Financing the Sustainable Energy Transition: A “Smart” Role for International Public Finance

The International Energy Agency (IEA) projects that between 2011 and 2035, an average of US$316 billion will be needed annually to limit atmospheric greenhouse gas concentrations to 450 parts per million, consistent with the internationally agreed target of limiting global warming to 2 degrees Celsius above pre-industrial levels. The IEA also estimates that some 80 percent of new electrical capacity within the coming decades will be installed in developing countries. Although these countries are already investing massively in renewable energy technologies, international support is needed to make this transition happen at the speed required to stabilize the global climate.

Spending Wisely

Development assistance for renewable energy in developing countries increased to more than $13 billion in 2010, and multilateral development banks (MDBs) are increasing their financing for renewables. A joint MDB report to the G8 identified $4.2 billion in investment in renewable energy in 2009, and another $4.9 billion for climate-related development policy loans.  According to the MDBs’ strategic objectives and current pipeline, renewables financing is projected to increase to $5.9 billion by 2012, with an additional $4.6 billion for climate-related development policy loans.

Yet these financial flows constitute only a small portion of the finance needed. This shortfall has sparked a debate over the “smartest” use of these funds. Many experts argue that public monies should be used mainly as a leverage tool to mobilize sufficient commercial capital and build commercially sustainable markets. The UN High Level Group on Climate Change Financing has pointed to the importance of spending public resources wisely. Public monies should support activities that create the conditions for the sector’s development. This would mobilize commercial financing, build sustainable markets for greenhouse gas mitigation technologies, and develop the conditions for a sustained, endogenous growth of the sector.

Support for “Smart Renewable Energies Policies”

What do these conditions entail? Drawing from 12 developing countries’ experience in designing and implementing renewable energy policies, a new report from the World Resources Institute (WRI) published jointly with the German Marshall Fund and the Heinrich Boell Foundation outlines some principles to make international public support for renewable energy effective. The report observes that “compared to just financing an individual wind farm, financing the conditions that incentivize building and operating wind farms will have a more transformative impact” and points out the need for donors to take into account a comprehensive package of measures when planning their support.


Figure 1 : Elements of a Smart Renewable Energy Policy, Source WRI, May 2011

Developing a long-term strategy for renewable energy is a crucial first step. Research shows that countries where renewables have reached a significant market share have had targets and strategies in place. The report emphasizes the importance of making planning decisions based on a transparent and sound assessment of the full cost of different options, so that the benefits, risks, and hidden costs of all energy sources are assessed realistically and openly.

In Thailand, for example, NGOs have been successful in improving the decision-making process. This led to the inclusion of small independent renewable power producers as a supply option in the Thai Power Development Plan. Donors can assist governments in developing plans and strategies and build capacity for similar future efforts. For example, in 2007 the Global Environmental Facility (GEF) supported a project that provided knowledge, hard data, and analysis for developing South Africa’s Integrated Resource Plan targets for renewable energy.

Beyond planning, the details of a country’s legislation and the institutional capacity for implementation will influence its success. For example, the success of a feed-in tariff (FIT) depends heavily on getting the tariff level right, based on an assessment of the technology, market conditions, and resource availability. Examples from India show that regulators have struggled with finding the right level of support. The Central Electricity Regulatory Commission had set its FIT for solar PV much higher than the tariff level determined in some Indian states. Indeed, the tariff was so high that the commission was overwhelmed with the huge investor interest it generated, and decided to use a competitive bidding process instead. The average rates determined in the bidding were 32 percent lower than the initial FIT.

Because the details of a good policy are difficult to figure out, donors have a role to play in providing capacity building and technical assistance for the design of performance-based incentives such as feed-in tariffs, competitive bidding schemes, and renewable energy portfolio standards. The report points to the importance of both traditional technical assistance as well as South-South learning to build regulators’ capacity. For example, the German government’s GIZ-Wind project has facilitated exchanges between Chinese policymakers (CREIA, NEA, and ERI) involved in designing the Chinese feed-in tariff for wind energy, and the Vietnamese government, to inform the latter on the calculation and adjustment methods for the premium.

Getting down to business: the Worldwatch Institute’s Low Carbon Energy Roadmaps

The comprehensive set of principles identified in the report confirms the approach that Worldwatch has taken to develop context- and country specific Low-Carbon Energy Roadmaps in the Dominican Republic, Haiti, and Jamaica.

Working in close cooperation with the governments of all three countries, the Roadmaps provide support to identify and create the political, financial, and technical conditions needed to scale up the countries’ renewable energy markets.

In the Dominican Republic, for example, the government is currently updating its National Energy Strategy and has formulated long-term targets for the development of renewables. Translating this vision into actual growth of the sector requires many more technical, financial, and policy steps.  As part of our Roadmap project, we are completing a wind resource assessment for particular zones within the Dominican Republic.

Xing Fu-Bertaux is a Research Associate at the Worldwatch’s Energy and Climate program and a co-author of the report Grounding Green Power.


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