DELIVERING ON THE ENERGY EFFICIENCY PROMISE IN THE MIDDLE EAST

Transcription

1 Utilities Energy DELIVERING ON THE ENERGY EFFICIENCY PROMISE IN THE MIDDLE EAST AUTHORS Marc Hormann Joern Carlos Kuntze Jad Dib Long known as one of the world s great energy sources, the Middle East and North Africa (MENA) region is now emerging as a growing consumer of energy, with a level of primary energy consumption second only to Asian countries. Critically, while primary energy intensity1 has been steadily decreasing since 1980 in most parts of the world, the Middle East is seeing energy consumption grow faster than GDP (Exhibit 1). Such fast-paced growth in energy intensity will have a significant impact on the region s economic competitiveness, by requiring more than 3 percent of GDP for energy infrastructure investment by 2030, versus 1 percent for the rest of the world. Exhibit 1: REGIONAL ENERGY INTENSITY AT PURCHASING POWER PARITY, 2010 Kilogram of oil equivalent at five pence Europe Latin America Australasia North America Asia Africa Middle East CIS CAGR ( ) -1.4% -0.4% -1.1% -1.1% -1.0% -1.7% 1.2% - 2.2% Source: Enerdata Yearbook Energy intensity is a measure of the energy efficiency of a nation s economy, typically calculated as units of energy per unit of GDP.

2 Energy consumption growth in the Middle East is being fuelled by the population boom, investments in infrastructure and energy-intensive industries such as petrochemicals and a high level of energy subsidies (gasoline prices, for example, are less than US$0.50 per liter in the Middle East, compared to US$1.00 to US$2.00 per liter in developed economies). Energy consumption has grown so quickly, in fact, that some Gulf countries are having difficulty meeting demand, resulting in power cuts during peak times in summer. Continued projected consumption growth of 3 percent per annum and the level of investments that will be required are likely to lead to an even wider gap between supply and demand. Adding to the problem is that the Gulf States are no longer able to maintain the status quo of using natural gas for power generation, while reserving fuel oil for exports. With natural gas supplies becoming insufficient to meet local demand, oil exporting countries must tap into their money-generating fuel oil reserves, impacting both local economic growth and global energy security (Exhibit 2). Exhibit 2: GULF STATES GAS PRODUCTION AND CONSUMPTION, 2009 Billions of cubic feet 3,000 2,770 2,770 Production Consumption 2,500 2,000 1,725 2,086 1,500 1, Saudi Ar abia UAE Kuwait Source: U.S. Energy Information Administration. Given the challenges of future energy demand, the time is ripe for MENA countries to take a closer look at the energy efficiency technologies and programs that are being used successfully in other regions of the world (including emerging economies) to reduce energy intensity. Even moderate adoption of proven energy efficiency measures in the Middle East could reduce energy demand by a quarter to half in the year 2030, greatly freeing up capital for other investments and oil for exports, as well as reducing the region s carbon footprint. Delivering on the Energy Efficiency Promise in the Middle East 2

3 ENERGY EFFICIENCY: THE GLOBAL PERSPECTIVE The concept of using energy more efficiently to address growing energy demand has been around for decades. But with global energy needs projected to increase by 55 percent by 2030 and growing concerns about energy security, economic competitiveness, climate change and pollution, governments around the world have been renewing their focus on energy efficiency programs. That renewed focus has had an impact, with most regions of the world reporting declining energy intensity as result. Energy efficiency programs can provide a range of beneficial impacts, e.g.: Reduce imported energy needs Reduce domestic demand to maximise fuel exports Increase reliability of supply Improve industrial competitiveness Reduce production costs and energy costs to consumers Reduce pollution Contribute to global efforts to mitigate climate change Countries across the globe have addressed the energy efficiency challenge in a variety of ways, ranging from local and regional initiatives to comprehensive national strategies. All energy efficiency programs, however, generally make use of one or more of the following types of initiatives: Education/outreach: programs aimed at creating awareness about energy efficiency and influencing energy users behavior Regulatory: policies and regulations designed to enforce the adoption of energy efficiency measures Incentives: programs that provide financial and other rewards to encourage energy users to implement energy efficiency measures Some key regional efforts to increase energy efficiency are highlighted in Exhibit 3. In addition, in 2010, 23 major economies (include the UAE) agreed to participate in the UNbacked Clean Energy Ministerial, which includes five initiatives (the Global Energy Efficiency Challenge) to help cut energy waste around the world. 2 2 See Delivering on the Energy Efficiency Promise in the Middle East 3

