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1540-7977/12/$31.00©2012 IEEE0 IEEE power & energy magazine may/june 2012

Twin

Peaks

Surmounting theGlobal Challengesof Energy for All andGreener, More EfficientElectricity Services

Digital Objec t Identifier 10.1109/MPE .2012.2188666

Date of publi cation : 19 April 2012

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may/june 2012 IEEE power & energy magazine 21

By Marcelino Madrigal, Mikul Bhatia,Gabriela Elizondo, Ashok Sarkar,and Masami Kojima

TTHE ENERGY SECTOR FACES TWIN CHALLENGES. THE FIRST IS TO MAKE

more energy available at affordable prices to enable all people to use modern energy to

meet their basic needs. The second is to slow the world’s overall growth of energy con-sumption through conservation and energy efficiency improvement and to make energy

sources more environmentally sustainable, locally and globally.

The International Energy Agency (IEA) estimates in its 2011 World Energy Outlook

(IEA 2011 WEO) that about 1.3 billion people did not have access to electricity in 2010.

Even 1.3 billion, however, underestimates the true extent of energy poverty, because

many with nominal access to electricity face frequent, if not chronic, power shortages.

Power shortages affect not only the welfare of households and the effective operations

of schools, clinics, hospitals, and water supplies—adversely affecting public health and

education, among other areas—but also businesses and the rest of the economy. In World

Bank’s 2011 surveys of 127 developing countries, firms reported that, on average, they

were losing electricity nearly 50 hours a week, generating more than a fifth of electricity

consumption from their own backup generators, and losing more than 5% of the value oftheir sales due to power outages. These statistics illustrate how urgently many developing

countries need to secure an adequate and reliable electricity supply as one of their top

priorities for continued economic growth.

The need for clean cooking and heating solutions is just as pressing. Globally, about

3 billion people continue to rely on traditional solid fuels. Indoor air pollution from the

combustion of solid fuels is estimated to kill four people every minute (UNDP and WHO

2009). In addition, where biomass is collected, the time burden on the collectors—many

of whom are women and children—can be considerable. Time spent collecting biomass

takes children away from attending school and studying at home, deprives parents of

time that could otherwise be spent on child care, and denies adults alternative productive

activities, including income generation. Where biomass is not harvested sustainably, its

use can lead to the degradation or loss of tree resources.

While developing countries need more energy, the production and consumption of

energy is already the largest contributor to global greenhouse gas (GHG) emissions. On a

per capita basis, developed countries emit disproportionately more: in 2009, the countries

belonging to the Organization for Economic Co-operation and Development (OECD)

accounted for 18% of the world’s population but 41% of the CO2 emissions from fuel com-

bustion. In contrast, sub-Saharan Africa, with 13% of the world’s population, accounted

for less than 2% of the emissions (IEA 2011). Provided there is a political will, developed

countries are in fact in a position to reduce future energy consumption and GHG emis-

sions in absolute terms. They also have the financial and technical wherewithal to take

the lead and drive down the costs of emerging energy sources and technologies with low

life-cycle GHG emissions by investing in research and development and taking innova-

tions to the market.

Recognizing the importance and urgency of these global energy challenges, the United

Nations General Assembly in December 2010 declared 2012 the International Year of

Sustainable Energy for All (SE4All). In response, the SE4All Initiative was announced in

2011 and set three goals for 2030. The target of the first goal, universal access to modern

energy, is developing countries. The second and the third goals—doubling the rate of

© E Y E

W I R E , B R A N D X P I C T U R E S

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2 IEEE power & energy magazine may/june 2012

improvement of energy efficiency and doubling the global

share of renewable energy—are intended for both developedand developing countries.

Future Evolutionof the Global Energy SectorGlobally announced plans to reduce emission are not enough

to tackle global climate challenges in the energy sector and

bring modern energy and electricity services to under-

served populations. For instance, the New Policies scenario

in IEA 2011 WEO—in which recently announced govern-

ment commitments and plans that address the foregoing

twin challenges are assumed to be fully implemented over

time, even if they have not yet been formally adopted—is a

pathway that falls short of achieving modern energy access

for all, efficient use of energy resources, and locally and

globally sustainable energy sector development. In 2030,

under currently announced actions, 1 billion people will still

remain without electricity, and 2.7 billion people will lack

clean cooking facilities. Total global emissions will con-

tinue to increase on a trajectory that has long-term global

temperatures increasing by more than 3.5 8C by 2035, since

power generation capacity increases from 4,957 GW in 2009

to 9,038 GW by 2035 and the share of renewable generation

technologies and nuclear only rises from 32% to 47% during

that time.

