Mohan Munasinghe

Overview

The objectives of this paper are to define the role of management and conservation of energy demand in national energy planning, explain their importance for developing countries seeking to achieve rapid overall economic development, propose an analytic framework and a practical implementation methodology, identify appropriate research issues and priorities, and describe several case studies.

Analysis

Integrated Planning and the Management of Energy Supply and Demand

Integrated national energy planning (INEP) is a framework designed to assist investment planning, pricing, and management in the energy sector. INEP is an essential part of national economic planning. Energy supply and demand management (ESDM) is the process used to implement energy plans and policies. Although ESDM has a short-to medium-term orientation, its activities should be consistent with the long-term perspectives and policies defined by INEP. In turn, energy supply management (ESM) and energy demand management (EDM) are components of ESDM. Energy conservation is a subset of EDM. The objectives and tasks of INEP and ESDM include

• Detailing the energy needs of the economy to achieve growth and development targets, Choosing the mix of energy sources that will meet requirements at the lowest cost,

• Minimizing unemployment,

• Conserving energy resources and eliminating wasteful consumption,

• Diversifying supply and reducing dependence on foreign sources to save scarce foreign exchange,

• Meeting national security requirements,

• Supplying basic energy to the poor,

• Contributing specific energy demand and supply measures to develop special regions or sectors of the economy,

• Raising revenues from energy sales to finance energy development,

• Stabilizing prices, and

• Preserving the environment.

To achieve these goals, the policy instruments for ESDM include physical controls, technical methods (including research and development), direct investments or policies to induce investments, education and promotion, and pricing, taxes, subsidies, and other financial incentives. The steps involved in planning include the analysis and forecasting of the supply and demand for energy, energy balancing, ESM and EDM policy development, and impact analysis. The responsible institutions should fall under a central energy authority or ministry of energy. Line agencies (for example, the electric utilities) should implement policies and deliver the product.

Shadow Pricing

Shadow prices represent the costs of goods and services when market imperfections cause these costs to differ from market prices. This is a common situation in developing countries, where market distortions (for example, monopoly practices and market interventions such as taxes and duties) result in gaps between market prices and true economic values. In the case of traded items, the world price (excluding taxes and duties) can serve as the shadow price. In the case of nontraded items, a more complex set of calculations, based on the marginal social costs and benefits of using a particular resource, may be required. If the nontradeable item is not important enough to warrant individual attention, a standard conversion factor can be used (the ratio of the official exchange rate and the shadow exchange rate). Because the estimation of shadow prices is generally a lengthy and difficult task, it is suggested that previously calculated shadow prices be used.

Pricing Policy

Pricing is an important tool for EDM, especially in the long run. Energy pricing has efficiency and social objectives. The efficiency or economic-growth objective requires that pricing promote an efficient allocation of resources both within the energy sector and between it and the rest of the economy. Efficiency prices are determined on the basis of marginal opportunity cost and include, to the extent possible, environmental costs. Adjustments to efficiency prices are made to account for social objectives (for example, subsidized prices for low-income consumers, a fair rate of return on assets, energy conservation, price stability, simplicity of pricing structures, and promotion of regional or sectoral development). Methods of price control exercised by governments include price subsidies, cross-subsidies (higher prices for some groups subsidize lower prices for others), import and export duties, excise and sales taxes, quotas, and conservation regulations.

Energy Conservation

Energy conservation is an element of demand management that seeks to reduce the use of energy below some level that would otherwise prevail. The reduction involves elimination of waste, decreases in activities that use energy, interfuel substitution, and substitution of capital and labour for energy. In essence, the adoption of a conservation measure is economically justified if the marginal benefit of energy savings exceeds the sum of marginal costs for additional energy and for nonenergy inputs and the marginal costs of reductions in consumption benefits.

The technical efficiency of energy use is defined by the first and second laws of thermodynamics, which are also known as the conservation and thermodynamic efficiencies. The first law defines efficiency as useful energy output divided by total energy input. The second law efficiency is defined as the theoretical minimum energy required, divided by the maximum useful work available from the actual energy input. The second law efficiency recognizes that a "high-quality" fuel (for example, natural gas) is not ideally matched to "low-quality" end use (for example, space and water heating). Although these thermodynamic concepts are important, especially in energy audits, energy bookkeeping, and energy balances, they should be used only to supplement the economic assessment of conservation measures. They should never be the sole criterion for selecting the optimal level of energy use for a given activity.

Applications of Energy Conservation

The practical application of policies for energy conservation requires a disaggregated analysis of the technical, economic, environmental, and behavioural relationships in each sector-specific end use. Four case studies are used to illustrate an electric power project, a solar energy project, an electricity tariff study, and a conservation measure. A review of more than 30 country studies identifies constraints to effective conservation and suggests a number of corrective measures (Gaskin and Gamba 1983). Other studies analyze the relative effectiveness of various conservation measures (Beijdorff and Stuerzinger 1980) and the policy applications of conservation methods (Pinto 1984).

Suggestions for Further Research

To improve the effectiveness of policy implementation, research should