CDIE Impact Evaluation ENERGY CONSERVATION IN THE PHILIPPINES Designed on the heels of the 1979 oil crisis, a USAID energy management project was implemented in 1986 when conditions were less auspicious oil prices had dropped and the Philippines was in political upheaval. Despite these drawbacks, the project succeeded in generating savings and cutting pollution. USAID's $4.27 million, six-year Technology Transfer for Energy Management project þ helped 17 participating companies save $1.9 million worth of oil a year þ set up a $2.4 million development loan fund that was completely loaned out and repaid þ built up institutional capacity in the public sector þ achieved a 19.5 percent economic rate of return, conservatively estimated Several factors inhibited even greater success: þ oil prices dropped by almost half in 1986 þ government policy favored industrial energy users by taxing fuel oil at a lower rate than other petroleum-based products þ energy-saving technologies were not widely marketed, so few were replicated by other companies PN-ABY-206 1996, Number 4 SUMMARY The $4.27 million Technology Transfer for Energy Management project was successful on several counts. Participating companies saved $1.9 million worth of oil a year, for an economic rate of return of 19.5 percent. Assuming minimal replication of the technologies demonstrated, the rate increases to 23 percent. Including environmental benefits and minimal replication, the economic rate of return jumps to 62.5 percent. The objective of the project was to promote adoption of energy-efficient technologies in the industrial and commercial sectors large consumers of energy and primary generators of carbon dioxide (CO2) emissions. Energy conservation was especially important in 1984 when the project was designed, because the price of oil had risen to $28 a barrel and the Philippines depends on imported oil for 56 percent of its energy. Widespread replication of energy-efficient technologies was expected to reduce oil imports, conserve foreign exchange, and improve the competitiveness of Philippine firms. By the end of the project, 30 technology demonstrations had taken place at the 17 participating companies. Financial payback periods ranged from 0.3 to 20.9 years, averaging 1.8 years. All $2.4 million set aside in the development loan fund had been loaned and all loans were repaid. All together, participating companies saved 109,331 barrels of oil per year. The estimated financial rate of return was greater than 12 percent for 11 of the firms, and greater than 28 percent for 8 of the firms. The results, while positive, could have been even more impressive. Several factors help explain why more energy was not saved. When the project was implemented, government policy favored industrial energy users by taxing fuel oil less than other petroleum-based products. The financial incentive for these companies to conserve energy was less than for other companies. The incentive was reduced even further when the price of oil dropped from $28 a barrel in 1984 to $13 a barrel in 1986. The energy-saving technologies demonstrated under the project were, for the most part, technically and financially sound. In some cases, though, they had little replication potential or were introduced to companies that would probably have adopted them without financing by the project. In addition, the project did not market the technologies widely, which explains why there was little direct replication beyond the 17 companies. Institution building in the public sector, though not a high priority of the project, was nonetheless successful. In contrast, there is little evidence the project increased institutional capacity in the private sector to undertake energy audits, for example, or to make equipment sales, although this was a project priority. The evaluation suggests six lessons learned: þ Government and donor commitment to energy conservation is fundamental to project success þ Private firms need substantial financial incentives to invest in energy-efficient technologies þ Such technologies will be replicated only if they have broad application, are cost effective, and are widely disseminated þ The public and private sectors have important, but different, roles to play in encouraging and implementing energy conservation þ Pressure to disburse donor funds can be counterproductive þ Energy-using firms consider environmental benefits from energy conservation ancillary CDIE Study In October 1995 a three-person team evaluated the Technology Transfer for Energy Management project. This was one of six impact assessments on energy conservation USAID's Center for Development Information and Evaluation (CDIE) carried out. Other countries in the series are Czech Republic, Guatemala, Hungary, Jamaica, and Pakistan. Over two weeks, the CDIE team interviewed individuals involved with the project and visited 5 of 17 energy-using companies that participated: 3 companies manufactured a product (steel, cement, paper), and 2 provided a service (telephone, laundry). The project was implemented from 1986 to 1991. BACKGROUND The Economic Problem The Philippines is highly dependent on energy imports, primarily