The Second Wave
By SPENCER SWARTZ
After years as energy-efficiency laggards, China and a number of other fast-growing emerging markets are putting a high priority on restraining oil demand.
Stung by high energy costs prior to the world recession, these countries are implementing a host of measures to try to contain energy consumption and damp the impact of future oil-price spikes. Among other things, they're laying down tough new efficiency standards on everything from cars to buildings to home appliances.
Fatih Birol, chief economist at the Paris-based International Energy Agency, says the developing world may represent a second "wave" to the energy-efficiency boom started the past few years in developed nations like the U.S. "Many emerging markets are starting to realize energy-efficiency measures make sense from the standpoint of energy security, limiting the impact of high oil prices and fighting pollution," Mr. Birol says.
Of course, even if many of the measures are fully implemented, the energy savings could be more than offset by population growth and fast economic activity as developing markets industrialize. Another potential stumbling block: These nations offer their people large energy-price subsidies to cushion the impact of high prices but that encourage wasteful consumption. Still, if these countries can stick with and extend efficiency programs, their efforts could have big implications for the global oil market—since rapid crude-oil consumption in emerging markets has been a key driver of high prices in recent years.
In the past few years, roughly 325 measures and policies in emerging markets, mostly in Asia, have been announced, Mr. Birol says. The IEA expects that these measures—slightly slower economic activity due to the fallout from the recession—to have a marked impact on oil demand, at least over the next few years. In June, the agency lowered its forecast for emerging-market oil demand to 43.3 million barrels a day by 2013, down around 1 million barrels a day from its previous outlook.
When it comes to boosting efficiency, China has been among the most active of its emerging-market peers and is, arguably, the most important: The country is the world's second-biggest oil consumer after the U.S., and its consumption is expected to grow by at least 3% annually over the next four years. China is also the world's largest emitter of greenhouse gases.
"The direction China is taking in trying to slow the growth of its energy consumption is very clear," says Eurasia Group analyst Damien Ma.
Already, the Chinese government has boosted taxes on big sport-utility vehicles to 20% from 8% to encourage purchases of smaller and more fuel-efficient vehicles. Now it's weighing new fuel-economy regulations that would be tougher than U.S. standards. The rules would mandate that new cars, minivans and sport-utility vehicles get 42 miles a gallon by 2015, up from 36 now. In comparison, auto makers in the U.S. will have to increase average fuel efficiency to 35.5 miles a gallon by 2016, up about 30%.
China is also looking to home appliances for energy savings. This year, the government announced plans to subsidize purchases of energy-efficient air conditioners—on the order of $44 to $125 per unit, depending on the buyer's financial needs. The country's National Development and Reform Commission is hoping the purchase of new air conditioners will save 75 terawatt-hours of power demand annually in coming years. The country used about 2,900 terawatt-hours of electricity a year in 2006, according to the most recent data from the Asian Development Bank; the U.S. used around 4,000.
As another measure of China's commitment to energy efficiency, the nation's efforts are drawing attention from investors. APG, which administers the pensions of almost 3 million Dutch public-service workers, thinks there are potentially $50 billion to $100 billion in annual money-making opportunities from investing in energy-efficient programs in China.APG, with around $293 billion under management, laid the groundwork for an investment fund launched in mid-2008 targeting efficiency investments solely in China. It committed around $50 million into the investment vehicle last year, but it declines to say what type of returns the China-focused fund has generated so far, says Michael Friedlander, chief financial officer for APG Investments Asia.
A Wave of Changes
In India, meanwhile, the Bureau of Energy Efficiency, established in 2002, has pushed a series of measures the past two years, including increased energy-efficiency standards for new buildings and appliances. The measures are expected to save the equivalent of 1,500 megawatts in power-generation capacity—about enough electricity for almost 1 million Indian homes—by the end of 2009.
