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Electricity end-use efficiency
Electricity end-use efficiency An assessment of the scope for efficiency gains and policy options Genevieve Mclnnes and Erich Unterwurzacher
The demand for electricity is generally growing faster than that for other energy carriers in industrialized countries. Rising concern about the environmental impact of energy production and use, as well as about the costs of increasing electricity consumption, are fuelling interest in opportunities for slowing demand growth by improving end-use efficiency. An assessment of historical developments and currently available end-use technologies in the electricity sector of lEA member countries reveals considerable scope for further improvement. This potential gain can only be achieved, however, through vigorous and concerted action on the part of consumers, governments and electric utilities. These initiatives include demand-side management strategies and measures which have been receiving increasing attention in recent years. Keywords: Electricity efficiency; Demand-side management; Environment
Electricity plays a vital role in modern economies. In 1988, fuel inputs to electricity generation accounted for about 36% of the primary energy requirements in OECD countries and electricity provided about 17% of final energy consumption. Electricity has been the fastest growing energy vector for several decades. The electricity sector is a major user of fossil fuels and is, in practice, the only way that nuclear, hydro and some renewable energy sources can be transformed into usable energy. There has been rising concern in recent years about how to meet the growing requirements for new capacity and at the same time to minimize the environmental Genevieve McInnes and Erich Unterwurzacher are energy analysts at the International Energy Agency (IEA), 2 rue Andr6-Pascal, 75775 Paris Cedex 16, France.
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impacts and other indirect costs associated with electricity supply. These issues have varied in importance from country to country. Nuclear power has been the central issue in several countries, while in others concern has focused on emissions of conventional pollutants from thermal power stations. The siting of new hydropower plants, excessive dependence on imported oil and the rising costs of new capacity have also become major issues. More recently, the possible long-term climatic effects of greenhouse gas emissions have amplified concern about the environmental consequences of electricity generation from fossil fuels. Given that approximately 30% of CO2 emissions are produced by power plants, the electricity sector is a target area for measures to reduce the environmental consequences and risks of energy-use and production. In several studies undertaken recently in OECD countries, 1'2 improving electricity end-use efficiency has been advocated as an important element in strategies designed to limit greenhouse gas emissions. The development of effective electricity end-use efficiency strategies requires an understanding of historical trends in electricity demand and a realistic evaluation of the potential for efficiency improvements for a range of end-uses. Barriers toimproving energy efficiency need to be clearly identified and policies that can help overcome such barriers have to be assessed. It is also useful to draw on experience accumulated so far, as a number of end-use initiatives have already been launched by electric utilities in OECD member countries. TRENDS
IN ELECTRICITY
DEMAND
Electricity demand in the OECD grew in the 1960s and early 1970s at a rate of about 7%/year, equivalent to a doubling of demand each decade. After 0301-4215/91/030208-09 © 1991 Butterworth-HeinemannLtd
Electricity end-use efficiency
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Figure 1. Energy and GDP developments in the OECD (1970-86). Source: IEA, Energy Balances of OECD Countries, IEA, Paris, France, 1990.
1973, growth rates slowed, but electricity remained the fastest growing energy carrier. Since 1973, electricity requirements have grown by more than 50%, while oil demand has remained fairly stable and final consumption of natural gas has grown by over 10%. Figure 1 illustrates the annual growth rate of GDP, oil requirements and electricity consumption between 1970 and 1987 (based on three-year moving averages) in IEA countries. A difference between electricity consumption trends and those of other energy carriers can also be found in energy intensity indicators, which relate energy-use to economic activity. The ratio between the growth of electricity demand and of GDP has declined from about 1-1.5 in the 1960s and early 1970s to less than 1 now. More precisely, electricity intensity increased significantly between 1960 and 1973 and remained fairly stable thereafter, while overall energy intensity (including all energy sources) fell between 1973 and 1988 by about 24% and oil intensity declined by almost 40%. Developments in electricity demand are the result of a range of very diverse factors, including energy policy measures, disposable income levels and consumer behaviour. Governments have in some cases encouraged the use of electricity as a substitute for oil for energy security reasons. In addition, electricity is a particularly versatile form of energy, it is clean at the place of its use and its prices are
generally less volatile than those of hydrocarbons. In some countries, electricity tariffs have been designed to support and attract electricity-intensive industries. Expectations about future price developments are an important criterion in investment decisions and tend to make electricity more attractive as a fuel even when competing energy forms are available. As a result, the market penetration of electric technologies has increased in all economic sectors, and especially in households and in the service sector. In some rapidly growing service industries, such as television and data processing, electricity is the only form of energy which can be used. Overall trends in electricity demand by end-use sector in the OECD between 1973 and 1988 are shown in Table 1. Most of the domestic appliances widely used today began to penetrate markets in the early 1960s and continued to do so in the 1970s and 1980s. Consumers enjoy the convenience of these appliances and demand is growing steadily. For example, the market penetration of dishwashers, described in Table 2 for several OECD countries, progressed significantly between 1973 and 1986. In 1973 in Germany only 7% of households were equipped with dishwashers, whereas in 1986 almost every third household owned one. Saturation levels have not yet been reached and further electricity demand growth can be expected as markets develop for dishwashers and for other equipment with similar characteristics in market
Table 1. Electricity consumption in the OECD (1973--88).
Industry Commercial/public Services Residential Total
Electricity consumption (mtoe) 1973 1985 1988
Annual changes 1973-85
1985-88
146.0
179.7
195.4
1.7
2.8
61.3 89.4 304.2
104.9 136.4 430.7
121.4 150.5 477.7
4.6 3.6 2.9
5.0 3.3 3.5
(%)
Source: IEA, op cit, Ref 4.
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Electricity end-use efficiency Table 2. Dishwasher ownership level, developments between 1973 and 1986 (% households).
Germany Italy Sweden UK USA
1973
1986
7.0 6.6 11.0 1.4 25.0
30.0 10.2 29.5 7.1 40.0
Source: L. Schipper, 'Household electricity use in six IEA countries', Lawrence Berkeley Laboratory, University of California, Berkeley, CA, USA, 1988.
penetration and consumer preference. Virtually all domestic appliances have shown similar historical development and new technologies will probably contribute to additional electricity requirements. For instance, manufacturers of electronic equipment see the residential sector as a major future market for high definition television (HDTV). HDTV-sets have a significantly higher per-unit electricity requirement than conventional television sets, though, as a result of competition among manufacturers, it is reasonable to expect efficiency improvements comparable to those achieved for standard television sets over the last three decades. Similar developments can be identified in the commercial service sector. The rapid growth of modern service industries has contributed to a strong increase in demand, particularly for lighting and office automation. Office automation in some commercial premises already requires the same amount of electricity as lighting. 3 These trends are likely to continue as our economies become even more oriented towards service activities such as finance, real estate and leisure services. Though efficiency improvements have had a significant impact on residential energy demand, increases in levels of ownership have in many cases largely offset efficiency gains. Taking again the example of dishwashers, Table 3 shows that unit consumption decreased between 1973 and 1986 by more than 60%, though the surge in market penetration has more than compensated for lower per unit electricity consumption. The net effect was a quasi doubling of electricity demand for dishwashers. Though saturation levels will be reached and technological progress will continue in all product areas, consumer demand for new equipment must be considered in developing projections of future electricity requirements. Structural changes in the economies of the OECD also have a strong influence on electricity demand, through the effects of increased personal income, changes in lifestyle, shifts in the composition of
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industrial output and developments in production technologies. Intersectoral shifts, ie, changes in the output of different sectors, such as the growth of the service sector at the expense of agriculture and industry, and intrasectoral changes, such as the growth of the machinery industry and the reduced output of primary industry, both result in higher demand for electricity than for other fuels. The application of advanced production technologies such as process automation, is likely to give additional momentum to electricity demand. THE SCOPE FOR EFFICIENCY IMPROVEMENTS A comprehensive assessment of the scope for efficiency improvements would require the examination of all specific electricity end-uses and the efficiency of the technologies employed. Given that there are hundreds of different end-use technologies and that their applications differ from one country to the next, it is more realistic to concentrate on selected major end-use technologies, which account for a large fraction of total electricity use. For instance, six end-uses, residential space and water heating and refrigeration, commercial and public building space conditioning, industrial motors, and lighting, represent 65 to 71% of total electricity consumption. As the number of countries for which complete data exist is limited, six countries (Germany, Italy, Japan, Sweden, the UK, and the USA) have been selected to represent a broad range of climatic, economic and electricity sector characteristics. 4 The USA alone absorbs almost 50% of IEA electricity demand, while the share of other countries ranges from 2.4% in the case of Sweden to 12.4% for Japan. In these countries, industrial motors are by far the largest electricity end-use category (21 to 42%), followed by lighting (10 to 18%). Commercial and public building space conditioning and residential space heating are also major electricity consumers in
Table 3. Dishwasher efficiency improvements, ownership level and electricity consumption in Germany.
