Energy Analysis and Policy

Selected Works

Mohan Munasinghe

• Publisher: Butterworth-Heinemann
• Year: 2013
• Print ISBN: 9780408056342
• eBook ISBN: 9781483162072
• Topic: Business
• Subtopic: Real Estate
• Index: Business

Energy Analysis and Policy: Selected Works discusses the major aspect of electricity economics, including pricing, demand forecasting, investment analysis, and system reliability. This book provides a clear and comprehensive overview of the diversity of problems in analyzing energy markets and designing sound energy policies. Organized into 14 chapters, this book first discusses the energy economics in developing countries; integrated national energy planning (INEP) in developing countries; energy pricing; practical application of INEP using microcomputers; and energy strategies for oil-importing developing countries. Subsequent chapters describe the energy demand management and conservation; national energy policy implementation; energy demand analysis and forecasting; and energy project evaluation and planning. Other chapters explore non-conventional energy project analysis and national energy policy; rural energy issues and supply options; and bioenergy management policy. Rural-industrial energy and fossil fuel issues, as well as energy R&D decision-making in developing countries, are also presented. As the issues in this book are very important, this book will be helpful to a wide and appreciative audience.

Chapter 1

ENERGY ECONOMICS IN DEVELOPING COUNTRIES: ANALYTICAL FRAMEWORK AND PROBLEMS OF APPLICATION¹

Publisher Summary

Central to the success of the energy economics approach has been the concept of economic value of scarce resources. The economic numeraire has provided the basis on which alternative uses of various resources might be evaluated, facilitating the trade-off between energy and other more traditional inputs, such as capital and labor, and different forms of energy. The complexity of energy-economic interactions indicates that energy sector investment planning, pricing, and management should be carried out on an integrated basis. In energy planning and policy analysis, the principal emphasis is on the detailed and comprehensive analysis of the energy sector, its linkages with the rest of the economy, and the main interactions within the various energy subsectors themselves. The purely financial goals most often encountered relate to meeting the revenue requirements of the sector, and are often embodied in criteria, such as some target financial rate of return on assets, or an acceptable contribution toward the future investment program. The central concepts of opportunity costs and economic value have provided the numeraire on the basis of which integrated national energy policies can be developed, and alternative options concerning the use of scarce resources can be traded off. The economic efficiency objective provides a practical benchmark against which other goals and objectives are conveniently evaluated.

1.1 Introduction

The pervasive and vital role of energy in national economies indicates that the identification of energy issues, and energy policy analysis and implementation are important areas of study. While the softening of world oil prices which began in 1986 has provided some relief to the economies of oil importing nations, energy related problems still preoccupy the minds of decisionmakers in most developing countries. Thus, the availability of adequate energy resources at a reasonable cost remains a vital precondition for continued economic growth, while most of the key energy issues identified during the past decade persist. Typically, developing country energy investments still account for about 25 percent of total public capital expenditures, while this figure is around 50% in some nations -- particularly in Latin America. Furthermore, oil importers are spending an average of 15–20 percent of export earnings on petroleum imports, and serious fuelwood shortages and deforestation problems continue unabated -- especially in Africa and Asia.

Following the first international oil crisis of 1973, the rapidly increasing costs of all forms of energy, led by the world oil price, stimulated the development of new analytical tools and policies. Indeed, much of this success may be attributed to the discipline of energy economics, and the increasing recognition received by our profession reflects the valuable contributions made by many distinguished researchers and colleagues in the field. It is a privilege to briefly set out in this paper, my views on the progress made in recent years, and its impact on energy decisionmaking and implementation in the developing countries. Unfortunately, limitations of space and time prevent full justice being done to the considerable literature available.

Central to the success of the energy economics approach has been the concept of economic value of scarce resources. The economic numeraire has provided the basis on which alternative uses of various resources might be evaluated, facilitating the tradeoff between energy and other more traditional inputs such as capital and labour, as well as among the different forms of energy themselves. Furthermore, economic efficiency in both energy supply and use is a practical benchmark. Thus, the economic costs of deviating from efficient policies, to meet sociopolitical and other goals, may be used to assess the desirability of such options.

