Chapter 1: Energy in the World Economy
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1.1 Introduction
Energy is a foundation stone of the modern industrial economy. Energy provides an essential ingredient for almost all human activities: it provides services for cooking and space/water heating, lighting, health, food production and storage, education, mineral extraction, industrial production and transportation. Modern energy services are a powerful engine of economic and social development, and no country has managed to develop much beyond a subsistence economy without ensuring at least minimum access to energy services for a broad section of its population. Throughout the world, the energy resources available to them and their ability to pay largely determine the way in which people live their lives. Nevertheless, it is critical to recognize that what people want are the services that energy provides, not fuel or electricity per se.
Many factors play a role in influencing energy supply, not least of which are its availability, price and accessibility. The regional endowment of energy sources and the pace at which they are developed and distributed are not uniform around the world. Figure 1.1 shows annual primary energy consumption per capita in various regions of the world (WEC, 1993). The data indicate the wide variation between regions, not solely accounted for by climatic differences. Average world annual consumption at around 1.6 toe/capita; in OECD countries the average is around 5 toe/capita and in developing countries it is less than 1 toe/capita.
Figure 1.1: Primary Annual Energy Consumption per Capita (1990) toe/capita
The last two centuries have seen massive growth in the exploitation and development of energy sources, and the world has gained many benefits from these activities. The magnitude of energy consumed per capita has become one of the indicators of development progress of a country, and as a result, energy issues and policies have been mainly concerned with increasing the supply of energy. This approach is now seen as a vision that needs challenging. Decoupling growth in energy consumption per capita from economic growth and focussing on the appropriate provision of quality energy services to assist economic development is key (UNDP, 1997; UNDP/EC, 1999; and World Bank, 2000b).
1.2 Fuel Types
World primary energy use remains dominated by fossil fuels (coal, oil and natural gas), which account for 75% of total primary energy supply. Renewable energy sources, comprising mainly biomass4 (including fuelwood) and hydropower, currently represent less than 19% of world primary energy use, of which biomass contributes about 14%. Nuclear energy contributes around 6%. Figure 1.2 illustrates these data (BP, 1998).
Figure 1.2: World Primary Energy Use by Fuel Type, 1997 (Gtoe)
The patterns of energy use by fuel type and the way these patterns change over time in developing countries reveal further insights into exploitation of different energy resources. Figures 1.3, 1.4 and 1.5 show estimates of total final energy use by fuel type in Latin America, Asia and Africa respectively over the period from 1980 to 1995 (EC, 1999).
The role of biomass is of particular significance. Biomass use is unevenly distributed around the world: it represents 3% of energy use in industrialized countries and an average of 33% in developing countries, with large differences between regions: biomass covered over 60% of final energy use in Africa, 34% in Asia and 25% in Latin America. Other renewable energy sources, such as small-scale hydropower, geothermal, wind, and solar energy, do not feature as significant energy inputs. Worldwide the aggregated energy supply from these renewable sources amounts to less than 1% of the total. The data also indicate that the proportions of different fuel types changed little in developing countries between 1980 and 1995.
Households and communities in rural areas in developing countries typically rely on diverse sources of energy; using one fuel for heating, another for cooking or lighting and others for agricultural and other productive activities. Most biomass is consumed in traditional ways in the household sector, and is simply collected rather than purchased. Such fuels are locally 'free' in cash terms, but have a cost of much time and physical effort often by children and women. In some rural and urban areas, charcoal has become a cash crop contributing to a monetised economy, and in some urban areas, there are active markets in local woodfuels.
Figure 1.3: Total Final Energy Use in Latin America
Figure 1.4: Total Final Energy Use in Asia
Figure 1.5: Total Final Energy Use in Africa
Because biomass remains such an important fuel around the world, energy policies for developing countries need to be as concerned with the supply and use of biomass, whether in its traditional role or used in modern technology, as they are about fossil fuels or other renewable sources of energy.
1.3 Energy and Development
In developing countries, it is widely accepted that poverty will not be reduced without greater use of modern forms of energy. Surpassing the 1 toe/capita per year level of energy use seems to be an important instrument for development and social change. Whilst low energy consumption is not the only cause of poverty and under-development, it does appear to be a close proxy for many of its causes. For example, environmental degradation, poor health care, inadequate water supplies and female and child hardship are often related to low energy consumption. As an example of this, Figure 1.6 shows life expectancy in 70 developing countries as a function of commercial energy use per capita per year (World Bank, 2000a)5.
Figure 1.6: Life expectancy and energy use per capita
Empirically it appears that social conditions improve considerably as energy consumption per capita increases. Whilst development is a complex process, it is a paradigm of development policy that without appropriate energy services there can be no true economic development. Energy services in suitable forms are essential ingredients for future growth and development.
Even now, around 2 billion people have no access to electricity and rely on traditional fuels, such as dung, crop residues and woodfuel. Another 2 billion have per capita consumption that is barely one-fifth of the average consumer in OECD countries.