Better addressing global energy challenges requires

actions that are better described by IEA’s Energy for All

and 450 scenarios. This combination will be called the

“structural change scenario” in the remainder of this arti-

cle. The Energy for All scenario adopts the access goal of

the SE4All Initiative. The 450 scenario targets a long-term

CO2-equivalent atmospheric concentration of 450 parts per

million (ppm), which is estimated to result in an average

long-term global temperature rise of 2 8C. Although widely

acknowledged to be ambitious, even limiting the tempera-

ture increase to 28C will have considerable negative cli-

mate change impacts, such as rising sea levels and increased

floods, storms, and droughts. Some of the policies that lead

to this structural-change scenario are as follows: ✔ For universal access, US$1 trillion is invested in

supply infrastructure between 2010 and 2030. In-

vestments go to grid, minigrid, and off-grid power

systems, as well as biogas digesters, gas stoves, and

advanced stoves for solid fuels.

✔ Carbon pricing is introduced in all OECD countries

(the group includes Mexico and Turkey) by 2025 at

the latest, and Brazil, Russia, and South Africa begin

to introduce carbon pricing in 2020.

✔ All net-importing countries phase out fossil fuels

completely by 2020, and all net-exporting countries

do so by 2035.

✔ The United States reduces its CO2 emissions by 17%

between 2005 and 2020 and introduces carbon pricing

in 2020.

✔ China reduces its carbon intensity by 45% between

2005 and 2020, sets higher carbon prices than those

in the New Policies scenario, and enhances support

for renewable energy.

✔ India reduces its CO2 intensity by 25% between 2005

and 2020 and expands feed-in tariffs for renewable

energy.

✔ Europe reduces emissions by 30% between 1990 and

2020 and strengthens the Emissions Trading Scheme

in line with the 2050 road map adopted by the Euro-

pean Climate Foundation.

✔ Carbon capture and storage is a key abatement mecha-

nism and accounts for 18% of emissions savings in

the 450 scenario relative to the New Policies scenario

(note that regulatory, policy, and technical barriers

need to be addressed before this technology can be

deployed on the scale needed).

Under the structural change scenario, global demand for coal

and oil peak before 2020 and decline by 30% and 8%, respec-

tively, by 2035, relative to their 2009 levels. Demand fornatural gas grows by 26%. Four-fifths of total CO2 emissions

table 1. Features of a global structural change capable of providing more, greener,and more efficient energy services for all (source: IEA 2011 WEO and SE4All Goals).

SE4All Goal Main Feature Results

Access to modern energy US$48 billion is invested every year until 2030for universal access, more than five times the

investment for access in 2009.

All households have access to modern energy by2030: households newly connected to electricity

consume 800 kWh in 2030, and all haveadopted clean and efficient cooking options.

Renewable energyand emissions

Power generation capacity increases from4,957 GW in 2009 to 9,484 GW by 2035, andthe share of renewable generation technologiesand nuclear rises from 32% to 62%, also by 2035.

CO2 emissions peak in 2020 and decline to21.6 Gt by 2035, consistent with a pathwaycompatible with a 50% chance of limiting theaverage temperature increase to 2 8C.

Energy efficiency Global primary energy demand increases byonly 23% between 2009 and 2035.

Annual average energy intensity continues todecrease in the period 2009–2035 comparedwith 1985–2009, from about –1.4% to –2.1%annually for OECD countries and from –1.5% toabout –3.3% annually for non-OECD countries.

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cost of supply—especially the cost of the first connection,

and sometimes operational costs as well. The main source of

funds for extending access is the revenue earned from larger

and better-off electricity users. If there are many large con-

sumers (industry, commercial, and high-consumption resi-

dential consumers) and better-off small consumers against

a comparatively small number of poor households withoutaccess, the former can relatively easily cross-subsidize the

latter. If, on the other hand, few large consumers and better-

off small consumers must cross-subsidized numerous poor

consumers, the revenue earned from the former is unlikely

to be sufficient to cover efficient costs of service provision,

according to the World Bank. Making household fuel use

cleaner has unique challenges that require both proper low-

cost technical solutions and proper cost recovery and tariff

mechanisms to ensure that services providers continue to

earn revenue to sustain services while expanding into areas

without service.

