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12. Energy efficiency: New approaches to technology transfer
William U. Chandler and Marc R. Ledbetter with Igor Bashmakov and Jessica Hamburger
This paper considers the energy efficiency potential and the priorities for technology in Eastern Europe, the former Soviet Union, and China. These regions are interesting because they produce a combined total of one-third of global energy-related carbon dioxide emissions, and they are undergoing rapid changes of energy and economic policy.
Energy efficiency technology transfer is often cited as a high priority in international development cooperation programmes for Eastern Europe, the former Soviet Union, and China. This priority is warranted by the fact that energy efficiency improvements bring multiple benefits. Efficiency can reduce energy bills for consumers, reduce the capital required for energy system development, and reduce pollutants, including the oxides of carbon, sulphur, and nitrogen. Efficiency, in fact, is perhaps the clearest example of a sustainable development strategy because it is the one strategy that contributes to development by providing higher levels of employment, higher standards of living, and better working and environmental conditions.
Igor Bashmakov and Jessica Hamburger contributed sections of this report. William Chandler and Marc Ledbetter are responsible for the integrated piece, its validity or errors.
The three formerly centrally planned regions rank high in energy intensity -no matter how economic output is measured. If we consider rationalization of these economies through restructuring as well as technological energy efficiency improvements, the efficiency potential in the regions is large indeed. Rapid economic and political change in these regions may thus presage major reductions in energy intensity, though this improvement will be offset to some extent by increases in energy used for personal consumption. That trade-off is the subject of a different paper.
Market restructuring is, of course, the first priority for rationalizing energy use in these countries. No other measure to improve the efficiency with which energy is used will have as large an effect. But market restructuring is not enough. Experience in market economies tells us that markets leave vast untapped cost-effective resources of energy efficiency. Strong non-market measures are often proposed to supplement markets, including imposing heavy energy taxes and high performance standards on energy-using equipment. However, it has become increasingly clear that such measures are not always politically feasible. Nor are they always appropriate. Therefore, additional approaches are needed that provide strong incentives to producers and consumers to improve energy efficiency, including measures such as market-pull programmes, integrated resources planning, demand-side management, financing, and partnership between government, non-governmental organizations (NGOs), and business to stimulate efficiency investments.
2. Energy efficiency prospects in three key regions Eastern Europe
The nations of Eastern Europe rank among the least energy-efficient countries in the world. Per capita energy use in the former Czechoslovakia, for example, exceeds that of Austria, yet former Czechoslovakian GNP per capita is only one-third as high as Austria's (Kostalova et al., 1992). It is this excessive, uncontrolled energy use that more than anything else causes severe air, land, and water pollution in the immediate region. The region, with less than 3 per cent of the world's population, produces 9 per cent of global energy-related greenhouse gas emissions - almost as much as China.
Energy inefficiency constrains economic growth. Consider the case of Poland, which is the world's fourth-largest coal producer and which meets three-quarters of its domestic energy demand with coal. Poland in 1985 allocated one-third of its entire annual industrial capital budget to coal mining alone. Coal production in Poland before the revolution consumed one-fifth of all steel used in the country and nearly one-tenth of all electric power. Coal production is becoming more difficult and expensive year by year as the resource is being depleted. The average depth of mines is now 600 metres, and the required depth of new mines is increasing at a rate of 10-20 metres per year. Reducing the demand for coal simultaneously frees capital for more productive uses elsewhere in the economy (Sitnicki et al., 1990).
The nations of Eastern Europe have had varying degrees of success in reducing their burdens of energy intensity. Poland, as a result of strict price decontrol measures, cut energy intensity by 11 per cent between 1988 and 1990, more than any other East European nation. Energy intensity in the former Soviet Union, in contrast, has increased (Bashmakov, 1992a; see also Makarov et al., 1990).
GDP, unfortunately, dropped dramatically in Poland until 1992. (In 1992 Poland's economy grew at a rate of 5 per cent, faster than any other in Europe.) However, energy use has fallen faster than the economy. Consequently, the amount of capital allocated to energy production has dropped markedly since the economic reforms began, owing primarily to structural change. The share of capital allocated to coal is down from almost 40 per cent of industrial investment to just over 20 per cent. A smaller share of investment for the energy sector means that Poland's crumbling infrastructure - poor telephone service, lack of health care facilities, inadequate public transportation will suffer less from the misallocation of capital seen for the last 50 years.
Poland has won these gains the hard way in part by imposing an extremely rapid rate of adjustment to world prices on its citizens. Its policy represents extraordinary political courage. Consider the following changes in energy prices in Poland in 1991-1992 (Slawomir Pasierb, executive director, Polish Energy Efficiency Centre):
- the price of residential natural gas has increased 1,600 per cent;
- the price of residential electricity has increased 1,000 per cent;
- the price of gas to Polish industry has reached US levels.
