Developing World: Prosperity via Energy Efficiency
Diana Farell & Jaana Remes | The McKinsey Quarterly | February 2009
The key for increasing
prosperity in developing countries lies in higher energy efficiency. Sustainable
management of this costly good could reduce the growth of these countries
energy demands in the coming twelve years by more than half - from 3.4 percent
to 1.4 percent. Thus, by 2020 energy demands would be 25 percent smaller than
they are today - a decrease whose volume amounts to more than total Chinese
energy consumption. But time is short: every building and every factory that is
built without adherence to some strict energy standard is another lost chance
for energy conservation. By simply utilizing already existing energy technology
consumers and producers could save around 600 billion US dollars per year.
The McKinsey Global Institute presents four central tasks to aid developing countries in achieving energy efficiency:
- Reduce energy subsidies: According to estimates by the International Energy Agency, state energy subsidies amounted to more than 250 billion US dollars in 2005. That is a higher yearly amount than is spent on energy infrastructure. However, there are opportunities to safeguard the poor from high energy prices. The government should encourage the purchase of more efficient energy equipment and use the money saved on energy consumption to support the lower rungs of society.
- Provide state incentives for improving energy efficiency: Governments should encourage accurately measuring energy consumption, such as the installation of "smart meters" in households. Energy saving should be directly rewarded to raise the incentive of lowering consumption.
- Impose energy efficiency standards: Standards for energy efficiency would promote the production of energy sparing equipment. Simultaneously, this would lower the cost of low-energy appliances allowing more people to buy them.
- Encourage public-private partnerships: Through cooperation between governments, energy providers, distributors and mortgage banks, financing enhanced energy efficiency is possible. China, the world's largest producer of lightbulbs, has already begun restructuring in order to produce more energy efficient bulbs.
The current economic crisis and the low oil prices have little long-term influence on development. 65 percent of saving opportunities through higher energy efficiency are found in developing countries. Making energy investments - around 90 billion US dollars - in these countries before 2020 is crucial. This amount is only half of what developing countries would have to pay for energy infrastructure in order to meet rising energy demands. Indeed, due to lower labor costs, investing in energy efficiency in developing countries is 35 percent less expensive than in developed countries.
This summary was prepared by the Atlantic Community editorial team from "Promoting Energy Efficiency in the Developing World," published here in the The McKinsey Quarterly, February 2009