Many households, especially those in remote rural areas,may continue to use solid fuels for the foreseeable future.

Indeed, in the IEA’s Energy for All scenario, about 1.3 billion

people are assumed to continue using solid fuels in 2030,

with access being achieved through adoption of advanced

stoves that have considerably lower emissions and higher

efficiencies than traditional three-stone fires for cooking.

Slightly fewer people would shift to LPG, and about 350 mil-

lion would move to biogas, according to IEA 2011 WEO. In

recognition of the need to find solutions tailored to those who

will continue to use solid fuels, clean and efficient cooking

and lighting solutions should be pursued in these situations.

Optimizing Electricity Access:The Local ContextSelecting among the various electricity access solutions,

which encompass grid-based, mini- and microgrid, and off-

grid technologies, can have significant implications for cost,

ease of implementation, and sustainability. It is important to

select the optimal technology and carefully consider trade-

offs between costs and benefits, likely demand growth dur-

ing the planning period, and the prospect of eventual transi-

tion to grid-based access as appropriate. On the last point,

some solutions—such as solar lanterns and microgrids—

may be transitional, eventually replaced by or subsumed into

systems based on larger grids.

Development should be based on financially sustain-

able approaches. Supply-driven approaches to expanding

access often ignore financial sustainability concerns aris-

ing from the inability or lack of willingness of customers

to pay fully for the service. Experience across several coun-

tries (for example, see “Vietnam: A Successful Grid Access

Expansion”) has shown that rapid expansion of grid-based

electricity access can best be implemented and sustained

when investments are prioritized based on willingness and

ability to pay and when clear technical guidelines are pro-vided, in an environment of strong government leadership

In its push for rapid electrification in the 1990s, Vietnam

followed an approach of allowing multiple entities and

financing arrangements to construct, manage, and oper-

ate rural distribution networks without imposing minimal

technical requirements. This approach enabled a rapid

increase in electrification: from 1994 to 1997, access in-

creased from 14% to 61%. Longer-term technical prob-

lems with reliability, the quality of service, and distribu-

tion losses began to emerge, however. Furthermore, the

low efficiency with which some of these networks were

operated, coupled with the lack of financial strength in

some of the community rural distribution utilities, under-

mined the quality and financial sustainability of electric-

ity service. The government responded so as to improve

service quality and the financial sustainability of rural

electricity distribution. A significant feature of the re-

sponse was to define strategies for the system planning,

implementation, and management of rural electrification.

Furthermore, to enhance the development of the power

sector and all electricity activities, the government set

up a new legal and regulatory framework for the sector.

An important recent milestone in this respect was the

prime minister’s Decision 21 in 2009, which stipulated a

unified national tariff for all residential consumers. It was

designed as an incremental block tariff, with the first sub-

sidized block being a lifeline block. The decision also en-

abled the takeover of financially weak local distribution

utilities by the larger power corporations, consolidating

the rural electricity distribution and retail business. In

2010, the Vietnam Distribution Code was approved. It es-

tablished the rights and obligations of power corporations

with respect to distribution and retail activities and their

customers, including provisions regarding quality-of-ser-

vice obligations and consumer protection.

In 2010, 99% of the communes and 96% of the house-

holds in Vietnam were estimated to be connected to the

grid. The four tasks that remain are:

• to rehabilitate the low-voltage electricity distribu-

tion networks in approximately 3,000 communes

• to determine the most suitable way to achieve the

target of electrifying all of the country’s households

• to continue to improve the quality of access and re-

liability of supply

• to continue to ensure that electricity is affordable

to the poor.

Source: World Bank.

Vietnam: A Successful GridAccess Expansion

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and planning and with proper funding from different

sources, including cross-subsidies and government funds.

Such cases typically benefit from higher population density,

greater economic activity, and better transport connectiv-

ity, which allow productive loads and paying demand to be

attained rapidly.

