  
Energy services and development
Lars J. Nilsson
Department of Environmental and Energy Systems Studies
Lund Institute of Technology at Lund University, Sweden
Owen Bailey
Department of Civil and Environmental Engineering, and the Cornell Institute for
Public Affairs
Cornell University, NY, United States
Abstract
Increased energy efficiency at the point of end-use is a key strategy for addressing a
range of energy related problems, including greenhouse gas emissions. There are
energy efficiency alternatives that can be implemented at low cost,and perhaps with
some cost savings – these activities offer no-regrets opportunities for climate change
mitigation. In addition, high levels of end-use energy efficiency will be key for sustainable growth of energy systems, which will be required for economic growth and
the concurrent increased demands for energy services.
This paper briefly reviews the role of energy in development, and the main experiences and considerations associated with energy efficiency as a strategy for leastcost provision of energy services.A major challenge for society is accelerating the rate
of energy efficiency improvement to meet the increasing demand for energy services
and to ameliorate the negative impacts of increased energy supply at the same time.
Thus, the primary focus of this paper is the discussion of various policies and incentives that are conducive to energy efficiency, within the context of development.
Introduction
The overall objective of an energy system should be to provide energy services at
affordable cost without socially unacceptable side effects. Energy services, such as
illumination, refrigeration, torque, cooling and heating, and cooking, are what
satisfy people’s daily needs, not pure kilowatt-hours (kWhs) of electricity or liters
of gasoline. Energy services may also allow access to other forms of service
through, for example, transportation or internet use. Energy commodities are a
means to an end, not an end unto themselves. There are many alternative and
superior means of providing energy services with reduced external impacts from
energy supply.
If the present trends in energy demand and the energy supply mix persist, the
associated environmental, socioeconomic, developmental, and security problems
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will continue to worsen (Goldemberg et al. 1988). Improved efficiency in the
extraction, conversion, and distribution of energy, along with increased reliance
on renewable sources of fuels and electricity, are key strategies to substantially
improve the situation. It is clear that minor adjustments of the present energy
system, such as lower emissions of various pollutants or increased energy security,
will be insufficient to meet objectives formulated by society ( 1997).
Placing stress on energy services rather than energy supply brings improved
energy efficiency into focus, especially at the point of end use. Historically, society
has neglected energy end-use efficiency improvements compared to efforts to
expand and improve efficiency of conventional energy exploration, conversion,
and distribution. However, interest in end-use efficiency strategy as a means of
meeting the demand for cost-effective energy services is growing. While there are
many historic examples of impressive increases in end-use efficiency, countries
around the world are still very far from reaching the ultimate limits of efficiency,
as defined by the laws of physics.
The share of energy being consumed by developing countries will continue to
increase in the coming decades. At the same time, developing countries will also
be facing the task of accelerating socioeconomic development and increasing
standards of living, closing the gap between industrialized countries and developing countries. The proportion of global primary energy supply consumed by
countries that are members of the Organisation for Economic Co-Operation and
Development () and transition economies is projected to decrease from 68%
in 1995 to 54% by 2020. Conversely, consumption by China and the rest of the
developing world are projected to increase from 32% to 46 % in this time period
( 1998).
Solutions to energy planning and policy will differ between countries and
regions depending on available resources, technical skills, geography, culture, and
other conditions. Developing countries tend to have relatively abundant and inexpensive labor, whereas capital may be scarce and expensive, which may lead to different energy planning solutions than those employed in industrialized countries.
These solutions are reliant on national research and development to devise energy
strategies that are tailored to the nation’s specific needs, at times utilizing laborintensive, capital-frugal techniques. In this context, energy efficiency is an
approach, or strategy, that can help simultaneously meet multiple development
objectives.
In this article we briefly review how energy is used and what factors influence
energy demand. We also discuss the potential for end-use energy efficiency
improvements and explain some barriers to capturing economically cost-effective
solutions by the market. Different policy instruments to overcome such barriers
are also discussed.
What are the trends in energy use?
1 See WEA 2000 for a recent
review of global energy issues.
Before the industrial revolution, plants and animals were the primary sources of
energy. Since then, energy use has grown exponentially. Today coal, oil, and gas
contribute 77% of global primary energy demand.1 Nuclear power and hydro
power account for about 6.3% and 2.3% respectively, and the remaining 14% is
wood fuel and other biomass-derived fuels. Developing countries use a much
larger share of biomass fuels than industrialized economies. They also tend to use
them inefficiently, resulting in high pollution levels for low energy service levels.
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Globally, nearly 40% of all fuels and electricity are used in buildings for heating, cooling, lighting, cooking, and for running equipment and appliances. A similar amount is used in industry in a large number of processes such as electrolysis,
distillation, melting, and drying, as well as lighting, ventilation, compressed air,
etc. The remaining 25% is used for transporting goods and people – although the
transportation share of total energy use is increasing in many countries.