The bureau's director general, Ajay Mathur, says over the next three years the efficiency programs are projected to yield energy savings equivalent to about 10,000 megawatts of power-generation capacity as implementation spreads. Already, he says, people are flocking to the new, efficient products.
"People and companies in India are beginning to vote for energy efficiency with their pocketbooks," says Mr. Mathur.
Demand for these types of appliances is also booming in emerging markets in Eastern Europe and Russia, in part due to new efficiency regulations. The overall market in those countries for energy-efficiency products and services is around $30 billion annually, according to Rod Christie, who heads General Electric Co.'s energy operations in the region.
The U.S. company's energy division saw annual revenue growth of about 30% over the past five years in Eastern Europe, led by Russia, and expects strong growth after the recession subsides.
Many emerging-market measures are getting backing from international organizations, such as the Asian Development Bank. The Asian bank expects to increase funding on energy-efficiency projects in several of its member states to around $600 million annually in the next few years, up more than threefold from 2006, according to WooChong Um, director of the Manila-based bank's sustainable-infrastructure division. China, India and Pakistan are expected to receive a substantial amount of the ADB's projected financing for energy-efficiency projects.
But sustaining sizable net energy savings from efficiency measures faces many barriers in developing nations. More than $350 billion in annual energy-price subsidies are showered on consumers in developing nations, particularly China, according to industry estimates. While providing a social benefit for the poor, the subsidies—which show no real sign of being reduced—thwart prudent energy consumption.
A return to high economic growth rates could also wipe out energy savings as new industrial capacity is added and consumers, with more money in their pockets, load up on energy-consuming goods, like cars.
"These issues will serve as a real test about the ultimate effectiveness of all the efficiency measures we've seen announced recently in the developing world," says Daniel Yergin, chairman of IHS CERA. Highlighting that point, he adds: "China is in a race between increasing fuel efficiency and increasing number of cars on the road."
--Mr. Swartz reports on OPEC and oil issues for The Wall Street Journal and Dow Jones Newswires from London. He can be reached at spencer.swartz@dowjones.com.
By SPENCER SWARTZ
After years as energy-efficiency laggards, China and a number of other fast-growing emerging markets are putting a high priority on restraining oil demand.
Stung by high energy costs prior to the world recession, these countries are implementing a host of measures to try to contain energy consumption and damp the impact of future oil-price spikes. Among other things, they're laying down tough new efficiency standards on everything from cars to buildings to home appliances.
Fatih Birol, chief economist at the Paris-based International Energy Agency, says the developing world may represent a second "wave" to the energy-efficiency boom started the past few years in developed nations like the U.S. "Many emerging markets are starting to realize energy-efficiency measures make sense from the standpoint of energy security, limiting the impact of high oil prices and fighting pollution," Mr. Birol says.
Of course, even if many of the measures are fully implemented, the energy savings could be more than offset by population growth and fast economic activity as developing markets industrialize. Another potential stumbling block: These nations offer their people large energy-price subsidies to cushion the impact of high prices but that encourage wasteful consumption. Still, if these countries can stick with and extend efficiency programs, their efforts could have big implications for the global oil market—since rapid crude-oil consumption in emerging markets has been a key driver of high prices in recent years.
In the past few years, roughly 325 measures and policies in emerging markets, mostly in Asia, have been announced, Mr. Birol says. The IEA expects that these measures—slightly slower economic activity due to the fallout from the recession—to have a marked impact on oil demand, at least over the next few years. In June, the agency lowered its forecast for emerging-market oil demand to 43.3 million barrels a day by 2013, down around 1 million barrels a day from its previous outlook.
When it comes to boosting efficiency, China has been among the most active of its emerging-market peers and is, arguably, the most important: The country is the world's second-biggest oil consumer after the U.S., and its consumption is expected to grow by at least 3% annually over the next four years. China is also the world's largest emitter of greenhouse gases.
"The direction China is taking in trying to slow the growth of its energy consumption is very clear," says Eurasia Group analyst Damien Ma.
