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Chapter 1: Energy in the World Economy

1.1 Introduction

Energy is a foundation stone of the modern industrial economy. Energy provides an essential ingredient for almost all human activities: it provides services for cooking and space/water heating, lighting, health, food production and storage, education, mineral extraction, industrial production and transportation. Modern energy services are a powerful engine of economic and social development, and no country has managed to develop much beyond a subsistence economy without ensuring at least minimum access to energy services for a broad section of its population. Throughout the world, the energy resources available to them and their ability to pay largely determine the way in which people live their lives. Nevertheless, it is critical to recognize that what people want are the services that energy provides, not fuel or electricity per se.

Many factors play a role in influencing energy supply, not least of which are its availability, price and accessibility. The regional endowment of energy sources and the pace at which they are developed and distributed are not uniform around the world. Figure 1.1 shows annual primary energy consumption per capita in various regions of the world (WEC, 1993). The data indicate the wide variation between regions, not solely accounted for by climatic differences. Average world annual consumption at around 1.6 toe/capita; in OECD countries the average is around 5 toe/capita and in developing countries it is less than 1 toe/capita.

Figure 1.1: Primary Annual Energy Consumption per Capita (1990) toe/capita

The last two centuries have seen massive growth in the exploitation and development of energy sources, and the world has gained many benefits from these activities. The magnitude of energy consumed per capita has become one of the indicators of development progress of a country, and as a result, energy issues and policies have been mainly concerned with increasing the supply of energy. This approach is now seen as a vision that needs challenging. Decoupling growth in energy consumption per capita from economic growth and focussing on the appropriate provision of quality energy services to assist economic development is key (UNDP, 1997; UNDP/EC, 1999; and World Bank, 2000b).

1.2 Fuel Types

World primary energy use remains dominated by fossil fuels (coal, oil and natural gas), which account for 75% of total primary energy supply. Renewable energy sources, comprising mainly biomass4 (including fuelwood) and hydropower, currently represent less than 19% of world primary energy use, of which biomass contributes about 14%. Nuclear energy contributes around 6%. Figure 1.2 illustrates these data (BP, 1998).

Figure 1.2: World Primary Energy Use by Fuel Type, 1997 (Gtoe)

The patterns of energy use by fuel type and the way these patterns change over time in developing countries reveal further insights into exploitation of different energy resources. Figures 1.3, 1.4 and 1.5 show estimates of total final energy use by fuel type in Latin America, Asia and Africa respectively over the period from 1980 to 1995 (EC, 1999).

The role of biomass is of particular significance. Biomass use is unevenly distributed around the world: it represents 3% of energy use in industrialized countries and an average of 33% in developing countries, with large differences between regions: biomass covered over 60% of final energy use in Africa, 34% in Asia and 25% in Latin America. Other renewable energy sources, such as small-scale hydropower, geothermal, wind, and solar energy, do not feature as significant energy inputs. Worldwide the aggregated energy supply from these renewable sources amounts to less than 1% of the total. The data also indicate that the proportions of different fuel types changed little in developing countries between 1980 and 1995.

Households and communities in rural areas in developing countries typically rely on diverse sources of energy; using one fuel for heating, another for cooking or lighting and others for agricultural and other productive activities. Most biomass is consumed in traditional ways in the household sector, and is simply collected rather than purchased. Such fuels are locally 'free' in cash terms, but have a cost of much time and physical effort often by children and women. In some rural and urban areas, charcoal has become a cash crop contributing to a monetised economy, and in some urban areas, there are active markets in local woodfuels.

Figure 1.3: Total Final Energy Use in Latin America

Figure 1.4: Total Final Energy Use in Asia

Figure 1.5: Total Final Energy Use in Africa

Because biomass remains such an important fuel around the world, energy policies for developing countries need to be as concerned with the supply and use of biomass, whether in its traditional role or used in modern technology, as they are about fossil fuels or other renewable sources of energy.

1.3 Energy and Development

In developing countries, it is widely accepted that poverty will not be reduced without greater use of modern forms of energy. Surpassing the 1 toe/capita per year level of energy use seems to be an important instrument for development and social change. Whilst low energy consumption is not the only cause of poverty and under-development, it does appear to be a close proxy for many of its causes. For example, environmental degradation, poor health care, inadequate water supplies and female and child hardship are often related to low energy consumption. As an example of this, Figure 1.6 shows life expectancy in 70 developing countries as a function of commercial energy use per capita per year (World Bank, 2000a)5.

