McKinsey report looks into energy productivity solutions (page 1 of 3)

Scaling back energy demand growth to this extent would leave energy demand in these regions some 22 % lower in 2020 than it would otherwise have been—an abatement equivalent to the entire energy consumption of China today.

The report, Fueling sustainable development: The energy productivity solution, maps developing countries' energy demand across countries, end-users, and fuel-type. MGI finds that under current policies energy demand in developing countries will increase by 65% in the period to 2020, representing 80% of global energy demand growth. These countries currently account for 51% of global energy demand today and this share will rise to 60% in 2020 without further action.

Measured on a per capita basis, however, developing countries' energy consumption will still be less than 40% of that of developed regions by 2020.

MGI research indicates that by boosting energy productivity—the level of output achieved from the energy consumed developing countries could reduce fuel imports, lower the expense of building new energy-supply infrastructure, decrease vulnerabilties to future energy shocks, and lock in lower energy demand for generations to come.

Because of their positive returns, energy efficiency investments are not only economically attractive but also the cheapest way to meet growing energy needs. The economic case for improving demand-side efficiency is particularly strong in light of the current uncertain economic outlook and financial turmoil. The solutions included in MGI's assessment all generate an internal rate of return of 10% or more in lower energy costs. Solely using existing technologies that pay back for themselves in future energy savings, consumers and businesses in developing countries could secure savings of an estimated $600 billion a year by 2020.

Moreover, MGI finds that developing countries could productively invest some $90 billion annually over the next 12 years in energy efficiency improvements with positive returns. According to IEA analysis, it would take almost twice as much investment—$2 trillion over 12 years—to expand the supply capacity for the additional 22% of energy consumption that would occur without an improvement in energy productivity.

Indeed, because of their lower labor costs, the price tag for investing in energy productivity is on average 35% lower in developing economies than it would be in advanced economies. Moreover, the relatively early stage of economic development in these regions works to their advantage. Many developing countries will build more than half of the capital stock that will be in place in 2020 between now and then.

This gives these economies an opportunity to leapfrog to more energy-efficient technologies and lock in lower energy consumption (whereas more advanced economies will have to retrofit for higher energy efficiency, a much more costly proposition). Because of the huge program of capital stock building, it is vital that developing countries move quickly to boost energy efficiency, the research suggests.

MGI finds there are large differences in energy productivity among developing countries at similar levels of income. Three structural factors explain roughly half of the variation. In order of importance, these are energy policies, the structure of an economy, and the climate.

Policy-related factors—subsidized or taxed fuel and electricity prices, and the level of corruption in a particular country or region—explain a quarter of the variance; energy subsidies tend to reduce energy productivity, and taxes increase it.