Efficiency (kWh/appliance/year) Ownership (% of households) Consumption (TWh)
1973
1986
800
310
7.0 1.20
30.0 2.32
Source: Schipper, op cit, Table 2.
ENERGY POLICY April 1991
Electricity end-use efficiency Table 4. Economic opportunities for efficiency improvements of selected electricity end-uses, a
(A) (C)
(D)
(%)
(B) Total savings possible c
Existing market/institutional barriers d
Potential savings not likely to be achieved e
(E) Time frame for savings (years) f
4.7 5.4 6.8 16.7 9.9 27.0
Medium/high Mixed High Very high Mixed Low/medium
Some/many Some/many Many Many Some/many Few/some
Mixed Mixed Medium High Mixed Low
More than 20 10-20 10-20 10-20 20 or more 10-20
Share of total electricity final consumption b
Residential space heating Residential water heating Residential refrigeration Lighting Commercial space heating Industrial motors
Notes: "How to read this table: For example, for
lighting, 'very high' (more than 50% per unit) savings would result if the best available technology were used to replace the average lighting stock in use today over the next '10-20 years'. Some of these savings would take place under existing market and policy conditions. But due to the 'many' market and institutional barriers, there would remain a 'high' (30-50%) economic potential for savings that would not be achieved.
t'Average share for the six countries examined (USA, Japan, Germany, UK, Italy, Sweden). CBased on a comparison of the average efficiency of existing capital stocks to the efficiency of the best available new technology. This estimate includes the savings likely to be achievedin response to current market forces and government policies as well as those potential savings(indicated in Column D) not likely to be achieved by current efforts: low (0-10% reductionsper unit, on average); medium (10-30%/unit);
the USA and Sweden respectively. Residential refrigeration usually represents about 6.8% of total national electricity consumption. Other end-uses accounted altogether for about 29% of electricity consumption in 1986 and are very fragmented, ranging from household appliances, such as televisions, to industrial process heat. As a result of increasing electricity prices and market competition in the 1970s and early 1980s, improvements in technology and government programmes, there have been significant efficiency gains in all of the six major end-use categories over the past 15 years. Efficiency improvements appear to have been particularly significant for refrigerators, where average use per unit usually declined by 10-20% between 1973 and 1986, and for new buildings, where heat losses generally declined by 2050% or more from the 1970s to 1986. Lighting efficiency has probably increased by about 10% since the early 1970s, the efficiency of commercial space conditioning systems has improved by over 10% and that of industrial motors by 5% or less. The trend towards improved efficiency in new equipment and buildings will likely continue, though the rate of change appears to be slowing. This slackening could of course be accounted for by price developments, but may also be due to the fact that the easiest measures to increase efficiency were taken in the years following the oil price hikes. Nevertheless, electricity savings resulting from these efficiency improvements will continue to occur as existing capital stock is replaced. The pace of improvements
ENERGY POLICY April 1991
high (30-50%/unit); very high (more than 50%/unit); and mixed (spanning at least three categories). '~Extent of existing market and institutional harriers to efficiency investments. cPotential savings (reductions per unit) not likely to be achieved in response to current market forces and government policies (part of total indicated in Column B). gRequired to achieve most of the economic potential for savings. Source: lEA, op cit, Ref 4.
can be accelerated by strong economic growth as this will tend to increase the rate of the replacement of less efficient technologies by new, more efficient ones. Estimates of the efficiency improvements that are both possible and economic are far from precise, as the effects of market forces and government policies are difficult to assess. Table 4 outlines some opportunities for energy savings in each of the major six end-use categories. The Table provides an indication, in relative terms, of both the total existing potential for savings and the potential which is not likely to be achieved by current market forces and governmental policies alone. It also indicates the importance of market and institutional barriers to improved efficiency and the time probably required to achieve the full potential for efficiency improvements should these barriers be removed or overcome. There is a potential for economically justifiable efficiency improvements in all end-uses. The largest economic saving potential is found in lighting uses. Electricity consumption in most lighting systems could be more than halved by the use of highefficiency light bulbs, electronic ballasts and improved reflectors and controls. The efficiency of home refrigerators could also be significantly improved. The use of new motors that are on average at least 10% more efficient than the stock in use also represents a considerable potential. The estimates presented in Table 4 suggest that savings in the range of 10 to 20% could result from efficiency improve-
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Electricity end-use efficiency Table 5. Energy savings due to partial replacement of incandescent bulbs by CFLs in an average IEA household. Total
Annual running hours 1 000 Number of bulbs 6 Incandescent bulbs: circuit voltage (W) 75 energy-use (kWh/year) 450 Partial replacement by CFLs: bulb voltage (W) 18 energy-use (kWh/year) 108 Saving/household electricity (kWh/year) 342 costs (S/year) 31 % of total expenditure 52
400 6
100 4
-
75 180
75 30
660
18 43
75 30
181
137 12 20
0 0 0
479 43 72
16
ments that are not likely to be achieved at present even though they are economically viable, ie, their payback time is below 5 years. The full achievement of this potential implies the replacement of existing capital stock and this could only happen over about two decades. IEA analyses of possible trends in electricity consumption to 2005 indicate that electricity demand, leaving this potential untapped, may grow by 2.7%/year. If a 10 to 20% electricity saving were achieved through improved efficiency, it would result in an annual reduction of 0.5 to 1.1% in this growth rate. But this would require numerous barriers to efficiency investments to be overcome. The scope for further efficiency improvements and consequent reduction of electricity demand growth can be illustrated by examining the case of lighting. This end-use has recently received considerable attention in many quarters, including policymakers, researchers and the supply industry. Incandescent bulbs are by far the dominant lighting technology, particularly in the residential sector, even though their efficiency is low compared to new compact fluorescent bulbs. An estimated 176.1 TWh is consumed by incandescent bulbs in IEA households every year. The average 75 W incandescent bulb costs about $0.6 and has a lifetime of about 1 000 hours, whereas a 18 W compact fluorescent lamp (CFL) has a lifetime of 8 000 hours and costs at least $14. On the basis of an average IEA electricity price for domestic consumers of ¢9/kWh, the rate of return for the additional investment required by CFLs would be 40% for an annual operating time of 1 000 hours, 16% for 400 hours and only 4% for 100 hours. It is reasonable to assume that most domestic consumers would be unlikely to consider investments which have rates of return below 10%. Table 5 presents the energy cost and saving effect of an average 16 bulb household switching to CFLs for all lighting applications which are used more than 100 hours/year.