The majority of these people lacking access to modern energy services are in the rural areas of developing countries. Bilateral and multilateral development aid in support of national efforts have included a variety of rural energy programmes, including investment projects, training and capacity building, to try to improve the provision of energy services. These include a wide range of activities managed by UNDP, the World Bank, the European Union, FAO and other agencies, together with projects funded via the Global Environment Facility and by bilateral organizations.
Box 1 gives examples of some multilateral programmes undertaken by various UN agencies6, (derived from UNDP/EC, 1999).
Box 1: Examples of energy activities of some UN agencies
Food and Agriculture Organization
FAO assists countries to meet their energy requirements in agriculture, forestry and fisheries as a means of achieving sustainable development. An integrated approach for the assessment, planning and implementation of energy and sustainable rural development is taken via technical assistance activities. The dual role of agriculture as a user and supplier of energy is a major factor in this work. Renewable energy applications are promoted especially in relation to enhanced agricultural productivity and other income generating activities. Networking is promoted, such as the Latin American and Caribbean Working group on Rural Energization for Sustainable Development, the Regional Wood Energy Development Programme in Asia and the Sustainable Rural Environment and Energy Network for the whole European Region.
Bioenergy data and projections are an important component of FAO's energy activities. Attention is also placed on the energy function of the sugar industry, as one of the diversification strategies of that sector, and to the production of low cost transport fuels to contribute to urban food security. FAO has also promoted awareness and better use of work animal technology.
Global Environment Facility
The GEF is an international financing mechanism that provides incremental funding for projects with global environmental benefits. It is also a funding mechanism for the UN Framework Convention on Climate Change and is jointly implemented by UNDP, UNEP and the World Bank. Medium-sized projects up to US$1M, project development activities and enabling activities can be funded via the GEF, and around 40% of funds allocated to date have supported climate change activities comprising energy efficiency and renewable energy projects, assessment and studies.
United Nations Development Programme
UNDP manages several energy-related programmes. Examples of two of these are:
The Initiative for Sustainable Energy (UNISE) is a shift from the traditional supply-side approach, and links energy with social and environmental issues as well as with economic development. Activities are supported through global, regional and national programmes, including technical expertise and training;
The FINESSE programme (Financing Energy Services for Small-scale Energy-users) aims to accelerate the commercialization of renewable energy technologies through pre-investment activities and the creation of the conditions and mechanisms for the credit sector to on-lend to small-scale energy users. FINESSE secures the involvement of small-scale operators, supporting franchise operations and enabling the local manufacture of key components. In Southern Africa, the programme has funded market studies and business plans for investments in projects in biogas, PV, mini-hydro, and solar water heaters. A loan guarantee fund has been supplied to help business plans meet loan conditions.
United Nations Environment Programme
UNEP aims to stimulate cooperation action to respond to emerging environmental challenges and to promote greater awareness and facilitate effective cooperation among all sectors of society and the actors involved in the implementation of the international environmental agenda. The UNEP Energy Policy and Programme focuses on the need for a global shift to less carbon intensive energy systems and through this reduced adverse environmental impacts on local as well as on global levels by promoting:
greater deployment of renewable and non-carbon energy technologies;
efficiency improvements in conventional energy supply and end-use technologies;
provision of better energy services from existing energy systems.
World Bank
The World Bank ESMAP programme (Energy Sector Management and Assistance Programme) provides global technical assistance for the energy sector, including national energy assessments for over 60 countries that have helped pave the way for subsequent capital investment. The Bank has also launched a number of initiatives to encourage private sector investment in renewable energy in developing countries:
The Renewable Energy and Energy Efficiency Fund (REEF), which finances private sector renewable projects of less than 50MW together with energy efficiency activities;
The Solar Development Corporation (SDC), which is a collaboration with a number of foundations, and promotes stand-alone PV systems through private sector mechanisms;
The PV Market Transformation Initiative (PVMTI) is a strategic intervention to accelerate the sustainable commercialization and financial viability of PV technology. PVMTI will make selected concessional investments in private sector PV market development projects in India, Kenya, and Morocco. With technical assistance and appropriately structured financing, these projects are eventually expected to provide successful examples of sustainable and replicable business models that can be financed on a commercial basis.
1.4 Energy Consumption by End-use Sector
Data on energy consumption by end-use sector in developing countries can be used to illustrate further the demand patterns for energy. As an example, Figure 1.7 shows the distribution of primary energy consumption by end-use sector in 10 southern African countries (FAO, 1995). The importance of energy in household use is clear from these data, with 68% of total energy consumption. Industry, transport and agriculture are all relatively small users. This picture is similar in many other developing countries, and contrasts with industrialized countries, where average household energy demand is around 40% of total energy use, and industry and transport are around 30% each.
