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MKie G Iie
Fueling sustainable development:The energy productivity solution
October 2008
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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
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at www.mckinsey.com/mgi.
Copyright McKinsey & Company 2008
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Fueling sustainable development:The energy productivity solution
Diana Farrell
Jaana RemesDominic Charles
McKinsey Global Institute
October 2008
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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
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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.
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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).
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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
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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.
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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.
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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.
Source: McKinsey Global Institute analysis
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
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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
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Exii 3
Exii 4
Developing countries display wide differences in fuel use
Source: McKinsey Global Institute analysis
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
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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
Source: McKinsey Global Institute analysis
2005 primary energy demand by fuel mix
Percent
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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 (
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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
Source: McKinsey Global Institute analysis
End-use energy demand growth, 200520
QBTUs
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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).
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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
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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.
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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.
Source: McKinsey Global Institute analysis
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
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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
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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.
Source: McKinsey Global Institute analysis
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
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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.
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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.
13 World Energy Outlook, IEA, 2006.
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
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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,
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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.
Source: McKinsey Global Institute analysis
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
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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
14 World Energy Outlook, IEA, 2006.
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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).
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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.
Source: McKinsey Global Institute analysis
Policy
distortions
Policy
distortions
Lack of
information
Lack of
information
Agency issuesAgency issues
Other factorsOther factors
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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).
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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.
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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).
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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.
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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.
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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.
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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
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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.
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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).
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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/).
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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).
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