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There are about 270 million households in IEA countries. The partial replacement of incandescent bulbs by CFLs along the lines described in Table 5 represents a potential saving of 129 TWh/year over the eight-year lifetime of CFLs at a cost of $43 billion in CFLs alone. These figures need nevertheless to be compared to the savings due to reduced generating capacity and avoided generating costs. Using a capacity factor of 50%, 129 TWh would be generated by 29 500 MW of capacity costing (using the average US replacement cost of £1 250/kW 5) some $36 billion, though power stations have a lifetime of at least 15 years. Avoided generating costs, taking an average figure of ¢3.3/kWh, would amount to $4.25 billion/year.
THE ROLE OF G O V E R N M E N T POLICIES Although a substantial potential exists for economically justifiable efficiency improvements, this potential is not achieved in real market conditions because of the presence of a variety of institutional and market barriers. Lack of information, lack of consumer confidence in new technologies, lack of capital, or simply a rather limited interest in energy costs and savings, have all contributed to slowing the introduction of energy efficient technologies. Action by governments as well as by electric utilities will be necessary if these barriers are to be overcome. Energy efficiency is not at the moment a major criterion in consumer purchase decisions. Purchase price, size or appearance are more likely to influence a consumer's decision. The introduction of CFLs in the residential sector for instance is hampered by substantial barriers of this kind. The initial purchase price is high and the average domestic consumer can hardly be expected to work out the rate of return of an investment in CFLs. Lamp fixtures might have to be changed and the light provided by energyefficient CFLs may not meet quality requirements. In fact consumers may believe that the new lamp does not emit the light they are used to. Such behaviour, together with limited access to capital, means that a consumer's implicit discount rate is well above those usually applied in business - 35% is probably a minimum and it can in some cases exceed 200%. 6 Low income households use significantly higher discount rates (above 100%) than households with higher incomes. In addition, rent paying tenants apply implicit discount rates that are much higher than those used by owner-occupiers. 7 Governments have tried to close the gap between
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Electricity end-use efficiency
efficiency improvements likely to be taken up by the market and potential improvements that are economically justifiable. Market forces and other factors which determine electricity end-use efficiency can be influenced by the regulatory framework of utilities and by a range of environmental, energy security, fiscal and other policies that affect the allocation of economic resources. In designing more effective policies to encourage greater electricity end-use efficiency, there are at least four possible strategies that might be considered by individual governments, depending on their economic and political circumstances: •
•
•
•
modification of electricity pricing and other utility regulations to ensure that correct price signals are given to electricity users; removal of any limitations to utilities' implementing demand-side management activities if these activities yield net benefits for both consumers and the utility; improvement of the effectiveness of market forces by ensuring that electricity users have access to adequate information and advice; and offsetting financial barriers to energy efficient investments by offering selected, though usually temporary, financial inducements or by introducing carefully designed efficiency standards.
These strategies can be pursued by the application of three types of policy instruments: information, regulation and economic instruments. Information plays an essentially supportive, though indispensable, role in energy efficiency strategies, s It is most effective when it promotes actions that make good economic sense for an industry or for the consumer. Reliable information is necessary to enable electricity users to identify more energy efficient products and to evaluate the potential savings that might result. In a few countries, utilities and manufacturers have initiated programmes over a range of products to provide energy efficiency labels or similar information, stating estimated comparative annual electricity costs. So far, the USA has introduced the most comprehensive mandatory labelling system covering most major home appliances. These measures can result in significant electricity savings but their ultimate impact on electricity demand is usually limited. Many buyers, for a variety of reasons, just do not make use of the information provided. Regulations and standards can be fairly effective and easy to promulgate, but their initial design often
ENERGY POLICY April 1991
requires considerable technical knowledge. Energy efficiency building standards are a well established instrument, but the introduction and upgrading of equipment standards still poses complex technical and economic problems. The introduction of product standards is usually the centre of a debate involving issues such as free choice (leaving it to users to decide the trade-offs between convenience features, capital costs and operating costs) and restrictions on international trade. In addition, standards need to be updated regularly to take account of economic and technological changes, a process which implies the deployment of significant bureaucratic resources. The USA is probably the only country which has established efficiency standards on a large scale for major domestic appliances and space conditioning systems. Economic instruments involve either pricing policy or the use of financial inducements such as taxes, charges, subsidies or rebates. The first step governments can take to remove maket distortions working against the rational use of electricity, is to allow prices to reflect the long-term cost of supply, including distribution and external costs. Prices are the single most important instrument for influencing supply and demand because they provide both the consumer and the supplier with signals upon which to base their investment decisions. However, for a variety of reasons, electricity tariffs in most lEA countries are not based on the long-run costs associated with supplying electricity but on the average (historical) costs experienced by utilities. In many cases these prices understate the value of electricity. The problem is compounded by the fact that it is not clear to what degree prices really influence electricity demand. A review of the literature on this topic shows a bewildering degree of variation in elasticity estimates, even for a given country and a given sector. 9 Governments in several lEA member countries have encouraged changes in tariff structures and in many places the principles underlying price setting are currently under discussion. In Germany, for example, the government has diminished demand related degression for residential and commercial consumers by reducing the fixed charge. Furthermore, the new scheme aims to relate the demand (fixed) charge more closely to the actual load required. Reforms aimed at bringing tariffs closer to actual generating costs, especially in cases where costs display strong seasonal variations, are also under consideration in lEA countries. This is particularly true for countries with a large share of electricity generated by hydropower and a marked
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Electricity end-use efficiency
winter peak demand, such as Switzerland and Norway. Other instruments, such as taxes and subsidies, were widely applied when energy prices were high to accelerate the penetration of more efficient technologies or to promote fuel substitution. Most schemes have been gradually reduced in recent years as energy prices declined and, simultaneously, the political will to limit public spending reduced the availability of funds. There are a number of other reasons that made governments increasingly reluctant to grant financial incentives. A major pitfall of financial incentive programmes is that those who would have invested in energy demand-reducing measures anyway also benefit from the programmes. This 'free-rider' effect does not result in an optimal allocation of public resources. Nevertheless, developments in the area of environmental protection are fuelling interest in emission-related taxes and in market based economic instruments such as tradeable emission permits, which are likely to affect energy efficiency improvements and policy instruments designed to encourage their development.
