E N E R G Y & M I N I N G S E C T O R B O A R D D I S C U S S I O N P A P E R S E R I E S P A P E R N O . 3 S E P T E M B E R 2 0 0 2 Economic Development, Climate Change, and Energy Security ­ The World Bank's Strategic Perspective Charles Feinstein THE WORLD BANK GROUP The Energy and Mining Sector Board ACKNOWLEDGMENTS This paper was prepared by Charles Feinstein of the UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) with the contributions and editorial assistance of Todd M. Johnson of the World Bank Environment Department. It benefited from the inputs of several staff members of the World Bank Group, including Robert T. Watson, Jamal Saghir, Dominique Lallement, Robert Bacon, Ajay Mathur, Dana Younger, Richard Spencer and Ranjit Lamech. John Besant-Jones provided extensive commentary and guidance. 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E N E R G Y & M I N I N G S E C T O R B O A R D D I S C U S S I O N P A P E R S E R I E S P A P E R N O . 3 S E P T E M B E R 2 0 0 2 Economic Development, Climate Change, and Energy Security ­ The World Bank's Strategic Perspective Charles Feinstein The World Bank, Washington, DC THE WORLD BANK GROUP The Energy and Mining Sector Board Copyright © 2001 The International Bank for Reconstruction and Development/The World Bank. All rights reserved FOREWORD The WBG's energy business is changing in the face of a changing world, and changing in ways that reflect the This paper is intended as a World Bank Group (WBG) confluence of this triad of interests. We envisage and support contribution to the growing discourse on the linkages the transition in developing countries from traditional to between poverty reduction, the enhancement of energy modern energy for poor households while improving the security, and efforts to address the increasing threat of efficiency and environmental sustainability of the supply global climate change. As the paper took shape, it was and use of energy, increasing the choices of energy services evident that that the dialogue needed to be extended to a for consumers, and improving macroeconomic and fiscal broad range of stakeholders concerned with one or, stability. The WBG's Energy Business Renewal Strategy is increasingly, all three of these key aspects of energy and anchored in four business areas: (1) activities that have a i development. The importance of these topics is illustrated direct impact on poverty reduction; (2) those that help the by their prominence in the World Summit on Sustainable energy sector contribute to macroeconomic and fiscal Development process. Providing modern energy access for stability; (3) activities that enhance market development, rural development and improving the global sustainability governance, and the participation of the private sector; of energy supply and use emerged as key themes at the and (4) those that ensure the environmental and social Johannesburg Summit. sustainability of energy services and use. Historical experience shows that energy systems evolve only With more than five decades of experience in developing over many decades; however, the transition to a new system and transition countries, the WBG plays an important role is likely to accelerate, given the need for additional energy in supporting the development of sustainable energy for basic needs in developing countries, local and global markets and institutions. Through its wide range of financial environment concerns, and energy security. Energy is instruments delivered by the World Bank, the International essential for both economic growth and reducing poverty. Finance Corporation, and the Multilateral Investment Energy resources have been an important source of rev- Guarantee Agency, its lending program, its economic and enue for hydrocarbon exporting countries, but economies sector work and advisory activities, involvement with the that are highly dependent on oil imports and major oil Global Environment Facility, and leadership in carbon exporting countries both face macroeconomic and fiscal financing, the WBG can provide critical leverage for instability from fluctuations in world oil markets and prices. sustainable energy development through public and private The macroeconomic and fiscal risks can be magnified in partnerships, including nongovernmental organizations, developing countries by misdirected energy subsidies and foundations, and the private sector. rents, poor governance, and corruption. However, while energy is an essential driver of economic development and poverty reduction, too often it is the cause of environmental degradation (e.g., local air and water pollution, climate JAMAL SAGHIR change), adversely and disproportionately affecting the Director, Energy and Water health and livelihoods of the poor. Climate change impacts Chair of Energy and Mining Sector Board pose particular risks to developing countries because of expectations of greater climate variability in their regions, a greater proportion of climate-sensitive sectors, and the inability of government coffers and institutions to absorb the impacts. INTRODUCTION This paper describes the World Bank Group's strategic perspective on three particularly important challenges related to the supply and use of energy in the new century: economic growth and poverty reduction; mitigating environmental impacts, including global climate change; and enhancing energy security. The linkages between these themes are increasingly recognized worldwide. The paper provides an institutional view of how the integration of these themes should be addressed over a five to ten year time horizon. Because of the World Bank's mandate and positioning, the paper's emphasis is on