Two-thirds of all total primary energy is used by the wealthiest 25% of the
global population. This is a reflection of the much higher levels of energy services
enjoyed by affluent, industrialized countries. The economic elite in developing
countries also frequently have energy consumption patterns that are similar to the
affluent in industrialized countries. In many developing countries, energy
demand doubles every six to ten years, while it remains stable or grows gradually
in industrialized countries.
National energy intensities, as expressed by energy use per unit of gross domestic product () are decreasing in several industrialized countries and some
developing countries (Nilsson 1993). These trends are a result of energy efficiency
The average efficiency of electricity generation in central station power plants
has increased by a factor of six since the turn of the century. However, even in
industrialized countries about 70% of the potential energy of primary fuel is
wasted in the process of delivering kWhs of electricity.
improvements and structural changes, i.e., a shift of economic activity to less
energy-intensive sectors of the economy. For example, in  countries the proportion of  earned by industry dropped from 37% to 32% between 1974 and
1989. In addition, there are structural changes towards less material and energy
intensive products within industry.
The basic materials industries account for most of industrial sector energy use.
Declining consumption intensity of many basic materials such as steel, cement,
ammonia, and chlorine in industrialized countries – as measured by kg per 
– is an indicator of structural change (Williams et al. 1987). This trend is driven by
market saturation of goods such as fertilizers and refrigerators, and improved and
lighter construction, which reduces the amount of material needed for a given
product. In addition to the slowing growth in demand for many basic materials,
the processes by which they are produced have become more energy-efficient,
even during long periods with decreasing energy prices.
While maintaining a certain level of energy services, primary energy use can be
reduced and energy efficiency improved essentially in two ways: higher end-use
and conversion efficiencies. The efficiency by which energy services such as refrigeration, light, and transportation are provided is increasing as a result of technology development. For example, the efficacy in lumens per watt for a modern light
source is several times higher than for Thomas A. Edison’s original carbon filament lamp, which in turn was more efficient than candles or wick-lamps.
Energy conversion and distribution losses have also been reduced. The average
efficiency of electricity generation in central station power plants has increased by
a factor of six since the turn of the century. However, even in industrialized countries about 70% of the potential energy of primary fuel is wasted in the process of
delivering kWhs of electricity. Thus, in industrialized countries, for each unit of
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electricity saved at the point of end-use, three to four units of primary fuel are
saved. For many developing countries the leverage is even greater.
Increased use of modern energy carriers such as electricity and fluid fuels has
contributed to lower energy intensities. In particular, the flexibility of electricity
as an energy carrier has contributed to technological innovation and increased
industrial productivity. The advantages of electricity have led to increasing shares
of electricity in the energy balances of most countries. For example, Swedish
industry replaced nearly all direct hydropower and steam engines with electric
motors in the relatively short period between 1900 and 1955.
In developing countries, the demand for energy services is increasing as
economies grow. Higher incomes are leading to increased demand for energyintensive basic materials and energy-consuming products, such as televisions,
cars, air-conditioners, and refrigerators. Thus, during economic growth, developWhile most of the world’s iron-making is based on the use of coke, coal-poor, biomass-rich Brazil has developed a modern charcoal-based process based on the
efficient use of eucalyptus grown on plantations; this iron is processed into a
high-quality steel that is competitive in world markets ( 1997).
ing countries may partially repeat the experience of industrialized countries by
undergoing a phase of increased energy use per unit of GDP while building infrastructure, expanding basic industries, and accommodating changing consumer
preferences.
Perspectives on energy planning and policy are quite different between industrialized countries, developing countries, and economies in transition. Even
within each of these groups there is significant variance; however, some common
trends are apparent. Industrialized countries generally have mature energy supply
systems, growth in supply is low, and in many areas there is an over-capacity of
supply. Access to electricity and other modern energy carriers is nearly universal.
Saturation effects are evident in equipment for end-use services such as refrigeration, lighting, torque, and cooking. Capital for energy efficiency projects can, in
principle, be raised easily through the financial markets.
By comparison, developing countries are experiencing tremendous growth in
demand for energy services. There is still substantial room for growth in services
and energy supply, since many people do not have access to any electricity or commercial energy and those who do face limitations and reliability problems. Residential sectors are frequently without appliances that the industrialized world
tends to take for granted, such as refrigerators, electric lights, and televisions. Even
if such appliances were available at the residential level, the electricity to operate
them might not be available. Customers in all sectors also face constraints on the
quality and quantity of energy services due to the availability of economically feasible technologies. As a result, most developing country governments are currently
considering methods for providing energy services, often focusing on expanding
energy supply infrastructure.