UTILITY INITIATIVES Electric utilities can play a central role in increasing the efficient use of electricity. Electric utilities have traditionally concentrated on supply-side activities and their interest in electricity end-use has been limited to influencing demand patterns to optimize load management or increase market share. The reduction of peak loads has always been a priority as the costs entailed in serving peak demand are usually not fully r e f l e c t e d in tariffs. But the traditional role of utilities as a generator, transmitter and distributor of electricity has changed in several countries in recent years as some utilities became increasingly involved in broader demand-side management (DSM) activities. DSM initiatives include traditional end-use measures, such as peak clipping, valley filling, load shifting, as well as new measures to control electricity demand, such as strategic conservation and flexible load shaping. These utilities see new business opportunities in promoting end-use efficiency and have launched information campaigns, initiated incentive programmes, such as rebate schemes for the purchase of efficient appliances, and supported energy service companies which advise consumers on ways of reducing electricity bills. North American utilities have to date been the most active in DSM. This is because there are more
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utilities in North America which are facing the need to increase capacity and because their regulatory environment encourages least-cost planning approaches which often include investments in demand reduction. Utilities have a financial incentive to reduce customer demand if the costs of DSM measures do not exceed the difference between the loss in revenue and the avoided costs of not meeting increased demand. This situation occurs where the tariffs allowed by regulatory bodies or set by the utility are below long-run marginal costs. However, if tariffs are set at or above long-run marginal costs of supply, utilities in theory gain limited or no financial advantage in implementing DSM measures. There are large differences in pricing practices, supply and demand structures and resulting motivation for DSM among utilities, even within a single country. There are also differences in the methods used to determine utility rates of return or earnings, for instance in the types of investments allowed in a utility's rate base. Marketing aspects, the establishment of good consumer relations and a more competitive environment due to the fall in prices of competing fuels are other driving forces for utilities to undertake demand-side initiatives. Environmental concerns and the anticipation of government regulations have also induced utilities to promote end-use programmes. Identifying utilities that might be motivated to reduce electricity demand requires a careful examination of individual circumstances. In addition, there are diverging opinions about the effectiveness of various approaches to DSM and their impact on the economics of utilities and on electricity demand, l°'n In the USA, utilities in 43 States are currently actively involved in DSM: 25 States have implemented DSM schemes, 11 States have developed DSM initiatives and seven States are considering such initiatives. A recent survey found that investments in DSM usually absorb only 1 to 2% of total utility investments and energy savings of the same order are expected. Administrative costs make up a large part of the cost of DSM programmes. A study by Oak Ridge National Laboratory ~2 quantified the administrative costs of programme planning, evaluation, marketing, auditing, quality control, data collection and related activities. Administrative costs amount to about 20% of the total costs of residential sector programmes, though commercial lighting programmes have lower administrative costs (about 10 to 15% of programme expenditures). The impact of utility DSM programmes has so far been rather modest. Comparing demand developments in the USA between 1973 and 1983 with an extrapolation
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Electricity end-use efficiency
of the 1965 and 1975 trends, it appears that actual electricity demand was reduced by 241 GW. 13 This reduction was mainly due to increases in electricity prices (128 GW) and slower economic expansion (100 GW). Utility DSM programmes only made a small contribution to demand reduction (13 GW). But in recent years, the number and scope of utility DSM programmes have increased, leading to much larger savings than the 13 GW estimated for 1983.14 Other lEA countries have launched similar initiatives. Major Canadian utilities are intensifying their DSM activities. British Columbia Hydro will spend about C$ 330 million over the next 20 years in the residential, commercial and industrial sectors on various initiatives, such as retrofitting buildings, energy auditing, energy management control systems and improvement in refrigeration and lighting efficiency. The company expects cumulative savings over the next two decades to reach about 52.5 TWh. Ontario Hydro plans to meet 25% of their projected electricity demand growth through DSM measures costing $C 2.5 billion. In Australia, regulators in the State of Victoria see DSM as one option for meeting environmental objectives, especially in areas where most electricity is generated by coal-fired plants. In Europe, the Swedish Power Board is running an ambitious programme of pilot DSM schemes and Dutch, German and Danish utilities have undertaken efficient lighting programmes providing financial incentives for customers. However, rigorous evaluation is needed to analyse the real impacts on electricity demand in the shortand long-run. For example, some customers may have replaced 40 W incandescent bulbs by CFLs instead of replacing 60 W bulbs, as is usually assumed. Others might have taken advantage of the reduced operating costs of CFLs by leaving them on for longer periods than incandescent bulbs. In fact some lighting manufacturers use the lower operating costs of CFL as a security sales point: 'Get rid of dark corners and put off burglars when you are not around' urges one advertising leaflet. 15 Obviously, such increases in service levels may partially offset the impacts of end-use programmes on electricity demand reductions. A regional Austrian utility ran a one-year rebate programme in 1989 for the replacement of domestic appliances, including refrigerators and washingmachines. Rebates were deducted from electricity bills and were only granted if the new appliances were at least 25% more efficient than those being replaced. The campaign significantly accelerated stock turnover and also supported environmental objectives, as the treatment of chlorofluorocarbons
ENERGY POLICY April 1991
(CFSs) from old refrigerators could be organized in a centralized fashion. But such rebate programmes can also induce strategic behaviour on the consumer side, with unexpected long-term impacts. For instance, consumers may anticipate the next programme and delay investments in new, more efficient technologies. While generating units can generally be counted on to produce power once built, customers who are given a grant to reduce electricity consumption cannot be relied on to not increase energy-use elsewhere. CONCLUSION Electricity is a vital element of the economies of all OECD countries, but sustained growth in electricity end-use requirements has exacerbated a range of energy, environmental and economic problems. One of the responses to these problems is to increase efforts to improve electricity end-use efficiency. Although significant improvements in efficiency have already been achieved, there remains a large, economically viable potential for further gains that may be lost if current trends continue - in the range of perhaps 10 to 20% over the next two decades. The magnitude of the real savings depends on consumers, governments, and utilities. Governments and utilities can deploy a range of policy measures to overcome market barriers to increase efficiency. Many of these options have already been implemented by several countries and have been shown to be cost-effective, if well designed and carefully targeted. Increased government involvement and utility efforts to improve electricity enduse efficiency could, however, be costly and may not necessarily slow the pace of electricity demand growth. Nevertheless, improvements in electricity end-use efficiency could make a significant contribution to meeting environmental and energy security objectives, while at the same time supporting economic well-being. The opinions expressed in this articlc are those of the authors and do not necessarily reflect the views of the IEA or its member countries. 1Danish Ministry of Energy, Energy 2000 - A Plan o f Action for Sustainable Development, Copenhagen, Denmark, 1991). 2Ministry of Economic Affairs, Memorandum on Energy Conservation, SDU Publishers, The Hague, the Netherlands, 1990. 3j.p. Harris, L. Norford, A. Rabl and J. Roturier, "Electronic office equipment: the impact of market trends and technology on end-use demand for electricity,' in Electricity - Efficient End-Use and New Generation Technologies, and Their Planning Implications, Lund University Press, Lund, Sweden, 1989. 4International Energy Agency, Electricity End-Use Efficiency,
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Electricity end-use efficiency OECD, Paris, 1989. 5Nuclear Energy Agency and International Energy Agency, Pro-
jected Costs of Generating Electricity from Power Stations for Commissioning in the Period 1995-2000, OECD, Paris, 1989. 6A.K. Meier and J. Whittier, 'Consumer discount rates implied by consumer purchases of energy-efficient refrigerators', Energy, The International Journal, Vol 8, No 12, 1983, pp 957-962. 7R.S. Hartmann and M.J. Doane, 'Household discount rates revisited', The Energy Journal, Vol 7, No 1, 1986, pp 139-148. 81. Brown, 'An overview of policy and programme options for the promotion of energy efficiency', in Workshop on Conservation Programmes for Electric Utilities, IEA/OECD, Paris, 1988. 9E. Mills, 'An end-use perspective on electricity price responsiveness', Vattenfall Updrag 2000 Report, Stockholm, Sweden, 1989. l°C.J. Cicchetti and W. Hogan, 'Including unbundled demand-
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side options in electric utility bidding programs', Public Utilities Fortnightly, Vol 123, No 12, 8 June 1989, pp 9-20. UF. Wirl, 'Analysis of demand-side conservation programs', Energy Systems and Policy, Vol 13, 1990, pp 285-300. 12L. Berry, The Administrative Costs of Energy Conservation Programs, Oak Ridge National Laboratory, ORNL/CON-294, Oak Ridge, TN, USA, 1989. 13T.W. Keelin and C.W. Gellings, 'Impact of demand-side management on future customer electricity demand', EM--4815-SR, Electric Power Research Institute, Palo Alto, CA, USA, 1986. 14E. Hirst, Electricity-Utility Energy-Efficient and LoadManagement Programs Resources for the 1990s, Oak Ridge National Laboratory, ORNL/CON-285, Oak Ridge, TN, USA, 1989. 15OSRAM, leaflet describing 'Dulux El' lamps.
