also reduce energy costs to businesses

and consumers: MGI estimates that lower energy consumption would deliver


5/45

5

cost savings that could reach $600 billion annually by 2020. The investmentrequired to capture the energy productivity opportunity among end users would

be some $90 billion annually or the next 12 yearsonly around hal what these

economies would otherwise need to spend on the energy inrastructure.

Public policy can play a vital enabling role, encouraging consumers and

businesses to capture the benets o higher energy productivity. The dismantling

or reducing the infuence o todays disincentives to ecient energyuel

subsidies includedis a vital rst step; putting in place eective incentives is

the second. With supportive public policy, companies in developing economies

have a rich opportunity to innovate and create new markets or energy-ecient

goods and serviceswith the potential to export these into the worlds rapidly

growing green-solutions markets.

Time is o the essence. With many developing countries building capital stock

both on a huge scale and at a rapid pace, there is a unique opportunity to ensure

that this stock has an economically optimal level o energy eciency, thereby

locking in lower energy consumption or a generation. Developing countries that

can pull this o will make substantial progress toward their dual aims o energy

security and sustained economic growth.


6/45

6

Fueling sustainabledevelopment: The energy

productivity solutionIn many developing economies, energy is a growing concern among businesses,

governments, and consumers alike. The main worry is that energy-supply

inrastructure will not keep up with increasing demand, becoming a constraint

to growth. The conditions in global energy markets are aggravating the situation,

with high and volatile prices and supply riskswhether rom weather-related

shocks, political uncertainty, or evolving greenhouse gas (GHG) regulation.

Governments and businesses are seeking ways to resolve the challenges

they ace and ensure that insucient energy supplies will not halt sustained

growth.

Improving energy productivitythe level o output we get rom the energy we

consumeis a way to address all o these energy-related concerns (see What

is energy productivity?).1 By choosing more ecient cars and appliances,

improving insulation in buildings, and choosing lower-energy-consuming lighting

and production technologies, developing countries can cut growth in their energy

demand by more than hal over the next 12 yearsrom 3.4 to 1.4 percent per

year.2

Scaling back energy demand growth to this extent would translate into

1 Curbing global energy demand growth: The energy productivity opportunity, McKinsey GlobalInstitute, May 2007; and The case or investing in energy productivity, McKinsey Global

Institute, February 2008 (both available or ree download at www.mckinsey.com/mgi).

2 In this report, the developing countries that we analyze are China; Russia and Eastern

Europe (Armenia, Azerbaijan, Belarus, Bulgaria, Georgia, Kazakhstan, Romania, Russia,

Turkmenistan, Ukraine, Uzbekistan); Latin America (Argentina, Bolivia, Brazil, Chile, Colombia,

Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras,Jamaica, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, Venezuela);

Southeast Asia (Australia, Bangladesh, Indonesia, Malaysia, Myanmar, Nepal, New Zealand,

Philippines, Singapore, Sri Lanka, Thailand, Vietnam); Middle East (Bahrain, Iraq, Iran,

Kuwait, Kyrgyzstan, Oman, Pakistan, Qatar, Saudi Arabia, Syria, Tajikistan, UAE, Yemen);India; Arica (Angola, Benin, Cameroon, Congo, Cte dIvoire., Democratic Republic o Congo,

Eritrea, Ethiopia, Gabon, Ghana, Kenya, Mozambique, Namibia, Senegal, South Arica,Sudan, Togo, Tanzania, Zambia, and Zimbabwe).


7/45

77

2020 energy demand in these regions being 22 percent lower than it wouldotherwise have beenan abatement that would be larger than the entire energy

consumption o China today (Exhibit 1).

The economic case or improving demand-side eciency is very strong. The

solutions included in our assessment all generate an internal rate o return

(IRR) o 10 percent or more in lower energy costs. So rather than costing money,

investing in energy productivity generates energy savings that could ramp up

to $600 billion annually by 2020 across all developing regions. And ar rom

compromising the legitimate aspirations o consumers in developing countries

or greater comort and convenience, the more productive use o energy reduces

their energy costs and leaves more money to spend elsewhere.

Exii 1

Developing countries could cut energy demand growth by

more than one half through higher energy productivity

74

42

26

26

23

23

16

231

2005 energy

demand

138

32

106

52

14

38

42

31

36

30

45

30

39

29

27

22

14

380

2020 energy demand

base case

510

711

93

Demand abatement

opportunity fromenergy productivity

investment

Potential lower energy

demand in 2020

287

China

Russia

and EasternEurope

Latin America

SoutheastAsia

Middle East

Africa

India

End-use energy demand by region

QBTUsCompoundannual growthrate, %200520,base case

Compoundannual growthrate, %, 200520,with energyproductivitycapture

+3.4 +1.4

+4.2 +2.4

+1.4 -0.7

+3.2 +1.1

+2.3 +0.9

+4.5 +1.8

+3.6 +1.6

+3.7 +2.3

Potential 22%decline in energydemand in 2020from the base case

larger thantodays total energydemand from China

Source: McKinsey Global Institute analysis


8/45

8

W i eeg dii?

Any successul program that addresses todays mounting energy-related

concerns needs to be able to rein in energy consumption without limiting

economic growth. Higher energy productivity is the most cost-eective way

to achieve this goal.

Like labor or capital productivity, energy productivity measures the output

and quality o goods and services generated with a given set o inputs. MGI

measures energy productivity as the ratio o value added to energy inputs,

which is $79 billion o GDP per quadrillion British thermal units (QBTU) o

energy inputs globally. Energy productivity is the inverse o the energy intensity

o GDP, measured as a ratio o energy inputs to GDP. This currently stands at

12,600 BTUs o energy consumed per dollar o output globally.

Energy productivity provides an overarching ramework or understanding the

evolving relationships between energy demand and economic growth. Higher

energy productivity can be achieved either by higher energy eciency that

reduces the energy consumed to produce the same level o energy services

(e.g., a more ecient bulb produces the same light output or less energy

input), or by increasing the quantity or quality o economic output produced by

the same level o energy services (e.g., providing higher value-added services

in the same oce building).3

Investments in greater energy productivity would reduce the supply capacity

that these countries would otherwise need to build to keep up with growing

demand. And because energy eciency improvements require less capital

than new power plants or other energy-supply investments, improving energy

productivity also cuts down on energy-related capital needs. The InternationalEnergy Agency (IEA) estimates that, on average, each additional $1 spent on

more ecient electrical equipment, appliances, and buildings avoids more than

$2 in investment in electricity supply. According to MGI analysis, developing

countries could productively invest some $90 billion annually over the next 12

years on energy eciency improvements with positive returns. The IEA analysis

suggests that it would take almost twice as much investment$2 trillion over

12 yearsto expand the supply capacity or the additional 22 percent o energy

consumption that we will see i developing regions ail to improve their energy

3 We use the term energy eciency to reer specically to the technical eciency o

translating energy inputs into energy services.


9/45

9

productivity.4

Avoiding this expenditure on energy supply is particularly vitalor those developing economies that ace capital constraints on their growth

and have a pressing need or investment in other areas such as inrastructure,

health, and education.

Perhaps most importantly, a ocus on improving energy productivity sets

developing economies on a more sustainable growth path that will be more

cost-competitive in global markets, less dependent on imported ossil uels,

and less susceptible to uture energy price or supply shocks. Reducing waste

in domestic energy consumption similarly benets energy-supplying nations by

directly expanding energy-export capacity. More ecient consumption o energy

also reduces local pollution, an increasing challenge particularly in growing

urban areas. And by cutting down on energy-related emissions o global GHGs,

developing countries reduce the impact rom any GHG taxes imposed on their

exports and mitigate international political pressure around the issue o climate

change (see Energy productivity is the most cost-eective way to reduce carbon

emissions).

Many developing countries are already starting to make energy eciency a

part o their energy policy. China and Vietnam have included explicit energy

productivity targets in their development plans; Russia and Ghana are building

standard-setting capabilities; and Ecuador and India, among others, are making

public buildings more energy ecient. And with higher energy costs, businesses

are seeing the benets o becoming energy-lean in their operations.