crude oil. In fact, imported fuels are the source of 56 percent of the country's energy. Before 1972 oil was cheap, about $4 a barrel, and oil imports were less than 12 percent of total imports. But in 1984, the price of oil was $28 a barrel, and oil imports accounted for 28 percent of total imports. By 1989, oil prices would drop to $16 a barrel, and oil imports would decrease to 13 percent of imports. But this was not anticipated in the late 1970s and early 1980s when the government started several energy conservation programs to move the nation from dependence on imported oil toward increased energy self-sufficiency. Nor was it anticipated in 1984, when USAID designed the Technology Transfer for Energy Management project to promote adoption of innovative energy-efficient technologies. In 1986, just as the USAID project was getting under way, the Philippines underwent a major political upheaval. Corazon Aquino took over as president from Ferdinand Marcos. Aquino abolished the Department of Energy, among other actions. This clearly was not an auspicious time to launch an energy project. The situation did not improve. By the late 1980s, inadequate electricity generation had become a serious economic problem. The geography of the Philippines (with more than 7,000 islands) and its large population (more than 64 million) add significantly to the cost of providing electricity. By the last half of the 1980s, the period of this assessment, the Aquino government had not installed sufficient generation capacity. The oil crisis of 1979 was replaced by the power crisis of 1992 93. The Environmental Problem Burning petroleum-based fuels and coal is a major contributor to air pollution. In the Philippines, these pollution-causing fuels are used primarily by two groups: electric utilities that generate, transmit, and distribute electricity through power grids; and individual industrial, manufacturing, and service companies that use these fuels to produce steam and heat as essential elements of their production processes. Electric power generation has a significant environmental impact. Electric utilities consumed an estimated 34 percent of all fossil fuels used in the Philippines in 1993. That means 47 percent of power generation comes from petroleum-based fuels and 5 percent from coal. The second group of energy-using companies the many large, medium, and small industrial and commercial operations throughout the Philippines consumed more than 31 percent of fossil fuels burned in the Philippines in 1993. The predominant fuel source for these companies is bunker fuel oil. Air pollution emissions produced by burning petroleum fuel and coal include CO2, methane, nitrous oxide, carbon monoxide, sulfur dioxide, tropospheric ozone, and particulates. All these emissions contribute to global warming except sulfur dioxide and particulates. Sulfur dioxide is a key contributor to acid rain and human health problems, and particulates cause respiratory disease. The most significant contributor to global warming is CO2. According to a recent report by an interagency committee on climate change chaired by the Philippines Atmospheric, Geophysical, and Astronomical Services Administration, fossil-fuel burning is the major source of CO2 emissions in the Philippines, accounting for 53 percent of the total 72 million tons. Of total CO2 emissions caused by energy consumption (38.4 million tons), transportation contributed an estimated 35 percent; power generation, 28 percent; industry, 22 percent; refining, 4 percent; and other uses, 11 percent. The largest industrial contributors are cement (6 percent of the national total), mining (4 percent), and food and tobacco (4 percent). Iron and steel mills and paper-pulp mills and printing factories are also significant industrial sources of this greenhouse gas. Because these firms and industries are relatively energy intensive, they have the most need of, and could gain the most from, more efficient energy use. Efficiency improvements for these firms also result in the largest reductions in release of CO2, since petroleum and coal are the predominant fuel sources for electricity and process steam and heat. To illustrate: if losses due to inefficient power transmission and distribution had been reduced by 10 percent in 1990, more than one million tons of CO2 would not have been emitted. This is because compensatory generation (which increases the emission of air pollutants, including CO2) would not have been required to meet end user demand. Energy Conservation: Killing Two Birds with One Stone? The Philippines energy project was designed to achieve an economic objective, but, if successful, would have a positive environmental impact as well. Originally designed as a five-year, $4.6 million project, it was actually implemented over six years, 1986 91, and funded at $4.27 million. The project promoted adoption of energy-efficient technologies by industrial and commercial firms heavily dependent on fossil fuels and electricity. This was a good choice in 1983, because the industrial sector was a major energy user in the Philippines. At the time, total energy consumption, by sector, was: industry, 63 