Rationale for EE Intervention

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Nearly all devices and systems are less energy efficient in practice than their maximum efficiency in theory. There is always potential for improvement. Thus, few things are truly energy efficient. A device or system can only be more or less energy efficient than the alternatives at a given time, in a given situation. Thus, the technical potential can be defined as the achievable savings resulting from the maximum EE improvement available at a given time, regardless of cost considerations. Market potential is the saving that can be expected to be realized in practice. It reflects what is seen to be technically and financially viable by the consumers. Financial potential is the saving that can be achieved by optimizing the costs and achieving the

3 Diekman et al.1999, 25. See also Birol and Keppler 2000.

4 Newell 2000.

best resource utilization. It reflects the viewpoint of organizations. Economic potential is the saving that can be achieved at a net positive economic effect to society as a whole. Here, multiple economic actors are included and externalities are taken into consideration. An example would be the societal investment in EE to reduce growth in electricity demand. This might be less expensive than building a new power plant. These varying definitions point out the importance of various actors in determining potential energy savings.

The size of the EE potential is not stable, but varies according to different sectors, energy prices and technological developments. The estimates of energy demand reduction through efficiency improvements are based on assumptions about technical factors, equipment costs, expected rates of market penetration, consumer behaviour and policy measures. When considering the potential for improvement, it is important to distinguish between the potential technological savings and actual ones.

Often it is assumed that consumers behave in an economically rational way in view of a cost effective EE measure. However, the evaluation of the cost effectiveness of an EE measure depends largely on the discount rate used, though there is no agreement on what represents an appropriate discount rate. In some cases the discount rates applied to EE improvements are the same as those used by utilities for energy supply investments. In some cases, premiums are included to take into account resource depletion, energy security, environmental and other considerations in order to create 'societal cost effectiveness' measures. Most consumers make investment decisions without direct reference to discount rates and discounted capital flows.

Even in business or industrial organizations, where investments are more likely to be evaluated in terms of rates of return or payback period, more stringent investment criteria are applied sometimes to EE investments than to production investments. Many EE measures that would be paid back in two years or less still do not appear financially attractive for many industrial organizations. For most firms, energy is not a major cost category. Hence, EE often is a minor consideration and it is expected that the costs have to be paid back at a rapid rate. Product characteristics are more important for individual consumers, as are productivity considerations for industrial consumers of which efficiency is only one component. In addition, investments in EE are subject to fluctuations with energy prices. Information on the performance of EE investments is often difficult to acquire. They are perceived as having a higher risk than many other business operations.

These issues contribute to the problem of identifying a single, absolute cost effective potential. In practice, customers do not normally base their choices on formal economic calculations, but on considerations of comfort, quality and availability. Nevertheless a calculation of cost effectiveness gives valuable information about how well resources are used, and if their usage can be improved.

The cost effectiveness of an efficiency measure depends on the costs and benefits considered. For example, from a business perspective, the costs and benefits which are relevant are those borne by the energy user. These include the expenditures for equipment, installation as well as operation and maintenance costs. The benefits include energy cost savings, enhanced labour productivity, environmental compliance or product quality. These are the traditional accounting costs and benefits that affect the industry directly.

From a societal point of view there is a wider range of costs and benefits, which are relevant. These include monetary, health and environmental costs and benefits that accrue to society. Certain societal benefits, such as reduced local air pollution or diminished threat for climate change are external to the market and are difficult to quantify. Moreover, they accrue to society at large, not to the particular party implementing the efficiency measure.

A sustainable energy policy will reduce these pressures by promoting EE. Also, the need to become more energy efficient will stimulate technological innovation by creating markets for more efficient, more advanced products and services. This will create more jobs dedicated to the research and development of energy efficient products, energy advice and saving services, for example, in energy distribution companies.

EE, in short, is an untapped source of wealth creation. Investing in EE will prove to be a profoundly wise way to spend public and private money. While EE is an important objective in itself, promoting EE is also an essential part of an effective strategy to combat climate change. It is estimated that, by using the most advanced technologies, a CO2 reduction of about 50 per cent is possible until the year 2050.5 Energy efficiency, therefore, is a goldmine for CO2 reduction and should not be overlooked in aiming for the Kyoto targets and beyond. As Box 4.1 reveals, increasing EE fulfils multiple objectives.

5 Martinot and McDoom 2000.

Box 4.1 Key Reasons for Advocating EE

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Renewable Energy 101

Renewable Energy 101

Renewable energy is energy that is generated from sunlight, rain, tides, geothermal heat and wind. These sources are naturally and constantly replenished, which is why they are deemed as renewable. The usage of renewable energy sources is very important when considering the sustainability of the existing energy usage of the world. While there is currently an abundance of non-renewable energy sources, such as nuclear fuels, these energy sources are depleting. In addition to being a non-renewable supply, the non-renewable energy sources release emissions into the air, which has an adverse effect on the environment.

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