Yet much more remains to be doneand meeting the challenge is a matter

o some urgency. Rapid growth in developing countries means that these

economies are installing sizable volumes o new capital stock. Every new

building or industrial plant built without the optimal level o energy eciency is

an opportunity lost to leaprog to higher energy productivity and lock in lower

energy consumption or decades to come. Also, the emerging global market or

green products and services is still at an early stage. I their domestic markets

encourage innovation in energy-ecient solutions, pioneering companies rom

lower-cost developing regions have a unique opportunity to grow into major

global players beore the market matures.

4 World Energy Outlook, IEA, 2007.


10/45

10

Eeg dii i e m -eeie w ede

emii

Increasing energy productivity is the most cost-eective way globally to

reduce GHG emissions, representing roughly 70 percent o the positive-return

opportunities identied in McKinseys work on the global carbon-abatement

cost curve.5

Developing countries account or two-thirds o the negative-cost energy

productivity opportunity, or two main reasons. First, upgrading their rapidly

expanding capital stock to higher energy eciency costs less than retrottingalready existing plants or equipment. For example, increasing the eciency o

a new power plant by choosing more ecient equipment typically requires less

incremental capital than replacing or retrotting already existing equipment.

And second, lower labor expenses reduce costs o installation and some

other eciency investments. As a result, boosting the energy productivity o

developing countries economies alone has the potential to reduce global CO2

emissions by 15 percent in 2020, making it critical rom the global climate-

change perspective (Exhibit 2). For developing countries themselves, lower GHG

5 See A cost curve or greenhouse gas reduction, The McKinsey Quarterly, February 2007

(www.mckinseyquarterly.com); What countries can do about cutting carbon emissions, TheMcKinsey Quarterly, April 2008 (www.mckinseyquarterly.com); and The carbon productivity

challenge: Curbing climate change and sustaining economic growth, McKinsey Global Institute,July 2008 (www.mckinsey.com/mgi).

Exii 2

Developing regions represent 65 percent of the positive-return energy

productivity opportunities to reduce greenhouse-gas emissions

Developing regions

* United States and Canada.


North America*

1.3 Europe

0.4Japan and

South Korea

2.3

China

0.8Russia and

Eastern Europe

0.7Middle East

0.6India

0.5

Latin America 0.5

Southeast Asia0.2

Africa

1.6

End-use CO2 emissions abatement from higher energy

productivity in 2020 by region

Billion tonnes


11/45

11

emissions will reduce their exposure to the impact o any GHG taxes imposed

on their exports to other regionsan increasing concern particularly or

exports o manuactured products and raw materials.

In the ollowing pages, we present our microeconomic analyses o energy

end-use segments to assess energy demand growth prospects in developing

countries to 2020. We then describe the energy productivity opportunity across

sectors and regions and discuss how timely action is necessary i developing

countries are to capture the ull potential that is available. Lastly, we examine

todays barriers to higher energy productivity and suggest ways or governments,

businesses, and international organizations to overcome these hurdles and to

capture the attractive opportunities that are waiting to be seized.

DEvElopInG countrIEs account or just ovEr hal o Global

EnErGy DEManD toDay

Developing countries account or 51 percent o global energy demand today.

China consumes 16 percent o the worldwide total while Russia and Eastern

Europe account or another 9 percent. Latin America, Asia, Arica, and the MiddleEast collectively represent 26 percent. With the exception o Russia and Eastern

Europe, per capita energy consumption in developing regions is signicantly

lower than in developed regions (Exhibit 3).

Compared with developed economies, the industrial sector consumes a higher

share o energy in developing regions. This refects a lower share o servicesand

thus commercial-sector energy consumptionas well as the act that demand

or household transportation uels also tends to increase with income. Notable

exceptions to the pattern are Arica and India, where low income levels limit

energy consumption outside the residential sector, as well as the Middle East

and Latin America where subsidized uel prices boost transportation demand

(Exhibit 4).

The uel mix across regions varies widely, refecting dierent stages o economic

development as well as local energy endowments. In Arica and India, biomass

mostly wood and dung used or cooking and heatingstill represents one-hal

and one-third respectively o overall energy consumption. In the Middle East and

Latin America, local oil production and subsidized prices explain the high share


12/45

12

Exii 3

Exii 4

Developing countries display wide differences in fuel use


Energy demand 2005

Percent

23

13

24 2027 7

9

41 39 44 47 49 5061 63

74

45

7

25

Middle

East

25

China

7

21

Russia and

Eastern

Europe

Industrial

Transport

India

6

17

Latin

America

7

20

Developed

8

25

South-

east Asia

4

Africa

15

41

Commercial

Residential

Developing countries represent just over half of global

energy consumption today

Source: International Energy Agency (IEA)

Primary energy demand 2005

20

28

34

48

56

68

114

146

154

318

Japan and

South Korea

Russia and

Eastern Europe

Europe

Middle East

China

Latin America

Southeast Asia

Africa

India

North America

Primary energy demand per capitaMillion BTUs per capita

4 55

6

6

9

167

19

23North

America

Europe

Japan and

South KoreaChina

Russia andEastern

Europe

Latin America

Southeast Asia

Middle East

IndiaAfrica

Overall demandPercent

100% = 450 QBTUs


13/45

13

o petroleum products, refecting higher uel consumption and a heavier relianceon oil in the industrial sector. Energy endowments also explain the high share o

natural gas in Russia and Eastern Europe and o coal in China (Exhibit 5).

There are large dierences in energy productivity among developing countries at

similar levels o income (Exhibit 6). Three structural actors explain roughly hal

o the variation. In order o importance, these are energy policies, the structure

o an economy, and the climate (Exhibit 7). Policy-related actorssubsidized

or taxed uel and electricity prices, and the level o corruption in a particular

country or regionexplain a quarter o the variance; energy subsidies tend to

reduce energy productivity, and taxes increase it. The structure o an economy

explains another 21 percent; countries with large manuacturing sectors tend to

consume more energy and have lower energy productivity. Climate contributes

another 13 percent; the more extreme the weather, the more heating and/or

cooling is necessary, and the more energy is required per unit o GDP.

However, the act remains that less than 50 percent o the energy productivity

dierences that exist are due to these structural variations.6 This strongly

6 Some o the remaining variance refects within-sector dierences in economicactivity that we are unable to detect with the two-digit SIC code sector variablesincluded in the analysis.

Exii 5

Biomass remains a significant share of energy in developing

regions reducing overall efficiency

40

20

53

20

4840

2414

2151

41

24

19

7

20

18

58

9

17

36

23

6

14 15 2233

56

1713

63

Russia and

EasternEurope

Developed

0

Middle East Africa

Biomass

Other

3

China

4 4

Latin

America

1

Coal

Gas

Petroleum

India

3

3

Southeast

Asia

1


2005 primary energy demand by fuel mix

Percent


14/45

14

Energy productivity varies widely among countries with similar levels of

economic development

0

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.180.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

0.38

0.40

0.42

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

Ireland

Italy Japan

Korea

Mexico NetherlandsNew ZealandNorway

Poland

Portugal

Spain

Sweden

Switzerland

Turkey United Kingdom

United States

Argentina

Bolivia

Brazil

Bulgaria

Chile

Peoples Republic of China

Colombia Costa Rica

Ecuador

Egypt

Honduras

India

Indonesia

Israel

Jamaica

Jordan

Kenya

Kuwait

Malaysia

Morocco

Nigeria

Pakistan

Panama

Peru

Philippines

Romania

Russia

Saudi Arabia

Senegal

Singapore

South Africa Australia

Thailand

Tunisia

Ukraine

Uruguay

Venezuela

Vietnam

Zimbabwe

Per capita GDP$PPP/person

Austria

Sri Lanka

Belgium

CanadaCzech Republic

Denmark

Finland

France

Germany

Greece

Hungary

Energy productivityGDP $PPP/thousand BTU

0.15

is world

weighted

average

R^2 of (6)%

Source: IEA; Global Insight; McKinsey Global Institute analysis

Exii 6

Policies and economic structure explain roughly half of the energy

productivity variation among developing countries

43

57 Explained

Unexplained

Variation in industry energy productivity

among developing countries,* 2005Percent

Type of contribution to variation in industry

energy productivity**Percent

21

23

57

13

Totalexplained

Climate Industrialstructure

Policies

Fixed Flexible

* 27 developing countries (


15/45

15

suggests that most countries have room to improve their energy productivity byadopting best practices developed elsewhere.

by 2020, EnErGy DEManD roM DEvElopInG EconoMIEs WIll

havE GroWn by 65 pErcEnt

Energy demand in developing countries will continue to increase at a rapid rate

in line with ast GDP growth. Under the current policy environment, developing

regions will generate 80 percent o global energy demand growth to 2020,

raising their energy demand by 65 percent (Exhibit 8). By 2020, these countrieswill together represent 60 percent o total global energy consumption.7 However,

measured on a per capita basis, these countries energy consumption will still

be less than 40 percent o that o developed regions by 2020.