Figure 1.6: Life expectancy and energy use per capita

Empirically it appears that social conditions improve considerably as energy consumption per capita increases. Whilst development is a complex process, it is a paradigm of development policy that without appropriate energy services there can be no true economic development. Energy services in suitable forms are essential ingredients for future growth and development.

Even now, around 2 billion people have no access to electricity and rely on traditional fuels, such as dung, crop residues and woodfuel. Another 2 billion have per capita consumption that is barely one-fifth of the average consumer in OECD countries.

The majority of these people lacking access to modern energy services are in the rural areas of developing countries. Bilateral and multilateral development aid in support of national efforts have included a variety of rural energy programmes, including investment projects, training and capacity building, to try to improve the provision of energy services. These include a wide range of activities managed by UNDP, the World Bank, the European Union, FAO and other agencies, together with projects funded via the Global Environment Facility and by bilateral organizations.

Box 1 gives examples of some multilateral programmes undertaken by various UN agencies6, (derived from UNDP/EC, 1999).

Box 1: Examples of energy activities of some UN agencies

Food and Agriculture Organization

FAO assists countries to meet their energy requirements in agriculture, forestry and fisheries as a means of achieving sustainable development. An integrated approach for the assessment, planning and implementation of energy and sustainable rural development is taken via technical assistance activities. The dual role of agriculture as a user and supplier of energy is a major factor in this work. Renewable energy applications are promoted especially in relation to enhanced agricultural productivity and other income generating activities. Networking is promoted, such as the Latin American and Caribbean Working group on Rural Energization for Sustainable Development, the Regional Wood Energy Development Programme in Asia and the Sustainable Rural Environment and Energy Network for the whole European Region.

Bioenergy data and projections are an important component of FAO's energy activities. Attention is also placed on the energy function of the sugar industry, as one of the diversification strategies of that sector, and to the production of low cost transport fuels to contribute to urban food security. FAO has also promoted awareness and better use of work animal technology.

Global Environment Facility

The GEF is an international financing mechanism that provides incremental funding for projects with global environmental benefits. It is also a funding mechanism for the UN Framework Convention on Climate Change and is jointly implemented by UNDP, UNEP and the World Bank. Medium-sized projects up to US$1M, project development activities and enabling activities can be funded via the GEF, and around 40% of funds allocated to date have supported climate change activities comprising energy efficiency and renewable energy projects, assessment and studies.

United Nations Development Programme

UNDP manages several energy-related programmes. Examples of two of these are:

  • The Initiative for Sustainable Energy (UNISE) is a shift from the traditional supply-side approach, and links energy with social and environmental issues as well as with economic development. Activities are supported through global, regional and national programmes, including technical expertise and training;
  • The FINESSE programme (Financing Energy Services for Small-scale Energy-users) aims to accelerate the commercialization of renewable energy technologies through pre-investment activities and the creation of the conditions and mechanisms for the credit sector to on-lend to small-scale energy users. FINESSE secures the involvement of small-scale operators, supporting franchise operations and enabling the local manufacture of key components. In Southern Africa, the programme has funded market studies and business plans for investments in projects in biogas, PV, mini-hydro, and solar water heaters. A loan guarantee fund has been supplied to help business plans meet loan conditions.

United Nations Environment Programme

UNEP aims to stimulate cooperation action to respond to emerging environmental challenges and to promote greater awareness and facilitate effective cooperation among all sectors of society and the actors involved in the implementation of the international environmental agenda. The UNEP Energy Policy and Programme focuses on the need for a global shift to less carbon intensive energy systems and through this reduced adverse environmental impacts on local as well as on global levels by promoting:

  • greater deployment of renewable and non-carbon energy technologies;
  • efficiency improvements in conventional energy supply and end-use technologies;
  • provision of better energy services from existing energy systems.

World Bank

The World Bank ESMAP programme (Energy Sector Management and Assistance Programme) provides global technical assistance for the energy sector, including national energy assessments for over 60 countries that have helped pave the way for subsequent capital investment. The Bank has also launched a number of initiatives to encourage private sector investment in renewable energy in developing countries:

  • The Renewable Energy and Energy Efficiency Fund (REEF), which finances private sector renewable projects of less than 50MW together with energy efficiency activities;
  • The Solar Development Corporation (SDC), which is a collaboration with a number of foundations, and promotes stand-alone PV systems through private sector mechanisms;
  • The PV Market Transformation Initiative (PVMTI) is a strategic intervention to accelerate the sustainable commercialization and financial viability of PV technology. PVMTI will make selected concessional investments in private sector PV market development projects in India, Kenya, and Morocco. With technical assistance and appropriately structured financing, these projects are eventually expected to provide successful examples of sustainable and replicable business models that can be financed on a commercial basis.