ENERGY POLICY April 1991
The demand for electricity is generally growing faster than that for other energy carriers in industrialized countries. Rising concern about the environmental impact of energy production and use, as well as about the costs of increasing electricity consumption, are fuelling interest in opportunities for slowing demand growth by improving end-use efficiency. An assessment of historical developments and currently available end-use technologies in the electricity sector of lEA member countries reveals considerable scope for further improvement. This potential gain can only be achieved, however, through vigorous and concerted action on the part of consumers, governments and electric utilities. These initiatives include demand-side management strategies and measures which have been receiving increasing attention in recent years. Keywords: Electricity efficiency; Demand-side management; Environment
Electricity plays a vital role in modern economies. In 1988, fuel inputs to electricity generation accounted for about 36% of the primary energy requirements in OECD countries and electricity provided about 17% of final energy consumption. Electricity has been the fastest growing energy vector for several decades. The electricity sector is a major user of fossil fuels and is, in practice, the only way that nuclear, hydro and some renewable energy sources can be transformed into usable energy. There has been rising concern in recent years about how to meet the growing requirements for new capacity and at the same time to minimize the environmental Genevieve McInnes and Erich Unterwurzacher are energy analysts at the International Energy Agency (IEA), 2 rue Andr6-Pascal, 75775 Paris Cedex 16, France.
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impacts and other indirect costs associated with electricity supply. These issues have varied in importance from country to country. Nuclear power has been the central issue in several countries, while in others concern has focused on emissions of conventional pollutants from thermal power stations. The siting of new hydropower plants, excessive dependence on imported oil and the rising costs of new capacity have also become major issues. More recently, the possible long-term climatic effects of greenhouse gas emissions have amplified concern about the environmental consequences of electricity generation from fossil fuels. Given that approximately 30% of CO2 emissions are produced by power plants, the electricity sector is a target area for measures to reduce the environmental consequences and risks of energy-use and production. In several studies undertaken recently in OECD countries, 1'2 improving electricity end-use efficiency has been advocated as an important element in strategies designed to limit greenhouse gas emissions. The development of effective electricity end-use efficiency strategies requires an understanding of historical trends in electricity demand and a realistic evaluation of the potential for efficiency improvements for a range of end-uses. Barriers toimproving energy efficiency need to be clearly identified and policies that can help overcome such barriers have to be assessed. It is also useful to draw on experience accumulated so far, as a number of end-use initiatives have already been launched by electric utilities in OECD member countries. TRENDS
IN ELECTRICITY
DEMAND
Electricity demand in the OECD grew in the 1960s and early 1970s at a rate of about 7%/year, equivalent to a doubling of demand each decade. After 0301-4215/91/030208-09 © 1991 Butterworth-HeinemannLtd
Electricity end-use efficiency
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Figure 1. Energy and GDP developments in the OECD (1970-86). Source: IEA, Energy Balances of OECD Countries, IEA, Paris, France, 1990.
1973, growth rates slowed, but electricity remained the fastest growing energy carrier. Since 1973, electricity requirements have grown by more than 50%, while oil demand has remained fairly stable and final consumption of natural gas has grown by over 10%. Figure 1 illustrates the annual growth rate of GDP, oil requirements and electricity consumption between 1970 and 1987 (based on three-year moving averages) in IEA countries. A difference between electricity consumption trends and those of other energy carriers can also be found in energy intensity indicators, which relate energy-use to economic activity. The ratio between the growth of electricity demand and of GDP has declined from about 1-1.5 in the 1960s and early 1970s to less than 1 now. More precisely, electricity intensity increased significantly between 1960 and 1973 and remained fairly stable thereafter, while overall energy intensity (including all energy sources) fell between 1973 and 1988 by about 24% and oil intensity declined by almost 40%. Developments in electricity demand are the result of a range of very diverse factors, including energy policy measures, disposable income levels and consumer behaviour. Governments have in some cases encouraged the use of electricity as a substitute for oil for energy security reasons. In addition, electricity is a particularly versatile form of energy, it is clean at the place of its use and its prices are
generally less volatile than those of hydrocarbons. In some countries, electricity tariffs have been designed to support and attract electricity-intensive industries. Expectations about future price developments are an important criterion in investment decisions and tend to make electricity more attractive as a fuel even when competing energy forms are available. As a result, the market penetration of electric technologies has increased in all economic sectors, and especially in households and in the service sector. In some rapidly growing service industries, such as television and data processing, electricity is the only form of energy which can be used. Overall trends in electricity demand by end-use sector in the OECD between 1973 and 1988 are shown in Table 1. Most of the domestic appliances widely used today began to penetrate markets in the early 1960s and continued to do so in the 1970s and 1980s. Consumers enjoy the convenience of these appliances and demand is growing steadily. For example, the market penetration of dishwashers, described in Table 2 for several OECD countries, progressed significantly between 1973 and 1986. In 1973 in Germany only 7% of households were equipped with dishwashers, whereas in 1986 almost every third household owned one. Saturation levels have not yet been reached and further electricity demand growth can be expected as markets develop for dishwashers and for other equipment with similar characteristics in market
Table 1. Electricity consumption in the OECD (1973--88).
Industry Commercial/public Services Residential Total
Electricity consumption (mtoe) 1973 1985 1988
Annual changes 1973-85
1985-88
146.0
179.7
195.4
1.7
2.8
61.3 89.4 304.2
104.9 136.4 430.7
121.4 150.5 477.7
4.6 3.6 2.9
5.0 3.3 3.5
(%)
Source: IEA, op cit, Ref 4.
ENERGY POLICY April 1991
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Electricity end-use efficiency Table 2. Dishwasher ownership level, developments between 1973 and 1986 (% households).
Germany Italy Sweden UK USA
1973
1986
7.0 6.6 11.0 1.4 25.0
30.0 10.2 29.5 7.1 40.0
Source: L. Schipper, 'Household electricity use in six IEA countries', Lawrence Berkeley Laboratory, University of California, Berkeley, CA, USA, 1988.
penetration and consumer preference. Virtually all domestic appliances have shown similar historical development and new technologies will probably contribute to additional electricity requirements. For instance, manufacturers of electronic equipment see the residential sector as a major future market for high definition television (HDTV). HDTV-sets have a significantly higher per-unit electricity requirement than conventional television sets, though, as a result of competition among manufacturers, it is reasonable to expect efficiency improvements comparable to those achieved for standard television sets over the last three decades. Similar developments can be identified in the commercial service sector. The rapid growth of modern service industries has contributed to a strong increase in demand, particularly for lighting and office automation. Office automation in some commercial premises already requires the same amount of electricity as lighting. 3 These trends are likely to continue as our economies become even more oriented towards service activities such as finance, real estate and leisure services. Though efficiency improvements have had a significant impact on residential energy demand, increases in levels of ownership have in many cases largely offset efficiency gains. Taking again the example of dishwashers, Table 3 shows that unit consumption decreased between 1973 and 1986 by more than 60%, though the surge in market penetration has more than compensated for lower per unit electricity consumption. The net effect was a quasi doubling of electricity demand for dishwashers. Though saturation levels will be reached and technological progress will continue in all product areas, consumer demand for new equipment must be considered in developing projections of future electricity requirements. Structural changes in the economies of the OECD also have a strong influence on electricity demand, through the effects of increased personal income, changes in lifestyle, shifts in the composition of
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industrial output and developments in production technologies. Intersectoral shifts, ie, changes in the output of different sectors, such as the growth of the service sector at the expense of agriculture and industry, and intrasectoral changes, such as the growth of the machinery industry and the reduced output of primary industry, both result in higher demand for electricity than for other fuels. The application of advanced production technologies such as process automation, is likely to give additional momentum to electricity demand. THE SCOPE FOR EFFICIENCY IMPROVEMENTS A comprehensive assessment of the scope for efficiency improvements would require the examination of all specific electricity end-uses and the efficiency of the technologies employed. Given that there are hundreds of different end-use technologies and that their applications differ from one country to the next, it is more realistic to concentrate on selected major end-use technologies, which account for a large fraction of total electricity use. For instance, six end-uses, residential space and water heating and refrigeration, commercial and public building space conditioning, industrial motors, and lighting, represent 65 to 71% of total electricity consumption. As the number of countries for which complete data exist is limited, six countries (Germany, Italy, Japan, Sweden, the UK, and the USA) have been selected to represent a broad range of climatic, economic and electricity sector characteristics. 4 The USA alone absorbs almost 50% of IEA electricity demand, while the share of other countries ranges from 2.4% in the case of Sweden to 12.4% for Japan. In these countries, industrial motors are by far the largest electricity end-use category (21 to 42%), followed by lighting (10 to 18%). Commercial and public building space conditioning and residential space heating are also major electricity consumers in
Table 3. Dishwasher efficiency improvements, ownership level and electricity consumption in Germany.