the developing and transition economies. The paper also focuses on patterns of energy supply and use, although--given that Earth's climate is already changing and further change is ii inevitable--adaptation to climate change is a critical issue for developing countries. SUSTAINABLE ENERGY DEVELOPMENT to socially productive uses (e.g., energy for education and IN THE EMERGING AND TRANSITION health services delivery), to economically productive uses ECONOMIES: KEY DRIVERS (e.g., motive power for small- and medium-scale enterprises and industry, irrigation, and ICT). The energy-poverty link- Historically, energy "revolutions" have hardly been sudden age runs two ways: (1) the poverty-exacerbating effects-- or revolutionary, requiring 40­60 years to achieve capital through household income expenditure,2 pollution exposure, stock replacement and technology and fuel substitution. and the simple drudgery of collecting and transporting Nevertheless, desires for growth and poverty reduction, traditional fuels--to the lack of access to clean, affordable, local and global environmental mitigation, and enhance- and efficient modern fuels; and (2) the role of modern ment of energy security are poised to accelerate the pace energy in empowering business development, employment, of the coming energy transition--all the more so as the income generation, and more productive social services underlying synergies are recognized and exploited. that lift populations out of poverty and enable economic growth. This concept of energy and poverty is also more Economic Growth and Poverty Reduction responsive to achieving the MDGs. In the present international development context, the Viewed from a national growth perspective, there is a Millennium Development Goals (MDGs) frame development strong correlation between energy consumption and 1 assistance efforts and set targets for reductions in poverty, economic income. Figure 1 shows the level of energy improvements in health and education, and protection of consumption in kilograms of oil equivalent (kgoe) per person the environment. The goals have been adopted by the in more than 160 developed and developing countries and World Bank Group (WBG), the International Monetary the corresponding levels of national income (indicated by Fund, the members of the Development Assistance gross national product [GNP]). Part of the explanation for Committee of the Organisation for Economic Co-operation this observed correlation is that most economic activity and Development (OECD), and many other agencies. They found a new expression in the Millennium Declaration of Figure 1. Energy Consumption and Economic Income the United Nations, adopted by the General Assembly in September 2000. The goals provide a formidable challenge to the international community: to reduce global poverty by half over the next 15 years. Significantly, however, none of the 21 targets contain a specific reference to energy, although it is well recognized in the energy development community that modern energy is needed to deliver critical services to the poor. Furthermore, many of the goals--such as reducing infant and maternal mortality due to poor health care facilities and increasing information, communications, and technology (ICT) services-- cannot be reached if energy services are not provided. For three-quarters of the world's 2.5 billion truly poor (who live on less than US$2 per day), the central energy issue is access to modern energy.1 The role of energy services would be impossible without energy. Thus, economic growth and the span of energy service benefits are only recently that creates jobs and raises incomes relies on additional or becoming understood, ranging from energy for consumptive more efficient energy use. Most sectors of the economy uses ( e.g., cooking, basic lighting, and radio and television), depend on an adequate and reliable supply of energy. For example, the rate of modern energy access in Sub-Saharan Africa is approximately 8 percent, and their per capita conventional energy consumption is 1 less than 1/20th of levels in the industrialized world. The developing world's poor spend a substantial proportion--an estimated 12 percent of their household income--for energy services. Because of the low 2 efficiency of their energy supply and consumption, this fraction is four times higher than in wealthier households. Table 1. Stabilization of atmospheric concentrations of In terms of economic management, government borrowing CO2 will require emissions reductions globally (IPC 2001) and contingent liabilities or financial guarantees given to investors in energy infrastructure have often been a source Date for Global of macroeconomic and fiscal instability in developing Stabilization Date for Global emissions to fall Level emissions to peak below current levels countries. Likewise, significant budget expenditures are 450 2005-2015 2000-2040 made to support various direct or indirect subsidies of 550 2020-2030 2030-2100 energy consumers. Energy is especially important for 650 2030-2045 2055-2145 macroeconomic and fiscal stability in oil and gas exporting 750 2050-2060 2080-2180 countries such as Mexico, the Russian Federation, Nigeria, 1000 2065-2090 2135-2270 Indonesia, Algeria, Venezuela, Vietnam, and Iran. In these These dates are associated with CO2 stabilization alone ­ countries, energy accounts for a substantial portion of GDP, stabilization of CO2 equivalent concentrations need to occur government revenues, and export earnings. In common even earlier because of the contribution of the non - CO2 with developing economies that are highly dependent on greenhouse gases oil imports, the exporters' macroeconomic