Already, the Chinese government has boosted taxes on big sport-utility vehicles to 20% from 8% to encourage purchases of smaller and more fuel-efficient vehicles. Now it's weighing new fuel-economy regulations that would be tougher than U.S. standards. The rules would mandate that new cars, minivans and sport-utility vehicles get 42 miles a gallon by 2015, up from 36 now. In comparison, auto makers in the U.S. will have to increase average fuel efficiency to 35.5 miles a gallon by 2016, up about 30%.
China is also looking to home appliances for energy savings. This year, the government announced plans to subsidize purchases of energy-efficient air conditioners—on the order of $44 to $125 per unit, depending on the buyer's financial needs. The country's National Development and Reform Commission is hoping the purchase of new air conditioners will save 75 terawatt-hours of power demand annually in coming years. The country used about 2,900 terawatt-hours of electricity a year in 2006, according to the most recent data from the Asian Development Bank; the U.S. used around 4,000.
As another measure of China's commitment to energy efficiency, the nation's efforts are drawing attention from investors. APG, which administers the pensions of almost 3 million Dutch public-service workers, thinks there are potentially $50 billion to $100 billion in annual money-making opportunities from investing in energy-efficient programs in China.APG, with around $293 billion under management, laid the groundwork for an investment fund launched in mid-2008 targeting efficiency investments solely in China. It committed around $50 million into the investment vehicle last year, but it declines to say what type of returns the China-focused fund has generated so far, says Michael Friedlander, chief financial officer for APG Investments Asia.
A Wave of Changes
In India, meanwhile, the Bureau of Energy Efficiency, established in 2002, has pushed a series of measures the past two years, including increased energy-efficiency standards for new buildings and appliances. The measures are expected to save the equivalent of 1,500 megawatts in power-generation capacity—about enough electricity for almost 1 million Indian homes—by the end of 2009.
The bureau's director general, Ajay Mathur, says over the next three years the efficiency programs are projected to yield energy savings equivalent to about 10,000 megawatts of power-generation capacity as implementation spreads. Already, he says, people are flocking to the new, efficient products.
"People and companies in India are beginning to vote for energy efficiency with their pocketbooks," says Mr. Mathur.
Demand for these types of appliances is also booming in emerging markets in Eastern Europe and Russia, in part due to new efficiency regulations. The overall market in those countries for energy-efficiency products and services is around $30 billion annually, according to Rod Christie, who heads General Electric Co.'s energy operations in the region.
The U.S. company's energy division saw annual revenue growth of about 30% over the past five years in Eastern Europe, led by Russia, and expects strong growth after the recession subsides.
Many emerging-market measures are getting backing from international organizations, such as the Asian Development Bank. The Asian bank expects to increase funding on energy-efficiency projects in several of its member states to around $600 million annually in the next few years, up more than threefold from 2006, according to WooChong Um, director of the Manila-based bank's sustainable-infrastructure division. China, India and Pakistan are expected to receive a substantial amount of the ADB's projected financing for energy-efficiency projects.
But sustaining sizable net energy savings from efficiency measures faces many barriers in developing nations. More than $350 billion in annual energy-price subsidies are showered on consumers in developing nations, particularly China, according to industry estimates. While providing a social benefit for the poor, the subsidies—which show no real sign of being reduced—thwart prudent energy consumption.
A return to high economic growth rates could also wipe out energy savings as new industrial capacity is added and consumers, with more money in their pockets, load up on energy-consuming goods, like cars.
"These issues will serve as a real test about the ultimate effectiveness of all the efficiency measures we've seen announced recently in the developing world," says Daniel Yergin, chairman of IHS CERA. Highlighting that point, he adds: "China is in a race between increasing fuel efficiency and increasing number of cars on the road."
--Mr. Swartz reports on OPEC and oil issues for The Wall Street Journal and Dow Jones Newswires from London. He can be reached at spencer.swartz@dowjones.com.
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