Efficiency (kWh/appliance/year) Ownership (% of households) Consumption (TWh)
1973
1986
800
310
7.0 1.20
30.0 2.32
Source: Schipper, op cit, Table 2.
ENERGY POLICY April 1991
Electricity end-use efficiency Table 4. Economic opportunities for efficiency improvements of selected electricity end-uses, a
(A) (C)
(D)
(%)
(B) Total savings possible c
Existing market/institutional barriers d
Potential savings not likely to be achieved e
(E) Time frame for savings (years) f
4.7 5.4 6.8 16.7 9.9 27.0
Medium/high Mixed High Very high Mixed Low/medium
Some/many Some/many Many Many Some/many Few/some
Mixed Mixed Medium High Mixed Low
More than 20 10-20 10-20 10-20 20 or more 10-20
Share of total electricity final consumption b
Residential space heating Residential water heating Residential refrigeration Lighting Commercial space heating Industrial motors
Notes: "How to read this table: For example, for
lighting, 'very high' (more than 50% per unit) savings would result if the best available technology were used to replace the average lighting stock in use today over the next '10-20 years'. Some of these savings would take place under existing market and policy conditions. But due to the 'many' market and institutional barriers, there would remain a 'high' (30-50%) economic potential for savings that would not be achieved.
t'Average share for the six countries examined (USA, Japan, Germany, UK, Italy, Sweden). CBased on a comparison of the average efficiency of existing capital stocks to the efficiency of the best available new technology. This estimate includes the savings likely to be achievedin response to current market forces and government policies as well as those potential savings(indicated in Column D) not likely to be achieved by current efforts: low (0-10% reductionsper unit, on average); medium (10-30%/unit);
the USA and Sweden respectively. Residential refrigeration usually represents about 6.8% of total national electricity consumption. Other end-uses accounted altogether for about 29% of electricity consumption in 1986 and are very fragmented, ranging from household appliances, such as televisions, to industrial process heat. As a result of increasing electricity prices and market competition in the 1970s and early 1980s, improvements in technology and government programmes, there have been significant efficiency gains in all of the six major end-use categories over the past 15 years. Efficiency improvements appear to have been particularly significant for refrigerators, where average use per unit usually declined by 10-20% between 1973 and 1986, and for new buildings, where heat losses generally declined by 2050% or more from the 1970s to 1986. Lighting efficiency has probably increased by about 10% since the early 1970s, the efficiency of commercial space conditioning systems has improved by over 10% and that of industrial motors by 5% or less. The trend towards improved efficiency in new equipment and buildings will likely continue, though the rate of change appears to be slowing. This slackening could of course be accounted for by price developments, but may also be due to the fact that the easiest measures to increase efficiency were taken in the years following the oil price hikes. Nevertheless, electricity savings resulting from these efficiency improvements will continue to occur as existing capital stock is replaced. The pace of improvements
ENERGY POLICY April 1991
high (30-50%/unit); very high (more than 50%/unit); and mixed (spanning at least three categories). '~Extent of existing market and institutional harriers to efficiency investments. cPotential savings (reductions per unit) not likely to be achieved in response to current market forces and government policies (part of total indicated in Column B). gRequired to achieve most of the economic potential for savings. Source: lEA, op cit, Ref 4.
can be accelerated by strong economic growth as this will tend to increase the rate of the replacement of less efficient technologies by new, more efficient ones. Estimates of the efficiency improvements that are both possible and economic are far from precise, as the effects of market forces and government policies are difficult to assess. Table 4 outlines some opportunities for energy savings in each of the major six end-use categories. The Table provides an indication, in relative terms, of both the total existing potential for savings and the potential which is not likely to be achieved by current market forces and governmental policies alone. It also indicates the importance of market and institutional barriers to improved efficiency and the time probably required to achieve the full potential for efficiency improvements should these barriers be removed or overcome. There is a potential for economically justifiable efficiency improvements in all end-uses. The largest economic saving potential is found in lighting uses. Electricity consumption in most lighting systems could be more than halved by the use of highefficiency light bulbs, electronic ballasts and improved reflectors and controls. The efficiency of home refrigerators could also be significantly improved. The use of new motors that are on average at least 10% more efficient than the stock in use also represents a considerable potential. The estimates presented in Table 4 suggest that savings in the range of 10 to 20% could result from efficiency improve-
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Electricity end-use efficiency Table 5. Energy savings due to partial replacement of incandescent bulbs by CFLs in an average IEA household. Total
Annual running hours 1 000 Number of bulbs 6 Incandescent bulbs: circuit voltage (W) 75 energy-use (kWh/year) 450 Partial replacement by CFLs: bulb voltage (W) 18 energy-use (kWh/year) 108 Saving/household electricity (kWh/year) 342 costs (S/year) 31 % of total expenditure 52
400 6
100 4
-
75 180
75 30
660
18 43
75 30
181
137 12 20
0 0 0
479 43 72
16
ments that are not likely to be achieved at present even though they are economically viable, ie, their payback time is below 5 years. The full achievement of this potential implies the replacement of existing capital stock and this could only happen over about two decades. IEA analyses of possible trends in electricity consumption to 2005 indicate that electricity demand, leaving this potential untapped, may grow by 2.7%/year. If a 10 to 20% electricity saving were achieved through improved efficiency, it would result in an annual reduction of 0.5 to 1.1% in this growth rate. But this would require numerous barriers to efficiency investments to be overcome. The scope for further efficiency improvements and consequent reduction of electricity demand growth can be illustrated by examining the case of lighting. This end-use has recently received considerable attention in many quarters, including policymakers, researchers and the supply industry. Incandescent bulbs are by far the dominant lighting technology, particularly in the residential sector, even though their efficiency is low compared to new compact fluorescent bulbs. An estimated 176.1 TWh is consumed by incandescent bulbs in IEA households every year. The average 75 W incandescent bulb costs about $0.6 and has a lifetime of about 1 000 hours, whereas a 18 W compact fluorescent lamp (CFL) has a lifetime of 8 000 hours and costs at least $14. On the basis of an average IEA electricity price for domestic consumers of ¢9/kWh, the rate of return for the additional investment required by CFLs would be 40% for an annual operating time of 1 000 hours, 16% for 400 hours and only 4% for 100 hours. It is reasonable to assume that most domestic consumers would be unlikely to consider investments which have rates of return below 10%. Table 5 presents the energy cost and saving effect of an average 16 bulb household switching to CFLs for all lighting applications which are used more than 100 hours/year.
