What will it take to deepen the renewable energy transformation?

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Those of us who have been working on climate change over the years have witnessed a number of encouraging announcements as a run-up to the Paris COP, where the global community is gathering to agree on collective action to reduce greenhouse gas emissions beyond 2020.  The two largest emitters have announced action, with China agreeing for the first time to peak its GHG emissions by 2030 (using a number of tools such as emissions trading), and the United States agreeing to cut its emissions to 26-28% below 2005 levels by 2025.  The World Bank’s State and Trends Report on Carbon Pricing announced that about 40 countries and 23 cities, states, or regions have put a price on carbon emissions—explicitly internalizing costs of damage to the environment. This means that about 7 billion tons of carbon dioxide, or 12 percent of global greenhouse gas emissions are covered by some type of carbon pricing scheme.  And countries continue to submit pledges to reduce GHG emissions—through the Intended Nationally Determined Contributions—in advance of the Paris COP.

In the energy world, there is equal excitement about recent developments.  Renewable energy prices have significantly fallen over the years, in particular for wind and solar. The International Energy Agency (IEA) announced earlier this month that renewable energy will be the largest source of new power generation capacity globally—700 GW in the next 5 years. The IEA does not expect that the fall of oil prices to affect the growth in renewable energy, and expects the power sector to continue to lead the way in the global energy transformation. The IEA also estimates that the share of power generation from modern renewables (including hydropower) will increase from 22 % in 2013 to 26% in 2020.  

Despite this recent growth in renewable energy generation, the contribution of renewable energy to total consumption will be proportionally less given the intermittency of wind and solar in particular. Therefore, a lot more needs to be done if we have a shot at keeping global temperature increases to below 2 degrees Celsius, which is considered the threshold for dangerous climate change.  So the question arises: what will it take to deepen the renewable energy transformation?

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The World Bank’s global experience of working on transforming the energy sector in developing countries over the past few decades can provide some clues:

Innovation:  Despite the considerable cost reductions in wind and solar over the past decade, substantial innovations are required in energy storage to increase reliability, and with operational efficiencies of utilities and market structure to increase the penetration of renewable energy in existing grids.  For more mature technologies such as geothermal and hydropower, there is a need for more systematic and innovative approaches to ensure environmental and social sustainability.  Despite its potential, hydropower remains largely untapped in sub-Saharan Africa, South Asia, and other parts of the developing world, where hydropower may be the largest available source of affordable renewable energy.

Reduction of fossil fuel subsidies:  Renewable energy would become more cost-competitive if energy prices were reflective of the costs of service. According to the OECD, fossil fuel subsidies remain substantive in the OECD region. The Middle East and North Africa region represents about half of the estimated subsidies, and renewable energy in the energy mix of the region is quite small perhaps due to the heavy subsidies on fossil fuels. Shifting to cost-reflective pricing would have a significant impact on the energy mix, as has been witnessed in Jordan which is in the final stages of subsidy reforms. In Jordan,  the government intends to achieve full cost recovery by 2017 (thus more than doubling cost recovery rates for electricity), through a mix of fuel switching to lower priced fuels, modest tariff increases, and conservation measures.  

Power utility reform:  Power utilities in developing countries are often in poor financial health and unable to pay for renewable energy. This arises from a cycle of underpricing, underinvestment, systems losses, theft, and poor collection rates, which means that they are often indebted. This creates a barrier to achieving the deep renewable energy targets that have been seen in Europe and elsewhere.  In addition, renewable energy can be generated from multiple distributed sources, as is the case for rooftop solar. Utilities and regulators will need to adapt and take advantage of this to unleash the renewable energy potential. Although this is often neglected in global climate change discussions, operationally efficient and financially sound sectoral performance is a significant element to achieve renewable energy targets. 

In the end, policy environment matters in addressing climate change. The development of the renewable energy industry has been largely driven by government policy and the interest of the private and public sector entities to comply with these policies at the lowest cost possible.  Thankfully, there are plenty of drivers and national interests that have spurred renewable energy: the need to reduce dependency on fossil fuels especially for energy importing countries, the need to diversify the energy mix and promote energy security, interest in developing export markets in knowledge and technology, the wider availability of renewable energy resources relative to fossil fuels, and the need to attract private sector capital and reduce the fiscal burden of the energy sector.  As environmental damage is not implicitly included in energy pricing, renewable energy received $120 billion in green subsidies in 2013, which is expected to double in the next decade.

The development community has a significant role to play. In providing dedicated or contingent financing to offset the higher than normal costs compared with conventional technologies, credit enhancement instruments to reduce project risks, project preparation funds, and promoting sound fundamentals in the power sector.

Authors

Charles Cormier

Practice Manager for Energy and Extractives

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