Figure 1.7: Energy consumption in 10 southern African countries (1990)
1.5 Global Issues in Energy Supply and Demand
Changes in the way that energy is delivered to final consumers are taking place around the world. Energy generation, distribution and supply are moving from the public to the private sectors, and governments are now less likely to be directly involved in managing the energy business. Competition between private utilities is becoming more common, with the government role reducing to one of policy, oversight and regulation. There is also a move away from centrally planned generation and supply, with the market determining operational decisions and the allocation of investment funds. These trends are likely to continue, and are affecting developing and industrialized countries alike, with implications for investment in central power generating capacity and grid extensions.
Projections suggest that energy demand in developing countries will eventually overtake that of industrialized countries. Some forecasts are that on current trends world energy use will grow at 1.4% annually until 2020, with growth in OECD countries of 0.7% and growth in developing countries of 2.6% (WEC, 1995). According to this scenario, developing countries will reach the level of total consumption in OECD countries by 2015, as shown in Figure 1.87, and by 2050, they will have doubled it (WEC, 1995, and World Bank, 1999). Nevertheless, the level of energy consumption per head of population in developing countries will still be only one quarter of that in OECD countries.
Recent assessments from the World Energy Council (WEC, 2000a) have suggested that there are no technological or economic reasons why the world cannot enjoy the benefits of both a high level of energy services and a better environment. One consequence of this is that there is an opportunity for the development of energy services to follow a new path so that developing countries do not repeat the energy demand patterns of industrialized countries. However, a sustainable energy future will require economic, regulatory and institutional frameworks that facilitate appropriate investments, together with proper accounting for social and environmental externalities.
Figure 1.8: Primary Energy Consumption Forecast
Some analysts suggest that the resource base for fossil fuels appears sufficient for there to be less concern than in the 1970s and 1980s about major supply shortages. Resources of both conventional and unconventional oil and gas are thought to be available for another 50-100 years with known technology and at current costs. Coal resources are abundant and should last for more than 100 years. As a result, these analysts affirm that petro-chemicals will remain commercially relevant well into the foreseeable future. However, other analysts observe that oil and gas resources are finite, and that use of these resources are likely to become increasingly reserved for higher value petro-chemical production rather than for fuel supply. This view suggests that the longer-term uncertainties regarding energy supply, together with the forecasts of considerably increased energy demand during the next 50-60 years could produce energy market difficulties in future years. There are also views that suggest that a transition to renewable energy will precede any eventual fossil fuel depletion because of environmental concerns.
Nevertheless, the focus of attention in energy policy is currently being placed on the efficiency by which fossil fuel energy resources are utilized, improving the regulatory and investment framework in which energy is supplied to end-users and tackling the environmental impacts of energy technologies, including their role in climate change. These tend to be the shorter to medium term priorities in energy policy formulation.
1.6 Local Environmental Impacts
The combustion of fossil fuels and traditional woodfuels can create adverse local environmental effects. In developing countries, the local environmental problems associated with energy use remain matters of concern that are as, or even more, urgent than they were in industrialized countries 50 or 100 years ago. Further, it is the poor who suffer most from such problems, because it is they who are forced to rely upon the most inefficient and polluting sources of energy services for lack of access to better alternatives. The connection between woodfuel use, cooking and the epidemiology of respiratory and other illnesses is a topic of active research. Nevertheless, a consistent pattern linking energy, environment and health has become clear (World Bank, 1999). Woodfuel combustion in confined, often unventilated indoor areas and at low thermodynamic efficiency leads to high concentrations of smoke and other pollutants.
The World Bank has estimated that the economic costs of air pollution from all sources are US$ 350B/year, or the equivalent 6% of GNP of all developing countries. Much attention is now being given to technical and policy measures that can reduce the local environmental impact of energy use.
1.7 Climate Change
An issue of much relevance to future energy policy is mitigation of the effects of global climate change. Industrialized countries are responsible for at least 80% of the build-up of greenhouse gases in the atmosphere, and consumption of fossil-fuel derived energy accounts for the largest share of anthropogenic emissions of greenhouse gases. Through the UN Framework Convention on Climate Change and Agenda 21 (UNCED, 1992), the international community has agreed to work together to meet the problems of climate change, and industrialized countries are taking steps to reduce or stabilize their emissions of CO2 and other greenhouse gases.
The implementation of the Kyoto Protocol, once in force, or of any other agreement, which might develop from the Protocol, will greatly influence energy policy, investment decisions and the development and deployment of energy technologies. The Protocol assigns legally binding emission reduction targets and through Joint Implementation and the Clean Development Mechanism, industrialized countries (listed in Annex 1 to the Protocol) can meet part of these targets by financing initiatives to reduce greenhouse gas emissions in other countries. This process may help to lever new financial support for sustainable energy development projects by providing additional benefits to investors (UNDP, 1998). Dealing with climate change will require global efforts to control greenhouse gas emissions. Emissions from developing countries are increasing, and will eventually naturally exceed those of industrialized countries. The means by which economic growth and increased energy demand can be reconciled with protection of the local and global environment is central for future sustainable energy development.
1.8 Energy Security, Diversity of Supply and the Role of Renewable Energy
In simple terms, the concept of diversity of supply means not placing too much reliance on any single fuel, technology or other factor. Ensuring that there is dive