The energy services in European economies in transition (EITs), economies
that were formerly centrally planned, are similar to those of other industrialized
countries in some respects, i.e. the level of service available. However, the opportunities for energy efficiency improvements are typically much greater in EITs.
  
Energy supply infrastructures are adequate, yet they are often obsolete, polluting,
and oversized due to economic downturns and removal of energy subsidies.
Demand for more services and transportation fuels is also increasing rapidly,
especially in the road transportation sector.
What are the opportunities for energy e≤ciency?
A whole-system approach is required in order to provide energy services in the most
efficient manner. This method begins with analyzing the types of services needed
and the most efficient means of supplying those services using mainly locally available resources. An example of this is designing an energy-efficient building using
solar energy. Decisions are then based on the technologies and the type and quantity
of energy supplies that can help fulfill any remaining need for energy services at the
lowest cost – ideally also including social and environmental costs.
When energy efficiency measures result in saved units of energy, they can then
be used for other purposes. These surplus units, sometimes called ‘negawatts,’ can
provide the same services as generated units except they are generally cheaper,
cleaner, faster to obtain, safer, less interruptible, and less burdensome on national
security than generated units of energy. As a result, investing in energy efficiency
can provide higher returns of services to society for a given financial investment
than investing in energy supply. This type of energy system design philosophy is
called end-use oriented, least-cost method, or a bottom-up approach.
Within the context of the least-cost method, developing countries might invest
in more energy efficient and water efficient irrigation systems to reduce the cost of
pumping. In situations such as villages that maintain a local power supply, energy
efficiency investments can help reduce capacity requirements or enable a given
capacity system to provide more energy services.
End-use oriented, least-cost energy strategies are aimed at achieving the greatest developmental gains for society, given the limits of available capital and technology. End-use, least-cost development saves financial resources, which can then
be devoted to other services such as health care, education, commercial development, and job creation. This strategy will help to get the most use from energy services out of the available resources. Energy services are vital for many important
areas of development, and having high quality energy services is indispensable for
keeping a nation’s citizens and businesses healthy.
What is the potential for modern technology transfer?
In some cases, technology transfer from industrialized countries to developing
countries has taken the form of shipping old, obsolete, inefficient, and polluting
equipment to the developing country. This practice has helped to encourage repetition of the detrimental formative development patterns of the industrialized
world. The operation and maintenance of these inefficient technologies can also
tie up the developing country’s economic resources. The transfer of state-of-the
art technologies will provide developing economies with many of the additional
benefits of energy efficiency, including improved national energy security,
reduced trade imbalances from energy imports, greater demand for skilled labor,
and increased industrial competitiveness.
Developing countries have the opportunity to ‘leapfrog’ the steps taken by
industrialized countries and develop new technologies, or use the most efficient
existing technologies, as their economies grow. Perhaps the clearest, and therefore
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most widely cited, example of leapfrogging is the direct application of modern
technology for telecommunications in developing countries, e.g., optical fibers
and cellular phones. By jumping directly to the advanced technologies, many
countries have avoided wasting resources on labor and material-intensive copper
cables when expanding infrastructure.
In the context of energy efficiency, one historical example of leapfrogging is in
Mexico, where the world’s first plants for producing iron by direct reduction
(without smelting) were built. This technology, used in conjunction with electric
arc furnaces for steel-making, is especially well suited to many developing countries because favorable returns can be realized at scales of 100,000 tons of annual
capacity or less, compared to the 2.5 to 3.5 million ton per year needed for conventional blast furnaces plus oxygen-blown converters. Another example is in
Brazil. While most of the world’s iron-making is based on the use of coke, coalpoor, biomass-rich Brazil has developed a modern charcoal-based process based
on the efficient use of eucalyptus grown on plantations; this iron is processed into
a high-quality steel that is competitive in world markets ( 1997).
New technologies for demand-side efficiency are becoming widely available,
with lower costs, increased efficiency, and improved service. In contrast, many of
the fuels needed for supply-side electricity generation are becoming more difficult
and expensive to find. In the residential sector, the available ‘state-of-the-shelf ’
technologies for lighting, heating and cooling for indoor air and water, cooking,
and appliances have dramatic improvements in efficiency and life-cycle cost of
operation over those currently in use or most frequently purchased. There are
technologies available to the commercial and industrial sectors, such as improved
lighting systems, drive-power and motor systems, industrial process heat and
chemical reactor systems, along with heating, ventilation, and air conditioning
systems that use up to 90% less energy to provide the desired services.
What is the potential for improved efficiency?
Research into various areas of energy end-use suggests that actually implementing the best designs and technologies available today could reduce energy use drafigure 1
Electricity use in refrigerators in
Denmark. Technical development typically leads to
improved energy efficiency.