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There are about 270 million households in IEA countries. The partial replacement of incandescent bulbs by CFLs along the lines described in Table 5 represents a potential saving of 129 TWh/year over the eight-year lifetime of CFLs at a cost of $43 billion in CFLs alone. These figures need nevertheless to be compared to the savings due to reduced generating capacity and avoided generating costs. Using a capacity factor of 50%, 129 TWh would be generated by 29 500 MW of capacity costing (using the average US replacement cost of £1 250/kW 5) some $36 billion, though power stations have a lifetime of at least 15 years. Avoided generating costs, taking an average figure of ¢3.3/kWh, would amount to $4.25 billion/year.
THE ROLE OF G O V E R N M E N T POLICIES Although a substantial potential exists for economically justifiable efficiency improvements, this potential is not achieved in real market conditions because of the presence of a variety of institutional and market barriers. Lack of information, lack of consumer confidence in new technologies, lack of capital, or simply a rather limited interest in energy costs and savings, have all contributed to slowing the introduction of energy efficient technologies. Action by governments as well as by electric utilities will be necessary if these barriers are to be overcome. Energy efficiency is not at the moment a major criterion in consumer purchase decisions. Purchase price, size or appearance are more likely to influence a consumer's decision. The introduction of CFLs in the residential sector for instance is hampered by substantial barriers of this kind. The initial purchase price is high and the average domestic consumer can hardly be expected to work out the rate of return of an investment in CFLs. Lamp fixtures might have to be changed and the light provided by energyefficient CFLs may not meet quality requirements. In fact consumers may believe that the new lamp does not emit the light they are used to. Such behaviour, together with limited access to capital, means that a consumer's implicit discount rate is well above those usually applied in business - 35% is probably a minimum and it can in some cases exceed 200%. 6 Low income households use significantly higher discount rates (above 100%) than households with higher incomes. In addition, rent paying tenants apply implicit discount rates that are much higher than those used by owner-occupiers. 7 Governments have tried to close the gap between
ENERGY POLICY April 1991
Electricity end-use efficiency
efficiency improvements likely to be taken up by the market and potential improvements that are economically justifiable. Market forces and other factors which determine electricity end-use efficiency can be influenced by the regulatory framework of utilities and by a range of environmental, energy security, fiscal and other policies that affect the allocation of economic resources. In designing more effective policies to encourage greater electricity end-use efficiency, there are at least four possible strategies that might be considered by individual governments, depending on their economic and political circumstances: •
•
•
•
modification of electricity pricing and other utility regulations to ensure that correct price signals are given to electricity users; removal of any limitations to utilities' implementing demand-side management activities if these activities yield net benefits for both consumers and the utility; improvement of the effectiveness of market forces by ensuring that electricity users have access to adequate information and advice; and offsetting financial barriers to energy efficient investments by offering selected, though usually temporary, financial inducements or by introducing carefully designed efficiency standards.
These strategies can be pursued by the application of three types of policy instruments: information, regulation and economic instruments. Information plays an essentially supportive, though indispensable, role in energy efficiency strategies, s It is most effective when it promotes actions that make good economic sense for an industry or for the consumer. Reliable information is necessary to enable electricity users to identify more energy efficient products and to evaluate the potential savings that might result. In a few countries, utilities and manufacturers have initiated programmes over a range of products to provide energy efficiency labels or similar information, stating estimated comparative annual electricity costs. So far, the USA has introduced the most comprehensive mandatory labelling system covering most major home appliances. These measures can result in significant electricity savings but their ultimate impact on electricity demand is usually limited. Many buyers, for a variety of reasons, just do not make use of the information provided. Regulations and standards can be fairly effective and easy to promulgate, but their initial design often
ENERGY POLICY April 1991
requires considerable technical knowledge. Energy efficiency building standards are a well established instrument, but the introduction and upgrading of equipment standards still poses complex technical and economic problems. The introduction of product standards is usually the centre of a debate involving issues such as free choice (leaving it to users to decide the trade-offs between convenience features, capital costs and operating costs) and restrictions on international trade. In addition, standards need to be updated regularly to take account of economic and technological changes, a process which implies the deployment of significant bureaucratic resources. The USA is probably the only country which has established efficiency standards on a large scale for major domestic appliances and space conditioning systems. Economic instruments involve either pricing policy or the use of financial inducements such as taxes, charges, subsidies or rebates. The first step governments can take to remove maket distortions working against the rational use of electricity, is to allow prices to reflect the long-term cost of supply, including distribution and external costs. Prices are the single most important instrument for influencing supply and demand because they provide both the consumer and the supplier with signals upon which to base their investment decisions. However, for a variety of reasons, electricity tariffs in most lEA countries are not based on the long-run costs associated with supplying electricity but on the average (historical) costs experienced by utilities. In many cases these prices understate the value of electricity. The problem is compounded by the fact that it is not clear to what degree prices really influence electricity demand. A review of the literature on this topic shows a bewildering degree of variation in elasticity estimates, even for a given country and a given sector. 9 Governments in several lEA member countries have encouraged changes in tariff structures and in many places the principles underlying price setting are currently under discussion. In Germany, for example, the government has diminished demand related degression for residential and commercial consumers by reducing the fixed charge. Furthermore, the new scheme aims to relate the demand (fixed) charge more closely to the actual load required. Reforms aimed at bringing tariffs closer to actual generating costs, especially in cases where costs display strong seasonal variations, are also under consideration in lEA countries. This is particularly true for countries with a large share of electricity generated by hydropower and a marked
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Electricity end-use efficiency
winter peak demand, such as Switzerland and Norway. Other instruments, such as taxes and subsidies, were widely applied when energy prices were high to accelerate the penetration of more efficient technologies or to promote fuel substitution. Most schemes have been gradually reduced in recent years as energy prices declined and, simultaneously, the political will to limit public spending reduced the availability of funds. There are a number of other reasons that made governments increasingly reluctant to grant financial incentives. A major pitfall of financial incentive programmes is that those who would have invested in energy demand-reducing measures anyway also benefit from the programmes. This 'free-rider' effect does not result in an optimal allocation of public resources. Nevertheless, developments in the area of environmental protection are fuelling interest in emission-related taxes and in market based economic instruments such as tradeable emission permits, which are likely to affect energy efficiency improvements and policy instruments designed to encourage their development.
