Fast-growing economies and understanding the benefits of improved energy efficiency

Bain Insights from Bain & Company provide a good article on the Forbes website concerning the commitment to energy efficiency that emerging economies are keeping, even with the fall in energy prices. These are welcome developments.

 

Emerging Markets Are Finally Getting Serious About Energy Efficiency

Companies in energy, manufacturing, financial services and many other industries stand to benefit from efforts to reduce energy consumption in the world’s fast-growing economies, providing they understand how policy makers shape these programs and where the opportunities lie.

Despite the dramatic fall in energy prices over the past 18 months, many governments in fast-growing economies remain committed to energy efficiency. Even states rich in oil and gas have established ambitious energy-efficiency programs to reduce energy consumption. They see the need to reduce energy consumption—and private companies and their investors should see the opportunity inherent in these efforts.

Motivations differ from one country to the next. Reducing greenhouse gas emissions is important for some, but most are pursuing the economic benefits of curbing internal demand. In oil- and gas-producing regions, less consumption leaves more for export. Some governments also want to reduce subsidies on transportation fuel and electricity, as the International Monetary Fund has recommended. And, of course, savings from energy efficiency can be used for other economic activities in the private and public sectors.

Of course, governments can’t do this all on their own: They need the industrial and commercial partners. By launching energy-efficiency programs and incentives, policy makers create new opportunities for many businesses—including energy service companies (ESCOs); utilities; financial institutions; training organizations; certification bodies; automakers; and manufacturers of building materials, insulation, heating and air conditioning equipment, and other white goods.

Success for any of these companies requires a thorough understanding of how governments shape energy-efficiency policies and markets. In many fast-growing economies, government-owned organizations make up a large share of the economy. This enables policy makers to lead by example, taking a comprehensive approach to the design and implementation of energy-efficiency initiatives, typically across an entire sector such as transportation or construction. To encourage efficiency and manage demand, governments create new rules, offer access to affordable financing and train new talent—all of which fuel new business opportunities.

Governments shape energy-efficiency markets by determining the rules by which industry operates in their countries. In India, for example, the Bureau of Energy Efficiency created Perform, Achieve and Trade (PAT), an incentive scheme to encourage energy savings in nearly 500 plants across eight industries. The PAT scheme is similar in some respects to the emissions trading schemes found in Europe and North America: Companies that save more energy than their targets receive energy savings certificates (ESCs) that they can sell to companies that miss their goals.

The selection of technical standards also plays an important role. Governments and industries work closely with international standards bodies, typically adopting proven standards. They rarely reinvent the wheel but sometimes modify to meet local needs—for instance, making allowances for greater air conditioning use by cars in hotter climates. Often they can move faster in developing markets than in larger and more mature ones, because they look to international practices and experiences of early movers. The United Arab Emirates, for example, quickly followed the lead of some developed markets in banning the sale of incandescent light bulbs as of January 2015.

Governments also fund energy-efficiency measures using direct investments in the energy services industry, public-private partnerships and incentives like tax reductions. In some cases, they create incentive programs to encourage early replacement of older, inefficient products (such as old .air conditioners) with new products that use less energy. Financing can take many forms, including tying loans to performance-based contracts that allow companies to reduce their payments based on their energy savings.

Finally, governments help develop local talent to support these efforts by funding energy-efficiency centers and courses in state universities. These programs educate students and professionals in energy efficiency, conduct research, facilitate technology transfer, disseminate knowledge, provide training, and strengthen graduate studies and applied research.

Businesses that are considering launching energy-efficiency products and services in fast-growing economies should think about three basic principles to form the foundation of success.

Understand the rules. Gain a solid understanding of the ways that regulators structure policies, regulations and incentives for energy-efficiency programs. Designing programs to encourage the formation of an energy services industry differs from making rules that would prohibit certain energy uses—though both aim at increasing energy efficiency. Even where standards align with international norms that multinational corporations may be familiar with, processes for compliance may differ.

Define your role. With a clear view of the regulatory landscape, businesses can identify their market opportunities and prospective customers. Most will enter the market aiming to deliver a limited set of products or services; a few will aim for a broader role in the landscape—for example, as a platform developer or a provider of breakthrough technologies or business models that create opportunities for others.

Develop the value proposition. Develop a competitive value proposition and the capabilities to deliver on it. For businesses entering developing markets, a key aspect of this process is determining whether their products or services are suitable, or require substantial reinvention. Sometimes they need to develop new skills or find local partners. In one region, they may have the necessary people and assets for success, but find they are unable to replicate it in another.

Across the world’s fastest-growing economies, the push to become more energy efficient will continue to create opportunities for many players in the energy sector and beyond. Success requires a clear understanding of the goals and methods of policy makers’ efficiency programs and your organization’s competitive advantages and challenges, as well as a focused effort to build and refine the necessary capabilities to capture these opportunities.

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