The World Bank recently launched an East Asia energy flagship report in Singapore: “Winds of Change: East Asia’s Sustainable Energy Future” (full disclosure: I’m the lead author). This report recommends that six East Asian countries (China, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) shift to a low-carbon sustainable energy path that can stabilize CO2 emissions by 2025, improve local environment, and enhance energy security without compromising economic growth. The report calls for immediate government action on policy and institutional reforms to transform the energy sector towards much higher efficiencies and more widespread use of low-carbon technologies.
There was wide media coverage for the report’s launch in Singapore. Most of the news coverage focused on the price tag of $80 billion for the additional annual financing needs to shift to the sustainable energy path recommended in the report. Some suggested that the price tag is too expensive, while others compared it with the China’s green stimulus of $200 billion. The good news is that the energy savings from energy efficiency and many renewable energy technologies will pay for this additional investment costs. The challenge is how to mobilize such a large amount of financing in a timely manner.
First, policy matters. The right enabling environment will create the market and demand for clean energy, and green financing will follow. The report presented a menu of policy options. For example, many renewable energy technologies are economically but not financially viable compared to fossil fuels. The report recommends three “magic bullets” for financing renewable energy:
- sufficient tariff levels with long-term power purchase agreements;
- mandatory power purchase requirements for utilities; and
- passing incremental costs to consumers.
In East Asia, China and Thailand have adopted feed-in tariff policies, which set fixed tariffs for renewable energy at a higher level than fossil fuels. Under such policies, financing renewable energy is no longer a major barrier. In Thailand, banks are competing for lending to renewable energy projects. Over time, taxes on fossil fuels to incorporate environmental external costs into energy pricing are the ultimate solution to provide a level playing field between renewable energy and fossil fuels -- thereby, increasing financing for clean energy.
Second, risk sharing and capacity building are critical for energy efficiency financing. It is most effective to tailor green financing to the costs and maturity of clean energy technologies, recommended in the report. For example, financing energy efficiency needs mechanisms for sharing the incremental risks, and building the capacity of banks and project developers. Many energy efficiency measures have “negative” costs, meaning energy savings are greater than additional investments.
However, most banks lack the required expertise, interests, and incentives for energy efficiency lending due to the small size of many projects and the perceived risks. While domestic capital is rarely the problem in most East Asian countries, inadequate policy frameworks and institutional capacity are significant barriers to financing. Therefore, building capacity and confidence of the local banks through loans and partial risk guarantees have proved to be an effective approach to increase financing for energy efficiency in China and Eastern European countries.
Finally, East Asian countries need international support. These countries cannot move to a low-carbon sustainable energy path alone. The report called for transfer of substantial financing and low-carbon technologies from developed countries. The report estimated that of the $80 billion annual net additional financing needs, about $25 billion per year would be required as concessional financing to cover the incremental costs and risks of energy efficiency and renewable energy. Substantial grants are also needed for institutional strengthening and capacity building. To date, the Clean Development Mechanism has not played a significant role in green financing. Long-term project financing and risk guarantee are critical for low-carbon technologies, and developed countries need to step up their commitment.
In conclusion, the technical and policy means exist for transformation of the energy sector, but only strong political will and unprecedented international cooperation will make them happen.