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


  helped 17 participating companies save $1.9 million worth of oil a year


  set up a $2.4 million development loan fund that was completely loaned out and repaid


  built up institutional capacity in the public sector


  achieved a 19.5 percent economic rate of return, conservatively estimated


Several factors inhibited even greater success:


  oil prices dropped by almost half in 1986


  government policy favored industrial energy users by taxing fuel oil at a lower rate than other

   petroleum-based products 


  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: 


  Government and donor commitment to energy conservation is fundamental to project success


  Private firms need substantial financial incentives to invest in energy-efficient technologies


  Such technologies will be replicated only if they have broad application, are cost effective, and are

   widely disseminated


  The public and private sectors have important, but different, roles to play in encouraging and

   implementing energy conservation


  Pressure to disburse donor funds can be counterproductive


  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).


    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,