VIEWPOINT

Energy conservation The need for a sharper institutional focus

Jane Carter

Improved efficiency of energy usage has a new role to play in economic growth in both developed and de- veloping countries. Economic pricing of energy is central to effective energy conservation pohcies. But even when such policies are pursued, there are a number of barriers which inhibit the effective working of the market - in particular, the fragmentation of re- sponsibility for decisions affecting energy use (both within individual governmental systems and amongst the myriad of individual consumers involved), and lack of appreciation of the scope for increased efficiency and of what can be achieved technically. Governmental intervention is neces- sary to overcome market imperfec- tions. The form will vary according to political philosophy and social and institutional patterns. Experience in the industrialized countries, with a varied institutional response, can pro- vide valuable guidelines for develop- ing countries, whose importance in commercial energy markets is in- creasing sharply and could prove a crucial factor in times of market dis- ruption.

Keywords: Energy conservation; Govern- ment intervention; Developed and de- veloping countries

The author is an International Energy Efficiency Consultant, 27 Gilkes Crescent, Dulwich Village, London SE21 7BP.

The key role of energy in growth and development has only been brought into the mainstream of economic analysis comparatively recently. The development of the industrialized world was fuelled by cheap energy - coal, subsequently supplemented by electricity, gas and oil, and most re- cently by nuclear power. The abrupt change to a higher energy cost scenar- io with the oil price increases of 1972/73 and 1978/79 has led to a reappraisal of the interrelationships between energy consumption and eco- nomic growth, to facilitate the neces- sary adjustments in energy consump- tion and production patterns in de- veloped and developing countries alike.

At the inception of the 1973 crisis, energy use in the developed world far outstripped that of the developing world. With less than a third of the world's population, the developed countries consumed 90% of its energy (Table 1). It was obvious that the industrialized economies had a major opportunity to improve the efficiency of energy usage. There was also con- siderable scope for the developing world to improve its standards of fuel conversion efficiency, even if only up to the low standards of the rest of the world, whose useful consumption of energy was twice as high. This scope is even greater now that the developing countries have doubled their share of commercial fuel energy markets to 20% (compared with 10% in 1955). Indeed, the World Bank has estimated that a major conservation effort could

yield at least as much energy benefit - 1.2 million bbl/day of oil equivalent by 1990, saving import costs of US$18 billion (at 1980 prices) - as a max- imum effort to exploit indigenous oil reserves.

It is perhaps not surprising that the main thrust of conservation effort in the last decade has come from the industrialized countries, all of which have introduced major programmes to improve efficiency of energy usage. For them, the problems of adjustment are difficult, but not insurmountable. High levels of industrialization and urbanization, coupled with a relatively stable population, provide a robust foundation. However, most develop- ing countries are faced with the addi- tional problems of rapid population growth; the need for structural change and accelerated growth to maintain and improve standards of living; shor- tage of technical skills; shrinking ex- port markets due to recession and protectionist policies in the developed world; and a daunting burden of fore- ign debt, much of which relates to heavy borrowing to finance the energy imports of the past decade.

There is a wide diversity in the political and economic circumstances of developing countries. At one ex- treme are countries mainly dependent on subsistence agriculture and live- stock tending; at the other extreme are countries such as Korea and Bra- zil, with a large and dynamic industrial sector and the highest per capita in- comes. In between come the heavily

0301-4215/85/020117-03503.00 ~) 1985 Butterworth & Co (Publishers) Lid 117

Viewpomt

Source: Energy consumption data based on J. Parikh, Energy and Development, World Bank PUN 43, 1977. GDP data based on I. Kravis eta/, 'Real GDP per capita for more than 100 countries', Economic Journal, Vo188, June 1978.

1LIoyds Bank Economic Bulletin, No 74, February 1985, pp 1-3.

Table 1. Energy consumption and gross domestic product, industrial countries and developing countries, 1973.

Ratio of industrial

Industrial Developing to Unit countries countries developing

Per capita total energy Metric tonnes consumption (including of oil rough estimates for equivalent traditional fuels and (toe) counting hydropower at equivalent primary fossil fuel rates)

4.22 0.48 8.8

Real GDP per capita US$ 3343 520 6.4 (Kravis calculations)

Energy consumption toe 1263 916 1.4 per million dollars of real GDP

Assumed average fuel % conversion efficiency

Useful energy toe consumption per million dollars real GDP

50 35 1.4

631 321 2.0

Population Millions 1119 2717 0.4

populated but relatively poor coun- tries, such as China, India and Pakis- tan, with a substantial and growing industrial sector superimposed on a p r i m a r i l y a g r i c u l t u r a l and low- productivity economy. Nevertheless, the experience of industrialized coun- tries may provide valuable guidelines for the formulation and operation of conservat ion policies, part icular ly with regard to institutional response.