China alone represents 34 percent o the global energy demand growth that

MGI projects to 2020. Even with the signicant energy eciency improvements

expected under current policies in China, continuing industrialization and quickly

7 MGIs base case assumes global GDP growth o 3.2 percent annually to 2020 andan oil price o $50 a barrel.

Exii 8

Developing regions will contribute 80 percent of global energy demand

growth to 2020

21

16

16

1110

10

23

12

14964

41

AfricaLatin

America

Developing

regions

Developed

regions

7

India Total

190

PacificRussia

and

Eastern

Europe

Europe North

America

South-

east

Asia

China Middle

East


End-use energy demand growth, 200520

QBTUs


16/45

16

expanding demand rom the countrys growing ranks o middle-class consumerswill uel rapid energy demand growth (see Chinas energy demand is set to

double by 2020).

ci eeg demd i e de 2020

With current policies, Chinas energy demand will grow at 4.2 percent annually

to 2020, almost doubling rom 74 QBTUs in 2005 to 138 QBTUs in 2020.

Chinas industrial energy demand will grow at 3.5 percent per year to 2020,

aster than worldwide growth o 2.2 percent.8

As a result, Chinas energydemand will account or 26 percent o global industrial energy demand in

the next 12 years. With strong GDP growth, demand or basic materials is

expected to soar. For instance, Chinas steel demand will grow by 4.4 percent

annually by 2020, with the country consuming 48 percent o global steel. As

a result, energy demand rom the steel industry will grow even aster at 5.1

percent annually. Despite continuing improvements in energy eciency, the

average energy intensity o steel production will increase as scarcity o scrap

steel will lead to more energy-intensive integrated steelmaking.

But it is not just Chinas rapid industrialization that will boost energy

consumption. Chinas residential energy demand will grow at 4.4 percent per

year over the next 12 years. Chinas growing and increasingly prosperous

middle class already aspires to own more spacious houses and new, larger

appliances, and higher incomes will reinorce this trend. Chinas foor space

per capita today is 25 square meters, at the low end o the global spectrum.

However, when housing privatization began to gather pace ater 1995, per

capita foor space started to rise and is expected to hit 38 square meters in

2020.

The penetration o energy-consuming appliances will be an important

contributor to residential energy demand growth. As private-car ownership

soars, road transportation energy demand will grow by 6.4 percent per year in

MGIs base casetriple the pace o the global gure o 2.1 percent. Chinas

vehicle sales posted a compound annual growth rate (CAGR) o 8 percent

between 1995 and 2000, only to explode to 23 percent between 2000 and

2005. This strong growth is likely to continue. MGIs base case is that Chinas

8 Leaprogging to higher energy productivity in China, McKinsey Global Institute, July

2007 (www.mckinsey.com/mgi).


17/45

17

vehicle stock will grow by close to 10 percent per year to 2020, expanding

rom 25 million vehicles in 2003 to 120 million in 2020an increase o 350

percent.

Chinas commercial-sector energy demand is poised to grow by 6.3 percent

per year to nearly triple by 2020accounting or 40 percent o global

commercial-sector energy demand growth during this period. This robust

expansion in demand rom this source refects the increasing share o

services in Chinas economy as incomes rise. We expect commercial foor

space to expand by 4.8 percent per year by 2020 and, as a result, the

penetration o energy-consuming appliances will increase too. Commercial

buildings typically install basic heating and air conditioning when they are

rst constructed, and we expect space-heating penetration to increase rom

35 percent in 2000 to 55 percent in 2020. Other power-intensive appliances

and equipmentsuch as computers in oce buildings and advanced medical

equipment in hospitalswill then ollow.

Interestingly, India represents a much smaller share o energy demand growth

(8 percent o the global total) than China. There are three reasons or this.

First, India has a lower income level than China and thus a lower penetration

o energy-consuming appliances. Second, India is at an earlier stage in its

industrialization and has a lower share o heavy manuacturing, and its industry

thereore consumes less energy than industry in China. And third, a shit in

Indias uel mix rom biomass to more ecient electricity will act to mitigate

energy demand growth.

On the other hand, the Middle East will account or 11 percent o energy

demand by 2020, making it the second-largest contributor to the overall growth

in energy demand o developing countries. The $50 a barrel oil price assumed in

MGIs base case will boost the regions GDP growthat even higher oil prices,

the push to GDP growth will be even stronger. These countries energy-heavy

development strategies along with large energy subsidies to consumers will

continue to make growth highly energy intensive.

Latin America and Asia (not including China and India) will represent 8 percent and

5 percent respectively o overall growth in energy demand, with both industrial

and consumer end-use sectors driving expansion. Russia and Eastern Europe is

an exception among developing countries in that this region will witness slower


18/45

18

energy demand growth o 1.4 percent per year. This is due to the act that theseeconomies are shiting away rom the extremely energy-intensive and inecient

production o the Soviet era.

We do not expect the uel mix in developing countries to change much, the

residential sector being an exception to this trend as this sectors use o

biomass declines as electricity starts to take over. In India, or example, while

we expect overall energy demand growth o 3.6 percent annually, we project

growth in electricity demand at 5.2 percent. In itsel, ullling this demand or

electricity will be a signicant task as the trajectory o electricity demand implies

a tripling o installed capacity rom the current level o about 140 gigawatts.

This translates into an annual addition o 20 to 40 gigawatts, a ve- to tenold

increase on the 4 gigawatts per year o additional capacity put in place over the

past decade.9

In MGIs base case, the rapid acceleration o economic growth in developing

countries is one o the major causes or a speeding up o energy demand growth

over the next 15 years. However, changes in the GDP growth rate would impact

energy demand evolutionto a much greater degree than changes in oil prices.

Our research shows a substantial swing in energy demand growth between our

low- and high-growth scenarios (Exhibit 9).10 This swing is the equivalent o an

86-QBTU variation around our base-case demand orecast o 380 QBTUs o

energy demand in 2020. China and the Middle East together account or more

than 50 percent o this swing between the low- and high-growth scenarios.

Now take the impact o oil prices on energy demand growth. Here, the swing

between low- and high-price scenarios is only 8 QBTUs around our base-case

oil-price scenario o $50 a barrel. Oil at $30 a barrel decreases energy demand

growth by 7 QBTUs, while oil at $70 per barrel leaves global energy demand

virtually unchanged.

There are two reasons why the impact o oil prices on energy demand is so

small. First, changes in the oil price have an impact on only a small proportion

o the range o energy prices paid by end users. Coal prices dont necessarily

correlate with those o oil. In residential and commercial sectors, electricity and

gas prices are requently subject to regulation, and, thereore, changes in the oil

9 Powering India: The road to 2017, McKinsey & Company, June 2008 (www.mckinsey.com/

locations/india).