UTILITY INITIATIVES Electric utilities can play a central role in increasing the efficient use of electricity. Electric utilities have traditionally concentrated on supply-side activities and their interest in electricity end-use has been limited to influencing demand patterns to optimize load management or increase market share. The reduction of peak loads has always been a priority as the costs entailed in serving peak demand are usually not fully r e f l e c t e d in tariffs. But the traditional role of utilities as a generator, transmitter and distributor of electricity has changed in several countries in recent years as some utilities became increasingly involved in broader demand-side management (DSM) activities. DSM initiatives include traditional end-use measures, such as peak clipping, valley filling, load shifting, as well as new measures to control electricity demand, such as strategic conservation and flexible load shaping. These utilities see new business opportunities in promoting end-use efficiency and have launched information campaigns, initiated incentive programmes, such as rebate schemes for the purchase of efficient appliances, and supported energy service companies which advise consumers on ways of reducing electricity bills. North American utilities have to date been the most active in DSM. This is because there are more
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utilities in North America which are facing the need to increase capacity and because their regulatory environment encourages least-cost planning approaches which often include investments in demand reduction. Utilities have a financial incentive to reduce customer demand if the costs of DSM measures do not exceed the difference between the loss in revenue and the avoided costs of not meeting increased demand. This situation occurs where the tariffs allowed by regulatory bodies or set by the utility are below long-run marginal costs. However, if tariffs are set at or above long-run marginal costs of supply, utilities in theory gain limited or no financial advantage in implementing DSM measures. There are large differences in pricing practices, supply and demand structures and resulting motivation for DSM among utilities, even within a single country. There are also differences in the methods used to determine utility rates of return or earnings, for instance in the types of investments allowed in a utility's rate base. Marketing aspects, the establishment of good consumer relations and a more competitive environment due to the fall in prices of competing fuels are other driving forces for utilities to undertake demand-side initiatives. Environmental concerns and the anticipation of government regulations have also induced utilities to promote end-use programmes. Identifying utilities that might be motivated to reduce electricity demand requires a careful examination of individual circumstances. In addition, there are diverging opinions about the effectiveness of various approaches to DSM and their impact on the economics of utilities and on electricity demand, l°'n In the USA, utilities in 43 States are currently actively involved in DSM: 25 States have implemented DSM schemes, 11 States have developed DSM initiatives and seven States are considering such initiatives. A recent survey found that investments in DSM usually absorb only 1 to 2% of total utility investments and energy savings of the same order are expected. Administrative costs make up a large part of the cost of DSM programmes. A study by Oak Ridge National Laboratory ~2 quantified the administrative costs of programme planning, evaluation, marketing, auditing, quality control, data collection and related activities. Administrative costs amount to about 20% of the total costs of residential sector programmes, though commercial lighting programmes have lower administrative costs (about 10 to 15% of programme expenditures). The impact of utility DSM programmes has so far been rather modest. Comparing demand developments in the USA between 1973 and 1983 with an extrapolation
ENERGY POLICY April 1991
Electricity end-use efficiency
of the 1965 and 1975 trends, it appears that actual electricity demand was reduced by 241 GW. 13 This reduction was mainly due to increases in electricity prices (128 GW) and slower economic expansion (100 GW). Utility DSM programmes only made a small contribution to demand reduction (13 GW). But in recent years, the number and scope of utility DSM programmes have increased, leading to much larger savings than the 13 GW estimated for 1983.14 Other lEA countries have launched similar initiatives. Major Canadian utilities are intensifying their DSM activities. British Columbia Hydro will spend about C$ 330 million over the next 20 years in the residential, commercial and industrial sectors on various initiatives, such as retrofitting buildings, energy auditing, energy management control systems and improvement in refrigeration and lighting efficiency. The company expects cumulative savings over the next two decades to reach about 52.5 TWh. Ontario Hydro plans to meet 25% of their projected electricity demand growth through DSM measures costing $C 2.5 billion. In Australia, regulators in the State of Victoria see DSM as one option for meeting environmental objectives, especially in areas where most electricity is generated by coal-fired plants. In Europe, the Swedish Power Board is running an ambitious programme of pilot DSM schemes and Dutch, German and Danish utilities have undertaken efficient lighting programmes providing financial incentives for customers. However, rigorous evaluation is needed to analyse the real impacts on electricity demand in the shortand long-run. For example, some customers may have replaced 40 W incandescent bulbs by CFLs instead of replacing 60 W bulbs, as is usually assumed. Others might have taken advantage of the reduced operating costs of CFLs by leaving them on for longer periods than incandescent bulbs. In fact some lighting manufacturers use the lower operating costs of CFL as a security sales point: 'Get rid of dark corners and put off burglars when you are not around' urges one advertising leaflet. 15 Obviously, such increases in service levels may partially offset the impacts of end-use programmes on electricity demand reductions. A regional Austrian utility ran a one-year rebate programme in 1989 for the replacement of domestic appliances, including refrigerators and washingmachines. Rebates were deducted from electricity bills and were only granted if the new appliances were at least 25% more efficient than those being replaced. The campaign significantly accelerated stock turnover and also supported environmental objectives, as the treatment of chlorofluorocarbons
ENERGY POLICY April 1991
(CFSs) from old refrigerators could be organized in a centralized fashion. But such rebate programmes can also induce strategic behaviour on the consumer side, with unexpected long-term impacts. For instance, consumers may anticipate the next programme and delay investments in new, more efficient technologies. While generating units can generally be counted on to produce power once built, customers who are given a grant to reduce electricity consumption cannot be relied on to not increase energy-use elsewhere. CONCLUSION Electricity is a vital element of the economies of all OECD countries, but sustained growth in electricity end-use requirements has exacerbated a range of energy, environmental and economic problems. One of the responses to these problems is to increase efforts to improve electricity end-use efficiency. Although significant improvements in efficiency have already been achieved, there remains a large, economically viable potential for further gains that may be lost if current trends continue - in the range of perhaps 10 to 20% over the next two decades. The magnitude of the real savings depends on consumers, governments, and utilities. Governments and utilities can deploy a range of policy measures to overcome market barriers to increase efficiency. Many of these options have already been implemented by several countries and have been shown to be cost-effective, if well designed and carefully targeted. Increased government involvement and utility efforts to improve electricity enduse efficiency could, however, be costly and may not necessarily slow the pace of electricity demand growth. Nevertheless, improvements in electricity end-use efficiency could make a significant contribution to meeting environmental and energy security objectives, while at the same time supporting economic well-being. The opinions expressed in this articlc are those of the authors and do not necessarily reflect the views of the IEA or its member countries. 1Danish Ministry of Energy, Energy 2000 - A Plan o f Action for Sustainable Development, Copenhagen, Denmark, 1991). 2Ministry of Economic Affairs, Memorandum on Energy Conservation, SDU Publishers, The Hague, the Netherlands, 1990. 3j.p. Harris, L. Norford, A. Rabl and J. Roturier, "Electronic office equipment: the impact of market trends and technology on end-use demand for electricity,' in Electricity - Efficient End-Use and New Generation Technologies, and Their Planning Implications, Lund University Press, Lund, Sweden, 1989. 4International Energy Agency, Electricity End-Use Efficiency,
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Electricity end-use efficiency OECD, Paris, 1989. 5Nuclear Energy Agency and International Energy Agency, Pro-
jected Costs of Generating Electricity from Power Stations for Commissioning in the Period 1995-2000, OECD, Paris, 1989. 6A.K. Meier and J. Whittier, 'Consumer discount rates implied by consumer purchases of energy-efficient refrigerators', Energy, The International Journal, Vol 8, No 12, 1983, pp 957-962. 7R.S. Hartmann and M.J. Doane, 'Household discount rates revisited', The Energy Journal, Vol 7, No 1, 1986, pp 139-148. 81. Brown, 'An overview of policy and programme options for the promotion of energy efficiency', in Workshop on Conservation Programmes for Electric Utilities, IEA/OECD, Paris, 1988. 9E. Mills, 'An end-use perspective on electricity price responsiveness', Vattenfall Updrag 2000 Report, Stockholm, Sweden, 1989. l°C.J. Cicchetti and W. Hogan, 'Including unbundled demand-
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side options in electric utility bidding programs', Public Utilities Fortnightly, Vol 123, No 12, 8 June 1989, pp 9-20. UF. Wirl, 'Analysis of demand-side conservation programs', Energy Systems and Policy, Vol 13, 1990, pp 285-300. 12L. Berry, The Administrative Costs of Energy Conservation Programs, Oak Ridge National Laboratory, ORNL/CON-294, Oak Ridge, TN, USA, 1989. 13T.W. Keelin and C.W. Gellings, 'Impact of demand-side management on future customer electricity demand', EM--4815-SR, Electric Power Research Institute, Palo Alto, CA, USA, 1986. 14E. Hirst, Electricity-Utility Energy-Efficient and LoadManagement Programs Resources for the 1990s, Oak Ridge National Laboratory, ORNL/CON-285, Oak Ridge, TN, USA, 1989. 15OSRAM, leaflet describing 'Dulux El' lamps.
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