Based on data from Professor
Jorgen Norgard, Department of
Buildings and Energy, Technical
University of Denmark. Lyngby,
Denmark.
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299
figure 2
Di≠erent concepts of the
energy efficiency potential
(Nilsson 1998)
matically and improve energy efficiency several times relative to present levels
(von Weizäcker et al. 1997). For example, the best new refrigerators use less than
half as much energy as the present average refrigerator in use. Advanced technology, which is not yet commercially available, uses as little as one-fifth of the present average.
The amount of potential for energy efficiency improvement is sometimes
debated, and confusion arises due to varying conceptions of ‘potential.’ Definitions range from what may be technically possible to what may be perceived as
economic and achievable in practice. Estimates of the potential for saving energy
by improving end-use efficiency typically vary from 5%–15% up to 75%–95%,
depending on the end-use application and technical and economic assumptions
(see Figure 2). At the lower end, typically, are estimates of the overnight potential
for profitable changes with short payback times in existing installations. Reported
payback requirements for investments in energy efficiency are typically one to
three years. An example of low-cost overnight measures is improved control or
time-scheduling of lighting and ventilation systems.
Over the longer term, energy efficiency opportunities arise when equipment is
replaced at the end of its lifetime, during new construction, or when a building is
renovated for reasons other than improving energy performance. Taking these
opportunities to apply energy-efficient technology can reduce energy use by more
than 50% relative to the average technology used. The potential increases further
when requirements for short payback times are relaxed, and a more long-term
economic perspective is applied. Using best available ‘off-the-shelf,’ or advanced
technology, takes us even closer to the theoretical minimum energy use for any
given service.
Evaluating end-use technology investments based on life-cycle cost ()
analyses frequently shows a broad minimum in the  curve. In other words, the
net present value of capital plus energy costs does not change much when capital
is substituted for energy. For a given energy service, there are many alternative
choices with different levels of energy efficiency and capital costs but with the
same . Examples include selecting air-handling unit sizes for a given task,
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In the context of energy efficiency, one historical example of leapfrogging is in
Mexico, where the world’s first plants for producing iron by direct reduction (without smelting) were built. This technology, used in conjunction with electric arc
furnaces for steel-making, is especially well suited to many developing countries.
sizing pipes in a pumping system, adding extra insulation to a house, or different
vehicle technology alternatives. Thus, there is little economic risk involved in
making an extra investment associated with a higher energy efficiency alternative.
Potential estimates and efforts to improve efficiency sometimes concentrate on
reducing energy losses in individual components, such as air-conditioners or boilers. Greater opportunities for cost-effective energy efficiency improvements are
typically identified when using a system-wide approach, as illustrated in Figure 2.
The cost of improving the efficiency of only a cooling or heating system of a house
may increase to a point where it becomes uneconomical to continue making further efficiency improvements. However, system-wide efficiency measures, for
example through improved insulation and building design, may bring cooling and
heating needs down to a level where the conventional cooling or heating system
can be replaced by a much less expensive system or eliminated altogether.
figure 3
A system-wide approach
may result in greater energy
efficiency improvements at
lower cost than when components are viewed in isolation. (Adapted from Nilsson
1995)
It is also worth noting that the energy efficiency potential is changing as higher
efficiency technologies are continuously being introduced into the market. A
common misconception about energy efficiency is the idea of ‘ever-rising costs’ to
achieve greater energy efficiency (H. Nilsson 1995). An example of this is the idea
that improved designs for energy-efficient and -free refrigerators will automatically require more expensive insulation materials and compressors. However,
this perspective does not take into account the dynamics of real markets, where
factors such as technological breakthroughs and development, learning, production volume, and industrial retooling bring costs down. It also ignores the reality
that energy efficiency improvements often are introduced in conjunction with
other product or process improvements that have a value, e.g., improved quality
and productivity.
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The greatest opportunities for energy efficiency typically arise at the time of
new construction. The cost of retrofitting an existing building to a certain level of
performance is considerably higher than installing technologies during construction. Failure to do so may result in lost opportunities, i.e., it may be prohibitively
expensive to improve an existing building or to replace a new but inefficient
household appliance. In countries with high rates of economic growth and associated investments in industry, buildings, etc., it is particularly important to seize
these energy efficiency opportunities when they are available.
Energy scenarios can be used for exploring various development paths for the
global energy system. Such scenarios can demonstrate that solutions to current
energy problems are possible, and that sustainable energy futures, for example
with 60% to 70% reductions in carbon dioxide emissions relative to present levels,
Improving a work environment through installing energy efficient lighting and
air-handling will save energy, but the value of a 5% to 10% office worker productivity increase that may potentially result from the change may be ten times
higher.
are compatible with the need for increased levels of energy services. A key element
in sustainable energy scenarios is an accelerated rate of energy efficiency improvements relative to historic rates. Best available technologies or advanced technologies are assumed to reach high levels of market penetration in such scenarios. In
addition, sustainable energy future scenarios are based on a greater utilization of
renewable energy and other advanced technologies.2
What are the non-energy benefits?