The price of residential electricity is now at 5 US cents per kilowatt hour, close to the actual cost and equal to the price paid by many US residential customers. Yet annual per capita income in Poland is one-quarter that of the United States. In two years, Poland has made the transition from highly subsidized energy to free prices. In comparison, the United States took 10 years to accomplish the same thing.
In Hungary, energy prices have reached world market levels. The price of gasoline in Hungary, in fact, is twice as high as in the United States. The economy has also fallen dramatically, in 1991 reaching only 70 per cent of the 1988 level. The Hungarian economy is lower in energy intensity than those of other East European nations, however, because it began energy price reform over a decade ago and uses oil and gas, which are easier to use efficiently than coal, to a greater extent. The nation imports about 60 per cent of its total energy supply, primarily oil and natural gas. Hungary is an export-oriented economy, and thus can earn the foreign currency now necessary for purchasing oil and gas (Jaszay, 1990).
The situation has evolved somewhat more slowly elsewhere in Eastern Europe. The Czech Republic, like Poland, is plagued by heavy reliance on coal, which, with lignite, supplies over two-thirds of total energy use. The economy has undergone much slower market reform than in Poland, and prices remain controlled. Nevertheless, restructuring is under way, with prices hundreds of times higher for industrial natural gas and electricity than in 1989. In 1991, Czech and Slovak GDP was 20 per cent below the 1989 level. Similarly, Bulgaria's economy dropped by 11 per cent in 1991, and the number of jobs fell by 14 per cent. Inflation reached 72 per cent on an annual basis. Food now costs about 40 per cent of average household disposable income (Bulgarian Agency for Economic Coordination and Development, 1992). And three-fifths of the Bulgarian industrial sector is operating at less than half of capacity owing to shortages of energy. The nation recently imported 70 per cent of its energy from the former Soviet Union (Dempsey, 1992).
Romania remains far behind the rest of Eastern Europe in economic and energy reform. The nation's economic and political infrastructure still suffers from the legacy of the Ceausescu regime. In the electricity sector, power shortages remain common and the quality of power is so badly degraded that the frequency drops from the standard 50 Hz to 47.5 Hz. Chronic energy and power shortages since 1980 resulted in the disconnection of the power grid from that of the Council for Mutual Economic Assistance (Comecon). To keep the system operating, the national dispatcher had to resort frequently to brownouts and blackouts, with the brunt of shortages borne by domestic consumers and public lighting even though industry accounted for two-thirds of power use. Present policy, however, is now oriented more toward consumers, and the energy deficit is borne by industry. The present shortage of electric energy supply amounts to 30 gigawatt hours per day - over 40 per cent of total electric power use (Gheorghe, 1992).
The energy efficiency potential in Eastern Europe amounts to 1525 per cent of current energy use. With consumption at about 16 exajoules (EJ), this means that up to 4 EJ of savings is available. The carbon emissions reduction that would be achieved by capturing this potential would total 80 million tons.
Future energy use in Eastern Europe - or in any post-planned economy - is exceedingly difficult to project. In general, future demand will depend on two broad factors: the extent of economic restructuring and the application of modern energy efficiency technology. Without restructuring, economic growth is likely to be anaemic. With restructuring and with energy productivity improvements, growing incomes are likely to push up consumption in the residential and transportation sectors, offsetting demand reductions in the industrial sector. One study suggested that a combination of economic reform and the introduction of energy efficiency technology, however, could enable Eastern Europe to hold energy demand - and carbon emissions - virtually constant (Kolar and Chandler, 1990). However, much more work is needed to clarify the future of energy demand in the region.
The former Soviet Union
The former Soviet Union overall consumes three-quarters as much energy as the United States, yet produces only 30-50 per cent as much economic value. The economy of that region has experienced collapse equal to the Great Depression in the United States in 1929. GDP in the former Soviet republics fell 15 per cent in 1991 and 10-20 per cent more in 1992 - all the way back to 1970 levels (Bashmakov, 1992b).1 This crisis translates into hardship for 90 million persons 30 per cent of all former Soviets - who now live below the official poverty line.
Unfortunately, the economic crisis has not yet produced energy efficiency improvements; the energy intensity of the Soviet economy has in fact increased. This problem is explained by the fact that the light manufacturing sector has been hit hard by the reduction in imports, which provided spare parts and other essential inputs, whereas the energy-intensive heavy materials sector has not been affected as much.
High energy intensity in the former Soviet Union is not due to high levels of energy use by consumers, however. Russians live in small apartments: they enjoy only 15 m² of household space per capita, compared with 30 and 55 m² for West Europeans and Americans, respectively. Electric power consumption per capita in the region is 70 per cent of US levels, but actual direct consumption by consumers is only 10 per cent that of the average US citizen.² Similarly in the transportation sector, residents of the former Soviet Union rely heavily on mass transportation.