and fiscal balances are exposed to high risks from fluctuations in ambitious targets generally imply first reducing the growth 2 world oil markets and prices. rate in emissions, followed by a time in which allowable emissions reach a peak level and then follow a declining Environmental Protection and Climate Change trajectory to the long-term sustainable level. Global climate change is perhaps the least quantitatively Despite the multiplicity of options, one thing is clear: To understood, but also potentially the most devastating, result stabilize atmospheric concentrations of CO2, emissions of modern energy use. Most scientific experts agree that must be brought below the level of natural absorption of climate change induced by human activity is occurring and GHG emissions in Earth's carbon cycle--equivalent to a that further change is inevitable. The Third Assessment 90 percent cut in the level of today's emissions. This is the Report of the Intergovernmental Panel on Climate Change level to which emissions would eventually need to be (IPCC 2001) concludes that "most of the observed warming returned to meet the United Nations Framework over the last 50 years is likely to have been due to the Convention on Climate Change (UNFCCC) goal of increase in greenhouse gas (GHG) concentrations." About "stabilization of greenhouse gas concentrations in the 75 percent of the cumulative GHG emissions during the atmosphere at al level that would prevent dangerous past 150 years have been emitted by industrialized countries.3 anthropogenic interference with the climate system." As a result of this energy-led development, their per capita Dealing with the climate change problem will therefore GHG emissions today are five times higher than those of eventually require a global effort to control GHG emissions. developing countries. The IPCC also concludes that "most Current emissions from developing countries are growing less-developed regions are especially vulnerable" to the fast, and by early this century are expected to exceed those projected adverse impacts of climate change. To avoid the of industrialized countries. The fundamental question is: How risks of climate change impacts, developing countries will do we reconcile the requirement for developing countries need to adapt their development paths. to meet basic human needs--to date fueled by coal, oil, and gas--with the need to protect the environment? Over the Given the uncertainties surrounding the level and timing of next 10 years, the focus for developing countries is not on climate change damage, there are multiple possible targets achieving GHG emission targets, but rather on incorporating for an upper limit on GHG concentrations in the atmosphere. climate change considerations into the development of Multiple time paths of emissions rates are associated with their energy markets, institutions, and technologies. any given long-term stabilization target. Each emissions path is in turn associated with a particular time horizon for Developing countries fully recognize the implications of action. For example, an aggressive target (450 parts per global climate change and the need for all nations to million atmospheric CO2 concentration) implies an assume responsibility for protecting the global atmosphere, immediate reduction in global emissions (Table 1). Less as reflected in their decision to ratify the UNFCCC. The 150-year time frame corresponds to the approximate atmospheric residence time of carbon dioxide. 3 However, because these countries' contribution to the Energy Security cumulative increase in atmospheric concentrations of GHG emissions has been small relative to that of industrial The 1970s oil shocks confronted the developing countries countries, and because of the urgency of their short-term with a new set of energy security issues. Few of the oil needs to provide food, energy, and other vital services for importing countries had the necessary foreign exchange the poor, it was recognized that developing countries and reserves to absorb price increases. Concerns about macro- economies in transition would be unwilling and unable to economic management and fiscal balance--national invest their scarce resources in measures yielding benefits affordability--rose to the fore. Energy security was enhanced in the distant future or outside their boundaries. For that through reliance (sometimes an overreliance) on domestic reason, based on the principle of common but differentiated resources, bilateral energy trading relationships with reliable responsibility, industrial country parties to the UNFCCC nearby partners, and access to regional markets. However, agreed to provide new and additional grant resources to vulnerability to significant price fluctuations remains a major their developing country counterparts and to support the energy security concern for both oil and gas exporting transfer of technology on beneficial terms. countries and net importers of energy products and services. The recent agreements reached on the implementation of A second energy security preoccupation in developing the Kyoto Protocol will likely have significant impact on the countries is the ability to adapt and apply imported energy 3 global energy sector. The agreement on the flexibility technologies to their local needs and manage them mechanisms, including Joint Implementation (JI) and the successfully. In the perception of many developing countries, Clean Development Mechanism (CDM), has established failure to adapt and manage implies a continuing depend- the emerging carbon market. However, the size and growth ence on foreign technical know-how, a dependence that is of that