World Bank Perspective on Global Energy Security

Jamal Saghir
Director, Energy and Water
World Bank

G8 Energy Ministerial Meeting
March 16, 2006
Moscow

Mr. Chairman, Honorable Ministers, Your Excellencies, Distinguished Participants, Ladies and Gentlemen, Good morning.

On behalf of the World Bank it gives me great pleasure to participate in this meeting and present the World Bank perspective on Global Energy Security.

At the outset it is important to note that the precise meaning of energy security varies according to country circumstances.   In our views:

Ø       For energy producers, it is the ability to secure, long term and attractive markets for their natural resources that often underpin their economies.

Ø       For the major industrialized, it is the continuing supply of energy that drives their economies and supports a high and growing quality of life and economic growth.

Ø       For poor countries, it is a vital ingredient in their paths out of poverty. Energy increases poor people’s productivity and incomes; lighting and power improve their health and enable them to participate in education, and helps them connect to the global market.

Ø       For +5 Countries (Brazil, China, India, Mexico and South Africa), it is the ability to meet growing demand for energy from imported or internal sources; diversification of energy supply sources; securing capital and financing for investment in resource development and infrastructure, technological solutions to reduce dependence on imported supplies and meeting people’s basic energy needs and creating effective demand for energy services.

But in the last few years energy has become a two-edged sword: it is an important component of economic growth by driving efficiencies through productivity gains, while pushing some over the poverty threshold because of the impact of high prices.

Today I will focus my remarks on the last group – the poor countries - and I want to make six points rather briefly.

Ø       Providing access to clean fuels for the 2.6 billion people that rely on traditional biomass fuels for cooking and to electricity for the 1.6 billion people that have to use candles, kerosene lamps and other primitive lighting source must be part of our strategies to improve global energy security.  They cannot be forgotten or marginalized as the developed and transition countries seek to enhance their own energy security.

Ø         The world today has a terribly inefficient energy system.  It is especially inefficient in poor developing countries.  There is thus a great opportunity to rid the energy system of these inefficiencies.

Ø       Tackling these inefficiencies is key to attracting investments in the energy sector in poor developing countries.

Ø       Volatile and high oil prices disproportionately impact poor net oil importing developing countries. 

Ø       Energy efficiency and diversifying energy supplies can mitigate the impact of high and volatile energy prices.

Ø       Enhancing energy security will require a far-sighted and cooperative approach internationally. While striving for energy security, countries should in our views work to build on the value of interdependence, instead of focusing on energy independence and trying to address these concerns on their own.

Let me elaborate on these issues. But first let us remind ourselves of some key facts and figures:

• 4 out of 5 people without electricity live in rural areas of the developing world, mainly in South Asia and sub-Saharan Africa.   In countries like Burundi, Guinea, Malawi, and Rwanda, no more than 5 percent of households have electricity in their homes.
•    In 2004, the richest 20% of the world’s population consumed 58% of total energy, whereas the poorest 20% consumed less than 4%.
• Poor people in developing countries spend up to a quarter of their cash income on energy.
• Firms in developing countries report that they lose about 5 percent of their annual sales due to power outages.    Investment Climate Surveys have consistently found that unreliable or unavailable electricity services is a “major or severe obstacle to doing business” for  25 percent of firms in Latin America, 38 percent of firms in South Asia and 44 percent of firms in sub Saharan Africa.
• Developing countries have only developed 20% of their hydropower resources, in comparison to 70% in OECD countries.

I think the bottom line is clear. poor people in developing countries need not only more access to energy, but also a shift from inefficient energy sources, like fuel wood or raw coal, to more modern, cleaner technologies which they need to use it wisely, if they want improve their living standards.

I think also you will agree poverty reduction is linked not only to the provision of modern energy services, but also to energy security, and that as the developed and transition countries address their energy security concerns they must at the same time seek to address energy poverty in poor developing countries. 

I have said that there are huge inefficiencies in the energy systems in developing countries.  Let me cite some figures.

• It is not unusual for electricity distribution systems in developing countries to have losses of 15% to 45% due to commercial and technical inefficiencies.
• Global estimates of energy subsidies are as high as $200 billion per year.
•    Private sector investment in the power sector in developing countries has decreased from $50 billion in 1997 to $12 billion in 2004.
• The energy sector is particularly prone to corrupt practices because it is capital-intensive, limits competition, and vulnerable to the discretionary power of policy makers and regulators in many of the developing countries. In some countries, corruption increases the value of contracts by more than 20 percent.  On top of that, commercial losses in the system can fall in the 15-20 percent range.  In a sector such as energy, with large investments, this is a major burden for any country—all the more so for developing countries.
• As we know the energy investment needs for developing and transition countries are enormous. Total capital investment are estimated by the IEA at $8 trillion equivalent to an average of US300 billion a year from 2004 to 2030   If we can address these inefficiencies we can do much to attract the investment needed.