High Soviet energy intensity grew primarily out of the skewed emphasis on heavy industry and energy-intensive materials, as well as reliance on outdated technology. The buildings sector also lacks individual heating controls in apartments, and all sectors lack economic incentives to conserve heat and hot water. Heavy energy supply investments have become excessive and reduce economic growth. The total annual investments in oil, natural gas, and coal production have reached almost 20 per cent of all investment and 40 per cent of industrial investment.
Restructuring the Soviet economy would have major benefits for energy conservation. Materials use per capita is very high compared with other nations, and market reforms would have two effects. First, less scrap and unnecessary material would be produced. Secondly, materials would be used more efficiently in manufacturing, construction, and packaging as manufacturers compete for price-sensitive markets. Structural reform could save 11 EJ by 2010, or almost one-sixth of current total Soviet energy demand.
The potential energy savings the former Soviet Union could achieve by implementing energy efficiency measures is over 15 EJ (15 quads, or 7.5 million barrels of oil equivalent per day). The largest savings are available in the energy, industrial, and agricultural sectors. The investment required to achieve these potential energy savings is estimated at US$4-6 billion.
Energy consumers would profit substantially from investments in energy-efficiency improvement projects. Potentially avoided capital investments total up to 1.8 trillion roubles (mid-1992 values). In addition, atmospheric pollution could be reduced 10 per cent, including a significant decrease in greenhouse emissions at no additional capital cost.
According to research by Igor Bashmakov, every rouble invested in the production of energy efficiency equipment produces - throughout the economy - five times more jobs than a rouble invested in electricity generation, and seven times more than a rouble invested in the oil and gas industry. Therefore, 29 billion roubles in investments in energy would create as many jobs as 175 billion roubles in energy supply (mid-1992 roubles) (Centre for Energy Efficiency, Moscow, 1992). The difference between 29 and 175 billion roubles of investments represents 40 per cent of the total capital accumulated in residential buildings. In other words, energy efficiency measures could free resources to improve living conditions substantially for the Russian population. If a share of the investment savings were to go to production in light and food industries and residential buildings construction, then simultaneously more jobs would be created and production of consumer goods would increase, resulting in a better level of well-being in the former Soviet Union.
Full implementation of the wide range of energy efficiency improvements with very low costs could reduce CO2 emissions by 200 million tons of carbon in the former Soviet Union alone in the year 2005, the equivalent of annual CO2 emissions in France and Italy together. It would be very difficult to find any other country with so large and so cheap a carbon conservation potential and with a relatively well-educated labour force capable of developing and realizing programmes to capture this potential.
China has become the world's third-largest energy consumer, using 30.4 EJ in 1991. Consumption and domestic production increased by 5 per cent a year during the 1980s (Wang Qingyi, 1992). As in many developing or planned economies, the industrial sector dominates consumption. In 1991, China's energy was used in the following manner:
industry - over 68%
buildings - about 20%
transportation -about 6%
agriculture - about 5%
Energy consumption per unit of GNP (energy intensity) in China is twice the average level of other developing countries, and three times that of Western Europe (Zhang Aling, 1992).
Economic reforms begun in 1978 and accelerated since 1990 have led to tremendous growth in energy use and significant changes in China's energy management system. The rest of the economy grew much faster than the energy sector, however, causing energy demand to outstrip supply, especially in power production. During the 1980s, 5 per cent annual growth of energy production and consumption lagged behind explosive economic growth, which averaged 9 per cent per year over the decade, and reached 14.1 per cent in 1992.
A striking characteristic of China's energy economy is low per capita consumption. In 1990, commercial energy consumption per capita in China was only about 25.5 gigajoules (GJ), about 40 per cent of the world average, and less than one-tenth that of the United States. Space heating is prohibited or sharply restricted in large areas of China in order to conserve fuel for industry.
Environmental pollution remains a major problem with and challenge for China's energy industry. Coal combustion, which supplies three-quarters of China's energy needs, is the largest source of emissions. Whereas most countries convert coal to electricity, many Chinese consumers use coal directly, even for household cooking and heating. Excessive, inefficient coal use contributes to a range of global, regional, and local environmental problems.
China still faces severe energy shortages and severe energy-related environmental damage. Energy shortages are caused by a combination of low energy prices, use of inefficient technologies and management practices, rapid economic growth, transportation bottlenecks, and emphasis on energy-intensive industries, such as cement and steel. Insufficient energy supply prevented enterprises from operating at full capacity and caused economic losses. In 1988, 25 per cent of industrial enterprises were operating at low capacity and one-third of the agricultural sector suffered from severe power shortages, resulting in a 400 billion yuan loss in output value.