1.4 Energy Consumption by End-use Sector

Data on energy consumption by end-use sector in developing countries can be used to illustrate further the demand patterns for energy. As an example, Figure 1.7 shows the distribution of primary energy consumption by end-use sector in 10 southern African countries (FAO, 1995). The importance of energy in household use is clear from these data, with 68% of total energy consumption. Industry, transport and agriculture are all relatively small users. This picture is similar in many other developing countries, and contrasts with industrialized countries, where average household energy demand is around 40% of total energy use, and industry and transport are around 30% each.

Figure 1.7: Energy consumption in 10 southern African countries (1990)

1.5 Global Issues in Energy Supply and Demand

Changes in the way that energy is delivered to final consumers are taking place around the world. Energy generation, distribution and supply are moving from the public to the private sectors, and governments are now less likely to be directly involved in managing the energy business. Competition between private utilities is becoming more common, with the government role reducing to one of policy, oversight and regulation. There is also a move away from centrally planned generation and supply, with the market determining operational decisions and the allocation of investment funds. These trends are likely to continue, and are affecting developing and industrialized countries alike, with implications for investment in central power generating capacity and grid extensions.

Projections suggest that energy demand in developing countries will eventually overtake that of industrialized countries. Some forecasts are that on current trends world energy use will grow at 1.4% annually until 2020, with growth in OECD countries of 0.7% and growth in developing countries of 2.6% (WEC, 1995). According to this scenario, developing countries will reach the level of total consumption in OECD countries by 2015, as shown in Figure 1.87, and by 2050, they will have doubled it (WEC, 1995, and World Bank, 1999). Nevertheless, the level of energy consumption per head of population in developing countries will still be only one quarter of that in OECD countries.

Recent assessments from the World Energy Council (WEC, 2000a) have suggested that there are no technological or economic reasons why the world cannot enjoy the benefits of both a high level of energy services and a better environment. One consequence of this is that there is an opportunity for the development of energy services to follow a new path so that developing countries do not repeat the energy demand patterns of industrialized countries. However, a sustainable energy future will require economic, regulatory and institutional frameworks that facilitate appropriate investments, together with proper accounting for social and environmental externalities.

Figure 1.8: Primary Energy Consumption Forecast

Some analysts suggest that the resource base for fossil fuels appears sufficient for there to be less concern than in the 1970s and 1980s about major supply shortages. Resources of both conventional and unconventional oil and gas are thought to be available for another 50-100 years with known technology and at current costs. Coal resources are abundant and should last for more than 100 years. As a result, these analysts affirm that petro-chemicals will remain commercially relevant well into the foreseeable future. However, other analysts observe that oil and gas resources are finite, and that use of these resources are likely to become increasingly reserved for higher value petro-chemical production rather than for fuel supply. This view suggests that the longer-term uncertainties regarding energy supply, together with the forecasts of considerably increased energy demand during the next 50-60 years could produce energy market difficulties in future years. There are also views that suggest that a transition to renewable energy will precede any eventual fossil fuel depletion because of environmental concerns.

Nevertheless, the focus of attention in energy policy is currently being placed on the efficiency by which fossil fuel energy resources are utilized, improving the regulatory and investment framework in which energy is supplied to end-users and tackling the environmental impacts of energy technologies, including their role in climate change. These tend to be the shorter to medium term priorities in energy policy formulation.

1.6 Local Environmental Impacts

The combustion of fossil fuels and traditional woodfuels can create adverse local environmental effects. In developing countries, the local environmental problems associated with energy use remain matters of concern that are as, or even more, urgent than they were in industrialized countries 50 or 100 years ago. Further, it is the poor who suffer most from such problems, because it is they who are forced to rely upon the most inefficient and polluting sources of energy services for lack of access to better alternatives. The connection between woodfuel use, cooking and the epidemiology of respiratory and other illnesses is a topic of active research. Nevertheless, a consistent pattern linking energy, environment and health has become clear (World Bank, 1999). Woodfuel combustion in confined, often unventilated indoor areas and at low thermodynamic efficiency leads to high concentrations of smoke and other pollutants.

The World Bank has estimated that the economic costs of air pollution from all sources are US$ 350B/year, or the equivalent 6% of GNP of all developing countries. Much attention is now being given to technical and policy measures that can reduce the local environmental impact of energy use.