Investment Needs and Financing SourcesIEA estimates that an additional US$30.5 billion, over and

above the US$13 billion committed under the New Poli-

cies scenario (both in 2010 U.S. dollars), would be needed

annually between 2010 and 2030 to achieve universal access

to electricity by the latter date. All urban areas and nearly

30% of the rural households that would be left unconnected

in the New Policies scenario are expected to be connected

through on-grid solutions. The remaining 70% of the rural

households that would otherwise be without service are rela-

tively more remote; two-thirds of them would be connected

through minigrid solutions, and one-third through off-gridsolutions. For cooking and heating, the estimates are US$1

billion annually under the New Policies scenario and an addi-

tional US$3.5 billion for universal access to provide biodi-

gesters, LPG stoves and cylinders, and advanced biomass

cookstoves. The total annual expenditure comes to US$48

billion, compared with US$14 billion in the New Policies

scenario and US$9 billion in 2009. An annual financing of

about US$18 billion would be required from multilateral

and bilateral sources, US$15 billion from developing coun-

try governments, and another US$15 billion from a diverse

range of private-sector actors.

Institutional and Regulatory AspectsA strong institutional setup for expanding access to energy

is highly desirable. Designated agencies responsible for

planning, designing, executing (through public utilities and

private players), and monitoring energy access programs

can play a critical role, especially in sub-Saharan Africa and

South Asia. Increasingly, these agencies would have to act as

market developers and policy formulators rather than just as

implementers. In addition, in response to the lack of inter-

est on the part of distribution utilities in rural electrification

and in the hope of minimizing political interference, many

countries have opted to establish a specially designated

institution to manage multiyear earmarked resources so as

to support rural electrification projects. It is necessary, how-

ever, to ensure that these agencies are adequately resourced.

This approach is often accompanied by a rural electrifica-

tion fund, managed jointly or by a separate entity.

It is also desirable to adopt tariffs that cross-subsidize

efficiently so as to increase financial performance and access

to funds. Cost recovery through tariffs is critical in building

financially sustainable systems. In particular, the high costs

of electricity supply in rural areas and the limited capacity of

households to pay for the service make it difficult to attractinvestment in rural electrification. To do so requires a system

of tariffs and subsidies that ensures sustainable cost recovery

while minimizing price distortions, but such a revenue gener-

ation scheme is absent in many countries. All too often, tariff

subsidies are designed to favor the large majority of consum-

ers, including the well-off, while failing to offer incentives

to utilities to invest in rural electrification. According to the

World Bank, such ill-designed tariff schemes are found par-ticularly in sub-Saharan Africa, where subsidies applied to

residential consumers are highly regressive.

Technology standards for integrating stand-alone mini-

grids with the main grid when the two meet are critical. With

the involvement of several diverse players, ranging from state-

owned utilities to community organizations and private entre-

preneurs, such standardization is in fact indispensable. Apart

from safety and performance considerations, this is especially

important for transition technologies such as minigrids, which

may eventually be integrated into the main grid. Minigrid

solutions need to be designed adequately to be able to sustain

internal demand growth and to include the capability to inter-act with interconnected grids as this becomes feasible.

Renewable EnergyThere are sources of electricity that are low in both cost and

emissions. While the costs of most renewable energy tech-

nologies are highly dependent on the quality of the natural

resource at the installation site, large-scale hydropower tends

to offer the lowest cost and can be competitive with conven-

tional thermal generation. Similarly, geothermal generation

can also be cost-competitive, making it another suitable can-

didate for increasing access and supply reliability in devel-

oping countries. These technologies have challenges of their

own, including large front-end costs and long construction

lead times. At the opposite end of the spectrum, solar tends to

be a more expensive form of renewable energy but could still

be the least-cost option in remote, isolated areas. Table 2 pro-

vides typical characteristics of renewable energy and indica-

tive economic costs, levelized and exclusive of subsidies or

policy incentives. The levelized cost of electricity takes into

account the production patterns for each technology, which

are driven by the particular resource’s availability charac-

teristics, e.g., solar radiation, wind speed, and water inflow

regimes. The characteristic cost estimates demonstrate that

large economies of scale still prevail in power generation.