10 For China and India, our high- and low-GDP growth scenarios assume plus or minus 2

percent; or other developing economies, plus or minus 1 percent; and or developed

economies, plus or minus 0.5 percent.


19/45

19

price do not necessarily eed through to the prices charged to consumers and

businesses. Even in transportation sectors, many consumers are partly insulated

rom movements in the crude price. One-third o global uel consumption is

either subsidized or heavily taxed (Exhibit 10).

The other reason even high oil prices have such a limited eect on energy

demand is that these prices have two main eects that go in opposite directions

and thereore virtually cancel each other out. In road transportation sectors that

are not subject to major subsidies or tax breaks, high oil prices directly lower

energy demand. In the United States, or instance, MGIs projections show that

oil prices o about $70 a barrel result in uel demand being 15 percent lower than

it is at $30 a barrelthe equivalent o 2.5 million ewer barrels a day. However,

in oil-exporting countries in the Middle East, or example, high crude oil prices

have the opposite result. High oil prices accelerate GDP growth and thereore

energy demand. In addition, because energy prices are oten subsidized and

energy productivity is low, there is a very limited demand response even to very

high oil prices, urther reinorcing rapid energy demand growth.

High crude oil prices may not decrease or increase energy demand, but they dohave a signicant impact on the uel mix. Because oil and natural gas prices

GDP growth has a much stronger impact on energy demand

than the oil price

* At $30 per barrel oil price, substitution of coal with natural gas for power generation; with higher efficiency of gaspower plants, overall energy demand slightly decreasing over $50 per barrel scenario.


Oil-price scenarios

$/barrel

GDP-grow

thscenarios

Percent

30* 50 70

2.6

2.1

1.6

+49 +49

-7 +1

-38-37

+48

-37

Boundaryscenarios

Base case

380 QBTUs

2020 energy demand deviations from base case

QBTUs

Exii 9


20/45

20

paid by power companies tend to increase as oil prices rise, these energy

consumers have a greater incentive to shit to coal. The problem is that this

typically increases pollution and GHG emissions.

IMprovInG EnErGy proDuctIvIty coulD cut EnErGy DEManD

GroWth by MorE than hal

The good news is that there are large, economically attractive opportunities that

can signicantly reduce the rate o energy demand growth globally and in the

developing world in particular. MGI projects that, across all developing regions,capturing the energy productivity potential would cut energy demand growth

rom 3.4 to 1.4 percent annually. We base this estimate on the adoption o

existing energy-ecient technologies that pay or themselves in uture energy

savings, and on the removal o energy subsidies that discourage ecient energy

use.

Our research nds that there are energy productivity opportunities across all

the regions (Exhibit 11). Approximately 85 percent o the potential consists o

energy demand reduction rom adopting existing technologies that provide an

Exii 10

A large share of global fuel demand is insulated from the oil price by taxes

or subsidies, especially demand for diesel

Source: GTZ International Fuel prices 2005; McKinsey Global Institute analysis

Fully exposed

demand

19

35

11

3869

16

74

Gasoline Diesel

Gasoline

Diesel

Very high subsidies

126

126

Gasoline

Diesel

Very high subsidies

126

126

Gasoline

Diesel

Subsidies2753

2756

Gasoline

Diesel

Subsidies2753

2756

Gasoline

Diesel

Taxation

54118

5797

Gasoline

Diesel

Taxation

54118

5797

Gasoline

Diesel

Very high taxation

>119

>98

Gasoline

Diesel

Very high taxation

>119

>98

Breakdown of global demand by country fuel retail price

Cents per liter, percent, November 2004


21/45

21

IRR o 10 percent or more.11 These opportunities are available in all the major

energy end-use sectors.

Residential (22 percent o the opportunity).z Examples include very high-return

opportunities in more ecient appliances and equipment as well as in

compact fuorescent (CFL) and light-emitting diode (LED) lighting, and large,

but more capital-intensive, opportunities with longer payback periods in high-

eciency building shells. To capture these opportunities, developing regions

would need global incremental investment in the range o $21 billion annually

to 2020or a cumulative $13 billion per QBTU abated in 2020.

Commercial (9 percent).z There are signicant opportunities in commercial

buildings, largely in heating, cooling, and lighting. Yet because o the

higher initial eciency level in this sector, the average incremental capital

requirement to abate 1 QBTU o commercial-sector energy in 2020 is a

cumulative $16 billion in 2020.

Transport (5 percent).z While auto manuacturers are likely to adopt engine-

11 For a ull analysis o the energy productivity investment opportunities, see The case orinvesting in energy productivity, McKinsey Global Institute, February 2008 (www.mckinsey.

com/mgi).

* United States and Canada.


Developing regions represent 65 percent of the positive-return

opportunities to reduce energy demand

25

North America*

20 Europe

6Pacific

30

China

14

Middle East

14Russia and

Eastern Europe

11Latin America

10

India7

Southeast Asia6

Africa

End-use energy demand abatement in 2020 by region

QBTUs

Developing regions

Exii 11


22/45

22

related uel-economy improvements when oil prices are $50 a barrel orabove, some opportunities remain in reducing vehicle weight and size through

material substitution and vehicle redesign. Given the high cost o lightweight

materials such as aluminium or high-perormance composites relative to iron

and steel, the incremental capital requirements are larger than in the other

sectorscumulatively close to $18 billion per QBTU o energy abated in

2020.

Industrial (45 percent).z This is the largest area o potential with a broad array

o ragmented opportunities in steel, chemicals, aluminium, ood processing,

textiles, electronics, and many other industries. Yet this aggregate gure

consists o hundreds o smaller opportunities. These include large cross-

sector prospects such as combined heat and power (CHP) generation and

the optimization o motor-driven systems, as well as more sector-specic

opportunities such as liquid-membrane separation in chemicals or thin slab

casting in the steel industry. The global incremental investment required

to capture this opportunity is $58 billion per annumor a cumulative $19

billion per QBTU abated in 2020.

Power sector (20 percent).z Roughly two-thirds o the primary energy

consumed in electricity generation is lost during the generation process

itsel and during transportation to end users. With conversion eciencies

ranging rom less than 30 percent in older coal generators to 60 percent in

advanced combined-cycle gas turbines (CCGT), there are large opportunities

or reducing losses in both new and existing power generation plants.12 It

makes a big dierence whether the rapidly expanding electric power capacity

in many developing countries relies on high-eciency technologies such as

supercritical coal plants or advanced CCGTs. And in many regions, it makes

economic sense to replace inecient, old power capacity because uture

energy savings pay or the investment cost o new, more ecient equipment.

In Russia today, almost 40 percent o existing power capacity is already at

the end o its technical lietime, so that replacing these plants with new-

generation technologies makes economic sense. Lastly, large opportunities

exist to increase the eciency o the transmission system in order to reduce

associated losses.

Reducing excessive energy consumption in subsidized environments today

accounts or the remaining 15 percent o the total opportunity to boost energy

12 Conversion eciency reers to the ratio o electric power output to the energy inputs required

to generate it.


23/45

23

productivity (see Estimating the energy wasted because o subsidies).

Eimig e eeg wed ee idie

The IEA estimates that energy subsidies in non-OECD countries totaled

more than $250 billion annually in 2005more than the annual investment

required or electricity-supply inrastructure in these countries. This investment

in supply is likely to be even higher in the current environment because o

spiraling oil prices.13

Countries that subsidize transportation uels encourage driving and havevehicle feets with lower uel economy. As a result, these countries consume

up to twice the uel per vehicle as other countries at similar income levels

(Exhibit 12). And because a subsidy covers each unit o energy wasted as

well, the overall cost o such programs is substantial. For example, Iran spent

16 percent o its GDP in 2007 on energy subsidies. In Mexico, the estimated

cost o such subsidies reached 2 percent o GDP in 2008. MGI estimates

that reducing uel subsidies by 80 percent globally (largely in the Middle East,

Venezuela, and Mexico) would reduce global demand or road transportation

uel by 5 percentthe equivalent o shaving 2.5 million barrels per day o

overall uel demand.