1.7 Climate Change

An issue of much relevance to future energy policy is mitigation of the effects of global climate change. Industrialized countries are responsible for at least 80% of the build-up of greenhouse gases in the atmosphere, and consumption of fossil-fuel derived energy accounts for the largest share of anthropogenic emissions of greenhouse gases. Through the UN Framework Convention on Climate Change and Agenda 21 (UNCED, 1992), the international community has agreed to work together to meet the problems of climate change, and industrialized countries are taking steps to reduce or stabilize their emissions of CO2 and other greenhouse gases.

The implementation of the Kyoto Protocol, once in force, or of any other agreement, which might develop from the Protocol, will greatly influence energy policy, investment decisions and the development and deployment of energy technologies. The Protocol assigns legally binding emission reduction targets and through Joint Implementation and the Clean Development Mechanism, industrialized countries (listed in Annex 1 to the Protocol) can meet part of these targets by financing initiatives to reduce greenhouse gas emissions in other countries. This process may help to lever new financial support for sustainable energy development projects by providing additional benefits to investors (UNDP, 1998). Dealing with climate change will require global efforts to control greenhouse gas emissions. Emissions from developing countries are increasing, and will eventually naturally exceed those of industrialized countries. The means by which economic growth and increased energy demand can be reconciled with protection of the local and global environment is central for future sustainable energy development.

1.8 Energy Security, Diversity of Supply and the Role of Renewable Energy

In simple terms, the concept of diversity of supply means not placing too much reliance on any single fuel, technology or other factor. Ensuring that there is diversity of fuel supply has long been a central theme within energy policy - both for primary fuel supplies and for sources of supply for derived electricity. Diversity has been of particular importance at times of oil price volatility and as one theme of the nuclear energy debate. One way of considering the benefits of diversity is to assess the variety, balance and disparity of fuel supply.

Variety of fuel supply considers the number of options available, including different technologies as well as fuel sources; the balance of supply must take into account how much the mix relies on any one of the available options while any disparity of supply assesses any qualitative differences between them. The central concept of diversity is responding to uncertainty and this underpins energy security - in turn this helps deliver economic performance and improves quality of life. Any failure to supply energy results in lost output and costs to industry, commerce and domestic users.

Diversity should, therefore, be seen as a means of providing greater strength in guarding against unforeseen events. It offers a kind of risk management which reduces the potential adverse impacts resulting from interruptions in supply, or excessive price rises in any single supply sector. It also provides additional options for substitution or replacement of supplies on which a country or region has become over-reliant. Diversity confers some insurance in the face of ignorance about the short and long term availability or price of any single energy source.

Indeed, history has shown that supply 'shocks' and extreme price volatility can have major economic and social impacts through national economies. The effects seem to be particularly sensitive when there is undue reliance on imported fuel oils. The oil price rises in 1973-74 led to major government initiatives in renewable energy, energy efficiency (conservation) and nuclear power development with a view to mitigating the risk associated with heavy use of oil. As we enter the 21st century, although fossil fuel reserves seem sufficient, global concerns for the environmental implications of fossil-fuels for electricity and heat generation and their use in transport have changed perceptions about choices of fuels and opened a wider debate about the most appropriate global energy development pathway.

Following the "oil crises" and rapid oil price rises of the early 1970s, diversity of supply arguments stimulated the first wave of development of new and renewable energy systems in the mid-1970s. Low oil prices in the 1980s tended to reduce the thrust of this effort, but interest in renewable energy has been revived during the 1990s, and looks set to continue into the 21st century. Renewable energy sources have the potential to meet an increasing proportion of the world's energy needs over the coming decades. The basic reason for this is that modern renewable energy systems can make positive contributions against a number of underlying economic and social drivers - the drivers that determine the development and deployment of new energy technologies.

Hence, renewable energy systems are seen to offer benefits in terms of reducing the local environmental impact of energy production; they can provide both employment opportunities and economic benefits in rural areas due to their inherent localised nature. Renewable energy sources are an important means of providing increased diversity and security of supply, and they also offer another set of energy supply options that can mitigate the impact of climate change by substituting for fossil fuels. Overall, therefore, an increasing role for renewable energy is considered important to achieve a more sustainable energy future in both industrialized and developing countries alike.

