PART I: ENERGY EFFICIENCY AND CONSERVATION POLICY



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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy PART I: ENERGY EFFICIENCY AND CONSERVATION POLICY

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy This page in the original is blank.

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy INSTITUTIONAL SUPPORT FOR INDUSTRIAL ENERGY PRODUCTION DELIVERY AND CONSUMPTION IN POLAND Jerzy Michna Polish Academy of Sciences Institute of Environmental Engineering Energy Consumption Division Ruda Slaska, Poland Roman Ney Polish Academy of Sciences Minerals and Energy Economy Research Centre Krakow, Poland ABSTRACT This paper addresses the suitability of institutional arrangements for development and implementation of Polish energy policy. Historical arrangements and current directions are presented concerning the production and delivery of coal, synthetic gas, natural gas, coke-oven gas, crude oil and derivatives, electricity, and thermal energy. Proposals are presented for new institutional arrangements in the transition to a market economy to implement energy and environmental policies. 1. HISTORICAL DEVELOPMENT OF INSTITUTIONAL SUPPORT FOR POLISH ENERGY POLICY In centrally planned economies, economic efficiency was not the primary criterion in the valuation of economy activities. Thus, institutional support for development of the energy economy was based first of all on political factors. Consequently, consideration of energy production and delivery took precedence over matters related to energy consumption, and the institutions dealing with production and delivery occupied a higher position in the organizational hierarchy. The energy crisis of 1973 brought about new research on complex energy problems that included consideration of energy conservation activities and substitution of energy carriers. At this time, research activities aimed at improving the efficiency of the whole energy economy including energy supply policy, energy conservation policy, and environmental policy. By 1984, these activities had elevated energy conservation problems to a level of

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy importance comparable to energy production and delivery problems. However, reorganization of government research programs in 1985 resulted in decreased emphasis on energy efficiency. During most years since the second world war until the reorganization in 1985, energy production and delivery were directed by the Coal, Energy, and Chemistry ministries. Early in the 1970s, the Coal and Energy ministries were merged (Fig. 1). The ministries contained offices working with energy problems in each sector: iron and steel, metal industry, chemistry, consumer goods, transportation, residential buildings, and agriculture. Energy consumption problems were coordinated at first by a Department for Inspection in the Energy Ministry, and later, in the beginning of the 1960s, by a special section of this Ministry (PiGPE) called the State Inspection of the Fuel and Energy Economy. Also during the 1960s, an office for distribution of coal was established in the Coal Mining Ministry called the Central Office for Selling Coal (Centrala Zbytu Wegla), and a strategic energy planning office was created in the State Planning Commission (KPpRM). After the energy crisis of 1973, the State Inspection of Fuel and Energy Economy was expanded in scope, renamed the Chief Energy Economy Inspection (GIGE), and subordinated to the Ministry of Material Economy. Also, the Polish Academy of Sciences created a Committee for Energy Problems (KPE-PAN) to perform research on Polish energy economy efficiency. Then, in 1984, after the passage of a new energy economy bill by the Polish parliament, the scope of the GIGE was reduced when it became the Energy Conservation Department within the Ministry of Materials and Fuels. In 1987, the Industry Ministry was created, and energy problems were handled by the Energy Economy Department (Departament Gospodarki Energetycznej) which was quite limited in scope. Presently, the fundamental aim of the Polish government is to achieve the free market economy. Realization of this goal has brought about changes in the Ministry of Industry that eliminated many small offices and created a Coal Agency (Agencja Wegla) and a Company of Power Networks (Spolka Sieci Elektrycznych). Also, the State Planning Commission (KPpRM) has been replaced by the Central Office for Planning (CUP), in which some teams from the energy department have been included in the Department of Sector Studies and Infrastructure. The activities formerly handled by the GIGE are now managed by the Council for Energy Economy (RGE) within the Ministry of Industry. The distribution and delivery of energy carriers are realized by special regional Energy Inspection Offices (OIGE). Their duties are: inspection of energy consumption methods in industry, analysis of energy consumption parameters, and advice on development projects on energy consumption in industry. 2. STRUCTURE OF CURRENT INSTITUTIONAL SUPPORT FOR ENERGY POLICY The primary institution in the Polish government for creating and implementing energy policy is the Ministry of Industry through the Energy Economy Department. Within this department are 40 persons divided among 6 teams (Fig. 2). Since the beginning of the new democratic government in 1989, the Department has developed a very liberal market-based

