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p. 16 of 30 BACK | NEXT Introduction Regional Energy Context Energy Policy Issues Structural Reform Energy Efficiency Supply Side Measures Demand Side Management Energy Pricing Energy and Environment Rural Energy Development Regional Cooperation and Energy Development Conclusions and Recommendations

Bank Policy Initiatives for the Energy Sector : Energy Policy Issues : Energy Efficiency

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Demand Side Management

43. Since industry accounts for over 55 per cent of the final energy consumption in DMCs, the Bank had accorded importance to energy audits of energy-intensive industries and to persuading such industries to adopt energy efficient technologies and equipment. While this approach had been practical for public enterprises (especially in the PRC), the response of the private sector to energy audit has not been as enthusiastic as expected in many DMCs (such as India, Republic of Korea, Malaysia, Pakistan, the Philippines, and Thailand). The private sector is most likely to respond to energy price signals and legislative requirements. The key to the success of programs to promote energy efficiency lies in a combination of: (i) energy prices fully reflecting the long-run marginal cost of supply, border prices and opportunity costs; (ii) legislation and enforcement of sound environmental standards (covering all types of pollution) as well as building codes and appliance standards focusing on energy efficiency; (iii) trade regimes and investment regimes that allow the easy flow of energy efficient technology and goods; (iv) fiscal policies that penalize the production and import of energy-inefficient goods and technologies and that reward the energy efficient ones; (v) evolution of energy efficient national and regional standards for appliances and equipment, establishment of testing facilities and introduction of labeling and truth-in- labeling requirements; and (vi) tax and other forms of incentives for industries, households and commercial establishments to adopt energy efficient technology and equipment. The Bank's program lending modality could be used to achieve policy changes in DMCs along these lines (see also para. 46).

44. About 19 per cent of the commercial energy and about 30 per cent of all electricity in DMCs are consumed by residential and commercial consumers. As experience in OECD countries illustrates, getting the energy prices right is a necessary but not a sufficient condition for inducing consumers to use energy efficiently. Unlike the industrial consumers, residential and commercial consumers of natural gas and electricity are numerous, each with a relatively small amount of consumption. From their perspective, front-end costs of changing over to energy efficient demand side management (DSM) options (such as compact fluorescent lamps, electronic ballasts, improved switchgear, energy efficient motors, compressors and consumer durables, heating and cooling systems) are far too high compared to the relief they get in monthly energy bills.

45. However, extensive studies in North America and Europe have conclusively shown that from the perspective of the nation and the utility the cost of reducing demand by a kW of electricity is substantially lower than the cost of adding a kW of generation, even without taking into account the unquantified environmental gains by avoiding such generation. Thus, North American utilities and European utilities have instituted comprehensive DSM measures, such as free or subsidized distribution of energy efficient systems and applications, and provision of up-front financing on reasonable terms for energy efficiency investments made by the consumers. The costs incurred are added to the rate base of the utility so that the expenditure incurred is accorded the same status as expenditure incurred in capacity addition. In preparing least-cost power development plans, these utilities have adopted integrated resource planning, in which: (i) demand reduction options such as DSM are accorded the same status as supply addition options, so that utilities are required to treat all cost-effective DSM options on the same footing as supply additions; and (ii) environmental costs and benefits of all options considered are more fully incorporated than in conventional least-cost analyses.

46. In view of the scarcity of resources and the serious environmental implications of supply increases required to meet the accelerated demands, it is urgent that the DSM concept finds widespread acceptance in DMCs. While the average annual per capita electricity consumption in DMCs is only a fraction of that in OECD countries, there is still a great deal of inefficient electricity consumption that DMCs can ill afford. Also, unlike the OECD countries, DMCs with a very low coverage of electricity supply and a very low stock of installed appliances have an excellent opportunity to ensure that demand grows on the basis of efficient electricity use.¹ Therefore, DSM options in DMCs should receive as much attention as supply side options. Available studies imply that the forecast demand growth could be moderated by about 10 per cent during this decade. However, DSM options deal with thousands of consumers and make a major demand on the institutional capacity of the utilities. Subsidized pricing of electricity is also a major constraint to DSM initiatives.

47. The Bank's approach will be to (i) encourage utilities to incorporate into their energy planning models the key elements of integrated resource planning (IRP), (ii) organize in the utilities an adequately staffed DSM group to plan and undertake DSM activities, (iii) support such groups with appropriate training programs, and (iv) to use the Bank's TA resources to prepare DSM master plans and components to be included in projects to be financed by the Bank. The Bank will also promote the establishment of energy service companies to undertake energy efficiency improvements in the premises of consumers. The Bank will also have to encourage simultaneous shifts in government policy and related legislative changes. Such beginnings have already been made in PRC, Indonesia, Malaysia, the Philippines and Thailand. In general, before agreeing to finance new capacity addition, the Bank will have to be satisfied that the utility is paying adequate attention to both supply side efficiency options such as economically sound rehabilitation and retrofitting of existing plants, system loss reduction and optimizing system operations, as well as demand side management options.

48. The DSM concept has been recognized as an integral part of the energy planning for all energy resources, sectors and forms. The energy efficiency potentials within reach of the agriculture, industry, buildings, transportation and electricity sectors could provide a major boost to DMCs' economies. However, for the possible efficiency gains to happen, a number of institutional barriers should be removed. These have been identified as (i) scarcity and high cost of energy efficient products and services, (ii) low energy prices; (iii) limited indigenous human resource skills to implement DSM, (iv) lack of commitment to DSM programs, and (vii) governments' reluctance to entrust the utilities with DSM implementation programs. The Bank's sector studies will have to focus on methods that minimize or eliminate these barriers.

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