End-use oriented, least-cost energy strategies do more than just save energy and
money for consumers and capital developers. There are many non-energy benefits to this approach as well. As discussed earlier, energy-efficient design of services
may help save capital, thereby allowing funds to be put toward providing energy
services to customers that might not previously have had access. In addition, this
saved capital can be used for improving other aspects of people’s lives such as
health care and education.
The improvements in productivity, quality, process control, etc. from energy
efficiency practices can help boost productivity and product output while creating new jobs in industry. This productivity improvement can enable these industries to compete internationally, which will, in turn, attract more capital investment to the country. Many energy efficient technologies, such as high-efficiency
motors and lights, allow increased operation control, resulting in large increases
in material, energy, and labor productivity. Increasing the competitiveness of a
business also facilitates attracting investment, gaining international market share,
and earning foreign currencies.
At the individual project level, the non-energy benefits may dwarf the economic value of direct energy savings. This is often observed when implementing
day-lighting technologies or modern artificial lighting, which substantially reduce
maintenance costs in addition to energy costs. Improving a work environment
through installing energy efficient lighting and air-handling will save energy, but
the value of a 5% to 10% office worker productivity increase that may potentially
2 For further information, see
Goldemberg et al. 1988 and
wea 2000.
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result from the change may be ten times higher. Other non-energy benefits can be
more difficult to quantify. For example, shifting from cooking on inefficient
wood-stoves to efficient stoves using electricity or a fluid fuel such as biogas can
substantially improve indoor air-quality and reduce negative health impacts from
indoor air pollution.
An end-use, least-cost energy strategy will also help to make a nation’s energy
system more reliable on a local level, and more secure on a national scale. Energy
efficiency improvements reduce the need to invest in large power plants and large,
extensive transmission and distribution systems. It simplifies the system by
moving the energy service, creating capacity (efficiency projects) closer to the enduser. This has a financial value in terms of both risk reduction and reliability.
Nationally, energy efficiency improvements may help to keep resources within the
country rather than draining money from the economy to burn more oil, coal, and
natural gas imported from other countries. Energy efficiency improvements can
also help support current industry and develop new national industries in
efficiency technologies, as well as design strategies and distributed energy systems
utilizing alternative energy supply technologies.
Nations using energy efficiency and renewable energy strategies will suffer less
local and regional environmental pollution. Indoor and outdoor air quality will
be greatly improved by reducing or eliminating the use of inefficient energy technologies that send large amounts of pollution into the local air for cooking, industrial process heat, transportation, and electricity generation. This pollution takes
the form of particulate matter, nitrogen oxides, volatile organic compounds,
ozone, sulfur dioxide, etc., all of which adversely affect human health.
What is to be done to implement energy efficiency?
3 See, for example, Fisher and
Rothkopf 1989; Jochem and
Gruber 1990; Golove and Eto
1996; and Reddy 1991.
Barriers to energy efficiency
There are many barriers to the successful implementation of an end-use, leastcost strategy for energy services. These barriers can help explain why a system may
require outside intervention in order to accomplish development goals. The outside agent may be a government agency, a private sector company, a non-governmental organization (), or an international lending or aid institution.
Among the barriers to end-use, least-cost planning is the traditional ‘supplyside’ mentality of energy planners, international financial institutions, and government agencies. These organizations have traditionally pursued supply expansion as a first step toward increasing energy services rather than focusing on
energy services. This approach is typified by an increased supply of raw energy
being defined as an end unto itself, rather than as one of many possible means to
an end. It often fails to fully realize the true end-goal of improved access to quality energy services. It is akin to the old adage of throwing money (or energy) at a
problem and hoping for the best solution.
There are several other reasons why energy efficiency improvements that are
apparently economically attractive are not implemented. There is an extensive literature on this subject.3 A complete list of specific barriers would be very long.
However, there are three general categories of barriers that can be identified:
• low fuel and electricity prices;
• differences in economic criteria between energy users and suppliers; and
• energy and its cost being a relatively low priority to most users.
  
Such scenarios can demonstrate that solutions to current energy problems are
possible, and that sustainable energy futures, for example with 60% to 70%
reductions in carbon dioxide emissions relative to present levels, are compatible
with the need for increased levels of energy services. A key element in sustainable
energy scenarios is an accelerated rate of energy efficiency improvements relative to historic rates.