The point I want to make here in citing these statistics is not to cause gloom but to pint out the huge opportunity if we can rid the energy system of these inefficiencies which are contributing to energy insecurity.

Let me here make an important point – one related to the need to incorporate clean and low carbon technologies in the investments taking place in developing countries.  Some argue that developing countries should not be burdened with carbon mitigation until significant steps have been taken in industrialized countries. Much of the world’s construction of long-lived capital stock is in developing countries (For example 60 GW of power generation capacity was built in China in 2005 - a truly staggering quantity). Unless energy efficiency and carbon efficiency are incorporated into new buildings and power plants now, wherever they are built, these facilities will become a liability when a price is later put on CO2 emissions.    We should instead, call for “leapfrogging” i.e. the introduction of advanced technology in developing countries first, or at least no later than in industrialized countries. Leapfrogging is a path to globally coordinated mitigation.

And yet another point.  Meeting the basic clean energy needs (say 50 kWh per month of electricity and 35 kilograms of LPG for cooking) of the 1.6 billion now without electricity and the 2.6 billion that use biomass would produce only a three percent increase in global CO2 emissions at the most. This is very little.  My point is that achieving universal access and reducing emissions are not mutually exclusive goals and would contribute to global energy security.

The energy poor are the most vulnerable to shortages in fuel availability and to fluctuations in the quality of fuel or energy service standards. Volatile and high oil prices disproportionately impact poor net oil importing developing countries.  The run up in oil prices since 2002 has caused poverty to rise by as much as 4-6% in some countries, with nearly 20 countries experiences increases of over 2%. Even the relatively modest hike in oil prices between 2003 and 2004 has implied increases in national oil bills of between 1.5 and 5 % of GDP for oil importing countries with high energy intensive economies. A sustained price increase of US$10 per barrel above the $30 per barrel level prior to 2004 would cause an economic shock equivalent to a 1.47 percent loss of GDP for the poorest countries (those with GDP per capita of less than US$300).

The World Bank Group supports oil importing countries through: (i) development policy lending including supplemental financing to respond to the oil price hike; and (ii) policy advice for vulnerable countries to cope with rising oil prices (by adjusting domestic price policies, targeting pro-poor cash transfers, and diversifying out of oil).

In the long run, more structural measures can enable reduced vulnerability of economies to supply and price rises and volatility. I would like to highlight the two main issues which will form the key pillars of long term energy security in our views. These are energy efficiency and developing and diversifying energy supplies.

Energy efficiency presents a “win-win” option: It is a cost effective, low risk and versatile approach to reducing the need for energy and associated infrastructure investment, and generally realizes significant environmental benefits. The key is likely to lie in appropriate and consistent long term objective setting with the right policy and pricing frameworks to achieve these.

Developing and diversifying energy supplies can entail several areas of actions: The sector operating environment can be improved, the energy portfolio can be diversified by promoting natural gas consumption, accelerating the development of clean energy technologies such as renewable energy and distributed generation, supporting clean coal, enhancing fuel switching capabilities, as well as exploring other alternatives; such as regional energy trade.

Let me conclude

Enhancing energy security will require a far-sighted and cooperative approach internationally, as well as a variety of specific initiatives and interventions at the national and international level. An agenda for action could include the following key elements:

Ø       Supporting and strengthening initiatives by international institutions and others to support the poorest countries in their adjustment to short term energy price shocks, and, in the longer run, to make healthy, clean affordable energy available to all their citizens;

Ø       Actively promoting more efficient use of energy in all economies through developing programs to agree broad sets of objectives and international bench marking, and facilitate exchange of information and technologies;

Ø       Facilitating the access and security of cross border energy investment and transit, so as to allow global and national fuel and supplier diversity,

Ø       Building on the commitment at G8 Gleneagles summit to a low carbon economy and adaptation to climate change by integrating this with the energy security agenda; and energy access agenda and

Ø       Promoting transparency about energy resources, use and production through the whole energy chain, especially in the critical oil market, by supporting and supplementing current initiatives and approaches as needed.

In sum, the enormous challenge of providing modern and sustainable energy services to the poor and enhancing their energy security requires from us all broad based international cooperation in five crucial areas:

Ø       Help developing countries adopt energy policies that support poverty reduction;

Ø       Mainstream energy issues into Poverty Reduction Strategy Papers (PRSPs) and poverty issues into comprehensive energy plans;

Ø       Mobilize financial resources to provide the energy services for serving the poor

Ø       Develop the huge hydropower potential taking into account environmental and social considerations; and

Ø       Build a dialogue with concerned developing countries on access and energy security from developing and developed country perspectives.

Thank you for your attention.