Special edition  » Green development

There are three compelling rreasons to decouple energy use from industrial output

The reasons are to enhance productivity by minimising the cost of energy used in production processes, to improve energy security by decreasing the need to import energy resources and to reduce the generation of pollutants and of global pollutants, primarily greenhouse gases (GHGs). Significant decoupling would be good for enterprises, the country and the environment.

There are even more reasons for Vietnam's manufacturing sector to become more energy efficient. First, the government is in the process of eliminating a subsidy for electricity production. Currently the price of coal used for electricity generation is only 50-60 per cent of coal production costs, resulting in electricity costs lower than most of other countries in the region.

This subsidy largely explains why the price of electricity in Vietnam is only $0.051kWh compared to $0.06kWh in Indonesia and Malaysia and $0.067kWh in Thailand. But this subsidy is going to end soon, which will increase production costs.

The government has already increased the price of coal to near market rates and in 2009 the price of electricity rose 8.9 per cent. At the same time industry responds to this increase in production cost, it will also have to adjust to the fact that the cost of labor is rising faster than productivity.

From 1995 to 2005 salaries increased by 77 per cent while productivity increased only by 56 per cent. Second, an additional $1 invested in energy efficiency avoids more than $2 in an energy supply investment.

Normative Framework Needs Specificity

There are sufficient environment and energy laws and sub-laws in Vietnam that should force a shift to a more resource efficient and low carbon manufacturing sector. These include the National Target Programme for the economical and efficient use of energy and the pending draft law on the same topic.

In tandem there are the Socio-Economic Development Strategy 2001-2010 and the plan for 2006-2010 and subsector steel, pulp and paper strategies that call for more attention to environmental protection and resource efficiency.

In some cases, such as the cement subsector strategy, there is even an explicit recognition of the complementarities of competitiveness and resource efficiency objectives and the need for a combination of closing resource inefficient and highly polluting small plants, modernising and expanding others and building new ones with more advanced technologies to meet economic and environmental objectives. Unfortunately, these laws and sub-laws have resulted in overlapping mandates and weak coordination among the implementing ministries.

On the other hand, these laws and sub-laws, plans and strategies are having a limited impact on energy efficiency because they are missing specific resource efficiency targets for the manufacturing sector and subsectors and there is lack of (a) programmes to support the manufacturing sector achieve targets and (b) protocols to monitor progress in meeting specific targets.

For example, the National Target Programme on economical and efficient use of energy calls for a 3 to 5 per cent reduction of total national energy consumption compared to the business as usual scenario during 2006 to 2010 and 5 per cent to 8 per cent during 2011-2015. However, there are no specific targets for various manufacturing, transport and commercial building sectors. Nor are there sector specific plans on how these sectors should go about achieving reductions.

Moreover, most of the manufacturing subsector development strategies do not report current resource use (energy, water and raw material) nor present a scenario that shows how a mix of closed, modernised and expanded and new plants would meet production and other objectives such as employment creation, resource efficiency and environmental protection.

In addition, the process of setting energy efficiency targets is hindered by the fact that there is not yet a national energy use inventory for the manufacturing sector. The Institute of Energy is still in the process of surveying approximately 700 establishments. The data being collected, however, is incomplete because of limited reporting and a focus on electricity consumption rather than total energy consumption. A review of the first 500 plant reports indicates that less than 200 were complete and that even a smaller number were reasonably accurate.

Donor Support Needed for Demand Driven Policies

There are several on-going donor funded programs building capacity in various institutions to deliver energy efficiency advice and services to the manufacturing sector. For example, the Danida-supported project for the Vietnam Energy Efficiency Programme (VNEEP) is increasing the number of auditors that could carry out energy audits. The national programme on industrial energy efficiency supported by the Japanese government focuses on technical advisory services at the enterprise levels. The UNDP programme on energy efficiency works with small- and medium-sized enterprises.

Most donor programmes operate as single-purpose rather than multi-purpose efforts to bring about incremental but important improvements in industrial operations. Most programmes have not yet built adequate institutional capacity to design and implement national policies that would create sufficient demand for services. None of the programmes implemented to date have yet resulted in the government setting national targets for decoupling energy use and manufacturing output.

Lastly, there appears to be little if any effort to involve subsector associations in starting resource efficiency or more limited energy efficiency programs for their members. In fact, most of the subsector associations are unaware of the productivity benefits to be gained from a resource efficiency programme.