Exii 12

Countries with fuel subsidies tend to have higher per capita

fuel consumption

Source: IEA; Global Insight

0

500

1,000

1,500

2,000

0 10 20 30 40 50

Bahrain

Indonesia

IranIraq

JordanLibya

Malaysia

Qatar

Saudi

Arabia

UAE

Venezuela

GDP at PPPThousand

Fuel consumption per capita, 2005


24/45

24

In the Russian residential sector, nonmarginal pricingor the zero marginal

costo gas or heating removes incentives or insulation and has led to

wasteul practices such as regulating room temperature by opening and

closing windows during the winter. We estimate that removing the current

subsidy on Russian gas alone would lead to 2 QBTUs in energy savings by

2020. Taking away kerosene subsidies in China and India and electricity

subsidies in Russia and India would also help reduce consumption. In

industrial segments, the major opportunities lie in removing energy subsidies

and policies that give preerential treatment to particular industries (e.g.,

power subsidies or avored industrial operations in Russia), and introducingcorporate-governance practices that create incentives to capture higher

energy productivity opportunities with positive returns (e.g., improving rening

conversion economics in Mexico). Together these represent an opportunity o

about 5 QBTUs by 2020.

We believe our assessment to be a relatively conservative estimate o the

overall potential available or developing countries. We have ocused on currently

available opportunities that do not account or technological innovations or

additional scale benets and learning that will accrue over time. Nor do we

assess the potential available rom comprehensive system redesignsan area

in which developing countries have a golden opportunity to implement more

radical step-changes during todays era o rapid capital expansion. With the

lower labor costs or, say, process design engineering and insulation installation,

we believe that pioneering companies in developing regions have an opportunity

to set standards ar above what is commercially available todayand reap

the economic benets (see Achieving more eciency or less investment).

aieig me efie e ieme

Average capital requirements or energy productivity investment across all

end-use sectors are some 35 percent lower in developing countries than

in developed regions. This largely refects lower labor costs, which act to

lower capital requirements both directly, or example, in labor-intensive plant

construction or the installation o equipment, as well as indirectly through

lower costs o locally produced inputs such as commodity materials and

equipment in the industrial sector, and in buildings. In areas where these cost

savings are particularly important, the gap can be much larger. For example,


25/45

25

in China the capital required per QBTU o energy abated in steel and pulp and

paper is more than 50 percent lower than in the United States.

The benets o lower capital costs not only reduce investments needed to

reach the same level o eciency but also expand the range o eciency

solutions that meet the 10 percent hurdle rate. Take the industrial sector

where developing regions represent 80 percent o the global total energy

productivity opportunity. This large share refects (1) the act that, with

expanding industrial capacity, developing countries can upgrade more

economically to higher-eciency technologies; (2) the remaining scope to

increase energy productivity in low-eciency legacy assets in a number o

regions; and (3) the act that lower labor costs reduce capital requirements

or many initiatives and make a broader set o actions on energy productivity

economically viable. In rening, or example, lower capital costs in China

make viable a number o opportunities that in the United States ail to meet

the hurdle rate o 10 percent IRR, in eect tripling the pool o economically

viable opportunities (Exhibit 13).

Exii 13

Pinch analysis (9.3/20.8)

Advanced control process systems (3.7/10.1)

Low-quality heat recovery (4.2/13.1)

Reduce fouling and corrosion (9.3/22.4)

Manage hot feeds (4.5/16.2)

Improve/replace boilers (5.3/12.1)

Lower capital costs in China push many refining initiatives over the 10

percent hurdle rate, expanding abatement potential

* The refining energy productivity opportunity is estimated to be 28 percent on average in other developing regions.


5.1

4.9

4.3

2.5

4.3

3.7

3.7

3.1

4.9

4.9

9.4

United

States

32.0

China

Improve steam

efficiency

Increase furnace

efficiency

Initiatives that are economic in China but not

in the United States*

United States IRR, percent / China IRR, percent

Abatement

Percent


26/45

26

InvEstInG In EnErGy proDuctIvIty brInGs larGE EconoMIc bEnEItsanD rEDucEs EXposurE to EnErGy-rElatED rIsKs

MGI has identied opportunities that oer returns o at least 10 percentand

considerably more in many cases. The average IRR across all these solutions is

17 percent, with lighting and appliance opportunities providing returns in excess

o 100 percent and paying back their initial investment in less than one year.

As we have noted, to capture all the opportunities in all end uses, developing

countries would need about $90 billion in incremental investment over the next

12 years. However, even by ocusing solely on the highest-return opportunities,

countries can achieve signicant energy savings with a raction o this overall

investment.

Far rom putting pressure on the economic development o these regions,

investing in energy eciency would generate large net economic benets. We

estimate that across all developing regions, the value o these savings would

ramp up to $600 billion by 2020or more i todays high energy prices prevail.

This translates into lower energy costs or businesses, consumers, and the

government and improves energy-related trade balanceseither by reducing

need or imports or by expanding export capacity. Higher energy productivityalso helps reduce demand-driven energy price pressure and reduces the risks

rom international energy price and supply shocks in the uture.

By lowering energy demand, higher energy productivity would also obviate

the need to spend so heavily on expanding developing regions energy supply

capacity. To meet the demand growth projected in MGIs base-case scenario,

energy supply will need to expand signicantly in all regions at a cost o some

$11 trillion.14 I developing countries were to capture the ull energy productivity

prize and cut their energy consumption by more than 90 QBTUs by 2020, they

would collectively save more than $2 trillion by avoiding investment in energy

supply. This is roughly twice the cumulative investment required to boost energy

productivity, representing a net decline in capital requirements o more than $1

trillion.

The resources that developing regions would save would then be available or

investment or expenditure elsewhereparticularly valuable in those developing

countries where access to capital is a constraint to growth today. For example,

in India, we estimate that annual supply-side savings could be in excess o



27/45

27

$14 billion in 2020greater than current government spending on health andeducation combined.15

So while there is a substantial opportunity to rein in growth in energy demand

across the world by embracing energy productivity as a goal, the potential in

developing countries is particularly attractive. These regions have a unique

opportunity to leaprog to more energy-ecient technologies and solutionsbut

they need to seize the potential urgently.

Rapid GDP growth in these countries means high investment rates on new

buildings, machinery, and equipment. As a result, more than hal o thecapital stock in many developing countries in 2020 will be built in the next

12 years. The energy eciency o the new capital stock will in turn determine

uture energy demandand its environmental impactor decades to come.

It is much more economic to incorporate higher energy eciency eatures

when installing new capital than to retrot at a later stage. This applies or

all solutions, whether implementing double, versus single, windows or

adopting new industrial-production technologies. For this reason, there

are large benets or developing countries to take action soon and install

higher-eciency capital during their rapid growth between now and 2020.

Many barrIErs to EnErGy proDuctIvIty rEMaIn

Despite the attractive economics o higher energy productivity, developing

countriesand those in the developed worldhave thus ar let much o the

potential on the table. The reason or this is that an array o policy distortions,

market ailures, and inormation barriers today stand in the way o consumers

and businesses seizing an economically attractive course o action (Exhibit

14).

Energy subsidies.z Subsidies on energy in many developing regions directly

discourage eciency by shielding energy users rom the true cost o the

energy they consume. As we have discussed, low energy prices encourage

waste among userswith large associated economic costs. Governments

tend to oer energy subsidies or legitimate political reasons. For instance,

the subsidized cost o cooking and heating uels can stem rom a desire to

15 Large allocations or education and welare, Economic Times, March 2,

2008 (http://economictimes.indiatimes.com/Features/Financial_Times/Large_allocations_or_education_and_welare/rssarticleshow/2829944.cms).


28/45

28

help the lowest-income segments o the population, while many oil-producingcountries cap transportation uel prices as a way to share the benets

accruing rom national energy resources. Many governments consider

access to electricity as a basic right and oer below-cost pricing to both

consumers and industry. However, holding energy prices below a market

level discourages the expansion o supply, and this can lead to shortages

and rationingand rationing tends to have the most direct negative impact

on the poor.