Figure 2 compares the levelized costs of electricity from

renewable sources and conventional technologies using data

from 190 power plants in 21 countries. The relative costs

show that the median cost for onshore wind power is typically

higher—sometimes more than double—that of conventional

technologies but can be cost-competitive with natural gas or

coal in some circumstances, particularly in North America.

Generation options have unique technical characteristics

that help the system as a whole ensure reliable and secure

operation. Therefore, promoting any one particular form of

generation beyond an optimal mix in a given system wouldnot be economically justifiable or technically viable.

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Planning Planning reemerges as an important tool in the carbon-con-

strained era. Planning does not preclude private sector partic-

ipation in investment and needs to be guided by clear national

policy goals, such as supply adequacy and reliability, local

and global environmental sustainability, and desired levels of

exposure to various price and nonprice risks. Planning should

always adhere to minimum-cost principles and appropriately

value, to the extent practically possible, all policy goals.

Planning should be followed by implementation by investors

figure 2. Levelized cost of electricity for some conventional technologies and wind power. Levelized costs computedat 10% discount rate, 2010. Data are from 190 plants to be commissioned by 2015 in various countries, mostly in AsiaPacific, Europe, and North America. In this figure: Austria (AUT), Belgium (BEL), Canada (CAN), Czech Republic (CZE),

Electricite de France (EDF), Germany (DEU), Hungary (HUN), Italy (ITA), Japan, Korea, Mexico, Energy Supply Associa-tion from Australia (ESAA), and the Electric Power Research Institute (EPRI). (Source: IEA.)

E S A A

, J P N

, K O R

C A N

, M

E X

, U S A

,

E

P R I

A U T

, B E L

, C H E

,

C Z E

, D E U

, E D F

,

E u r e

l e c

t r i c / V G B

,

H U N

, I T A

, N L D

,

S V K

, S W E

A s

i a P a c

i f i c

E u r o p e

N .

A m e r i c a

Nuclear

Coal

Gas

OnshoreWind

Nuclear

Coal

Gas

OnshoreWind

Nuclear

Coal

Gas

OnshoreWind

0 50 100 150 200 250

(US$/MWh)

Median Line

Nuclear

Gas

Coal

Onshore Wind

table 2. Typical characteristics and costs of some renewable energy options (source: REN21).

Technology Typical Characteristics US$/kWh

Hydropower 10 MW–18,000 MW 0.03–0.05

Mini-hydropower 100–1,000 kW 0.05–0.12

Pico-hydropower 0.1–1 kW 0.20–0.40

Onshore wind turbine 1.5–3.5 MW 0.05–0.09

Offshore wind turbine 1.5–5 MW 0.10–0.20

Biomass power 1–20 MW 0.05–0.12

Geothermal power 1–100 MW, binary, single- and double-flash, natural stream 0.04–0.07

Concentrating solar power 50–500 MW (trough), 10–20 MW (tower) 0.14–0.18 (trough)

Solar photovoltaic (PV), utility-scale 200 kWpeak–100 MWpeak 0.15–0.30

Rooftop solar PV 2–5 kWpeak 0.17–0.34

Biomass gasifier 20–5,000 kW 0.08–0.12

Village-scale minigrid 10–1,000 kW 0.25–1.00

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appropriate to the particular country’s circumstances, whether

it is regulated, integrated utilities that provide the energy ser-

vices or private investors in competitive markets.

The estimation of costs and the valuation of benefits

entail complex assessments that face substantial limitations

and uncertainties. Policy makers need to be capable of con-

ducting such analyses so as to be able to choose and deployappropriate economic incentives where necessary. For

example, the most cost-effective option for reducing emis-

sions in one country could be hydropower, while in others

it may be the combination of new wind and gas. Exploit-

ing lowest-cost options is critical in low-income countries in

order to increase access in an affordable manner.

Within the energy sector, integrated resource planning

can assist in the evaluation of alternatives to satisfy future

demand in an environmentally sustainable way, includ-

ing all supply and demand options. Planning that consid-

ers risks and looks proactively at supply and networks in an

integrated manner is increasingly important for scaling updispersed technologies such as wind and solar power.