4 Exhibit 3: KEY GLOBAL ENERGY EFFICIENCY INITIATIVES California has set very aggressive targets, complemented by a system of incentives and rewards for providers The American Reinvestment and Recovery Act calls for more energy efficient lighting, more stringent building efficiency standards and increased research Europe planning to reduce energy consumption and carbon emissions each by 20% and provide 20% of energy through renewable sources by 2020 Saudi Arabia and the UAE have national energy efficiency plans. The UAE is investing as well in green and efficient technology Japan uses government mandated targets, steep taxes on petroleum and a strong national consensus to conserve energy. Japan consumes less energy per economic dollar than the US, EU, China and India THE OPPORTUNITY IN THE MIDDLE EAST Energy usage patterns are somewhat different in the Middle East compared to many Western countries (Exhibit 4). In the Middle East, up to 70 percent of energy demand is for cooling in the residential and commercial sectors. Nevertheless, energy efficiency programs hold great promise to reduce energy consumption in the region. To quantify the savings that energy efficiency programs could generate in the MENA region, Oliver Wyman developed a model and analyzed two scenarios: technical potential and low policy intensity.3 The technical potential scenario considers the maximum potential of currently available and reasonably accessible technologies (high case). 3 In its analysis, Oliver Wyman assumed that the same technologies and practices used in Europe (based on the Study on the Energy Savings Potentials in EU Member States by the EU Commission) were applicable to the Middle East; however, consumption and usage patterns used as an input into our model were based on the Middle East s characteristics. Delivering on the Energy Efficiency Promise in the Middle East 4

5 The low policy intensity scenario assumes continued high barriers to energy efficiency, a limited policy effort to overcome these barriers and low discount rates for investments (low case). Exhibit 4: COMPARISON OF ENERGY USAGE UNITED STATES, EUROPE AND THE MIDDLE EAST, % Commercial Residential industrial 75% 37% 27% 29% 50% 40% 32% 54% 25% 41% 0 23% 17% United States Western Europe Middle Eas t Source: Economist Intelligence Unit 2011, Oliver Wyman analysis. The results of our analysis are shown in Exhibit 5 below. Even in the conservative low policy intensity scenario, the Middle East region could potentially reduce primary energy consumption by more than a quarter in 2030, which translates to savings in the range of 50 percent of total current consumption in the region. In the more aggressive technical potential scenario, the Middle East region could reduce projected primary energy consumption by more than half in Exhibit 5: ENERGY EFFICIENCY POTENTIAL IN THE MIDDLE EAST Primary Energy Usage in Kilotonnes of Oil Equivalent (ktoe) Commercial Residential industrial 100,000 94,115 75,000 50,000 25, ,293-27% -56% 68,555 20,634 50,822 41,160 36,043 9,904 21,386 16,000 11,878 9,870 baseline 2030 Low Polic y Scenario technical Scenario Source: Study on the Energy Saving Potentials in EU Member States for the EU Commission, Economist Intelligence Unit, Saudi Interim Report, Oliver Wyman analysis. Delivering on the Energy Efficiency Promise in the Middle East 5

6 CASE EXAMPLE: SAUDI ARABIA As an example, the application of our energy efficiency model to Saudi Arabia indicates that annual energy costs could be reduced by US$15 billion to US$32 billion, assuming constant electricity production costs, with most of the savings (~52 percent) generated by the residential sector. In addition, the Saudi government would be able to divert some of the US$100 billion in planned capital investments in the Saudi power sector over the next decade to other sectors or applications, such as renewable energy. Exhibit 6: CASE EXAMPLE POTENTIAL SAUDI ARABIA ENERGY SAVINGS THROUGH INCREASED ENERGY EFFICIENCY Primary Energy Consumption in TWh % % baseline 2030 Low Policy Scenario technical Scenario Production Cost $57.2 bn $41.7 bn $25.1 bn Savings Potential $15.4 bn $32 bn Note: Production cost $0.1 per KWh; electricity consumption in 2030: 572,000 GWh. Source: SEC; Saudi Gazette stating a study by the King Fahd University of Petroleum and Minerals, Oliver Wyman analysis. OVERCOMING BARRIERS TO UNLOCK ENERGY SAVINGS A few Middle Eastern countries have already launched national efficiency programs. For example, Saudi Arabia s Energy Efficiency Centre (SEEC) focuses on reducing power through audits, load management, regulation and education. The Saudi Arabian government has also recently decided to curb electricity subsidies. Last year, the United Arab Emirates launched the National Energy Efficiency and Conservation Program, which will seek to promote efficient utilisation of energy in the residential sector. Nevertheless, the adoption of energy efficient measures overall in the MENA region has been quite limited, a result of both structural and specifically Middle Eastern barriers (Exhibit 7). Delivering on the Energy Efficiency Promise in the Middle East 6