China made the following gains in energy efficiency in the 1980s (Shen Longhai and Zhou Changyi, 1992):
Energy consumption per 10,000 yuan of GNP fell from 392 GJ in 1980 to 273 GJ in 1990. Energy intensity decreased by 30 per cent over the decade, an annual average rate of 3.5 per cent. The accumulated energy savings were 7.9 EJ.
The income elasticity of energy demand was 0.56 during the 1980s. That is, almost half of the incremental growth in the national economy was made possible by energy conservation. Elasticity was reduced by two-thirds compared with the previous 25 years.
Energy efficiency improvements were achieved in two-thirds of industrial products examined in a government survey. Examples include the production of coal-fired power, steel, cement, aluminium, fertilizer, and crude oil processing.
In addition to price reform and ownership changes, the Chinese government also initiated policies to promote energy efficiency directly. Conservation was formally introduced into China's national economic plan in 1981. Laws and regulations were passed, and the State Planning Commission (SPC) undertook a study of energy consumption and the potential for conservation by enterprises (Shen Longhai and Zhou Changyi, 1992). Efficiency standards were set for a wide range of products, although they currently serve as guidelines, not enforceable regulations.
Funds were allocated to energy efficiency projects, and project implementation procedures were established. Projects are administered by the Energy Conservation Company, part of the State Energy Investment Corporation. The Energy Conservation Company reviews projects, provides soft loans, tax exemptions, and equipment, and solicits matching funds from local governments.
China's conservation measures focused on industry, which consumed almost 19.8 EJ in 1990. Measures were aimed specifically at the chemical, iron and steel, and building materials industries, each of which accounts for about 15 per cent of total industrial energy use, and on widely used equipment such as industrial boilers, fans, and pumps (Wang Qingyi, 1992). The main measures adopted were equipment retrofit; elimination of inefficient equipment; restrictions on wasteful and environmentally harmful production methods; adoption of efficiency standards; utilization of new energy conservation materials and equipment, such as computers to monitor consumption; waste recovery and utilization; and co-generation.
In fertilizer production, for example, significant energy savings were achieved by installing new equipment, using a new method to synthesize ammonia, and using electronic process controls. Large savings were also achieved in the steel industry through the adoption of various energy-efficient technologies and co-generation. Boilers were also made cleaner and more efficient through design changes; the use of co-generation, briquettes, and control mechanisms; and the adoption of fluidized bed and dust removal technology. Large efficiency gains can be made simply by replacing equipment designed and/or made in the 1950s, 1960s, and 1970s with more recent designs. In many cases, the more advanced designs already exist in China, but need to be popularized.
Energy planners in China are pushing for more reforms to promote economic and energy efficiency and environmental protection. Technical assistance can help China implement these reforms by supporting Chinese energy experts and by promoting joint ventures and foreign investment in energy efficiency technologies and services. Assistance in energy efficiency will improve the market for developed nation exports; reduce global carbon emissions; minimize energy-related pollution in China; and accelerate social progress and the development of a market economy in China.
The efficiency potential in China must be viewed in terms of how much future demand growth can be reduced. One major study of this potential suggested that year 2025 demand could be cut from a projected level of 75 EJ to 50 EJ (Sathaye and Goldman, 1991).
3. Technology needs
Technological energy efficiency opportunities in the former Soviet Union, Eastern Europe, and China include the use of efficient electric motors; adjustable speed drives for electric motors; automation of and greater use of sensors and controls in industrial processes; advanced boiler controls; combined-cycle power co-generation and other advanced power generation technologies; more sophisticated and improved lighting and refrigeration technologies; and thermal insulation and improved windows in buildings. In the district heating and electric power sector, transmission and distribution losses remain high, and new combined-cycle technologies could eventually cut heat rates in generating plants by 30 per cent or more. Major opportunities also exist in the use of heat meters and thermostatic valves for controlling radiators. More efficient trucks and automobiles are a high priority as the transportation sector grows with increasing income.
Recent developments in energy conversion technologies make possible the cleaner and more efficient use of fossil fuels. These same systems will reduce the cost of renewable energy to competitive levels, thus permitting large reductions in fossil and nuclear energy use over the coming decades (see Chandler, 1990; see also Johansson et al., 1993). These new technologies rely on combined-cycle and gasturbine system generation of electricity, usually coupled with the use of natural gas or the gasification of coal or biomass. Using Soviet gas in the short term and renewable resources in the longer term would enable the regions to reduce both their economic and environmental costs. Existing gas turbine systems could improve the thermal efficiency of electricity generation from about 30 per cent in the region to 40-50 per cent (Chandler et al., 1990).