Barriers to conservation Obviously, economic pricing of energy is central to an effective conservation policy. Energy prices must reflect the workings of the market and so give energy consumers the correct signals for the future, so that they can adjust their practices and investment deci- sions accordingly. But even when such policies are pursued, there are strong barriers to the impact of market forces:

• fragmentation of responsibility in government, amongst energy us- ers and in the energy conserva- tion supply industry;

• a low priority for conservation at governmental and management levels;

• uncertainty, both about the fu- ture level and pace of fuel price changes and over the economic

future generally; • a lack of appreciation of the scope

for increased efficiency and of what can be achieved technically;

• technical risks and uncertainties.

There is therefore a major role for government to play in devising and implementing sectoral programmes to increase energy efficiency. This is even more important for those de- veloping countries that have felt un- able to adopt economic pricing ener-

gY.

Experience of industrialized countries Major energy conservation program- mes have been instituted in industrial- ized countries, with many similar fea- tures. Yet progress has been uneven (see Table 2). An interesting analysis by Christopher Johnson I contrasts the experience of major industrial coun- tries. Japan has achieved a striking success - a growth in GDP between 1978 and 1982 of 39% with negligible change in energy usage, and a reduc- tion of a third in the energy compo- nent of industrial activity. FR Ger- many too has achieved a substantial growth of GDP (16%) with a reduc- tion of 30% in its energy usage. In France it looks as though economic growth has been achieved with mini-

118 ENERGY POLICY April 1985

2It is interesting that the USA, whose per- formance is at the lower limits of industrial- ized countries, relies heavily on market forces, although regulated gas and elec- tricity prices have distorted market signals.

mal additional energy demand. The UK has also reduced its energy content of GDP by 20%, although this largely reflects the increase in production of North Sea oil. Without this factor it has lagged behind the other industrial countries, and retains a highly energy intensive profile, with much lower lev- els of GDP growth. The USA has been even less successful, having reduced its GDP-energy ratio by only 14%.

Most industrialized countries have broadly similar programmes to en- courage greater efficiency of energy usage. A major determinant of their effectiveness seems to be the level of commitment which will catalyse frag- mented responsibilities and provide adequate resources of manpower and finance to unify the conservation re- sponse.

The need for institutional adaptation Since the improvement of energy effi- ciency is a component of a vast range of activities, responsibility at govern- ment level is normally shared by a number of individual departments, each with its own priorities and spend- ing programmes. In the UK, for exam- ple, responsibility for energy con- servation in buildings rests with the Department of the Environment, in industry with the Department of In- dustry and other Departments are responsible for their own sectors. Other powerful institutions also play a major role, including the energy in- dustries (primarily anxious to sell their products but with a concern for effi- cient usage); professional bodies re- sponsible for buildings and engineer- ing; local authorities; health author- ities and so forth. To get such a large orchestra to play in time and in tune requires a dominant conductor.

Viewpoint

An interesting study by the Associa- tion for the Conservation of Energy has analysed the administration of conservation programmes throughout Europe. In addition, an annual review of energy policies of International Energy Agency member countries looks critically at the same area. There seems a general consensus that the countries that have emerged as most successful have had a centralized and strongly administered national prog- ramme with a highly political profile and adequate financial resources. The precise arrangements have varied. Austria and France have established powerful independent agencies; Den- mark has shared responsibility be- tween two government departments, within a strong legislative framework; FR Germany has allocated overriding responsibility to the Ministry of Eco- nomic Affairs; the Japanese govern- ment has a strong centrally adminis- tered programme coupled with legisla- t ive back-up and an impressive budget; and the UK has recently es tabl ished an Energy Efficiency Office with a high profile, although there is not a unified energy conserva- tion budget.

Conclusion Economists will no doubt continue to debate the precise effects on conserva- tion of pricing policies and gov- ernmental programmes. But however the sums emerge - and there will be a wide range of answers - it is important to see these answers, not as alterna- tives, but as complementary parts of the whole. To the extent that one is weaker, the other needs to be stron- ger. But most importantly, diffusion of political and financial responsibility will debilitate the effectiveness of policy.

Table 2. Effects of energy conservation programmes in industrialized countries.

aManufacturing only. bExcluding France. Note: Figures in brackets are changes in UK industrial energy use- industrial production USA ratio. Japan Source: International Energy Agency, Energy FR Germany Policies and Programmes of lEA Countries, 1983 Europe b review, lEA, Paris.

Energy- GDP ratio 1973 1982 Change (%)

0.98 0.78 -20 (-21 a) 1.12 0.96 -14 (-23) 0.69 0.50 - 18 (-34) 0.64 0.52 -19 (-30) 0.71 0.60 -16 (-30)

Energy GDP Industrial consumption growth production % change 1973-82

- 15 +7 -18 a +5 +17 +7 + 1 +39 +24 - 6 +16 +3 - 2 +16 n.a.

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