1.9 Renewable Energy Technologies

Most renewable energy sources have low environmental impacts at both local and global levels compared with conventional fossil fuel energy technologies; they are available in a wide range of capacities; they offer fuel diversity and can make use of local resources to deliver energy to local users without extensive infrastructure investments. The technical potential for renewable energy in both industrialized and developing countries is very large. Table 1.1 lists the results of some recent modelling studies on the potential global market for renewable energy (DTI, 1999). Whilst these studies are very much "top-down" assessments of the broad potential for renewable energy systems, and do not take account of issues such as local conditions, and the influences of energy markets, a significant expansion of renewable energy systems in all scenarios studied is indicated.

Table 1.1: Summary of modelling studies for renewable energy markets


Time Horizon

Potential renewable energy contribution



4%of electricity, 2% of total energy (excluding 'non commercial use', estimated at 15-20% of total energy)

World Energy Council


Up to a 25% share of global markets (from the current level of around 18%)



Current contribution of 20% will rise to 60% of electricity and 40% of other fuels

Shell International


Up to 40% of total energy supply

The high long-term market penetration levels predicted by these studies are associated with substantial levels of capital investment in plant and equipment, and yet despite considerable research and development, the exploitation of modern renewable energy sources is still in its infancy. A prime reason is their lack of cost-effectiveness, together with the availability and reliability of the current renewable energy technologies. Furthermore, certain renewable systems are able to provide power only intermittently, and may need storage via batteries to give greater availability. It is worth noting that biomass technologies are an exception to this rule, as they utilize a resource that can be stored for use on demand when required, and which is not directly subject to short-term variations in weather (such as rainfall, wind or sunshine).

Bringing renewable energy systems to technical maturity will require substantial cost reductions, and continued efforts will be needed in demonstrating their contribution in competition with conventional fuels. A transition to a renewable based system will depend on political willingness to internalize the environmental and social costs of fossil fuel use, and on the successful development and deployment of technologies in appropriate commercially viable applications. Financial, administrative and institutional entities will also have to adapt their policies to take account of renewable energy systems so that barriers to market entry can be minimized.

1.10 The Energy Challenge

The current patterns of energy production and use, which have shaped the development process in the past, are unsustainable. The energy challenge now faced by countries around the world is to provide energy services that allow all people to achieve a decent standard of living, consistent with sustainable human development. This link between energy and development remains a key factor in development policy. It will be shaped by current trends of globalization, markets and popular participation in decision-making processes, the changing roles of government and energy utilities, and the mix of sources of external funding.

The World Energy Council has suggested (WEC, 2000b) that addressing the three goals of energy accessibility, availability and acceptability is fundamental to political stability world-wide, to stimulating new energy business strategies for the new century and to achieving a sustainable future for the world. Following the work done in establishing Agenda 21, UNDP has also identified (UNDP, 1997, and UNDP/EC, 1999) the need for a focused examination of the role of energy in achieving sustainable socio-economic development and has identified a series of actions required to increase the adoption of sustainable energy options. More recently, the World Bank has proposed a greater focus on rural energy in its lending for the energy sector, and is planning to bring renewable energy considerations more prominently into non-power sector lending, such as in the agriculture sector (World Bank, 1999).

FAO has had significant experience with the energy needs of the agricultural sector. Bioenergy issues and biofuels have been on the organization's agenda for decades. Over the last 10-15 years FAO has supported many rural energy projects in developing countries. These activities aim to assist developing countries to meet their energy requirements in agriculture, forestry and fisheries as a means of achieving sustainable development. A transition from the present energy supply of mainly woodfuel and animal and human work, to a more diversified base and a better use of modern energy technologies, is seen as key to improving the living conditions of rural populations (WEC/FAO, 1999).

Agriculture is an important, but not dominant, user of energy in developing countries. Nevertheless, improving energy services for rural people should include increasing the energy input to agriculture so that gains in productivity, enhanced food security and rural economic development can be made. Even a small amount of additional energy, normally insignificant at the level of national energy balances, can make an important contribution to a local rural economy. Due to its capacity for production of biomass, agriculture is also a potential source of renewable energy supply. Recognizing the dual role of agriculture as the first step in mobilizing its energy function is the main theme of this report. Together with the challenges faced by the international community in responding to the local and global environmental impacts of energy use, there is now a major opportunity for agriculture to play an important extra role in sustainable energy development.

4 Biomass definitions and related terms, and further descriptions of the energy content of biofuels are contained in Annex A.2.

5Life expectancy at birth uses data for 1997, and commercial energy use per capita per year uses data for 1996.

6Visit < matrix.pdf> for the latest information on the energy activities of UN agencies.

7The graph for the period 2000-2060 shows a scenario of future energy consumption based on current trends, and is intended as one illustration among many of recent energy demand projections.

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