Governments in emerging markets are getting serious about energy efficiency. Even though oil prices have dropped dramatically since mid-2014, policy makers in many fast-growing economies continue to recognize the imperative to reduce domestic energy consumption and the opportunities this presents. Even Gulf states rich in oil and gas—such as Qatar, Saudi Arabia and the United Arab Emirates—have established ambitious energy-efficiency programs and concrete measures to reduce energy consumption.

The reasons differ from one country to the next. For some, reducing greenhouse gas emissions is important, and for others, achieving long-term resource sustainability is key. In most cases, the greater motivation derives from a cost-benefit analysis: Leaders recognize the financial and economic benefits of curbing internal demand. Among the factors they consider:

  • Domestic subsidies. Some governments would like to reduce subsidies on transportation fuel and electricity, which make energy more affordable for consumers and businesses. As the price of oil has dropped, the International Monetary Fund has encouraged countries to reduce or remove fuel subsidies. India, Indonesia, Mexico and Egypt, among others, are reforming energy subsidies, and the UAE plans to phase out transportation fuel subsidies altogether.
  • Opportunity cost of exporting at market prices. For net exporters, every barrel consumed domestically— whether as fuel for transport, industry or electricity generation—is a barrel they cannot export at the market price.
  • Economic surplus. Savings generated through energy efficiency can be used for other economic activities in the private and public sectors. Economic surplus also ties directly to energy security, which is a key imperative, especially for net importers.
  • Efficiency is the cheapest source of energy. To meet their energy needs, emerging markets traditionally had to choose between consuming more fossil fuels or diversifying their energy supply mix to include more renewable sources. Efficiency is a more cost-efficient way to meet demand.

Raising energy efficiency requires coordination across industrial and commercial sectors throughout a country. Thus policy makers in fast-growing economies will need to collaborate closely with the private sector to achieve this. By introducing new energy regulations and encouraging greater efficiency through incentives, policy makers create new opportunities for a host of businesses, such as energy service companies (ESCOs); utilities; financial institutions; training organizations; certification bodies; automakers; and manufacturers of building materials, insulation, heating and air conditioning equipment, and other white goods. Some companies get involved early, bringing their expertise to help shape the market. Others wait until standards and directions are set and then identify the opportunities where they can best support energy transformations in these markets. All of this takes time, and among the key traits that winning players will bring to bear are patience and an active local presence.

Executives contemplating how to approach these opportunities should first understand how regulators in emerging markets develop energy-efficiency policies. This insight lays the groundwork for considering how best to develop successful products and services, within the opportunities and constraints of the regulatory landscape. Looking at how some global and regional companies have successfully embraced energy-efficiency opportunities serves as a useful guide to spark discussion about energy-efficiency ventures in emerging markets.

Policies that create the energy-efficiency opportunity

In many emerging markets, government-owned organizations make up a large share of the economy. Policy makers can lead by example, taking a comprehensive approach to the design and implementation of energy-efficiency initiatives, typically across an entire sector such as transportation or buildings. To encourage efficiency and manage demand, governments create new rules, offer access to affordable financing and train new talent—all of which fuel new business opportunities.

Regulations. Governments shape energy-efficiency markets as they determine the rules by which industry operates in their countries. In India, the Bureau of Energy Efficiency created Perform, Achieve and Trade (PAT), an incentive scheme to encourage energy savings in nearly 500 plants across eight industries. The PAT scheme is similar in some respects to the emissions trading schemes seen in Europe and North America: Companies that save more energy than their targets receive energy savings certificates (ESCs) that they can sell to companies that miss their goals.

The selection of technical standards also plays an important role. Governments and industries work closely with international standards bodies, typically adopting proven standards; they rarely reinvent the wheel but modify where it makes sense, to meet local needs. Often they can move faster in emerging markets than in larger and more mature markets, because they look to international practices and experiences of early movers. The UAE, for example, quickly followed the lead of some developed markets in banning the sale of incandescent light bulbs as of January 2015. Saudi Arabia has raised efficiency requirements for new, small air conditioning units and also announced fuel efficiency requirements for cars and light trucks, following the lead of the US’s Corporate Average Fuel Economy (CAFE) standards.

Governments also set rules for procurement by public organizations and the energy services industry. As in mature markets, shaping the rules for government purchasing can be a long and complex process, requiring patience by those who would sell products and services to government agencies. Where necessary, vendors may need to gain accreditation with relevant government bodies, and the companies that invest in accrediting staff are able to move quickly into new opportunities.

Financing. Governments fund energy-efficiency measures using direct investments in the energy services industry, public-private partnerships and incentives like tax reductions. In some cases, they create incentive programs to encourage early replacement of older, inefficient products (vehicles, air conditioners) with new products that use less energy. Financing can take many forms. Governments can tie loans to performance-based contracts that allow companies to reduce their payments based on their success in energy efficiency. With some contracts, an energy services company guarantees the energy savings while the customer remains liable for the loan. With others, the energy services company assumes the financing and technical risk, sharing any savings with the customer. Performance-based contracts rely on detailed measurement to verify that the claimed energy savings are real and the result of the efficiency measures that were implemented, rather than other factors such as changes in the weather.

Despite their complexity, these financing arrangements have increased the demand for energy services in several fast-growing markets, by preserving the investment and debt capacity of a customer, such as a building owner, while generating attractive returns of typically between 20% and 40% energy savings, with a payback over four to seven years.

Human capital development. Engineering and other technical talent is typically more available in developed markets. Most emerging markets’ educational systems do not supply enough people to staff a rapidly growing, technically based ecosystem of energy efficiency. The efficiency initiatives create many new opportunities for universities and organizations providing vocational training and professional certifications, as well as financing required for each of these. Companies based in mature markets may be able to bring their vocational training programs as part of their investment in emerging markets, or in some cases, they may support the training efforts of local chapters of organizations like the Association of Energy Engineers.

Governments can fund energy-efficiency centers, provide scholarships for foreign studies in energy efficiency and push the development of energy-efficiency courses and programs in state universities. Energy-efficiency centers educate students and professionals in energy efficiency, conduct research, facilitate technology transfer, disseminate knowledge, provide training, and strengthen graduate studies and applied research.