ACT Apr-Jun10.p65 - Petroleum Conservation Research Association

I N F O R M A T I O N C A P S U L E
Economics of Energy Efficiency
There are enormous economic benefits
that can be gained by increasing our
nation’s energy efficiency. Therefore,
investing in efficiency measures is the
most immediate and effective way to lower
energy demand, reduce carbon emissions,
and save households and businesses’
money. According to some experts, the
potential for savings throughout all
sectors of the Indian economy is
estimated to be of the order of
90 million tonnes oil equivalent.
Specialists also claim that the current
energy policy does not take full advantage
of savings offered by promoting energy
efficiency in transportation, buildings, and
industrial sectors which can actually make
a significantly large contribution toward
stabilizing energy prices, therfore
strengthening the robustness of the Indian
economy. It’s for all these reasons that
efficiency should be viewed as a hidden
energy reserve as well as an economic
opportunity.
From an economic perspective, energy
efficiency choices fundamentally involve
investment decisions that trade off higher
initial capital costs and uncertain lower
future energy operating costs. In the
simplest case, the initial cost is the
difference between the purchase and
installation cost of a relatively energyefficient
product and the cost of an
otherwise equivalent product that provides
the same services but uses more energy.
As far as doing away with less efficient
equipments is concerned, the cost is much
higher and therefore the decision of
whether to make the energy-efficient
investment requires weighing the initial
capital cost against the expected future
savings. Assessing the future savings
requires forming expectations of future
energy prices, changes in other operating
costs related to the energy use (e.g.,
pollution charges, carbon credits, PF
penalty, contract load reduction rebate
etc), intensity of use of the product, and
equipment lifetime. And finally deduction
of the future cash flows to initial
investment cost reveals the viability of the
investment.
As described above, the relative price will
finally depend on the capital cost of
efficiency improvements, the discount
rate, expected energy prices, equipment
utilization, and decision time horizon.
This framework applies at the household
level as well as at a broad sectoral or multisectoral
level where energy and capital
are used to produce energy.
Courtesy: VK Srivastava, Additional Director,
PCRA
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active conservation techniques