The environmental, security, and other external costs associated with energy use
are generally not reflected in fuel and electricity prices. For example, it has been estimated that if the environmental costs associated with electricity production in coal
and oil-fired power plants were included, the cost of electricity from such plants in
Europe would approximately double. Even though it is difficult to quantify environmental externalities, such as the cost of future climate change, risks associated
with nuclear power, or the cost of keeping oil flowing from the Middle East, the decision not to consider them quantifies them implicitly by setting their value at zero.
Direct or hidden energy supply subsidies are common in many countries. It is
estimated that between $250 and $300 billion is spent in subsidies globally
per year ( 1997). Prices are sometimes used as political instruments – fuels
and electricity may be subsidized or even given away for free to obtain public support. Artificially low electricity rates may be sometimes offered to attract industries. Energy-intensive industries that compete on international markets are typically exempt from energy taxes or receive a tax refund based on the amount they
export. The long-run marginal cost for new fuel or electricity production is high
in most areas, but prices to end-users are usually based on the lower average cost of
production.
Under-investment in end-use energy efficiency that results from low energy
prices is further compounded by the difference in economic criteria between energy
users and suppliers. This is caused in part by differences in the access to financing.
Investments in new power plants are often evaluated using real discount rates of 4%
to 6%. In contrast, end-users often require one to three-year payback times on
investments in energy efficiency, implicitly assuming discount rates of 30% to 100%.
A primary reason for this is that end-users do not have the same access to capital as
large energy suppliers. Consequently, from a whole-system perspective, there is
over-investment in supply and under-investment in energy efficiency.
The difference in economic criteria is also related to the fact that energy is a low
priority to most end-users. As a result, information and awareness about the opportunities to improve efficiency are limited. In many instances there are misplaced
incentives, e.g., when a landlord buys equipment for which a tenant must pay operating costs. The high required rates of return are also in part a reflection of the transaction costs involved in finding and evaluating investment options, and the risk that
the investor will not receive the expected benefits. One important policy objective is
improving the market mechanisms by reducing transaction costs and thereby helping consumers, architects, engineers, and managers make better choices.
Getting there: Policies and implementation practices
A successful energy policy builds upon a vision of a nation’s development. This
vision should include the types of services needed, the kind of industrial invest-
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ments to be made, the types of jobs created, and how to optimize the capital investment under the constraints of competing demands for resources. Analyzing a
nation’s assets (including natural resources, skilled labor, and capital) and defining goals will help direct a coherent development strategy along with an intelligent
energy policy and a well thought out plan to implement it.
There are a variety of policy tools that can be used to stimulate increased energy
efficiency. It is critical to try to foresee the logical short- and long-term responses
to some of these policy measures to determine if they will have the intended effect.
Consideration of the incentives that will be in place after a given policy is implemented will help to forecast responses to the policy in terms of natural resource
issues, technology development, and socioeconomic behavior. Policies may be
general in nature, e.g., energy or carbon taxes, or targeted to overcome or remove
barriers for specific sectors or technologies.
It is also important to develop a full understanding of the balance of incentives
and disincentives (motivators not to participate in an activity) needed to transform energy consumption patterns toward policy goals that address energy
efficiency both directly and indirectly. For example, electric utilities often have
incentives to generate and sell increasing amounts of electricity. They are
rewarded for selling electricity and penalized for reductions in its use. Incentive
systems or regulations need to be established to reward utilities for providing
energy services, rather than units of energy, as efficiently as possible. An important step toward that end is to allow utilities to collect profits from implementing
energy efficiency measures.
There are many forms of policies and market mechanisms for promoting and
supporting energy efficiency programs in energy service markets. These include:
voluntary and compulsory standards and building codes;
energy labeling of equipment;
regulation of monopoly energy companies;
design guidelines and education for architects or industrial engineers;
Research Design and Development () efforts;
energy service company () activities;
market transformation programs;
public-private initiatives and voluntary agreements;
government procurement policies, consortiums, and financial incentive programs; and
• other market mechanisms.
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Each of these programs or policies has the potential to increase energy
efficiency. Each also has unique benefits and drawbacks.
An effective method of initiating energy efficiency strategies is the implementation of policies that rely on market mechanisms. Energy efficiency potential is a
dynamic entity and it will continue to increase. Policies that rely on market mechanism are more likely to capture this potential and spark entrepreneurial activity. In
some areas market mechanism strategies may have a greater impact than, or be an
important complement to, the energy efficiency command and control structures
that are typically favored by governments, such as taxes, regulations, and standards.
Market approaches can go a long way toward achieving the goal of an energyefficient and developed economy. However, regulations and energy taxes may still
be used for shaping energy demand. During the design of a manufacturing process
  
or building or when an appliance is being purchased, the cost of operation due to
energy prices is often not considered. Hence, policies that rely on manipulating
energy prices are only one strategy for encouraging energy efficiency and may not
be the most effective for achieving policy goals.
