Externalities as Benefits and Drawbacks of Energy Efficiency

This section illustrates the large number of externalities in energy efficiency, since EE provides external benefits or imposed external costs in addition to financial outcome and energy production. As suggested in Table 5.9, the positive externalities are substantial.

The table shows that externalities exist on a local, national, regional and global level. Institutions, such as the GEF focus mainly on global externalities. This contrasts with the fact that national and local benefits and the participation of all stakeholders are increasingly important. The incremental cost principle, which requires GEF to pay only for the additional cost of global benefits, would not be suitable if the objective was to maximize overall net benefits regardless of whether they are local, national, regional or global.

34 Sinclair-Desgagne 1999, no page given in source.

36 Schmutzler 2001, 87.

38 Meyer 1995.

Table 5.9 Externalities of Energy Efficiency

Renewable energy

Externalities c i to both RE and EE

Energy efficiency

Positive Externalities (i) Smaller impact of power disruption due to small size of power plants.

(ii) Greater stability in energy supply through reactive power. This can lower the rate of brownouts and service interruptions, which can be costly for the economy.

(iii) Improved access to electricity for rural populations through small, decentralized, modular technologies.

(iv) Improved soils and greater wildlife diversity by growing energy crops on degraded land.Reclamation of degraded land and habitat

(v) Greater flexibility in sitting due to small scale and variety of installation

(vi) Faster and less costly decommissioning

(reversible technologies)

(i) Lower environmental impacts on air, land, water, climate and biodiversity.

(ii) Foreign exchange savings due to lower bills from imported energy.

(iii) Improved ability to hedge against currency and fuel price volatility through diversification of country's energy profile.

(iv) Increased export revenues from environment-friendly technologies (cf. wind power industry in Denmark).

(v) Lower investments in transmission and distribution (T&D) through energy savings and power stations located closer to customer loads.

(vi) Greater equality among nations due to greater global distribution of energy resources

(vii) Lower impact on indigenous people and local communities than fossil fuel-based projects and dams.

Cost savings for households, firms, municipalities, hospitals and others. For example, lower transmission losses, cost for heating, lighting, less need for fuel supply infrastructure. Postponed investments in energy generation and distribution Faster payback frees capital for reinvestment.

Lower impact of increases in tariffs due to lower consumption of electricity.

Lower requirement for capital than generation and transmission Greater work productivity due to better visual, acoustic and thermal environment in efficient buildings

{Table5-9 Continued)

{Table5-9 Continued)

Renewable energy

Externalities common to both RE and EE Energy efficiency

(viii) Better management of energy demand and reduced length of overall supply shortage due to shorter lead times (small scale, modular systems)

(ix) Stimulation of entrepreneurship, and innovation and local private sector development due to smaller project scale and the need for local manpower and materials.

(x) Regional development through projects, training and information dissemination

(xi) Greater regional independence due to lower reliance on centralized power producers.

(xii) Job and income creation due to -intensive technologies and smaller project scale. This can (a) reduce rural—urban migration;

(b) reduce income disparities.

(xiii) Use of idle production capacity in economic recession.

(xiv) Lower crime through better public lighting.

(xv) Lower mortality and morbidity through lower pollution due to cleaner energy production, better heating systems, better isolated homes and improved water quality. This lowers healthcare costs.

Negative (i) Visual intrusion and noise,

Externalities especially wind power.

(ii) Risk of monoculture due to bioenergy crops as well as the impact of biomass on water and soil.

(iii) High land use for some renewables (e.g., solar farms)

(xvi) Possibility of repair work during operation (live maintenance)

(xvii) Fewer national sovereignty issues and potential for conflict than oil and nuclear energy.

(xviii) Enhanced security of energy supply.

(xix) No need for coercive measures such as resettlement in large hydropower projects.

(xx) Ability to reach remote rural populations to provide/save energy where customer demand is low.

(xxi) Lower consumption of water and lower land use for some technologies

(i) Pollution and waste produced by the production, distribution, and maintenance of renewable energy and energy efficiency equipment.

(ii) Greater transaction costs, including management time, training and marketing.

(iii) Negative environmental effects relating to production and disposal of toxic parts (e.g., batteries for solar energy storage)

Source: Authors.

Energy efficiency can also have negative externalities.39 EE is often promoted based on the assumption that the positive externalities outweigh the negative ones. Sometimes positive externalities can outweigh the lack of financial viability (in addition to any negative externalities).

Externalities not only are relevant with regard to the choice of technologies, but also with regard to the choice of financing arrangements. For example, mobilizing private sector funding will show effects in terms of social justice, access and control.

It makes little sense to classify externalities into categories such as economic, political, cultural and social as these are highly interrelated. For example, energy efficient housing can lower morbidity and mortality, which at the same time saves costs and mitigates the strain on healthcare systems. Sustainable energy reduces environmental strains, which in turn lowers the need for pollution control and remediation investments.

Most of the benefits and drawbacks of energy efficiency can be conceptualized as positive and negative externalities. However, there are some benefits and drawbacks that are relevant for the implementer himself. By way of illustration, if a firm or household invests in energy efficiency and saves money, the financial savings represent the benefit but not an externality.

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