Incentivising energy efficiency

28 October 2018

Asia’s energy market has to transform to meet the sustainability commitments made to the UNFCCC Paris Agreement, but unlike the European markets that have supported sustainability improvements by accelerating investments in renewable energy and exiting coal- fired generation, Asia needs to identify an alternative route towards a more sustainable future. Unlike Europe, Asia has a stronger dependence on coal-fired generation and poor gas transportation infrastructure in a number of countries, as well as limited pipeline natural gas supply, that has made the displacement of coal-fired generation with gas both logistically and economically problematic. Two other characteristic that define Asia’s energy markets – strong annual energy consumption growth and political opposition to imposing physical emission reduction targets – could constrain economic growth through higher energy costs associated with emission costs.

With energy demand typically correlated at between 90-120% of GDP growth, and with average annual GDP growth in Asia forecast at around 6% through the medium-term, energy demand growth is expected to average around 6.5% annually. In Europe, by comparison, forecast annual GDP growth is significantly lower at between 1.5 and 1.8% for the EU with annual energy consumption contracting in many EU member states due to a combination of poor economic growth and increasing energy efficiencies.

While Europe has managed to support a change in its energy objectives from supply security and affordability to sustainability and security through emission caps and renewable energy investment, Asia’s path toward a more sustainable and secure energy future is more problematic, particularly if governments continue to manage energy prices, either directly through subsidies or indirectly through cross-subsidisation, as part of a policy approach aimed at maintaining affordable energy in order to minimise socio-economic risks.

In accepting the challenges presented by climate change, and with many Asia countries facing a higher risk from potential climate changes than European countries, Asia has committed to reducing its emissions by 2030. But planned renewable energy increases will be inadequate. Asia will need to improve its energy efficiency if it is to meet its emission commitments.

Essentially, the drivers of energy efficiency can be grouped in three categories: regulation, technology and behaviour.

Regulatory drivers usually entail mandatory energy efficiency targets that provide strong incentives due to the penalties imposed for failing to meet the targets, but these efficiency targets are usually only applied to the energy-intensive sectors that have the greatest energy consumption. This is similar to the approach adopted in the cap-and-trade emissions market that focuses on the largest emitters.

While there should be a progressive approach to emission reduction, with those installations emiting the most being set higher reduction targets, there needs to be an inclusive approach to emission reduction. The problem with mandatory schemes is that the cost of regulatory oversight and verification makes them less attractive for lower emitters.

Singapore, which will introduce a carbon tax in January 2019, will only apply this tax to installations that annually emit in excess of 25 000 tonnes of greenhouse gas emissions, and they will be subject to enhanced emission reporting under the amended Energy Conservation Act (ECA). These large industrial facilities will need to submit a monitoring plan and an improved emissions report based on the plan.

"While voluntary targets are objective ... their perceived weakness is the absence of an incentive"

While registered companies had to report their energy use and annual greenhouse gas emissions under the previous ECA, they were not required to submit their data based on an approved monitoring plan, nor did they have to adopt certain methodologies in their computations of such data. To ensure emissions monitoring and reporting aligns with international standards the NEA now requires a more robust and rigorous measurement and reporting standard.

Mandatory targets are selective and subjective. In Europe, the concern over carbon leakage has provided some energy intensive sectors with omissions from the full mandatory emission reduction target. Yet the reality is that these omissions are mainly being driven by European government fears of economic productivity leakage. Technology improvements are rapidly enhancing energy efficiency improvements from light bulbs to appliances and buildings. Smart metering is also enabling better energy consumption management and planning. According to Frost and Sullivan, while Europe is expected to dominate other regions in terms of revenue adoption within the global smart meters market by 2020, the Asia-Pacific region will be the next largest. For the industrial sector, and particularly the more energy intensive companies, solar power is an important technology in Asia given the high irradiation. Investment in solar power is best used to shave peak load, with the falling cost of solar panels expected to increase productivity and sustainability gains in the medium to longer-term.

The average cost of solar power was $88.57/MWh in 2017, with this forecast to lower to around $50/MWh by 2020 in high irradiation areas. Companies that have sufficient area (land, rood top) to install solar panels should consider investing in solar to both reduce peak grid electricity costs and improve corporate sustainability.

Industrial companies that produce significant heat from melting processes could consider waste heat recovery systems to reduce electricity usage and improve sustainability, while those companies producing waste (organic or inorganic) could consider waste to energy systems.

While energy consumption can be influenced by myriad factors, behavioural changes to energy consumption are generally voluntary. While voluntary targets are objective, as they are usually installation-specific and are set to achieve a desired result, their perceived weakness is the absence of an incentive. Why, for example, should a company reduce its emissions if it is not mandated to, particularly if a competitor company elects not to reduce its emissions? The problem with this thinking is that it is negative and reactive, and potentially carries much higher corporate risks.

Emissions reduction through energy efficiency improvements will provide two benefits; increased productivity and improved environmental reputation. Collectively, these provide a socio-economic reward and it is this reward that should provide the incentive to improve energy efficiency voluntarily. 

The above article extracted from “Incentivising Energy Efficiency Improvements”, a paper by Jeremy Wilcox (September 2018).

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