The use of market mechanisms that push the performance of the products and
services in a more energy efficient direction, in any given market, is sometimes
called market transformation. One technique for transforming markets is ‘feebates,’ where a certain standard is set for a product by a government agency or
other independent source. Products that perform above the standard receive a
rebate off of their sale price; products that perform below the standard are charged
a fee that is attached to their sale price. The program is revenue neutral; the fees
pay for the rebates. The effect is to encourage manufacturers to produce efficient
products, and for consumers to buy them. Consumers with more socially and
environmentally attuned buying habits are rewarded while those imposing
energy-related costs on society are penalized. This is a market approach that incorporates the ‘polluter pays’ principle.
Market transformations are limited in their effectiveness, however. Customers
still need individual attention because the existing stock of houses or electric
motors is much larger than the new capital equipment purchases. Transforming
markets may not remove inefficient equipment if it has a long lifetime. There will
These surplus units, sometimes called ‘negawatts,’ can provide the same services
as generated units except they are generally cheaper, cleaner, faster to obtain,
safer, less interruptible, and less burdensome on national security than generated units of energy. As a result, investing in energy efficiency can provide higher
returns of services to society for a given financial investment than investing in
energy supply.
still be a need for programs designed to eradicate obsolete, inefficient equipment
in homes and businesses. Market transformations only work at the point of purchase or design. They cannot address the abundance of less efficient equipment
that is currently being used in all sectors.
On the opposite end of the policy spectrum, regulations and standards can be
an effective way of ensuring a base-level of energy efficiency. Typically, product regulation determines a minimum acceptable level of energy consumption or performance, and requires that it be met. This type of regulation succeeds in eliminating
the worst products or services from the market and can be very effective in improving the overall performance levels of new investments. However, manufacturers or
designers may view the regulation only as a requirement to meet, rather than as a
starting point. There is little incentive to increase energy performance beyond the
minimum set by the government.An often heard comment about regulation is that
when, for example, an architect exclaims proudly that the building he designed
‘meets code,’ he is really saying that if he built it any worse he would be fined. The
result, from refrigerators to commercial buildings, is that energy performance
tends to clump around the government’s mandated standard with little variation
between companies. The government must then revise the code or standard every
few years, as technologies and design strategies improve, rather than having this
happen naturally, as it would if there were proper incentives in the market. As such,
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Thus, energy efficiency strategies offer low or negative cost, and can be
approached as no-regrets opportunities for mitigating climate change.
regulatory and voluntary standards can be effectively used in combination with
market-based approaches to stimulate improvement in energy efficiency.
The government can also help to coordinate voluntary programs that help to
encourage companies or consumers in a market to come together, and in so doing
receive benefits for cooperation that might not otherwise been available to the
market. This approach has been successfully implemented in Sweden through a
number of technology procurement or market transformation projects to
improve the performance of appliances, buildings, and industrial equipment.
Similar approaches have been tried in North America, for example through the
Partnership for a New Generation of Vehicles program, the Super Efficient Refrigerator Program, and the Green Lights program.
In summary, energy efficiency should be an intrinsic part of energy policy, and
energy policy an intrinsic part of development policy. Thus, policy strategy should
include energy efficiency as an integral component of the development process.
Policy strategy should foster a comprehensive and coherent set of incentive systems that encourage energy efficiency in all areas of development. The implication
of this is that energy efficiency will always be considered when a project or investment is being planned.
Summary
Energy efficiency, like other productivity improvements, helps to enhance development by providing increasing levels and quality of service. There is no trade-off
between protecting the environment and providing critical development services.
Energy-efficiency strategies incidentally provide environmental protection to
those populations who need it most—those who are most likely to suffer from
environmental problems and who can least afford to recover from them. Increased
energy efficiency is a key element in sustainable energy futures with low carbon
dioxide emissions.
There are several historical examples of impressive increases in energy
efficiency, and the potential for continued improvements is great. Theoretically,
the same level of energy services could be provided using only a fraction of the
energy supply used today. With the existing technology, it is cost-effective to
reduce energy use by 50% or more in some applications. Bottom-up studies suggest that industrial countries can reduce their energy demand by 10% to 30% at
low or negative cost to society, even when external costs are not included. Thus,
energy efficiency strategies offer low or negative cost, and can be approached as
no-regrets opportunities for mitigating climate change.
The major challenge for society is to accelerate the rate of energy efficiency
improvement in order to meet the need for energy services, particularly in developing countries, and at the same time to ameliorate the negative economic, social,
and environmental impacts of increased energy supply. Various policies can and
should be used to promote energy efficiency, including codes and standards, procurement policies, , market transformation programs, financial incentives,
etc. The preferred solutions, however, must be sensitive to a range of technology
and country-specific conditions.