Investment Needs and Financing SourcesGlobal investment in renewable power and fuels set a new

record in 2010: investment hit US$211 billion, up 32% from

US$160 billion in 2009 and nearly five and a half times the

amount spent in 2004. Financial new investment, a mea-

sure that covers transactions by third-party investors (asset

finance and investment by venture capital, private equity,

and public markets) reached US$143 billion in 2010, equally

split between developed and developing countries. The

developing world’s progress in renewable energy develop-

ment is no longer confined to one or two countries. In 2010,

financial new investment in renewable energy grew by 105%

to US$5 billion in the Middle East and Africa and by 39% to

US$13.1 billion in South and Central America.

IEA’s New Policies scenario projects 2,360 GW more

renewable energy capacity by 2035 than in 2009. Of the

increase in renewable power generation, 40% will come

from wind power, followed by hydropower at 26% and solar

at 24%. Correspondingly, annual subsidies for renewable

electricity should increase to nearly US$180 billion by 2035.

Financing poses two serious challenges. The first is the

volume of subsidies required to support renewable energy

deployment and the availability and sustainability of the fis-

cal and concessional sources to finance them. The second is

attracting private-sector investment in renewable energy to

leverage public and concessional finance effectively.

While some developing-country governments may choose

to provide subsidies for more expensive forms of renewable

energy from their own budgets, their fiscal space is typically

severely constrained in the light of many pressing social

needs. Capital flows to renewable energy investment will

require a combination of grant funding, sovereign guaran-

tees, risk mitigation instruments, and insurance of varioussorts, all depending on project and country conditions.

The second challenge requires designing and imple-

menting effective and efficient policies as well as estab-

lishing an investment climate capable of attracting the pri-

vate sector.

Institutional and Regulatory Support

An increasing number and variety of renewable energypolicies have driven substantial growth of renewable energy

technologies in recent years, especially in high- and middle-

income economies. Policy mechanisms enacted specifically

to promote renewable energy include price- and quantity-set-

ting policies, such as feed-in tariffs and renewable portfolio

standards. These price- and quota-based policies have been

complemented by a variety of fiscal and financial incentives.

Experience shows that the most effective policy or com-

bination of policies depends on factors such as technology

maturity, availability of affordable capital, and the local and

national renewable energy resource base. High- and middle-

income countries have made frequent policy shifts, andmany are now making combined use of price- and quota-

based instruments to address different segments of the

renewable energy market.

Several studies have concluded that feed-in tariff policies

have been effective in promoting renewable electricity due

to the stable revenue they guarantee to providers. The eco-

nomic efficiency (value for money) of feed-in tariff policies,

however, depends on their actual design (whether the instru-

ment provides the minimum subsidy necessary to develop

the market and meet renewable energy targets).

Quota-based policies have favored mature, lower-cost

technologies and have been less effective at scaling up the

market for newer, more expensive forms of renewable energy,

since prices in this mechanism, which are determined by

market forces, tend to be riskier. Over the last few years,

auctions have emerged as a strong mechanism to implement

renewable energy policy, especially in upper-middle-income

economies. Auctions offer an alternative for meeting renew-

able energy targets to traditional, administratively set feed-

in tariffs. When successful, auctions have fostered competi-

tion and pushed prices down. The design of auctions is still

evolving, and their design is critical for success.

Research, development, and innovation continue to be

equally important in developing countries to maximize the ben-

efits of deploying already existing or more mature renewable

technologies. Innovation in developing countries will be criti-

cal for adapting these technologies to local conditions, manu-

facturing the equipment locally, and operating it efficiently.

Energy Efficiency

Planning The effective implementation of energy efficiency poli-

cies around the world could potentially contribute to more

than one-third of avoided GHG emissions by 2050. Thoughthe savings would occur in both developed and developing

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countries, is it is estimated that more than two-thirds of the

efficiency-based potential emissions reduction could come

from demand-side interventions across different end-use sec-

tors in developing countries.

Scaling up energy efficiency is less a technology chal-

lenge than an implementation challenge. Most supply-side

and demand-side energy efficiency measures are alreadycommercially available, and the interventions are feasible

in the short term with current technology and at relatively

low life-cycle costs. Estimates suggest that currently avail-

able technologies alone should be able to achieve 30–40%

improvement across many sectors and countries, a poten-

tial not matched by investments. For example, updating

70% of the installed lighting base (which accounts for

20% of total global electricity consumption) could save

50% of the energy consumed for this purpose using exist-

ing technologies.

