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Energy Efficiency: Central Planning Failure

Energy Efficiency: Another Central Planning Failure

By Roger Kerr

Last month the Energy Efficiency and Conservation Authority (EECA) released a Situation Assessment Report on the National Energy Efficiency and Conservation Strategy.

Established in 2001, the strategy has two national targets:

- 20% improvement in energy efficiency by 2012; and

-increasing the proportion of New Zealand's energy coming from renewable sources.

If you think this "strategy' sounds remarkably like Soviet central planning, you wouldn't be wrong.

Indeed it has more in common with such plans. The targets are arbitrary and are unlikely to be achieved.

The Assessment Report is a catalogue of failure (although of course it doesn't use that language).

It says that there has not been "a substantial improvement in energy efficiency and renewable energy uptake at the national level."

Specifically, we find that the rate of "improvement' in energy efficiency, as measured by EECA, has declined. Between 2001 and 2004 it improved by about 0.4% per annum, compared with an average rate of 0.75% in the previous five years.

An ex-Ministry of Economic Development official was reported as saying recently that compared with the strategy's 20 percent target, "it will be lucky if it makes more than 2 or 3 percent."

As for the renewables target, EECA reports that there has been a decline in the proportion of New Zealand's energy coming from renewable sources. Renewable energy use as a percentage of total energy use fell from 30% in 1998 to 27% in 2004.

What did Soviet planners do when they failed to meet their targets? Their usual response was to change them.

So what do we find in the Assessment Report? "The NEECS energy efficiency target of an economy-wide improvement of 20% by 2012 is unclear, difficult to translate to sectoral level and challenging to measure." EECA suggests it could be replaced by "a package of sectoral energy intensity targets."

But this would make even less sense. The energy intensity of an economy - the amount of energy used per unit of GDP - has nothing to do with the efficiency of energy use or the nation's welfare. Countries that have cheap energy will naturally use more energy in their patterns of production than countries that don't.

New Zealand has comparative advantages in some forms of energy production and would be foolish not to exploit them. Efficiency also requires the preferences of consumers to be respected. Arbitrary targets don't respect diverse preferences.

Similarly, EECA suggests that the renewable energy target should be reconsidered. One option it proposes is to include a long-term target, "eg 2020-2050", for renewable electricity generation. Not many current bureaucrats will be around in 2050 to be held accountable for that target.

All this might be amusing if EECA's funding was not costing taxpayers a cool $22 million a year and if the whole idea of focusing on arbitrary targets rather than citizens' welfare were not fundamentally misconceived.

Obviously we want scarce energy resources to be used in ways that make the largest contribution to New Zealanders' living standards, and we want to be mindful of environmental effects. But this is true of the use of all resources. We also want water resources to be used in the most highly valued ways, for example, and not depleted unnecessarily. Think Big was an example of the folly of regarding energy as special.

In economic life, trade-offs have to be considered. It may well be efficient, for example, to "waste' some energy (eg by keeping lights on) in order to waste less of something more valuable, like human lives. More fuel-efficient vehicles may be noisier or less safe. Mandatory energy efficiency requirements tend to fall more heavily on low-income households that are less able to afford higher-cost buildings or equipment.

Also a more energy efficient device may be used more. A modern computer is much more energy efficient than the original ENIAC but we use far more energy today on computers.

New Zealand will certainly need to expand its energy supply, and make use of non-renewable resources as well as renewables, if the government is to achieve its target of 4 percent plus annual growth to raise incomes into the top half of the OECD range.

In a recent report, the Australian Productivity Commission assessed the scope for achieving environmental gains through energy efficiency programmes as modest, and warned against mandatory measures and a national energy efficiency target. Efficient markets are the best device for promoting energy efficiency.

The economist Milton Friedman once observed that if a private firm missed relevant targets it faced the prospect of going out of business, but if a government bureaucracy did the same thing politicians would increase its budget or its powers to avoid political embarrassment.

The government has already said it will develop a National Energy Strategy as well as review the National Energy Efficiency and Conservation Strategy. Stand by for an increase in EECA's $22 million annual budget as well.

Roger Kerr is the executive director of the New Zealand Business Roundtable.

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