percent; transportation, 22 percent; and commercial and residential, 15 percent. The widespread adoption of energy-efficient technologies was expected to reduce the country's dependence on imported oil, conserve foreign exchange, and improve the financial position of Philippine industrial and commercial firms. The project also sought to establish a strong institutional capacity in the private sector to undertake conservation-related investments. The private sector includes not only industrial and commercial energy consumers but also suppliers of equipment and services, engineering firms specializing in energy conservation, and lenders. To achieve these objectives, the project tried to overcome two main constraints to energy conservation: lack of information about energy-saving technologies (especially technical and economic feasibility), and lack of capital to finance initial energy conservation investments (compared with more traditional investments to expand industrial capacity). But appropriate technology and adequate financing are only two of three conditions typically associated with successful energy conservation programs. Sound pricing policy is the third. If domestic energy prices do not reflect international prices or long-run marginal costs, energy consumers (whether large industrial users or households) will underinvest in energy conservation. The greater the distortion, the worse the situation becomes, until there is virtually no private benefit from investing in energy conservation. PROGRAM ELEMENTS According to the final report on the results of the project, 20 companies were selected to implement energy conservation technologies; 17 actually participated. The project sponsored 30 technology demonstrations at the participating companies. Nine private financial institutions were trained and certified to administer loans to companies where new energy-saving technologies were demonstrated; five actually participated. This evaluation examines four program elements to ascertain their relative importance in contributing to energy savings: economic policy reform, technology transfer, education and awareness, and institution building. Economic Policy Reform In the 1980s, the government exercised monopoly control of the supply and price of oil and electricity. Because fuel oil was taxed less than other petroleum-based products (such as gasoline), prices for industrial consumers were distorted, leading to inefficient supply and use. In addition, fuel for power generation was exempted from normal taxes, which, together with other subsidies, contributed to undercapitalization and overconsumption of electricity. This ultimately led to the power crisis of 1992 93. By 1995 energy policies had improved substantially. The government began to privatize, starting with Petron, the marketing subsidiary of the Philippine National Oil Company. The energy sector is also being deregulated, slowly, so people can adjust to anticipated higher energy prices. And most new capital investment for electricity supply will be private. In 1993, private supply represented 18 percent 1,223 of 6,695 megawatts installed nationally; by 1994, private supply had reached 26 percent 2,075 of 8,014 megawatts. In addition, the government is expected to increase taxes on petroleum fuels used by industry. This will help reverse the situation whereby in 1995 users of regular gas, kerosene, and diesel were paying 5.268 pesos per liter into the oil stabilization fund, while industrial users of fuel oil actually were drawing 1.858 pesos per liter out of the fund as a subsidy. Finally, energy conservation has become a national priority, largely as a result of power shortages. For example, the reconstituted Department of Energy was implementing a major public education and awareness campaign in 1995, using posters to promote conservation, demonstrating renewed government commitment to energy conservation. Technology Transfer Technology demonstrations were partially successful. Eleven of the 17 participating companies achieved a financial rate of return greater than 12 percent, and for 8, the return was greater than 28 percent. In several instances, however, the technologies did not appear to have strong replication potential (for example, the air conditioner chiller optimization technology demonstrated at the Philippines Long Distance Telephone Company). In other cases, the team learned the technologies would have been adopted without project support. The Trust International Paper Corporation, for example, would have improved its power factor without the project. (Improving the power factor allows for more efficient and balanced use of electricity to avoid energy loss.) The team assessed the effect of energy-saving technologies through site visits at 5 of the 17 companies. Three manufacture a product (steel, cement, paper) and two provide a service (laundry, telephone). þ Electric arc furnace. Armco-Marsteel Alloy Corporation (now GST Industries) invested $218,500 for an "oxy-fuel" scrap metal melting system expected to improve furnace efficiency by 12 percent and increase steel production by 15 percent. The estimated payback period was 3.9 years. However,