Several important lessons have been learned by both energy analysts and policymakers, during the last 10–15 years. First the importance of an integrated approach to energy analysis, and more systematic exploration of energy-macroeconomic links, emerged. Furthermore, while policy analysis and formulation at the national level might be centralised, the effective implementation of policy requires the maximum use of decentralised market forces and institutions. Second, the need became apparent, for greater coordination between energy supply and demand options, and better use of demand management and conservation. Third, the more disaggregate analysis of both supply and demand within the energy sector offered greater opportunities for inter-fuel substitution in specific uses. Fourth, the analytical and modelling tools for energy subsector planning became more sophisticated, particularly in their treatment of uncertainty, reliability and supply quality. Fifth, greater practical reliance was placed on economic principles, such as marginal costing and shadow pricing in the developing countries, rather than relying on engineering and financial analysis alone.

1.2 Framework for Integrated National Energy Planning (INEP), Policy Analysis and Implementation

Energy decisions cannot be made in isolation. The complexity of energy-economic interactions indicate that energy sector investment planning, pricing and management should be carried out on an integrated basis, e.g., within a integrated national energy planning (INEP) framework which helps analyse the whole range of energy issues and policy options over a long period of time.

Energy planning, broadly interpreted, denotes a series of steps or procedures by which the myriad of interactions involved in the production and use of all forms of energy may be studied and understood within an explicit analytical framework. Planning techniques range from simple manual methods to sophisticated computer modelling. The complexity of energy problems and the enhanced capability of low cost microcomputers, has led to increasing reliance on the latter approach. Energy policy analysis is the systematic investigation of the impact of specific energy policies or policy packages on the economy and society, at all levels. Energy supply and demand management involves the use of a selected set of policies and policy instruments, to achieve desirable national objectives.

An important goal of developing countries must be to upgrade the quality of energy planning, policy analysis and management. However, the word planning, whether applied to the national economy or the energy sector in particular, need not imply some rigid framework along the lines of centralized or fully planned economies. Planning, whether by design or neglect, takes place even in the so-called market economies. Furthermore, while the energy planning, policy analysis and formulation may require centralised coordination, policy implementation is most effectively carried out using decentralised mechanisms and market forces, as discussed later in this paper.

In energy planning and policy analysis, the principal emphasis is on the detailed and comprehensive analysis of the energy sector, its linkages with the rest of the economy, and the main interactions within the various energy subsectors themselves. In the industrialised nations, the complex and intricate relationships between the various economic sectors, and the prevalence of private market decisions, make policy analysis a difficult task. In the developing countries, substantial levels of market distortions, shortages of foreign exchange as well as human and financial resources, larger numbers of poor households whose basic needs have to be met, greater emphasis on rural energy problems, and relative paucity of energy and other data, add to the already complicated problems faced by energy analysts everywhere.

In order to better understand the nature of decisionmaking in the energy sector, we begin by identifying below, some of the broad goals of energy policy as seen from the national perspective. (See Chapter 2 for the original development of the INEP concept).

National Policy Objectives

The broad rationale underlying all national level planning and policymaking is the need to ensure the best use of scarce resources, in order to further socio-economic development efforts and improve the quality of life of citizens. Energy planning must also be part of, and closely integrated with overall economic planning and policy analysis, to meet many specific, inter- related and frequently conflicting national objectives. Specific goals might include: (a) ensuring economic efficiency in the supply and use of all forms of energy, to maximize growth -- other efficiency related objectives are energy conservation and elimination of wasteful consumption, and saving scarce foreign exchange; (b) raising sufficient revenues from energy sales, to finance sector development; (c) meeting the basic energy needs of the poor, and income redistribution; (d) diversifying supply, reducing dependence on foreign sources, and meeting national security requirements; (e) contributing to development of special regions (particularly rural or remote areas), and priority sectors of the economy; (f) price stability; (g) preserving the environment; and so on.

Scope of INEP

The INEP concept may be represented by a hierarchical framework (see Figure 2.1 in Chapter 2), with reference to which the scope of integrated national energy planning, policy analysis, and supply-demand management may be clarified. At the most aggregate level, it is clearly recognized that energy is but one sector of the whole economy. Therefore, energy planning requires analysis of the links between the energy sector and the rest of the economy. The range of macroeconomic policy options from long term structural adjustments to short term stabilization programs, will have significant impacts on the energy decisions. More specific links between the energy sector and the rest of the economy include energy sector inputs such as capital, labour, raw material and environmental resources (eg. clean air, water or space), as well as energy outputs such as electricity, petroleum products, or wood fuel, and the impact on the economy of various energy policies.

