The Economics of Energy Efficiency in Developing Countries

Abstract

Almost all of the world’s energy demand growth is projected to occur in low- and medium-income countries (LMICs). Targeted energy efficiency investments have the potential to mitigate tensions between economic growth objectives and sustainable development commitments. We review the empirical evidence on both the private and social benefits of energy efficiency improvements in LMICs. In addition to direct energy savings, energy efficiency investments can generate indirect benefits such as improved reliability, enhanced energy access, and increased productivity. We highlight the role that energy subsidies, unreliable power supply, and capital constraints may play in the underinvestment in energy efficiency. Increasingly, LMICs are implementing policies and programs aimed at mitigating these barriers. We discuss some recent policy design innovations and emphasize the importance of rigorous evaluation.