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy energy policy which determines the scope of government regulation of the energy economy during the present transition period. Unfortunately, the policies emerging from the Ministry of Industry emphasize the development of energy production and delivery, as in the past, and opportunities for energy conservation are being missed. Actually, more support for such activities is coming from other Ministries, especially the Ministry of the Environment, the Central Planning Office, and the Ministry of Building. The Central Planning Office has organized a program for Rational Energy Policy, which aims at providing a basis for optimization of decision making processes in the energy economy during the transition period. The Ministry for Environmental Protection (Fig. 4) has organized the Polish Foundation for Energy Efficiency. The Foundation will help to develop energy conservation policy and promote the use of energy efficient new technologies. (See another paper in these proceedings: “Strategies for Industrial Energy Efficiency and Conservation Policy,” by Slawomir Pasierb, for more on the Foundation.) Another initiative, sponsored by a group of power engineers in industry and the Polish Academy of Sciences, involves the organization of the Polish Association for Energy Economics (St.RGE), which will be a member of the International Association for Energy Economics. One commission of the Association will prepare alternative solutions for energy conservation policy. 3. FUTURE CHALLENGES Poland needs to organize new institutional support for energy conservation activities during the transition period from a centrally planned economy to a market economy (Fig. 5). An ongoing debate involves whether the government should continue to house energy programs within the Ministry of Industry or else organize a new institution independent of the Ministry. In either case, additional obstacles are presented by the shortage of competent staff, which is a result of the previously mentioned decreases during the 1980s in government and scientific institution employment of professionals working on energy conservation policy problems. The developing trends of the whole Polish economy will have much influence on the organization of a central institution for energy conservation policy. Also, future development of Poland's environmental policy will affect institutional developments. Presently, these connections are not quite clear. Along with questions about the organization of central institutions, there are important concerns about the organization of regional support for energy and environmental problems. The currently operating regional inspection teams were created during the centrally planned economy in Poland, and therefore their scopes are limited. In the region of Silesia, an Energy Conservation Agency has been organized to address a great range of environmental protection and energy conservation problems in this province. This Agency is willing to collaborate with the United States, Germany, and France on a complex energy conservation and environmental

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy protection project for Upper Silesia. We expect that other provinces will organize similar institutions, and therefore the work for Upper Silesia can serve as a model for institutional development throughout Poland. Another debate involves the application of scientific research to methods for optimal decision making on energy policy, energy conservation policy, and environment protection policy. Our experiences during the first two years of transition have identified a shortage of diagnostic methods for formulating optimal policies. We are also concerned that the experiences of developed countries are only partially adaptable to our situation. Nevertheless, we expect that one of the most important components in the efficient development of a Polish energy economy will be collaboration with developed countries.

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy Fig. 1 Government Support for Energy Conservation during the Central Planned Economy

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy Fig. 2 Organization of Actual State Support for Energy Economy

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy Figure 3 Figure 3 Organization of Energy Economy Activities in the Central Planning Office

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy Fig. 4 Institutional Support on Energy Conservation in Ministry of Enironment Protection

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy STRATEGIES FOR INDUSTRIAL ENERGY EFFICIENCY AND CONSERVATION POLICY: THE ROLE OF GOVERNMENT AT STATE, REGIONAL, AND LOCAL LEVELS Slawomir Pasierb The Polish Foundation for Energy Efficiency Katowice, Poland ABSTRACT The main task for the Polish government in transition is to create and implement a stabilization program aimed at: reduction of the fiscal deficit, monetary and credit restraints, achieving a positive real interest rate, price liberation, foreign trade liberalization, and foreign exchange liberalization. This report discusses the role of the government in creating energy efficiency policy at various levels. It presents key recommendations regarding current energy efficiency initiatives. 1. INTRODUCTION - POLAND'S ECONOMIC TRANSFORMATION Two years ago the Polish economy was in disarray. Upon assuming power in September 1989, the new government immediately undertook the task of restructuring the economy. The more urgent tasks were to control inflation, strengthen domestic currency, remove price distortions and eliminate monopolies. The stabilization program, launched on January 1, 1990, aimed at:

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy UTILITY PROFIT INCENTIVES Previous systems of regulation in the United States provided utilities a financial incentive to increase their sales of energy regardless of its social benefit. New utility regulatory policies adopted in New England, California, and other parts of the United States, provide that the utilities' least-cost resource plan is also its most profitable plan. These policies can change a utility's perspective on encouraging efficiency, bringing the utility industry financial power and personnel infrastructure to bear on improving efficiency. This is likely to have a dramatic effect in the future. Pacific Gas & Electric Company, America's largest investor-owned utility, is now projecting that 75% or more of its load growth over the next decade will be met by energy efficiency. The Southern California Edison Company and the Los Angeles Department of Water and Power have committed to 20% net reductions in CO2 emissions, despite projections of rapid population growth. RESEARCH AND DEVELOPMENT ON ENERGY POLICY AND TECHNOLOGY Different economic, social, and cultural conditions provide different points of leverage for the individual and corporate decisions that determine future energy consumption. Policy research for each country or region to determine what those points of leverage are and how policies can best encourage energy efficiency can make a substantial difference in how many efficiency-encouraging policies are adopted. There is also a good record of the United States of federal science/engineering research and development on energy efficiency leading to commercial technologies that have saved tens of thousands of megawatts. ENERGY PRICING Economists have made a strong case for the benefits of setting energy prices at their full marginal cost to society. This cost should include not only the market price, but also the value of energy-related externalities, such as air pollution and economic stability (e.g., the risks of oil-related price spikes or shortages). In Poland, as in most countries, the price of energy to the consumer falls significantly below the economically preferable level. Raising energy prices is an important component of a rational energy strategy. However, it is not the only component needed, or even the most important one. Market failures prevent even privately optimal choices on energy efficiency from being made. In some cases, measures with payback periods of less than a year are routinely overlooked by the market. Raising energy prices will not induce much efficiency if energy price is not the principal motivator to begin with. For most energy efficiency decisions, it is not. Thus, significant progress can be made through policies that induce societally optimal choices even when the prices are “incorrect.”

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy 5. SUMMARY AND CONCLUSIONS Many analyses over the past 20 years of the costs and savings from new energy efficiency technologies have shown the potential for large improvements in energy efficiency, leading to predictions of stable or declining aggregate energy consumption. These studies will show that efficiency improvements are economically preferable to a “base case” of supply-side solutions to energy problems. These efficiency potentials have been realized to a great extent in regions that have made conscious efforts to implement energy efficiency policies. Based on this experience of practical success, the most effective types of policies have been described. The degree of success of these policies--both the ability to get them implemented, and their effectiveness once implemented--have been surprising to most energy analysts. The weight of opinion has generally been skeptical of the ability to replace supply-side investments with efficiency improvements on a macroeconomic scale. Recorded energy intensity reductions and reduced growth rates for overall energy have tended to be at or above the most optimistic end of the range of analysis projecting future trends and scenarios. Thus, it is plausible to project significant reductions in energy consumption for Poland based on the adoption of policies that have proven to be politically feasible and economically workable in other regions.

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy Figure 3

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy Figure 4

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy Figure 5

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy Figure 6 Total Energy Use per GNP, California versus Rest of United States, 1973 to 1988. Sources: California Energy Commission Conservation Division for California energy use, U.S. Department of Energy Monthly Energy Review for U.S. energy use, U.S. Bureau of Economic Analysis for GNP and Personal Income data. Gross State Product is obtained by apportioning GNP by the fraction of personal income in the state.

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy Figure 7 Energy Intensity of Building Sector, California versus Rest of Nation, 1978 to 1988. Sources: Borg and Briggs 1988 for California residential and commercial sector energy, U.S. Department of Energy Monthly Energy Review for U.S. Energy data, U.S. Bureau of Economic Analysis for GSP data.

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy Figure 1. Per Capita Electricity Use in California and the United States, 1978-1988. California's building and appliance standards and progressive energy policies have significantly reduced per capita electricity use over the past decade. In 1988 the average Californian used 210 kWh less than in 1978, while in 1988 the average American used 1220 kWh more than in 1978. Source: Electricity data—Electric Power Annual, DOE/EIA-0348(87), and DOE/EIA-0348(82), U.S. Dept. of Energy, EnergyInformation Agency. Population data—Statistical Abstract of the United States, 1989 ed., U.S. Dept. of Commerce, Statistical Abstract of California.

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Poland's Transition to a Market Economy: Prospects for Energy Efficiency and Conservation: Proceedings of the Joint Workshop of the U.S. National Academy of Sciences and the Polish Academy of Sciences on Strategies for Industrial Energy Efficiency and Conservation During the Transition to a Market Economy Figure A-3 Gasolipe use per capita versus urban density (1980) (from Newman and Kenworthy, Cities and Auto Dependence)