So far not so good

There has been no absolute or even relative decoupling of energy use and industrial ouput during 1990-2007. Energy use and industrial output (manufacturing value added) increased by virtually the same ratio between 1990 and 2007 and even between 2000 and 2007 (Table 1).

Regional Examples

Vietnam can draw on the experience of other developing countries in Asia in designing its own policies and technical support programmes.

China, in its 11th Five-Year Plan 2006-2010, set an energy reduction target of 20 per cent and a pollutant reduction target of 10 per cent by 2010 against a 2005 baseline. To achieve this target the government first closed small plants and phased-out inefficient, outdated capacity in high energy-consumption industries. Secondly, the government working with provincial authorities launched the "Top-1,000" programme, which targets China's 1,000 highest energy consuming enterprises.

It is providing guidance to the enterprises, calling on them to significantly reduce their energy intensity (energy use per unit of production) with the goal that energy intensity should reach the level of advanced domestic production and that some enterprises should attain either international or industry-advanced levels of energy intensity.

India in the Energy Conservation Act, 2001, empowered the central government and in some instances state governments to take steps in various sectors to achieve an estimated 20 per cent reduction in energy intensity.

Specific energy consumption (SEC) targets have been defined for these sectors as energy consumption per unit of output. However, some plants can achieve better energy efficiency improvements than their specified SEC improvement target, just as some plants may not be able to do so.

Consequently, to maximise energy savings across all designated consumers in the most cost-effective manner, plants will be encouraged to achieve more energy savings, and exceed their specified SEC target and the additional energy savings can be traded to meet the SEC target of any other plant that finds it difficult or too costly to meet its specified SEC target.

Malaysia is implementing the Malaysian Industrial Energy Efficiency Improvement Project (MIEEIP), which has targeted over 700 industrial enterprises in eight energy intensive industrial sectors. The project has a wide range of activities, including benchmarking, energy auditing, energy rating, and supporting energy service companies, establishing an association of energy professionals, technology demonstration, and an energy efficiency financing program.

According to the MIEEIP team, the energy audits conducted in 43 of the 48 most energy-intensive factories showed that electricity usage could be reduced by 5.6 per cent and fuel demand by 26.7 per cent annually if all measures recommended were implemented by each factory. This would result in total energy savings of 22 per cent, per annum across the 43 factories.

Initial Steps

The government needs to take several actions to decouple energy use and industrial output. Priority actions include setting specific numerical targets for decoupling energy use and industrial output; involving subsector associations in setting subsector specific decoupling targets and getting their commitments to meet the targets for the largest enterprises and finalising a data base on energy use in order to monitor progress in meeting targets.

Based on the experience of these countries and other more developed economies, such as the United Kingdom, the Netherlands and Japan, UNIDO elaborated the "Resource Efficient Greening of Industry" (REGOI) initiative that will draw on several support services offered by UNIDO and be undertaken in two phases.

The primary services involve environmental management and industrial energy efficiency. Supplemental ones will be those for competitiveness assessment, technology foresight and investment promotion.

The two phases of the programme will be a preparatory analysis to define the specifics of a green industry subsector strategy and implementation of the proposed strategy in two subsectors on a pilot basis.

The initiative is directed at subsectors and subsector associations rather than for the manufacturing sector as a whole because it is too difficult to formulate a cost-effective and responsive action plan for the entire manufacturing sector.

Rather the proposed effort would be in line with sectoral development plans. Subsector action plans will be arranged with an initial focus on energy efficiency and conservation, setting resource efficiency targets and stipulating a written long-term agreement between an industry association and the government partner on how and when targets will be achieved.

As shown in Table 2, there is considerable potential to improve industrial energy efficiency in several subsectors. If this potential is realised, it would be good for enterprises, good for Vietnam and good for the environment.

Ralph Luken, who retired in 2002 after 12 years with UNIDO as the senior environmental advisor, is currently UNIDO’s sustainable development consultant on industry-related environmental issues. He initiated the UNIDO/UNEP National Cleaner Production Centers Programme. Previous to his UNIDO assignment, he worked for the US Environmental Protection Agency in Washington, DC for 20 years.

Stefano Piras holds a Bachelors Degree in “Economy for International Markets and New Technologies” from the Università commerciale Luigi Bocconi in Milan, Italy. He is currently studying for a Master’s Degree and undertaking an internship at the UNIDO country office in Vietnam.