The second conceptual level of INEP treats the energy sector as a separate entity composed of sub-sectors such as electricity, petroleum products and so on. This permits detailed analysis, with special emphasis on interactions among the different energy sub-sectors, substitution possibilities, and the resolution of any resulting policy conflicts such as competition between natural gas, oil and coal for electricity production; woodfuel and kerosene for cooking; or diesel and gasoline for transportation.

The third and most disaggregate level pertains to planning within each of the energy sub-sectors. Thus, for example, the electricity subsector must determine its own demand forecast and long-term investment programs; the woodfuel sub-sector its consumption projections and detailed plans for reafforestation, harvesting of timber, and so on. It is at this lowest hierarchical level that most of the detailed formulation, planning, and implementation of energy schemes are carried out.

In practice, the three levels of INEP merge and overlap considerably. Energy-environmental interactions that tend to cut across all the levels need to be incorporated into the analysis -- to the extent possible. In view of the growing concern about protecting the environment, some of the salient issues are discussed in the next section. Finally, spatial disaggregation also may be required, especially in large or diverse countries. The INEP process should result in the development of a flexible and constantly updated energy strategy which can meet the national goals discussed earlier. Such a national energy strategy, of which the optimal investment program and pricing policy are important elements, may be implemented through a set of energy supply and demand management policies and programs that effectively use decentralized policy instruments and market forces, as described below.

In the recent past, analytical advances have been made in implementing hierarchical modelling with a policy focus. Earlier energy models sought to encompass the entire scope of energy planning within a single framework. However, recent work has been based on a modular hierarchical system along the lines of the INEP concept. The efficacy of this analytical approach has been proven in recent applications.

Policy Instruments

To achieve the desired national goals the policy instruments available to third world governments, for optimal energy management include; (a) physical controls; (b) technical methods; (c) direct investments or investment-inducing policies; (d) education and promotion; (e) pricing, taxes, subsidies and other financial incentives; and (f) reforms in market organization, regulatory framework and institutional structure. Since these tools are interrelated, their use should be closely coordinated for maximum effect.

Physical controls are most useful in the short-run when there are unforeseen shortages of energy. All methods of limiting consumption by physical means such as load shedding, or rotating power cuts in the electricity sub-sector, reducing or rationing the supply of gasoline or banning the use of motor cars during specified periods, are included in this category. Use of physical controls as long-run policy tools, however, is generally undesirable because of severe economic consequences. Technical means are used to manage both the supply of and demand for energy, and include determination of the most efficient means of producing a given form of energy (e.g., choice of the least-cost or cheapest mix of fuels for supplying power) and disseminating higher efficiency energy conversion devices.

Investment policies have a major effect on both energy supply and consumption patterns in...

Table of contents

• Cover image
• Title page
• Table of Contents
• About the Author
• Copyright
• Dedication
• Inside Front Cover
• FIGURES
• TABLES
• FOREWORD
• ACKNOWLEDGEMENTS
• INTRODUCTION
• Chapter 1: ENERGY ECONOMICS IN DEVELOPING COUNTRIES: ANALYTICAL FRAMEWORK AND PROBLEMS OF APPLICATION
• Chapter 2: INTEGRATED NATIONAL ENERGY PLANNING (INEP) IN DEVELOPING COUNTRIES
• Chapter 3: ENERGY PRICING: AN INTEGRATED FRAMEWORK
• Chapter 4: PRACTICAL APPLICATION OF INTEGRATED NATIONAL ENERGY PLANNING (INEP) USING MICROCOMPUTERS
• Chapter 5: ENERGY STRATEGIES FOR OIL IMPORTING DEVELOPING COUNTRIES
• Chapter 6: ENERGY DEMAND MANAGEMENT AND CONSERVATION
• Chapter 7: NATIONAL ENERGY POLICY IMPLEMENTATION: ENERGY CONSERVATION IN SRI LANKA
• Chapter 8: ENERGY DEMAND ANALYSIS AND FORECASTING
• Chapter 9: ENERGY PROJECT EVALUATION AND PLANNING
• Chapter 10: NON-CONVENTIONAL ENERGY PROJECT ANALYSIS AND NATIONAL ENERGY POLICY
• Chapter 11: RURAL ENERGY ISSUES AND SUPPLY OPTIONS
• Chapter 12: BIOENERGY MANAGEMENT POLICY
• Chapter 13: RURAL-INDUSTRIAL ENERGY AND FOSSIL FUEL ISSUES: THE CASE OF THAILAND
• Chapter 14: ENERGY R&D DECISIONMAKING IN DEVELOPING COUNTRIES
• BIBLIOGRAPHY