Gas turbines could also be used in the short term to take advantage of coal-bed methane. Coal seams in Poland and the former Czechoslovakia are very gassy - that is, they emit large volumes of methane. Tapping this methane before the coal is mined could produce up to 1 EJ (the equivalent of 500,000 barrels of oil per day) in Poland and the former Czechoslovakia. Doing so would make mines safer, reduce gas imports, and reduce emissions of a powerful greenhouse gas to the atmosphere. The US government is actively supporting exploitation of this resource in Eastern Europe and China and, more recently, in Russia.³
In China, efforts to improve technology have been targeted mainly on the industrial sector, which accounts for over two-thirds of energy demand. Within this sector, the chief energy consumers are the chemical industry, the iron and steel industry, and the building materials industry. China encouraged the adoption of energy-efficient technologies in these three industries and pushed for the use of efficient boilers, fans, and pumps in all industries. Technology upgrades were facilitated by the establishment of over 200 provincial and local energy efficiency centres. The centres are staffed by about 5,000 technical experts who provide energy audits, technical assistance, and training.
These gains were relatively easy because of China's extremely low efficiency rates, and there is still much room for improvement. In 1988, China consumed at least three times more energy for each unit of economic output than did Japan. Future efficiency gains will be more difficult because they will depend on improvements in management and technological efficiency, not simply on economic restructuring.
Energy waste and inefficiency are so widespread that opportunities for improving efficiency abound in nearly every sector and for nearly every end use in Eastern Europe. The limited availability of resources and, just as importantly, the timing of major capital investments and the needs of economically pressed citizens dictate a focused effort. Among the more important considerations that should drive policy focus in Poland are:
What uses of energy are subject to radical change as a result of economic restructuring, and what is the probability that energy efficiency investments in those uses will be stranded as a result of restructuring? What can be done to reduce this probability?
What large investments are being made, or will soon be made, in equipment and structures that will significantly affect Poland's energy consumption?
Because the huge energy price increases that have been imposed on Polish consumers are causing significant hardship, what cost-effective, near-term measures are available to reduce this hardship through improved energy efficiency?
Where is the market not working well in improving energy efficiency, and what would make it work better?
On the basis of these considerations and others, and on the basis of the particulars of the Polish energy economy, several policy priorities emerge.
Among the more important is application of integrated resources planning (IRP) in the electricity sector. IRP is a flexible planning framework that fairly compares end-use efficiency and load management resources (demand-side management resources, or DSM) against a wide range of supply-side resources. A plan produced through this process will recommend a path for acquiring both supply- and demand-side investments to meet energy needs at the lowest possible costs, considering the risks, reliability, and environmental costs of the resources. Including low-cost DSM resources typically results in large savings over traditional utility planning methods.
A sound integrated resource plan, with a strong DSM component, would help Poland guide the investment of a new US$1 billion power sector loan being negotiated with the World Bank, and would potentially save hundreds of millions of dollars. With the assistance of the US Agency for International Development and the government of Austria, Poland is now preparing such a plan (RCG/Hagler Bailly, 1993).
Application of IRP in the heating sector also holds great promise. As in the electricity sector, Poland's district heating systems are facing large capital investments for repair and upgrading. Before pouring huge sums of capital into systems that have been sized to meet the load in poorly insulated and controlled buildings, it is important to consider the cost-effectiveness of improving these buildings to reduce the heat load on the systems, and thereby take advantage of smaller and less expensive system capacity requirements.
Providing consumers with access to capital is an important policy option. Energy-efficiency loan funds can be created for use by utilities and major industries through revenues from fuel taxes or loans from multilateral development banks. Blocks of financing could be channelled to utilities for distribution to residential, commercial, and industrial consumers through DSM programmes. In the industrial sector, loans could be made available to enterprises for investments increasing energy efficiency in addition to output or productivity. Experience has shown that disbursing such loans requires technical assistance, including:
- energy audits for industry and buildings;
- IRP specialists to advise utilities;
- loan-processing training for banking, utility, and industrial organizations.
Building domestic capability in the manufacture and installation of energy-efficient equipment and materials is also a high priority. East Europeans still depend heavily on domestically produced equipment and materials, but unfortunately these products typically have much lower energy performance than do competing foreign-produced products. Because the foreign products remain significantly more expensive than their domestically produced counterparts (often two to four times more expensive), potential energy savings from more efficient products are usually forgone in favour of much lower purchase prices. The result is a continuing flow of inefficient products into the marketplace. The unfortunate trade-off between very high first costs and energy efficiency need not continue. A concerted effort to encourage the development of domestic capability for producing energy-efficient products, which could take advantage of domestic low-cost labour and materials, is an attractive option for reducing energy consumption, supporting domestic industry, and positioning domestic companies to compete better with foreign producers.
An effective means of speeding development of domestic production capability is to help domestic producers develop markets for their products through "market-pull" programmes that, through a variety of mechanisms, substantially increase the market demand for their products. Market-pull mechanisms might include voluntary efforts in which large consumers and other interested parties offer financial incentives to producers to help cover the development costs of new energy-efficient products.
