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Promoting energy efficiency in the developing world

Developing countries stand to benefit if they raise their energy productivity, research by the McKinsey Global Institute (MGI) has found. They could slow the growth of their energy demand by more than half over the next 12 years. They also have a huge opportunity to strengthen their economic prospects from boosting their energy productivity. This document explores areas that developing countries should consider for energy policy purposes.

The paper reveals that presently, a range of market failures and information barriers discourage developing countries from increasing their energy productivity, even with high energy prices. The following are some of the constraints which have implications for developing country policy-makers:

  • capital constraints for low-income households
  • consumers tend to lack the information they need to make the right choices
  • many companies have relatively little incentive to identify and invest in the fragmented energy savings opportunities that are available
  • current tighter credit markets are squeezing the financing of all investments.

The paper reports that MGI identifies the following four priority areas to raise energy productivity:

  • reducing energy subsidies, as they tend to lower energy productivity
  • governments should provide incentives for utilities to improve energy efficiency and encourage their customers to do the same
  • implementing and enforcing energy efficiency standards to boost production of more efficient appliances and equipment and reduce their cost
  • encouraging public–private partnerships to finance higher energy efficiency in buildings.