Publications

Assessment of Energy Policy and Practices

Annex 1

Description of Building Blocks

A. INSTITUTIONS

A1. Institutions and Regulation:  energy systems require capital intensive investments which can be made possible only if investors have a strong expectation that expropriation is not likely. This requires that the government be able to guarantee that rule of law is enforced, property rights are respected, a high level of security is ensured with low levels of corruption; and that private arrangements be facilitated by providing the right "checks and balances" in the economy such as minority shareholder's protection, auditing standards, and the ability of courts to equitably settle disputes.

A2. Goods and Factors Markets:  energy systems do not work in isolation from other parts of the economy. They require the use of other goods and services, of capital and the employment of workers. As a consequence, efficient goods and services, financial and labour markets are key enablers of effective Energy Policies.

2. ECONOMY

B1. Macro-economy: energy is an essential element of economic growth and development. One of the major achievements of effective energy policies is their ability to sustain growth. On the other hand, a strong and stable economy, namely low cost of capital and low inflation rates provide a positive support for the implementation of business policies, not least in business. These policies facilitate the mostly highly capital-intensive investments of the energy sector.

B2. Innovation: Innovation is very important to support the continuous development of new solutions to the ever changing challenges emerging in the energy sector, as companies and governments struggle to find new energy resources and new ways to use existing ones in a sustainable, efficient and safe manner. This requires an environment that is conducive to innovative activity, supported by both the public and the private sectors.

B3. Energy Markets: Efficient energy markets are a key result of effective energy policies.  This building block measures the efficiency of energy markets (in particular the presence and effectiveness of price signals) by looking at the level of subsidies and the share of the energy spending in the economy. The share of FDI in energy investments is also a potential indicator of the openness of a national energy system.

B4. Investment: Investments are critical in ensuring that the right quantity and quality of infrastructure is in place to guarantee the availability of energy. This is measured by the proportion of gross fixed capital formation to overall country wealth and by the level of investment in the energy sector.

B5. Infrastructure: The existence of a high-quality infrastructure is critical for ensuring the efficient functioning of the energy system - economies depend on electricity supplies (and other sources of energy) that are free of interruptions and shortages, to ensure that businesses and factories can work unimpeded. High-quality infrastructure also helps ensure that households receive reliable energy at affordable prices. Energy systems depend also on many other key infrastructures: roads, rail, ports to transport the fuels or the materials, telecommunication networks that enable modern and reliable management of the system, etc.

B6. Energy Security: Secure supplies of energy are critical for the efficient functioning of economies. At the same time, secure and predictable foreign demand for energy resources is critical for energy rich countries. Security of supply/demand is also essential to avoid extreme price volatility of energy resources with consequent negative economic. Energy security, in that perspective, has two main dimensions:

- Long-term security measures the risks of demand (or supply) shocks and disruptions. It is measured by the diversity of supply/demand (a more diverse supply/demand is more resilient to shocks) and the energy intensity of the economy (energy consumption/GDP) - the less an economy is "dependent" on energy, the less it is exposed to potential shocks.

- Short-term security: measured by the existence of spare capacity or reserves (e.g., in the form of oil stocks, gas storage or spare electricity generation capacity)

C. SOCIAL CAPACITY AND EQUITY

C1. Education:  A high standard of education is an important pre-condition for a skilled labour force and for sustaining a robust rate of innovation. It is thus important to help guarantee investment in and the efficient functioning of the energy system. This building block measures the quantity and quality of education in the general population, the training of professionals and the availability of engineers and scientists.

C2. Health and Safety: Investments in health services and in safety are important not only for the wellbeing of the society (and therefore the capacity/flexibility to adjust to changes), but also for the performance of the economy and its energy sector as it helps ensure a more productive workforce.

C3. Equity: Balanced distribution of income and access to services (including energy) are important elements for the development of a country and the creation of a productive environment in which policies, including energy policies, can be implemented. Policies must play a role in the avoidance of social tensions within a country by preventing an inordinate level of inequalities (e.g., access to affordable energy). 

D. ENVIRONMENT

D1. Climate Change:  This building block measures the performance of a country in terms of its policies to reduce greenhouse gas emissions (measured as CO2 (equivalent). This is measured for example by considering emissions per capita but also emission per unit of economic output; by looking at the share of low-carbon technologies in the generation mix; and by measuring the cost of policies (marginal costs of avoided emissions).

D2. Other Environmental Factors:  The environmental performance of a country's energy policy is also measured through a factor connected to its levels of air and water pollution, and water stress.