While the benefits of increasing energy efficiency are

well recognized, there are several barriers to implementa-

tion that hamper the realization of its potential. These bar-

riers tend to be especially prevalent in developing countries

and particularly on the demand side. The barriers can be

institutional, financial, technological, and/or policy-related

and lead to higher risks for investments and transactions. Forexample, even financially viable energy efficiency projects

are often unable to obtain funding, because financiers per-

ceive higher technical and credit risks. The viability of the

project is judged according to the estimated savings, which

are seen to have large uncertainties and hence raise perceived

technical risks. At the same time, energy efficiency projects

do not entail asset-based financing (which is what bankers

are accustomed to in terms of appraisal) and lack collat-

eral guarantees for performance failure, thereby increasing

credit risks. In addition, the small size of many good energy

Improving energy efficiency has been a cornerstone of China’s

energy policy since the early 1980s. But China faces barriers

to energy efficiency measures, like most other countries. As

China approached the millennium, its government deployed

a variety of sophisticated policies that were well suited to the

developing market economy, including:

• economic reform of most enterprises through price

mechanisms

• regulation (with the passage of the Energy Conservation

Law in 1997 and a revision in 2007) in support of appli-

ance standards and labeling programs, building codes,

and industrial benchmarking

• research and development and/or technology transfer

of new and more energy eff icient technologies

• market-based initiatives, through development of new

investment mechanisms.

Since the early 1990s, several interventions have been

made in China to remove market and implementation bar-

riers. The China Energy Conservation Project, Phases I and

II—an effort supported by the Global Environment Facility(GEF) and implemented by the World Bank—has been suc-

cessful in creating an enabling environment for domestic

investment in energy efficiency projects through aggressive

development of China’s nascent industry for energy ser-

vice companies (more commonly known in China as energy

management companies). The succeeding stages of support

involved another World Bank project, the China Energy Ef-

ficiency Financing Project (also with two phases), which has

been implemented to strengthen the lending capabilities of

domestic banks for energy efficiency and reduce barriers for

large industries.

Under the 11th Five-Year Plan (2006–2010), China pledged

to reduce energy intensity by 20%. Prominent and comple-

mentary energy efficiency programs in the plan included:

• the 1,000 Large Industrial Enterprises Energy Conserva-

tion Action Plan to develop and implement specific en-

ergy efficiency improvement programs in the top 1,008

largest industrial energy consumers, which together ac-

count for about 0.33% of China’s total primary energy

consumption

• a set of programs to encourage a structural shift in in-

dustry away from energy intensity, including efforts to

adjust fiscal policy towards export-oriented, energy-

intensive industry and major programs to restructure or

close inefficient energy-intensive plants

• establishment of special energy efficiency funds to

provide additional incentives for energy conservation

investment

• the “ten key projects,” covering major energy efficiency

improvement technologies in manufacturing, transpor-

tation, commercial and residential buildings, and publicfacilities.

The targets set in the 11th Five-Year Plan were either met

or exceeded: energy consumption per unit of gross domestic

product (GDP) decreased by 19% during the plan years. Mov-

ing forward, the 12th Five-Year Plan (2011–2015) continues to

attach great importance to actively coping with climate change,

controlling GHG emissions, and further improving energy effi-

ciency. Under the plan, China is committed to reducing energy

intensity by 16% and CO2 emissions per unit of GDP by 17%.

Source: World Bank

China: Successful Energy Efficiency Improvement Measures

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efficiency projects leads to higher transaction costs for the

banks and, unless there are credible energy service compa-

nies that can bundle these small projects effectively for the

financiers, the potential remains untapped.

While the private sector has acted on opportunities to

improve energy efficiency where they are financially viable,

penetrating the public and residential sectors and small andmedium-size enterprises has been difficult and will require

public sector support. Some large developing countries, such

as China, have successfully begun implementing important

energy efficiency measures (see “China: Successful Energy

Efficiency Improvement Measures”).

Investment Needs and Financing SourcesThough the incremental costs of energy efficiency measures

pay back fairly quickly, the higher initial costs of energy

efficiency technologies—particularly when those costs are

borne directly by consumers—could be a major barrier in

some countries and sectors. Competition for financing fromalternative projects with higher risk-adjusted returns, along

with the scale and dispersed nature of projects, also deters

investment in energy efficiency improvement.