The Super-Efficient Refrigerator Program in the United States is an example of this type of programme. Also known as a "golden carrot" programme, this programme offered US$30 million in prize money to the winner of a competition among refrigerator manufacturers to produce and sell a refrigerator that consumed no more energy than 75 per cent of the level allowed by the 1993 US refrigerator energy efficiency standard. The programme was created by the Natural Resources Defense Council, the US Environmental Protection Agency, and a group of two dozen utilities. The prize money was provided by the electricity utilities. The winner of the competition was the Whirlpool Corporation, which proposed a refrigerator that uses no CFCs, sacrifices nothing in service, and costs buyers no more than standard models with comparable features (Treece, 1993).
An example of domestic capability building in energy efficiency is already under development in the Polish lighting products industry. The International Finance Corporation is developing a project that is intended to help build the Polish market for domestically produced compact fluorescent lamps. If approved, the project will use funds from the Global Environmental Facility of the World Bank to provide rebates to Polish producers of these lamps. The rebates are targeted at producers rather than consumers so that wholesale and retail mark-ups are applied to a smaller base price, yielding a much lower retail price than would be possible with a consumer rebate. The very low price is expected to overcome the strong reluctance among Polish consumers to purchase a lamp that now exceeds the cost of an incandescent lamp by a factor of 20 to 30. Currently, the only domestic producer of compact fluorescent lamps is Philips Lighting Poland, a joint venture of Philips Lighting and Polam Pila, a Polish producer.
Other domestic production capability programmes should be considered for refrigerators, electric motors, variable-speed electric motor drives, insulation, energy-efficient windows, residential heating equipment, industrial boilers, energy management systems, and other equipment and materials whose domestic producers could make a substantial contribution to domestic energy saving. Much of this capability building could be achieved through the development of joint ventures with non-domestic producers of energy-efficient equipment and materials, but special efforts, such as targeted deal brokering, are needed to speed the creation of the joint ventures.
Consumer information - in the form of appliance energy efficiency labelling - helps overcome a major market failure. New appliances can be labelled for energy efficiency so that buyers can cut their future energy costs. The programme fits within a philosophy of promoting market mechanisms because it promotes the availability of impartial and credible information, a legitimate activity of all forms of government. Most important energy-consuming appliances made or sold in the United States (including refrigerators, water heaters, furnaces, air conditioners, and lighting) must carry labels advising buyers on the energy cost of their operation as well as to meet standards for maximum rates of energy consumption. The European Community, led by Denmark, is actively considering energy efficiency label requirements. Some highly efficient lighting products marketed in Europe already bear annual energy-cost labels. Labelling would help push manufacturers to produce competitive products, and ensure that inefficient products are not "dumped" on the region by foreign exporters.
Of less importance now, but of enormous importance within the next 10 years, are policies to promote energy efficiency in the transportation sector. The countries of Eastern Europe have levels of public transit ridership that most Western countries can only dream about. More than 80 per cent of workers in Prague and Warsaw commute to work by public transportation. These passenger levels are at risk though. Rising incomes and the ease, flexibility, and convenience of commuting by car are pulling people out of public transportation and into cars. Warsaw and Budapest are already experiencing large traffic jams. Warsaw's city centre sidewalks are jammed with cars that make walking difficult. Financially pressed public transit systems, whose fare increases have been tightly controlled, have had difficulty maintaining their level of service. Warsaw's public transit system is so hard pressed that it could not pay its electricity bill for six months in 1991. Should the trend continue, large East European cities could find themselves in the same predicament as their Western counterparts: rapidly growing suburban, low-density sprawl, falling transit ridership, traffic-caused heavy congestion and pollution, and huge transportation and land-use commitments to the automobile. East European nations need to take advantage of their low dependence on the automobile by working to keep public transportation efficient, convenient, and attractive. Keeping riders on public transportation is a far less daunting task than persuading drivers to abandon their vehicles and choose public transportation.
The former Soviet Union
Energy price decontrol in the former Soviet Union is under way. However, privatization and restructuring will take longer. These efforts have not worked well in Eastern Europe, and the new nations formed from the Soviet Union would do well to take this process in manageable steps. The key issue is competition, and competition can be engendered among state-owned enterprises during the transition to private property. The utility sector will require regulation because for the foreseeable future the supply of thermal and electric energy by utilities will remain monopolistic.
Western nations can aid the difficult transition for the new nations of the former Soviet Union in many ways. Macroeconomic assistance is vital; but so is microeconomic assistance. That is, the former Soviet Union will need help in financing energy efficiency measures, particularly the installation of new, highly efficient gas turbines for power generation. Billions in loan guarantees, with the promise of technical cooperation from the private sector, would probably be necessary to make this happen.
In the utility sector, integrated resources planning is a high priority (see Vine and Crawley, 1991). Low-cost exchanges of experts would help transfer this experience. Placing half a dozen foreign IRP specialists in utilities and bringing a similar number of former Soviets to the West would best facilitate this process. Demonstrations could be developed in IRP for a few tens of millions of dollars, and would have the effect, in the long run, of saving billions.
