Status of Renewable  Energy

In 2004, about $55 billion was invested in renewable energy power systems, which is just over one-third the amount that was invested in conventional power plants.   The total capacity of renewable energy systems reached 160 gigawatts (GW) worldwide, with large hydropower comprising 16% of world electricity generation and new renewables comprising 4% of the total.    Developing countries have 44% of the total renewable generating capacity. 

This investment in renewable energy is financially viable because technologies such as hydropower, geothermal, biomass and wind can compete with wholesale electricity where resources are good and conventional fuels are expensive.  In similar situations, distributed technologies, such as solar, can compete with retail electricity prices.  The costs for renewable energy technologies have dropped significantly over the past 10 to 15 years as a result of technology improvements, institutional learning and economies of scale in production.   The future prospects for renewable energy technologies are promising because costs are expected to continue declining and because of the environmental, price stability, local job creation and energy security benefits that they provide.   As a result, at least 48 countries worldwide now have some type of renewable energy promotion policy, including 14 developing countries.    These promotional policies can have a significant influence on the location, amount and timing of investments in renewable energy.

Renewable energy has become big business.   Major global companies, such as General Electric, Siemens, Shell, British Petroleum, Sanyo, and Sharp have made significant investments and acquisitions in recent years.   Large commercial banks are starting to “mainstream” renewable energy investments in their lending portfolios. 

Comparative Technology Assessment

The Bank recently performed a study² to assess the current and future economic readiness of electric power generation alternatives for developing countries.  The study examined power generation technologies covering a size range of 50 W to 300 MW organized into three distinct electricity delivery configurations: off-grid, mini-grid, and grid.  The technology assessment includes renewable electricity supply technologies, conventional electricity supply technologies, and emerging technologies.   An economic assessment was performed for different operating conditions (peak and base-load in grid configurations; full-time and limited operating hours in mini-grid and off-grid configurations) and for different time periods (2004, 2010, and 2015) in order to incorporate projected cost reductions from scale-up of emerging technologies. The local and regional emissions (e.g. particulate, SO2 and NOx) are assumed to meet World Bank environmental safeguard requirements, and a levelized cost analysis was conducted.  The assessment incorporated an uncertainty analysis of projected capital and operating costs, producing cost bands that reflect sensitivity to key input assumptions. The study results make it possible to compare the levelized economic costs of electricity technologies over a broad range of deployment modes and demand levels, both at present and in future.   For study results, click here

Economic Valuation of Renewable Energy

Economic analysis for renewable energy can be illustrated by the Figure 1.   Traditional financial analysis, based on discounted cash-flow accounting, undervalues future fuel price risks and completely ignores the environmental and health costs of fossil-fueled power plant emissions.   As a result, the current utilization of modern renewable energy (excluding traditional biomass use) in most countries is quite small.  Yet, on a life-cycle cost basis, some renewable energy technologies are already cost competitive with conventional energy sources. However, the potential of these financially viable renewable energy technologies is not fully realized because of a variety of market barriers. 

As shown in Figure 1, if the cost of local environmental externalities and global externalities (e.g. through carbon credits are included in the economic valuation, as is done in a typical WBG economic calculation, the economically viable quantity of renewable energy increases.  If the diversification value is also added to the economic cost, the economically viable optimum quantity of renewable energy becomes even larger. 

Given the market distortion that environmental externalities and diversification values are not recognized in the market place as well as a series of market barriers, financial incentives are required to attract investors to achieve the economically viable optimum quantity of renewable energy.

Such economic analyses have been performed for various renewable energy projects, for example, in China, Croatia, Mexico and South Africa, to determine the economically viable optimum quantity of renewable energy.   For information on these studies click here

Environmental and Health Benefits of Renewable Energy

The environmental impacts of fossil fuel use often result in real costs to society, in terms of human health (i.e., loss of work days, health care costs), infrastructure decay (i.e., from acid rain), declines in forests and fisheries, and perhaps ultimately, the costs associated with climate change.  Costs of environmental externalities are difficult to evaluate and depend on assumptions that can be subject to wide interpretation and discretion.   Although environmental impacts and associated costs are often included in academic economic comparisons between renewable and conventional energy, investors rarely include such environmental costs in their energy investment decision-making process unless it is mandated by a legal or regulatory authority.  The two principal methods of monetization of environmental externalities are damage costs and pollution control (mitigation) costs.  The carbon emission reduction credits from the CDM mechanism under the Kyoto Protocol provides an extra revenue stream for renewable energy projects to reduce greenhouse gas emissions and can improve renewable energy projects’ financial viability. For more information on carbon credit, click here

Energy Security Benefits of Renewable Energy: Reducing Risk

Increasingly important is the contribution of renewable energy to the energy security of a country. Renewable energy systems broaden the portfolio of options for energy resources and for reducing dependence on fuels with significant price volatility and availability concerns. In the long-term, hydrocarbon supplies are expected to diminish, pushing up the price.  In the medium-term, oil and natural gas prices have been shown to be the most volatile of all energy commodities, and an overexposure to this volatility could harm the electricity sector.  Diversification away from fossil fuels could mitigate the impacts of both future price rises, and of volatility, thereby increasing overall energy security.  Renewable energy’s low, or often non-existent, recurrent input costs mean that its marginal cost of production is much less exposed to commodity price fluctuations. Therefore, renewable energy systems broaden the portfolio of energy resources used within a country and can contribute to energy security and economic stability.  