Private-sector financing will therefore be absolutely

critical. The McKinsey Global Institute reports that invest-

ing US$170 billion annually in energy efficiency worldwide

could generate an average internal rate of return of 17% and

produce energy savings of up to US$900 billion per year.

Estimates by IEA and the Global Energy Assessment of the

International Institute for Applied Systems Analysis indi-

cate that current global annual investments of US$200 bil-

lion in energy efficiency will need to be increased by another

US$258 billion to US$365 billion in order to achieve the

SE4All energy efficiency goals.

Institutional and Regulatory Support Despite numerous attempts, including significant efforts

by development institutions and national governments to

scale up energy efficiency improvements, results to date

have been modest. Transforming energy markets to raise

efficiency requires both regulatory policies and financial

incentives. There is no single one-size-fits-all model for

scaling up energy efficiency, especially on the demand

side. The greatest contributions come through efficiency

improvements in technology, rational energy pricing free

of generalized subsidies, market liberalization, and sys-

tematic efforts to reduce the energy intensity of specific

end-use sectors. Good governance and strong internal

capacity reduce risk to private-sector investors. But many

countries lack the human resources and technical capac-

ity to enforce energy efficiency regulations and develop

appropriate policies. The institutional frameworks, robust

implementation infrastructure, and effective governance

mechanisms that enable such change need to be strength-

ened for regulatory policies to have a larger impact indeveloping countries.

AcknowledgmentsThe findings, interpretations, and conclusions expressed in

this article are entirely those of the authors and should not

be attributed in any manner to the World Bank, to its affili-

ated organizations, or to members of its Board of Executive

Directors or the countries they represent.

For Further ReadingInternational Energy Agency (IEA), World Energy Outlook

2011. Paris, France: OECD, 2010.

International Energy Agency (IEA). (2010). Projected

Costs of Generating Electricity, 2010 Edition. Paris, France:

OECD. [Online]. Available: http://www.iea.org/textbase/

nppdf/free/2010/projected_costs.pdf

International Energy Agency (IEA). (2011). CO2 emis-

sions from fuel combustion statistics. [Online]. Available:

http://www.iea.org/co2highlights/co2highlights.pdf

International Energy Agency (IEA). (2011). Organization

for Economic Co-operation and Development (OECD), Orga-nization of the Petroleum Exporting Countries (OPEC), and

World Bank. Joint Report by IEA, OPEC, OECD and World

Bank on fossil-fuel and other energy subsidies: An update

of the G20 Pittsburgh and Toronto Commitments. [Online].

Available: www.oecd.org/dataoecd/14/18/49006998.pdf

REN21. (2011). Renewables 2011 global status report.

[Online]. Available: www.ren21.net/Portals/97/documents/

GSR/GSR2011_Master18.pdf

United Nations Development Programme (UNDP) and

World Health Organisation (WHO). (2009). The energy ac-

cess situation in developing countries. A review focusing on

the least developed countries and sub-Saharan Africa. [On-

line]. Available: http://www.who.int/indoorair/publications/

energyaccesssituation/en/index.html

United Nations Environment Programme (UNEP). (2009).

Catalysing low-carbon growth in developing economies: Pub-

lic finance mechanisms to scale up private sector investment

in climate solutions. [Online]. Available: www.unep.org/PDF/

PressReleases/Public_financing_mechanisms_report.pdf

United Nations Environment Programme (UNEP) and

Bloomberg New Energy Finance. (2011). Global trends in

sustainable energy investment 2011: Analysis of trends and

issues in the financing of renewable energy. [Online]. Avail-

able: bnef.com/WhitePapers/download/50

World Bank. (2010). Addressing the electricity access gap.

[Online]. Available: http://siteresources.worldbank.org/EX-

TESC/Resources/Addressing_the_Electricity_Access_Gap.pdf

World Bank Group. (2011). Enterprise surveys. [Online

database]. Available: http://enterprisesurveys.org

Biographies Marcelino Madrigal is with the World Bank.

Mikul Bhatia is with the World Bank.

Gabriela Elizondo is with the World Bank.

Ashok Sarkar is with the World Bank. Masami Kojima is with the World Bank. p&e

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