IRP could also be used to great effect in the district heating sector, where large, cost-effective demand-side resources should be allowed to compete against supply-side resources for new investments. Much of this demand-side resource can be developed with relatively low-technology measures.
The Russian Federation Ministry of Fuels and Energy and the Ministry of Sciences have articulated principles and mechanisms of government policy in energy efficiency. The main directions they recommend for improving energy efficiency are:
developing basic energy efficiency legislation, including incentives for investment and standards for energy-consuming equipment; and
developing a favourable economic environment, including soft credits for efficiency investments and the creation of a regional loan fund (funded by a 1 per cent value-added tax on energy).
This programme is not particularly aggressive, and, in projections made by a policy group, energy intensity of the economy would not decline beyond the 1990 level even by the end of the century.
Despite the rapid expansion of energy production since 1978, per capita commercial energy consumption remains low. The combination of low per capita energy use, inefficient technologies, and an inefficient management system results in a low level of energy services. Chinese energy planners are pushing ahead with a variety of reforms in order to raise the level of energy services while minimizing environmental damage. Priorities include:
- increased importation of efficiency and environmental technologies and services;
- continuation of the break-up of monopoly energy corporations;
- elevation of energy prices to cover production costs and discourage inefficiency;
- elimination of subsidies to money-losing state energy enterprises; and
- integration of conservation and energy supply investment planning, functions that are currently carried out by separate government agencies.
Fundamental changes in China's economic system have already laid the groundwork for these reforms and have been responsible for rapid growth in the economy and in energy use. Since 1978, China has taken great strides away from central planning toward what Party Secretary Jiang Zemin calls a "socialist market economy." State ownership is on the decline as unprofitable state enterprises lose their subsidies and make way for new ventures in the booming non-state sector.
Reform has come later and slower to the energy sector, but appears to be gaining momentum. Energy price reform, ownership changes, and energy efficiency policies are the essential elements of China's attempt to bridge the gap between energy supply and demand.
China's pricing system has been transformed by the introduction of markets, decentralization, and price adjustments. China has created a "two-tier" pricing system as a step on the path to free markets. Under this system, the government gives state enterprises an incentive to increase production by allowing them to sell above-plan output at market prices. It has been estimated that in 1989, on average, 38 per cent of a state enterprise's outputs were sold on the market, and 56 per cent of its inputs were procured on the market (McMillan and Naughton, 1992).
Price reform is sorely needed in the energy sector because prices are too low to cover the cost of production. Irrational pricing has resulted in massive debt. The cumulative debt owed by public coal mines and utilities amounts to 100 billion yuan, and there is no way to pay off the debts within the existing management system (Zhou Dadi, 1992).
In the case of energy products, the pricing system has more than two tiers. For example, there are three crude oil prices in China: the low plan price, the high plan price, and the international market price. The low plan price for oil tripled in 1993, from around US$5 a barrel to US$16.30 a barrel. This price hike brings about two-thirds of China's oil closer to the international price, which is around US$21 a barrel. In addition to raising the low plan price, administrators have also decided that much of the oil formerly assigned to the low-price category will now be sold at the high plan price. The high plan price is actually higher than the international price now because of transportation bottlenecks (Goldstein, 1992). Coal prices have also risen significantly in the 1990s and may soon be deregulated.
Electricity prices are also affected by a variety of market and regulatory mechanisms. Prices are regulated for state-operated power plants and cost based for plants operated by investors, which may be local government, users, or semi-private corporations. The state plants still sell electricity at a relatively low plan price, although the price has been raised somewhat owing mostly to the rising cost of fuel. Non-state plants set prices by calculating interest and profit from the capital investment and operation costs. The price paid by the consumer is often much higher than the price set by the generator, however, because governments at the provincial, municipal, and county level may impose fees to raise funds for electricity development. In addition, all plants are allowed to sell electricity at a higher price if they exceed the planned target.
The shift from planned to market prices has been matched by a shift away from ownership by the central government. Ownership changes have been accomplished through collectivization of state enterprises and the growth of the non-state sector. The non-state sector has grown at an annual rate of 17.6 per cent. Some analysts claim that the non-state sector employed as much as 82 per cent of the total labour force and produced 64 per cent of China's GNP in 1990. Its share of total industrial output expanded from 22 per cent in 1978 to 45 per cent in 1990 (Chen Kang, 1992).
Energy conservation measures were financed through China's policy of replacing oil with coal for domestic use. Instituted at a time when international oil prices were high, this policy allowed China to use hard currency from oil exports to purchase foreign technology that was more energy efficient and to build more coal-fired power plants. The policy may soon be phased out, however, for both economic and environmental reasons. It has been undermined by the drop in oil prices, as well as by the recognition of coal's contribution to air pollution and global warming (Christoffersen, 1992).