  
It is unrealistic to think that developing countries can achieve their development objectives without increasing their energy consumption. A wide variety of
strategies will be needed to implement a coherent policy of providing energy services while establishing the most efficient means of energy supply to provide the
raw inputs needed for those services. Energy efficiency is a cornerstone of sustainable development in industrial and developing countries alike.
References and suggested readings
Fisher, A.C. and M.H. Rothkopf. “Market Failure and Energy Policy: A Rationale
for Selective Conservation.” Energy Policy. Vol. 17, No. 4, 1989: 397-406.
Goldemberg, J., T.B. Johansson, A.K.N. Reddy, and R.H. Williams. Energy for a
Sustainable World. New Delhi, India: Wiley-Eastern Limited. 1988.
Golove, W.H., and J.H. Eto. Market Barriers to Energy Efficiency: a Critical Reappraisal of the Rationale for Public Policies to Promote Energy Efficiency. University of California, U.S.A.: Lawrence Berkeley National Laboratory Report
(-38059). 1996.
. World Energy Outlook. Paris, France: International Energy Agency. 1998.
Jochem, E. and E. Gruber. “Obstacles to Rational Electricity Use and Measures to
Alleviate Them.” Energy Policy. 18, (4), 1990: 340-350.
Nilsson, H. “Market Transformation: An Essential Condition for Sustainability.”
Energy for Sustainable Development, 1, (6), 1995: 20-29.
Nilsson, L.J. “Energy Intensity Trends in 31 Industrial and Developing Countries
1950-1988.” Energy: The International Journal. 18, (4), 1993: 309-322.
Nilsson, L.J. “Services Instead of Products: Experiences from Energy Markets Examples from Sweden.” in F. Meyer-Krahmer (ed.). Innovation and Sustainable Development. Heidelberg, Germany: Physica-Verlag. 1998.
. Fueling Development: Energy Technologies for Developing Countries.
Washington, DC, U.S.A.: U.S. Congress, Office of Technology Assessment,
--516, U.S. Government Printing Office. 1992.
Reddy, A.K.N. “Barriers to Improvement in Energy Efficiency. Energy Policy, 19,
(12), 1991.
Swisher, J.N., G.M. Jannuzzi, and R.Y. Redlinger. Tools for Integrated Resource
Planning, Improving Energy Efficiency and Protecting the Environment.
Roskilde, Denmark:  Collaborating Centre on Energy and Environment,
Risø National Laboratory. 1997.
United Nations Development Programme. Energy After Rio, Prospects and Challenges. New York, NY, U.S.A..: United Nations Development Programme. 1997.
Von Weizsäcker, E., A. Lovins, and L.H. Lovins. Factor Four: Doubling Wealth,
Halving Resource Use. London, England: Earthscan. 1997.
World Energy Council. Energy Efficiency Improvement Utilising High Technology, An Assessment of Energy Use in Industry & Buildings. London, England:
World Energy Council.1995.
Williams, R.H., E.D. Larson, and M.H. Ross. “Materials, Affluence, and Industrial
Energy Use.” Annual Review of Energy, 12, 1987: 99-144.
Worrell, E., M. Levine, L. Price, N. Martin, R. van den Broek, and K. Blok. Potentials and Policy Implications of Energy and Material Efficiency Improvement.
New York, New York U.S.A.: United Nations Department for Policy Coordination and Sustainable Development. 1997.
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Lars J.Nilsson received his MSc in Engineering Physics in 1987 at Lund University,Lund
Institute of Technology, and then joined the Department of Environmental and
Energy Systems Studies at the University. In 1993 he received his Doctor of Philosophy degree. Dr. Nilsson’s foci are energy policy, end-use oriented energy analysis, and
assessment of energy efficient end-use and renewable energy technologies. He has
also studied long-term trends in national energy intensities, the effects of energy
market liberalization on energy efficiency and renewable energy, and policy implications. After a post-doctoral position at the Princeton University (usa) Center for
Energy and Environmental Studies, he is now acting professor with the Department
of Environmental and Energy Systems Studies.
Lund Institute of Technology
Environmental and Energy Systems Studies
Lunds Universitet
Box 117
221 00 Lund.
Sweden
Tel: +046.222.00.00
Fax: +046.222.47.20
www.miljo.lth.se
Owen Bailey is a graduate student in Civil and Environmental Engineering at the
Institute for Public Affairs at Cornell University. He previously worked in the Energy
program at the Rocky Mountain Institute in Snowmass, Colorado.
Cornell University
Civil and Environmental Engineering
220 Hollister Hall
Ithaca, New York 14850
ocb1@cornell.edu