Mean variance portfolio theory is an effective tool for assessing risk in electricity generating portfolios.  Financial investors have long used this approach to dealing with uncertainty and have learned that a portfolio of assets provides the best means of hedging possible future outcomes.   This approach evaluates both the expected cost and the risk of all technologies in the electricity generating portfolio, and the reference³ provides an example of how the introduction of wind and geothermal technologies into the electricity generating mix for Mexico can reduce both the cost and the risk of future electricity generation.

Another publication gives an overview of how current power system planning models handle risk.⁷

Role in Rural Electrification

Renewable energy systems can play an important, cost-effective role in rural electrification.  However, the national or regional utility companies responsible for expansion of electricity services into rural areas are often structured exclusively around the grid-extension option.  The first step to creating a more open rural electrification planning framework is to understand the situations in which off-grid (mini-grid and stand-alone) renewable energy systems can be cost-effective in comparison to grid-extension.  

Grid-extension requires that both the overall level of electricity demand and the load density (number of households to be served per unit service area) be above specific minimum thresholds to be cost-effective.  Deciding whether grid-extension or off-grid energy systems are the least-cost option for supplying electricity to rural areas requires careful analyses that considers the total number of households to be served and their distance from the grid, the household service level, the load density, any requirements for productive loads such as rice mills, water pumping, and commercial operations; and the expected load growth.

The largest economic niche for stand-alone renewable energy systems is in small, sparsely settled, isolated communities - typically villages with fewer than 200 connections.   A second economic niche is small communities near (5 km or less) an existing medium voltage line - typically fewer than 100 connections.  A third economic niche is villages located near a low voltage line (3 km), if fewer than 50 households.   For more click here

Renewable Energy as a Development Enabler

Renewable Energy for Productive Uses

Renewable energy can provide important opportunities for economic development.  These opportunities can result from the creation of construction and operating jobs for renewable energy power plants, which tend to require more jobs per unit of energy installed, and they can also result from the creation of new manufacturing facilities for renewable energy technologies and components. 

For developing countries, renewable energy provides significant economic development benefit in rural areas, where small amounts of energy—in the form of electricity, heat, and motive power—can have very positive impacts on income, education, health, and food security.  For more applications of renewable energy for productive uses click here.

Renewable Energy and the Millennium Development Goals

On September 8, 2000, world leaders unanimously adopted the “United Nations Millennium Declaration” which calls for global policies and measures, corresponding to the needs of developing countries and economies in transition. As part of the Declaration, the Millennium Development Goals (MDGs) commit the international community to vigorously promote human development through global partnerships for expanding and accelerating social and economic progress in all countries.   Although the MDGs do not specifically mention “energy,” throughout every economic and social sector, energy plays an essential role in their achievement.  For more on the MDGs see UN Energy⁴ and this REN 21 report⁵ .

The lack of access to modern energy services is inextricably linked to poverty and the lack of fulfillment of other needs such as shelter, food, health care, education, secure land tenure, access to agricultural inputs, credit, information, and political power.  Renewable energy can play an important and cost-effective role in increasing access to modern energy services, and contributing to the MDGs  For more on the links between energy and the MDGs click here

Funding for Renewable Energy

IRenewable energy is traditionally financed by government and the private sector, stimulated by bilateral and multilateral assistance. Scaling up renewable energy will require increased support from traditional sources and substantial contributions from new financial backers, both domestic and international⁶ .

The bilateral and multilateral assistance in developing countries take the form of technical assistance grants, loans, guarantees or insurance.  Among the bilateral and multilateral donors, the World Bank Group, the Global Environment Facility (GEF), and the German Development Finance Group (KfW) provides the majority of renewable energy funding, and dozens of other donors and programs provide the rest. For a detailed list of funding sources for renewable energy, click here

At the International Conference on Renewable Energies that took place in June 2004 in Bonn, the WBG committed to a target of at least 20 percent average growth annually in both RE and energy efficiency lending over the next five years. To achieve this commitment, the WBG must increase its capacity to assist client countries in developing and implementing RE and energy efficiency projects, as well as more rapidly transfer best practice across sectors and regions.  Recently, the WBG was asked by the G-8 to lead the development of a new investment framework for clean energy development in partnership with other multilateral institutions and partner countries. For more on the WBG commitment to renewable energy, see http://www.worldbank.org/re

¹ REN21 Renewable Energy Policy Network, 2005, “Renewables 2005 Global Status Report,” Washington, DC: WorldWatch Institute. (PDF)
²  Technical and Economic Assessment: Off Grid, Mini-Grid and Grid Electrification Technologies, Summary Report, November 2005. (PDF)
³  A Portfolio Approach to Energy Planning in Mexico, World Bank, Shimon Awerbuch, Ph.D. and Martin Berger, D-Ing., 2005.(DOC)
⁴ The Energy Challenge for Achieving the Millennium Development Goals at http://esa.un.org/un-energy/pdf/UN-ENRG%20paper.pdf  
⁵ Energy for Development: The Potential Role of Renewable Energy in Meeting the Millennium Development Goals, prepared for the REN21 Network by the Worldwatch Institute, Washington, DC, 2005. (PDF)
⁶ The Global Investment Challenge: Financing the Growth of Renewable Energy in Developing Countries. Jamal Saghir. Renewable Energy World. Review Issue 2005-2006. 
⁷ Risk Assessment Methods for Power Utility Planning, World Bank ESMAP Special Report 001/07 March 2007, by Donald Hertzmark.