If the coal-for-oil policy is abandoned, China will have to find other sources of funding for energy efficiency. One obvious method is for the central government to take funds that are currently designated for expanding supply and reallocate them to conservation. This is not likely to occur, however, until the government adopts a planning method that integrates supply and demand. Meanwhile, the central government has shifted the burden of increasing efficiency to enterprises and local governments. Yet these organizations will have little incentive to invest in efficiency without price reform - that is, the removal of all subsidies for energy prices.
Facilitating joint ventures in energy efficiency simultaneously helps developed nations, firms and promotes economic development and environmental protection in China. Those who are sceptical of the profitability of trade and investment in China might note that Hong Kong, Taiwan, Japan, and South Korea have already taken the lead in profiting from China's booming economy.
The developed nations can promote joint ventures through business information exchange and demonstration projects, and legislative support for energy efficiency policies in China. Information exchange helps foreign companies understand the Chinese market how to do business, with whom they can collaborate, where siting their operations makes sense, how to conduct banking, how to get their money out of the country. One example of information exchange that has already been funded is the US Department of Energy's electric power mission to three major Chinese cities in June 1993. US participants represented independent power producers, regulated utilities, architectural and engineering firms, and equipment manufacturers. They met with Chinese counterparts to discuss opportunities for cooperation.
Facilitating demonstration projects in areas of foreign expertise is another good way to promote joint ventures. The US Environmental Protection Agency, for example, worked with China's Ministry of Energy to get World Bank Global Environmental Facility funding for a coal-bed methane demonstration project.
Technical assistance can also promote joint ventures through legislative and regulatory support for energy efficiency policies in China. Foreign firms cannot market their practices and technologies until the institutional and legal infrastructure in each country has been put in place. By helping Chinese experts promote IRP as a national policy, the West can increase demand for compact fluorescent light bulbs, metering systems, renewable energy assessments, and building efficiency technologies.
Energy policy must balance supply and demand measures to provide energy services for economic development while protecting consumers and the natural environment. A sustainable energy policy will promote economic development by:
- increasing industrial competitiveness by reducing net production costs;
- reducing net capital requirements by avoiding the need for new mines and power plants;
- improving overall productivity by promoting new technologies to increase labour and capital productivity while saving energy.
Such a policy would help consumers cope with rising energy prices by saving money through conservation. This strategy requires measures to overcome market failures, including: lack of information; split incentives; natural monopolies; and lack of capital due to the economic mismanagement of the former communist system.
Technology transfer will not proceed in any of the three regions without fundamental policy reform. Any rational energy policy must be based on market mechanisms, with limited intervention to regulate monopolies and overcome market failures. The basic mechanisms of a market-based strategy should include:
market pricing of energy supplies;
energy supply sector restructuring;
privatization and re-regulation of transmission and distribution networks for electricity, gas, and heat supply enterprises;
privatization of energy suppliers.
Technology transfer in the regions of the former Soviet Union, Eastern Europe, and China cannot be achieved without significant new efforts in the energy sector. Past energy policy has seriously harmed the region's economic and environmental health by encouraging the development of expensive, polluting supply alternatives for providing energy services. The establishment of market prices and freer markets should be the top energy policy priority for these countries, but adequate time should be allowed for their economies to adapt to these measures, and it should be recognized that market measures alone will not fully exploit the vast energy efficiency resources that exist. Among other policies and programmes that are needed to tap these resources, new models of technology transfer that aggressively promote both production and demand for new technologies are needed. By reorienting their policies to deliver cost-effective energy services through demand-side measures and, early in the next century, new renewable energy supply systems, the regions could achieve a healthier, more prosperous future. This strategy implies:
moving, with appropriate speed, to establish market prices and freer markets for energy;
where markets leave large, cost-effective energy efficiency resources untapped, adopting policies and programmes to improve energy efficiency to maximum cost-effective levels;
to the extent possible, satisfying new energy demand in the medium term with natural gas; and
developing renewable energy supplies over the long term.
The first element requires energy resources be priced to reflect both their replacement costs and their environmental impacts. The second element requires study and adaptation of the experience gained by other countries in exploiting energy efficiency resources. The third element requires careful development and use of natural gas resources in a way that will permit an easy transition to renewable energy carriers. And the fourth element must rely on a combination of Western research efforts and local measures for encouraging the market penetration of new energy sources.
1. US GDP fell from about US$1 trillion to US$0.75 trillion (1958 dollars) between 1930 and 1934.
2. Russian electricity consumption in 1990 totalled 7,031 kWh per capita, compared with about 10,600 kWh per capita in the United States.
3. Major reports on the potential for developing coal-bed methane have been sponsored by the US Environmental Protection Agency. See Bibler et al. (1992).
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