The Energy Efficiency Challenge

Submitted by Dr. Justin Robinson

Head of Department of Management Studies

UWI, Cave Hill

Tel 417 4299

As one who makes the trek from deep in St. Philip to UWI five days a week, the government’s decision to reverse the policy of subsidizing the price of petroleum products is going to hit me hard in the pocket. However, with oil prices stuck above US$90 per barrel for the last six months and projected to remain there for the foreseeable, fiscal responsibility would almost certainly have required that the government review its policy on subsidizing petroleum products

If the price of oil is likely to remain in the $90 plus range for the foreseeable future ( as most experts suggest), then in my view, households, firms, the government and other organizations need to be weaned from subsidized prices and aggressively embrace energy efficiency. In the meantime, targeted subsidies should be designed for the more vulnerable groups in society.

Energy efficiency has now become a key competitive variable among countries, and there is a veritable arms race among countries for first mover advantages in development and adoption of alternative energy technologies. The range of alternatives being explored is wide and varied from wind, solar and bio-fuels to wave and thermal energy sources. I am no scientist so I have no sense as to which of these if any will succeed as viable alternatives to oil, but it is clear that the imperative to improve energy efficiency must now rise to the top of the agenda for our society.

The previous administration launched a “green budget” in 2007. The various initiatives must now be aggressively marketed and beefed up if necessary. How many households, firms and other organizations have had an energy audit? Are they aware there is a tax break for this? Is the tax break large enough? Have we been training an adequate number of energy auditors?

The new government has a clear and well articulated energy policy in its manifesto. The DLP’s manifesto speaks to tax subsidies for installing solar electric systems in homes and businesses. The DLP manifesto speaks to the establishment of a “Smart Energy Fund” to provide low interest loans to households, firms and organizations seeking to install alternative energy solutions. The DLP manifesto also speaks to solar powering of government buildings. A combination of these measures and net metering with the Barbados Light and Power has the potential to substantially reduce the oil import bill for electricity generation, as well as generate new jobs. I know the policy agenda is quite crowded and there are many competing priorities, but the government may wish to move the above mentioned items up the agenda.

The government also needs to be vigorous in the application of competition policy to prevent abuses in terms of price increases. If energy costs account for 50% of costs then a 50% increase in energy prices should lead to around a 25% increases in prices, if there is full pass through of the price increase. Some of the current discussion suggests a one to one relationship between energy prices and production costs. The relationship between energy prices and production costs varies widely across industries, and the increases in energy prices should be an occasion for price gouging or other exploitation of the consumer.

However, the government can and should only do so much. The rest of the society has to play its part. As a financial economist the developments in the financial sector are of particular interest to me. A recent publication by the United Nations Environment Program Finance Initiative (UNEP FI) highlights a number of products launched by retail financial institutions around the world as they seek to confront the energy efficiency challenge. Commercial banks in Europe and Australia have been at the forefront with a number of initiatives, which I now outline.

Green Mortgages: In general, green mortgages, or energy efficient mortgage (EEMs), provide retail customers with considerably lower interest rates than market rates for clients who purchase new energy efficient homes and/or invest in retrofits, energy efficient appliances or green power. Banks some times provide green mortgages by covering the cost of switching a house from conventional to green power.

Green Home Equity Loans: These are reduced rate home equity loans for homeowners who install renewable energy in their homes.

Green Commercial Building Loans: Attractive loan designs and arrangements have started to emerge for green commercial buildings, characterized by lower energy consumption (-15 to -25%), reduced waste and less pollution than traditional buildings

Green Car Loans: These loans offer below market rates for the purchase of cars with demonstrated high fuel efficiency. These products have grown rapidly in Australia and Europe. Interestingly, most green car loans are offered by credit unions. In 2003 Australia’s MECU took the offered car loans where the credit union considers a fuel efficiency rating associated with the vehicle type and provides a low interest rate accordingly. In addition, for the term of the loan the credit union commits to offsetting 100% of the car’s CO2 emissions. Since the launch of this product the firm has seen a 45% climb in car loans.

Green Cards: Most offer to make NGO donations equal to one-half percent of every purchase, balance transfer or cash advance made by the card owner.

Green Insurance: The premium is linked to the use and this environmental footprint of the vehicle, and green home insurance, where special rates are provided for energy efficient buildings.

Our retail financial services sector justifiably prides itself on being world class and very much in step with the latest trends. I am sure that these green initiatives are shortly going to be available locally. We need them if we are going to spur an aggressive thrust for greater energy efficiency.

Energy efficiency is now a major challenge for every society. It is one Barbados is well positioned to excel in. As a small nation, any programs can have nationwide impact in a short space of time. The government must do its part, and there is a major role for the private sector and the rest of civil society. However, don’t wait for them, let the process begin with you. Start a green committee at your work place and conserve energy at home. I am about to take over my proposal for a green committee at UWI to the principal.