Market ailures and inormation barriers.z Even in markets where energy

prices broadly refect associated costs, a number o market ailures and

ineciencies restrict the adoption o energy-ecient solutions.16 In

developing economies, capital constraints are an impediment to upgrading

to more energy-ecient buildings, appliances, and equipment. Many low-

income households ace very high borrowing rates and simply cannot aord

to invest in more ecient equipment, even with large potential savings in

lower uture energy costs. In many cases, an individual who will not benet

16 For a synthesis o the research on the barriers to energy eciency, see The

Experience o Energy Efciency Policies and Programmes in IEA Countries: Learningrom the Critics, IEA, August 2005.

Exii 14

Distorting policies and market imperfections reduce the capture of energy

productivity opportunities

Examples

Fuel subsidies for transportation (e.g., Middle East)

Energy subsidies or nonmarginal pricing to households (e.g.,

Russian gas distribution)

Lack of financial incentives for public industries (e.g., China steel)

Households unaware of the cost of their energy choices and

often making choices based on nonfinancial factors

Fragmented energy costs unnoticed by companies

Appliance makers not adopting efficient materials and

technologies if consumers are unwilling to pay for them

Landlords and tenants opting for lower energy productivity when

benefits dont accrue to them

High hurdle rates in many commercial and industrial companies

Credit constraints for MUSH* and residential segments

* Municipalities, Universities, Schools, Hospitals.


Policy

distortions

Policy

distortions

Lack of

information

Lack of

information

Agency issuesAgency issues

Other factorsOther factors


29/45

29

rom the energy savings is the one making the investment decisions. Forexample, landlords are not inclined to make investments that benet their

tenants. Moreover, consumers are oten unaware o ways to become more

energy productive and tend to make choices based on nonnancial actors

such as convenience and comort.

Many companies in developing countries do not ace nancial or otherz

incentives that would catalyze them into taking complete advantage o the

opportunities to boost energy productivity. In some cases, government-

owned businesses lack the managerial incentives to capture eciency gains

(e.g., Mexican rening sector); in others, companies enjoy high levels o

other regulatory protection (e.g., until recently, the automotive industry in

many regions). In the absence o the requisite market pressure, improving

perormance and being more energy ecient is hard work or managers, and

companies simply orgo the opportunities. The small and ragmented nature

o energy costs in most operations tends to deter businesses rom capturing

the ull potential available. The absence o management incentives, capital

allocation practices, and a lack o skills also explains why many industrial

companies do not adopt economically viable energy-saving solutions.

Because changes in global oil prices do not typically translate into equally large

swings in consumer prices, as we have discussed, escalating oil prices alone

will not remove many o the barriers to higher energy productivity. In short,

even with oil prices at $100 a barrel or more, consumers and businesses may

well orgo the opportunity to boost energy productivity and reap its benets.

GovErnMEnts nEED to crEatE thE rIGht polIcy EnvIronMEnt or

hIGhEr EnErGy proDuctIvIty

There is much that governments canand shoulddo to overcome todays

barriers to higher energy productivity, creating an environment that rewards energy-

ecient choices and encourages innovation by consumers and businesses.

Governments need to shit the ocus o energy policies toward pushing demand-

side eciencya shit that we are beginning to see in many developing regions

(see Higher energy eciency is becoming a policy priority).


30/45

30

hige eeg efie i emig i ii

Governments in many developing countries have recently announced energy

demand-side management policies. China has committed itsel to a target

o reducing energy intensity by 20 percent by 2010, while Vietnam has set a

target o saving between 3 and 5 percent o the countrys energy consumption

in its ve-year plan rom 2007 to 2012.17 In an eort to promote energy

eciency, the government o Ecuador has introduced a program in 50 public

buildings.18 In India, the Bureau o Energy Eciency has joined orces with the

International Finance Corporation and the Alliance to Save Energy in a large-

scale eort to improve the energy eciency o municipal buildings.19 The

Indian government introduced an Energy Conservation Code or commercial

buildings in 2007 aimed at cutting their energy consumption by 25 to 40

percent.20

MGI highlights our areas that have the potential to support most eectively the

energy eciency agendas o developing world governments:

Reduce energy subsidies. Governments in developing countries need to reconsider

the energy subsidies that today discourage the ecient use o energy and in

some cases hinder a shit to more ecient uels. Not only do these subsidies

have signicant economic implications, but also they are not necessarily the

most eective policy tool to meeting the desired sociopolitical objectives.

We acknowledge that scaling back subsidies is raught with diculty. For one

thing, consumers and businesses have already made choices that lock in high

demand or subsidized uels, and reducing subsidies could potentially escalate

costs in the short term. Political resistance to losing energy subsidies can be

robust, as we have seen in Malaysia, Indonesia, and South Korea.21

17 Vietnam aims to save $8 billion by being more energy ecient,Asia Pulse, August 6, 2008.

18 Ecuadorian government launches energy eciency programme in public buildings,

Latin America News Digest, March 26, 2008.

19 IFC, Bureau o Energy Eciency, and Alliance to Save Energy promote municipal

energy eciency projects in India, States News Service, March 10, 2008.

20 Indian Business Insight, The Tribune, May 28, 2007.

21 Protests widen in Asia over uel costs: Truckers block ports as governments are

asked to help or quit, International Herald Tribune, June 14, 2008; Indonesiaraises its uel prices, The Wall Street Journal, May 24, 2008.


31/45

31

Nevertheless, there is a strong economic case or seeking to decouple incomesubsidy programs rom specic products or services. To ease a transition to

more ecient energy use, governments should consider providing nancing

or upgrading to more ecient capital and equipment, and use some o the

savings rom high energy prices to target poor segments o the population.

Other initiatives can achieve similar welare goalsat a lower costas energy

subsidies. For example, in Latin America and other countries, governments have

used conditional cash-transer programs to help reduce poverty, which can also

help compensate low-income households or high energy costs. Direct cash

payments that redistribute national oil revenues and boost household income

and national welareas we are seeing in Alaskaare another option. 22 These

programs have the additional benet that, rather than solely nancing inecient

energy consumption, they can generate broader multiplier eects in the economy

as additional income is spent on other products and services.

Reorm utility-company incentives. Utilities are typically rewarded or the volume

o electricity delivered, which encourages growth in electricity consumption rather

than energy eciency. Instead, regulators can encourage utilities to promote

energy eciency and reduce energy consumption among their customers. In

Thailand, the Electricity Generating Authority (EGAT) secured a mandate anddedicated nancing in 1993 or a Demand Side Management (DSM) program

ocusing on labeling o and inormation programs about electrical appliances.

By 2000, the program had already exceeded its electricity demand reduction

targets and yet had spent less than hal o the available unding. 23 Other policy

options that governments can introduce include white-certicate programs that

measure and reward progress toward achieving energy eciency targets, as

well as the adoption o technologies such as user-riendly smart metering to

help better manage household energy use patterns, and smart grids to reduce

transmission losses.

Improving transormation and distribution eciency within the electricity sector

itsel can radically increase energy productivity. In India, 35 percent o all

electricity is lost during transmission. Yet North Delhi Power Limited, a utility

established in 2002 as a joint venture between the Delhi government and Tata

22 Oil windall leads to $3,269 payout or Alaskans, Reuters News, September 5,

2008.

23 Thailand Promotion o Electrical Energy Efciency Project, World Bank GEF Post-

Implementation Impact Assessment, 2006 (http://www.egat.co.th/en/images/stories/pd/world_bank-post_evaluation_report.pd).


32/45

32

Power, has reduced its transmission losses to 18 percent and is installing smartgrid technologies aimed at enabling the company to urther cut losses to less

than 10 percent in three to seven years.

