Fueling sustainable development

Fueling sustainable development: The energy productivity solution

By Diana Farrell, Jaana Remes, Dominic Charles
Fueling sustainable development: The energy productivity solution

By choosing more energy-efficient cars and appliances, and selecting lower-energy-consuming production technologies, developing countries could cut their annual energy-demand growth by more than half over the next 12 years.

By choosing more energy-efficient cars and appliances, improving insulation in buildings, and selecting lower-energy-consuming lighting and production technologies, developing countries could cut their annual energy demand growth by more than half from 3.4 to 1.4 percent over the next 12 years. This would leave energy consumption some 22 percent lower than it would otherwise have been—an abatement equivalent to the entire energy consumption of China today.

MGI finds that, under current policies, energy demand in developing countries will increase by 65 percent in the period to 2020, representing 80 percent of global energy demand growth. These countries currently account for 51 percent of global energy demand, and this share will rise to 60 percent in 2020 without further action. Measured on a per capita basis, however, developing countries’ energy consumption will still be less than 40 percent of that of developed regions by 2020.

MGI research indicates that by boosting energy productivity—the level of output achieved from the energy consumed?developing countries could reduce fuel imports, lower the expense of building new energy-supply infrastructure, lessen their vulnerabilities to future energy shocks, and lock in lower energy demand for generations to come.

The economic case for improving demand-side efficiency is strong. Using solely existing technologies that pay for themselves in future energy savings, consumers and businesses in developing countries could secure savings of an estimated $600 billion a year by 2020. Far from costing money, investing in energy productivity generates energy savings that could ramp up to $600 billion annually by 2020 across all developing regions. Because of their positive returns, energy-efficiency investments are also the cheapest way to meet growing energy needs.

MGI finds that developing countries could productively invest some $90 billion annually over the next 12 years in energy-efficiency improvements with positive returns. According to IEA analysis, it would take almost twice as much investment—$2 trillion over 12 years—to expand the supply capacity for the additional 22 percent of energy consumption that would occur without an improvement in energy productivity.

Because of their lower labor costs, the price tag for investing in energy productivity is on average 35 percent lower in developing economies than it would be in advanced economies. Moreover, the relatively early stage of economic development in these regions works to their advantage. Many developing countries will build more than half of the capital stock that will be in place in 2020 between now and then.

MGI finds there are large differences in energy productivity among developing countries at similar levels of income. Three structural factors explain roughly half of the variation. In order of importance, these are energy policies, the structure of an economy, and the climate. Policy-related factors—subsidized or taxed fuel and electricity prices, and the level of corruption in a particular country or region—explain a quarter of the variance; energy subsidies tend to reduce energy productivity, and taxes increase it. The structure of an economy explains another 21 percent; countries with large manufacturing 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 of GDP. Yet less than 50 percent of the energy productivity differences that exist are due to these structural variations. This strongly suggests that most countries have room to improve their energy productivity by adopting best practices developed elsewhere.

The research examines the array of policy distortions, market failures, and information barriers that today stand in the way of consumers and businesses seizing energy productivity opportunities within reach. MGI also identifies seven areas of opportunities for companies in developing countries to create new energy-efficient products and services.

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