 The energy challenge faced by developing countries is enormous. According to the International Energy Agency’s (IEA) 2003 World Energy Investment Outlook, the power sector investment needs of developing countries during the next 25 years are approximately US$5 trillion. In comparison, WBG commitments to the power sector have ranged from US$715 million to US$3.6 billion per year. Some of the major challenges include:
Catching Up According to the IEA, renewable energy sources (excluding combustible biomass and hydropower) account for less than 2% of world power generation capacity. Solid biomass accounts for 10 percent of global energy use. Hydropower constitutes 2.2 percent of global primary energy use. The bulk of solid biomass (87%) is produced and consumed in non-OECD regions, where developing countries, situated mainly in South Asia and sub-Saharan Africa, use non-commercial biomass for residential cooking and heating. RE use is projected to make up less than 6% of world power generation capacity by 2030. The scale up of these renewable energy options is constrained by their newness, a limited appreciation of their potential, market imperfections, higher costs of some options, and insufficient human and institutional resources. To the top Hydropower  Countries in Europe and the U.S. have developed more than 80% of the potential of their economically-viable hydropower, and hydropower development has been a vital platform for economic growth. This is in contrast to 20% in developing countries as a whole, and under 5% in African countries. Developing countries themselves have repeatedly stressed the importance they attach to utilizing this large domestic source of energy, particularly when oil prices are now hovering around $60 per barrel.
The Bank Group supports hydropower regardless of the scale and whether with or without storage, as long as the projects are economically viable, can be sustainably operated and meet all environmental and social safeguards of World Bank Group. To the top Shortage of investment resources The financial gap is enormous. According to the IEA, about $7 billion per year in higher incremental investments are needed in order for RE to make a significant contribution to the energy needs of developing countries. Historically, RE was supported through donor assistance, currently on the order of $1.5 billion annually. Enhanced lending by the Bank Group and other donors will help. Despite this, a financing gap of about 80 percent still remains. Market-based mechanisms are needed to leverage much higher amounts than donor-induced investments alone. To achieve this, effective policy and regulatory frameworks are needed, financial markets must be encouraged to lend for RE, and market distortions that inhibit growth of RE markets -- such as subsidies for fossil fuels -- must be removed. To the top Identifying Opportunities Given the newness of RE and EE options in many countries, it has been critically important to engage the countries in identifying and assessing opportunities through economic and sector work. It is necessary to proactively assess RE and EE issues and options early and comprehensively to serve as input to country dialogue and key planning documents such as Poverty Reduction Strategy Papers and Country Assistance Strategies. To the top Incrementally higher costs of energy Some RE and EE investments may be economically least cost when full account is taken of environmental and other externalities and when volatility and uncertainties with respect to conventional fuel supplies and prices are considered. However, given the nascent state of market development, subsidies for conventional fuels, inability to internalize externalities, and other barriers, some RE and EE investments may be financially unviable. To the top Role of Subsidies Economically rational, well-designed and applied subsidies are beneficial in making economically sound RE and EE investments financially viable particularly for rural energy applications where capacity to pay is limited. Buying down the initial cost appears to be preferable to subsidizing the recurring costs because the long-term availability of funds for paying recurring costs is never assured. In some cases, carbon finance helps improve the financial attraction of RE and EE investments and GEF funds are available to remove barriers. Some developing countries have adopted policies and incentives to cover the incrementally higher costs of RE investments as steps towards making such options eventually commercially viable. These countries include Argentina, China, Brazil, India, Philippines, Thailand, Sri Lanka, and Turkey. To the top Learning effects The costs associated with preparing and supervising World Bank RE and EE projects have declined over the last decade as a result of significant “learning effects.” However, preparation costs remain relatively high and time-intensive for a “first-off” RE and EE project in a country compared to, for example, a power project. This is principally due to the need to devote significant resources and time towards intensive capacity building, expanding the knowledge base and upstream sector work. Once this capacity is built, subsequent follow-on projects can be prepared at a cost comparable to other more mainstream energy projects. As a result of the higher costs for preparing first-off projects, most WBG projects with RE and EE components have used trust funds and GEF assistance to cover project preparation expenses. To the top |
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