Set efciency standards or selected appliances and equipment. Government

eciency standards are an eective, low-cost way to coordinate a transition

to more ecient appliances, particularly white goods, consumer-electronics

products, vehicles, and lighting products. With the implementation o such

standards, economies o scale emerge and prices o energy-ecient products

typically decline to the level o the old, less ecient products. Instead o

regulating the use o specic technologies, standards are more eective i they

set targets or overall eciency, leaving the details o how to meet these targets

to innovations at the company level. Several governments have introduced

eciency standards across industries and in specic sectors as a orcing

mechanism toward higher energy eciency. Indonesia, or instance, has recently

adopted the United Nations technical regulation on auto energy eciency, and

China has introduced a rat o standards across sectors in the past ve years.

In Arica, Ghana has been a pioneer in establishing standards or household

appliances, and research shows that the countrys energy eciency standard

on air conditioners, or instance, will save Ghanaian consumers an average o$64 million per year on their energy bills and reduce CO

2emissions by some 2.8

million tonnes over 30 years.24

Encourage public-private partnerships in energy efciency. These partnerships

can help overcome barriers to energy eciency investments by creating new

ways o collaborating, nancing, or sharing the benets that accrue rom such

outlays. Innovation in this respect is likely to gather pace in uture years, but

thus ar three areas have yielded signicant results:

Inormation programs to increase awareness.z Many consumers dont realize

the extent o the energy savings that they would achieve as a result o investing

in higher energy eciency. Inormation campaigns and the introduction o

schemes on energy eciency labeling can help to ll this knowledge gap. In

China, or instance, Chongqing municipality has introduced an energy eciency

evaluation and labeling system or buildings.25 India has also initiated energy

24 AAGM: energy commission to enorce legislative instrument 1815, Ghanaian

Chronicle, March 27, 2007.

25 Chongqing initiates building energy eciency labeling system, China Industry DailyNews, February 15, 2008.


33/45

33

eciency ratings o building projects.26

South Arica mandates the labelingo appliances according to energy eciency.27 Singapore has made such

labels mandatory on air conditioners and rerigerators.28 Among the benets

o a well-established and clear labeling system is that it increases household

awareness o the economic benets o higher eciency and encourages

companies to oer more ecient products.

New ways o collaboration to improve building efciency.z To overcome some

o the inormation and agency barriers to higher energy productivity, some

governments have encouraged collaborations between energy-service

companies (ESCOs), mortgage companies, and utilities. These collaborations

draw in technical expertise, long-term nancing, and the capacity to tie

housing energy eciency to uture energy-cost packages. For example, the

Proesco program in Brazil helps nance energy eciency projects undertaken

by the countrys ESCOs.29

Public fnancing o private energy efciency investments.z Many households

and businesses in developing regions ace serious capital constraints,

which public nancing can help to overcome. In early 2008, China, which

manuactures 70 percent o the worlds light bulbs, announced very substantial

subsidies or the promotion o energy-ecient bulbs.30 Governments and

utilities in sub-Saharan Arica including in Uganda, Namibia, and Ghana have

been giving out ree CFL bulbs to the public.31 The Renewable Energy and

Energy Eciency Partnership (REEEP), a global public-private partnership,

nances the West Arica Modern Energy Fund. Overall, 44 percent o the

projects unded by the partnership promote energy eciency.32

26 India gets energy saving norms, Indian Business Insight, May 28, 2007.

27 Energy-eciency labelling will help consumers save electricity, LiquidArica, May

21, 2004.

28 What is the energy labelling scheme? Straits Times, March 14, 2008.

29 Brazil BNDES, BB to nance projects under Proesco programme, Latin America

New Digest, June 11, 2007.

30 China: government subsidizes energy-ecient light bulbs, Greenwire, April 25,

2008.

31 Regions governments look to save energy through distribution o ree CFL bulbs,

Global Insight Daily Analysis, November 5, 2007.32 For details o the partnerships activities, visit www.reeep.org.


34/45

34

While national governments play a vital role in setting a regulatory and public-policy backdrop that encourages the pursuit o higher energy productivity, smart

growth policies pursued by local governments on the ground can be highly

eective. Urban planning can have a signicant impact, and a number o major

and ast-growing cities in developing countries are demonstrating innovations

designed to abate energy consumption by increasing the eciency o its use

(see Smart planning in Chinas cities could have a large impact on energy

demand). Mexico City, or instance, has already replaced 3,000 taxis with

newer, more energy-ecient models and plans to have 10,000 taxis replaced

at higher eciency levels altogether, oering owners a subsidy o 20 percent o

the purchase price and nancing help or the rest.

sm ig i ci iie d e ge im eeg

demd

Chinas cities have an opportunity to abate their energy demand in 2025

by at least 20 percent i they drive toward higher energy productivity and

combine this eort with smart urban planning.33 MGI research nds that the

enorcement and wider deployment o building standards by Chinas cities

could save 3 QBTUs o 2025 energy demand; accelerating the adoption o

CFL or other energy-saving lighting devices could produce urther savings o

more than 3 QBTUs; and an even more aggressive build-out o ecient power

capacity than current plans could save another 2 QBTUs.

Promoting urban density, in itsel, is eective. By doing so, urban China could

cut 4 QBTUs o energy demand in the transportation end-use sector. Multiple

international studies have ound that petrol use varies as a unction o density

and that driving declines by between 20 and 30 percent or every doubling o

residential density. The key variables in these studiesresidential density,

nearby commercial areas, and good transit options, or instanceare

typically highly interrelated, suggesting that density alone is not enough to

deliver substantial savings but must be part o transit-oriented development.

Higher density together with smart planning could reduce vehicle ownership

in China by between 10 million and 30 million cars (although the number o

cars in aected cities would still grow to around 90 million even in the most

33 Preparing or Chinas urban billion, McKinsey Global Institute, summary published

March 2008 (www.mckinsey.com/mgi). The ull report will be published early in

2009.


35/45

35

aggressive reduction case).

City governments have the opportunity to urther abate energy demand and

reap major environmental benets through the use o alternative uels in

public feets o buses, taxis, and ocial cars. An aggressive replacement

programtaxis running hal and hal on compressed natural gas (CNG) and

hybrid, ocial feets being converted in ull to hybrid, and buses running

on a mixture o uelswould reduce Chinas urban transportation energy

demand by some 1.5 QBTUs by 2025. At the same time, this initiative could

reduce PM10

, NOx

, and CO emissions by about 10 percent compared with

levels today projected or 2025. Some Chinese cities are already leading

the wayChengdu, or instance, is aggressively converting its feets to

CNG. Action to increase the eciency o public transport is timely and vital

given building o mass-transit systems in Chinas cities on a huge scale. MGI

research nds that investment in urban transport will increase by our to six

times by 2025including more than 2 million new buses.

hIGhEr EnErGy proDuctIvIty Is a substantIal busInEss

opportunIty or coMpanIEs

Introducing public policies that incentivize and reward energy eciency is a

crucial rst step. However, businesses operating in dierent sectors are the

engine needed to exploit the ull energy productivity potentialand to nd

ways to innovate and expand the opportunities beyond those on the scene

today. Not only do companies have a substantial opportunity to secure energy

savings in their own operations, but they can also seek partnerships with the

public sector in their energy eciency eorts, as well as position themselves

or potentially lucrative new global markets in energy-ecient technologies and

green solutions. Some companies rom developing regions are already proving

to be pioneers in this regard, but there is potential or more players to emerge

as new champions.

Raise corporate standards or energy efciency. In todays high energy-price

environment, energy costs in themselves are proving to be a source o competitive

disadvantage or some companies. Furthermore, the risk o GHG-related taxes

being imposed on exports is higher or the least energy-ecient competitors.

In many cases, this is sucient motivation or senior management to ocus on

energy eciency, thereby reducing their companies energy consumption and


36/45

36

costs (see Examples o energy eciency programs introduced in companies).In the case o state-owned enterprises and other nonmarket institutions,

including energy productivity in perormance evaluations is another optionan

approach that we are already seeing in China. As discussed earlier, because o

the rapid expansion o industrial and electric power capacity in many regions,

developing countries have a unique opportunity not only to adopt the latest

available energy-ecient technologies but also to leaprog beyond them to even

higher levels o energy eciency.