7 Exhibit 7: BARRIERS TO IMPLEMENTING ENERGY EFFICIENCY POLICIES IN THE MIDDLE EAST STRUCTURAL BARRIERS MIDDLE EAST SPECIFIC BARRIERS IMPLEMENTING ENERGY EFFICIENCY POLICIES Effectively promoting energy efficiency programs will require governments to set overarching goals, educate and incentivise end users and promote greater private investment: DEVELOP A NATIONAL STRATEGY AND ENERGY EFFICIENCY GOALS Governments in the Middle East will need to play a leading role in setting the national energy efficiency agenda, including: Developing a national energy efficiency strategy that specifies measurable efficiency goals Developing the institutional, legal and regulatory frameworks that provide for incentives, enforcement and compliance monitoring Setting up a body with the adequate means and authority to monitor the achieved results and adjust the national strategy accordingly Developing a means to collect and analyze energy consumption data. In particular, governments will need to be able to monitor and track a set of measurable energy efficiency KPI s. In addition, Middle Eastern governments will need to review their existing energy subsidy regimes and determine how and to what degree these could be replaced with incentives that promote greater energy efficiency. Delivering on the Energy Efficiency Promise in the Middle East 7

8 ADOPT A TARGETED APPROACH TO DIFFERENT USER SEGMENTS Energy efficiency policies need to take into consideration the characteristics of different electricity consuming segments. While financial incentives have been universally successful in driving widespread adoption of energy efficiency, they are usually insufficient to capture its full potential, and so need to be accompanied by policies and other incentives that directly target the needs of each customer segment. An example of potential approaches for the residential, commercial and industrial segments is shown in Exhibit 8. Exhibit 8: A TARGETED APPROACH TO ACHIEVING ENERGY EFFICIENCY ADOPTION SEGMENT APPROACH DESCRIPTION Residential Commercial Industrial Push model composed of a package of measures Push model composed of a package of measures Pull model that takes into consideration the characteristics of each business Targeted promotions to educate/increase awareness Incentives that encourage the building of low emission houses and retrofitting of existing homes Regulation to enforce energy efficient standards (e.g., standby standard) and labelling for home appliances Smart metering Regulation to enforce adoption of energy efficiency standards through new building codes Financial incentives (direct, private-public investment) to retrofit commercial buildings Regulation that includes energy audits and that will enforce minimum energy performance standards Incentives for companies that comply with energy performance standards Energy management framework to assist companies in becoming more efficient, including best in class practices, benchmark data, training PROMOTE PUBLIC-PRIVATE INVESTMENT IN ENERGY EFFICIENCY Governments in the Middle East should also look to encourage private investment into energy efficiency, through collaboration with the private financial sector to establish public-private tools to facilitate energy efficiency financing. This can be done for example by providing subsidies, soft loans and other financial incentives to key energy efficiency players such as equipment producers, to promote the development of energy efficiency-compliant equipment. Delivering on the Energy Efficiency Promise in the Middle East 8

9 SUMMARY: AN ACHIEVABLE PROMISE Growing energy consumption in the Middle East threatens to sap the region s competitiveness and economic growth. Even a moderate adoption, however, of measures used elsewhere in the world to increase energy efficiency could significantly reduce investment needs for energy infrastructure, slow the pace of energy consumption growth, free up oil for export and help mitigate pollution and the region s carbon footprint. It will be up to governments to take the lead in developing national programs that explicitly specify energy efficiency goals, to put in place required policies and institutional infrastructure and to consider the trade-offs between subsidies that exacerbate consumption versus incentives designed to reduce it. As the world s focus shifts to how to conserve and use energy more wisely, now is the time for the Middle East to join those efforts to achieve a more promising and energy-efficient future. OLIVER WYMAN S APPROACH TO ENERGY EFFICIENCY Oliver Wyman has worked with a wide range of energy security stakeholders, including governments, non-governmental organizations, utilities and the private sector in exploring the dynamics of energy efficiency. Our focus is on helping countries and organizations make better decisions for their investment dollars, in a more timely fashion and with greater stakeholder support. Oliver Wyman s approach is based on a deep understanding of stakeholder perspectives, an analysis of the drivers of future scenarios and an examination of major trade-offs, leading to the development of recommendations for improvements in both governance and policy direction. Delivering on the Energy Efficiency Promise in the Middle East 9

10 With offices in 50+ cities across 25 countries, Oliver Wyman is a leading global management consulting firm that combines deep industry knowledge with specialised expertise in strategy, operations, risk management, organizational transformation and leadership development. The firm s 3,000 professionals help clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit Oliver Wyman s Energy team helps utilities and related energy companies address strategic and operational challenges through proven, results-oriented approaches. We have completed hundreds of engagements for more than 75 leading electric, gas and water utilities across the Middle East, North America and Europe, creating sustainable shareholder value. For more information about Oliver Wyman s perspectives on energy efficiency, please contact your account representative or one of the following partners: David Hoffman Practice Leader David.Hoffman@oliverwyman.com Marc Hormann Partner Marc.Hormann@oliverwyman.com Joern Carlos Kuntze Partner Joern.Kuntze@oliverwyman.com Copyright 2012 Oliver Wyman. All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report may not be sold without the written consent of Oliver Wyman.