Exme eeg efie gm ided i mie

Many companies in developing countries are embracing opportunities to save

on their energy costs by boosting energy eciency. In Thailand, or instance,

the Central Food Retail Company, operator o Tops supermarkets, plans to

modernize the energy eciency o its outlets by 2009.34 In Bahrain, Amwaj

Gateway has ormed a joint venture with Energy Management Services (EMS)

to introduce green building solutions in its developments.35 In Brazil, Ampla

Energia is investing $6.7 million in energy eciency projects in 2008.36 In

Russia, Lukoil is conducting energy audits o its subsidiaries.37 Ericsson,

the communications company, has recently received an award in China or

its innovations in the area o energy eciency. One such innovation is the

Ericsson Tower Tube, a new way o designing radio base stations that cuts

energy consumption by 40 percent and CO2

emissions by 30 percent. In

India, the Birla Cement Corporation has been one o a number o companies

that have improved energy eciency through the retrotting o plants and

improved operational control and optimization.38

Create and capitalize on new markets in energy efciency.Beyond reducing energy

costs, energy eciency creates revenue-generating business opportunities.

Companies can use energy eciency to strengthen their position in their home

34 Thailand: Central Food Retail Co. moves to increase energy eciency at Tops

supermarkets, Thai News Service, March 13, 2008.

35 Amwaj goes green, Mist News, June 18, 2007.

36 Brazil Ampla to invest $6.7 million in energy eciency projects in 2008, LatinAmerica News Digest, February 21, 2008.

37 LUKOIL implements energy savings program, RIA Oreanda News, April 18, 2007.

38 Cement cos energy consumption seen alling, Business Line (The Hindu), April 21,2008.


37/45

37

market and also leverage their know-how in other regions o the world, dependingon local market conditions and regulations. We have identied seven areas o

commercial opportunity in energy eciency that companies should examine:

building-technology products, electrical devices and other household equipment,

transportation uel eciency, transparency-creating products, customized

solutions, energy services, and nancing energy eciency investment (see

Seven major energy eciency business opportunities).

see m eeg efie ie iie

Building-technology products. These include space-heating, ventilation, and

air-conditioning equipment, windows, doors, elevators and escalators, and

building insulation, as well as building and end-product components such as

heat exchangers and solar-control glass. Improving the energy eciency o

building-technology products is becoming a key priority particularly when old

equipment is due or replacement. In India, K. Raheja Corp., one o the largest

developers in the real-estate and construction industries, has signed the rst

ever Project Development Agreement under the Clinton Climate Initiatives

Energy Eciency Building Retrot Program. Under this agreement, JohnsonControls will perorm energy eciency retrots in the Inorbit Mall, the largest

mall in Mumbai.39

Electrical devices and other household equipment. This opportunity spans

a large variety o products including household appliances, white goods,

light bulbs, PCs, printers, TVs, home-entertainment equipment, and oce

supplies. Indias Technology Inormatics Design Endeavor has won a number

o awards or its innovative energy-ecient wood-burning stove or use in

small businesses.40 China today produces 1.7 billion CFL bulbs a year, and

numerouscompanies in China are already pioneering next-generation LED

lighting and rechargeable polymer lithium-ion (PLI) battery cells or use not

only in electric vehicles but also in a variety o consumer electronics.

Transportation uel efciency.Fuel eciency is an increasingly important priority

39 Largest mall in Mumbai, India, to benet rom energy eciency building

retrot,Azobuild.com, February 20, 2008 (http://www.azobuild.com/news.

asp?newsID=5184).

40 British Ashden Awards unveil global green energy prize winners, www.chinaview.

com, June 19, 2008 (http://news.xinhuanet.com/english/2008-06/20/

content_8404214.htm).


38/45

38

or the buyers o cars, trucks, trains, or aircratand thereore or original

equipment manuacturers. Companies innovating new, higher-eciency

technology in transportation have a major commercial opportunity. In China,

or instance, the Beijing-based Chargeboard Electric Vehicle Company Ltd.

was the rst company to develop an energy-ecient braking retrot or diesel

buses that reduced uel consumption by 30 percent. The company is now

promoting the technology jointly with the Beijing Bus Company.41

Transparency-creating products. Such products help to educate energy users

about the impact o their choices and behavior on their energy consumption and

thereore encourage the more conscious use o energy. Advanced electricity

metering and smart grids are the prime example today o transparency-

creating products. In Russia, Kazakhstan, Ukraine, and Belarus, Incotex o

Moscow is leveraging Texas Instruments technology in its electricity-metering

systems and improving their energy eciency by up to 30 percent.42 In China,

Guangzhou Keii Electro Optics Technology Co. Ltd. is a specialist manuacturer

o inrared camera systems and their sotware programming, which can be

used in energy surveys o buildings and in industry to detect heat loss and

thereore promote more energy-ecient production.43

Customized solutions. These apply to complex systems integrating numerous

products such as large heating, air-conditioning, lighting, rerigeration, and

ventilation systems. We typically nd large integrated systems installed in large

premises, such as residential complexes, oce and commercial buildings,

industrial production acilities, orespecially or outdoor lightingentire

campuses or cities. Optimized overall system design together with smart

management and control technology allows end users to run these systems

with minimum energy consumption. In India, Wipro Technologies oers

customers end-to-end services or data-center customers so they can usetheir capacity more eciently and minimize their use o power, cooling, and

housing equipment.44

41 New buses could help Beijing cut uel intake, Peoples Daily Online, January 3,2006 (http://english.people.com.cn/200601/03/eng20060103_232502.html).

42 Incotex automated meter management systems improve energy eciency and

accuracy using TI controller technology, Texas Instruments press release, January29, 2008 (http://ocus.ti.com/pr/docs/preldetail.tsp?sectionId=594&prelId=sc080

01).

43 See www.keii.com.cn/application.htm or more detail.

44 Wipro unit joins global energy eciency consortium, ventures into renewableenergy, EnergyAsia, June 23, 2008 (http://www.energyasia.com/content/

view/15176/1/).


39/45

39

Energy services. ESCOs oer a wide range o activities to energy users,

primarily in industrial and commercial sectors and to public institutions. The

our major categories o services are (1) the operation and maintenance o

installations such as cogeneration, district heating units, and small-scale

residential boilers; (2) the supply o energy, oten in the orm o power and heat

rom cogeneration but also gas sourcing; (3) acility management in various

areas ranging rom technical management and cleaning to saety and security;

and (4) energy management, including energy audits, consulting, and demand

monitoring and management. ESCOs are increasingly common in developing

countries. An ESCO in Latvia, or instance, is engaged in retrotting streetlighting to higher-eciency technology.45 However, many developing-world

ESCOs need public partnerships to overcome initial nancing diculties.

Financing o investments in energy efciency. This presents a business

opportunity or banks and institutional investors. Financing may also be an

option or utilities that oten have low nancing costs (or a signicant amount

o ree cash) and long time horizons, particularly i utilities nd themselves

under pressure rom regulators or the public to engage in energy savings and

GHG abatement. In Pakistan, or instance, in partnership with the Building

and Construction Improvement Programme o the Aga Khan Housing Board,

First Micro Finance Bank is planning a credit scheme to enable households to

purchase equipment to make their homes more energy ecient, paying back

loans over time using savings in uel costs.46

45 Good Practice Case Study: First Lighting ESCO in Latvia: Eective Lighting in

CitiesTukums, case study report presented at the European Conerence on Local

Energy Action: Optimising local action to drive sustainable energy and transport in

the Europe o Twenty-Five, Brussels, October 2021, 2004, Brussels (http://www.

managenergy.net/products/R318.htm).

46 Improving Energy Efciency through Building Materials, Pakistan, UNDP, 2003

(http://sgp.undp.org/download/SGP_Pakistan2.pd).

8/8/2019 MGI Deve

mgi developing country energy perspective

Documents