market is uncertain at this time, given the significant usually interpreted as insecurity. Over time, lack of open allowance for carbon sinks in net emissions accounting, and transparent markets and good governance also con- the large excess of "hot air" in the Russian Federation, and tributes to the degradation and disfunctionality of complex the nonparticipation of the United States. It is possible that energy technologies. Failure to adapt technologies to local the demand for carbon offsets from CDM countries will be conditions also implies that energy service priorities will be driven by policies, particularly those of the European Union determined on the basis of an exogenous energy technology and its members. For example, the extent to which demand that cannot meet affordability and the priority social needs is satisfied internally by using the International Emissions of emerging market economies, especially in rural areas. Trading mechanism and the provisions for land-use change and forestry will be decided by these policies. Nevertheless, Third, developing countries have good reason to harbor the long-run benefits of participation for emerging and concerns about the vulnerability of their energy infrastructure transition economies, in the form of substantial financial to disruption by natural or man-made events. The recent inflows and promotion of locally environmentally beneficial extensive losses of the electric transmission and distribution energy sources, will be substantial. facilities of Orissa (cyclone) and Gujarat (earthquake) in India stand as a powerful testimony; floods can be equally Identifying and exploiting the simultaneous local environ- damaging, and droughts threaten the viability of hydroelectric mental benefits of addressing global climate change will facilities. In addition, power stations, refineries, pipelines, be key to stimulating developing country interest in GHG and transmission lines are early targets in cases of domestic emissions mitigation. Most developing countries are much insurrection, civil war, and international conflict. more concerned about local and regional air pollution than GHG emissions. While there are tradeoffs in dealing Finally, in developing countries that export hydrocarbon, the with global warming and local air quality, there are syner- misuse and inequitable distribution of the rents from energy gies in many cases--many of these pollutants (e.g. ozone, trade can itself be a driver of discontent, domestic instability, black carbon) also contribute to global warming. The IPCC and violence, which are all threats to domestic energy markets, has noted that, in some cases, the ancillary benefits of private investment flows, and infrastructure. Squandering mitigation of climate change can outweigh the costs of valuable resource revenues may also result in disinvestment reducing GHG emissions because of reductions in local in the very energy production facilities that brought financial and regional air pollution. riches, ultimately threatening the pace and sustainability of domestic energy resource development. ENHANCING ENERGY SECURITY IN THE Reducing Energy Infrastructure Vulnerability: DEVELOPING WORLD Distributed Energy. Reducing Vulnerability to External Shocks: Centralized energy infrastructure efficiently exploits Fuel and Source Diversity. economies of scale in construction and operation, and when adequately designed and maintained, it has Reducing vulnerability to external shocks through diversifying compiled an enviable record of technical reliability and fuel types and sources is akin to the portfolio diversification environmental compliance. However, large-scale well known to investors. Countries thus need to not only centralized facilities are also perceived to be vulnerable to evaluate the security of individual supply chains, but also large-scale catastrophe and loss. In addition, technological the riskiness of their energy supply portfolio against the change is redefining the scale at which efficiency and vagaries of energy markets. Governments also need to economy can be captured--initially in the form of avoid a false sense of security through ill-advised domestic combined-cycle gas turbines, but in the longer term ventures, such as maintaining inefficient local refineries through efficient microturbines, fuel cells, and sunlight-to- based on imported oil feedstock in preference to rationalized electricity converters as complements to large central fuel products procurement in regional markets. The facilities.­ In parallel, these distributed energy resources contribution of new and renewable resources is also provide inherent security advantages through their 4 increasingly seen from an energy security perspective. modularity and geographic diversity. The effect is similar Recent work extending modern portfolio theory to to that overtaking mainframe computers and dedicated renewables shows that the reduction in risk through the communication tie-ups; these are increasingly by-passed introduction of a modest amount of renewables often by distributed microcomputers linked by the Internet. In this outweighs the direct costs of even non-least-cost renewable connection, it is interesting to recall that the Internet itself sources. Significantly, these same analyses indicate that the was initially developed as a fault-tolerant, distributed optimal proportion of renewables is higher than current network to provide highly secure communications. levels of deployment in many countries. Reducing Political and Social Divisions: Moderating End-Use Energy Requirements: Promoting Good Governance and Equitable Increasing Supply- and Demand-Side Energy Energy Sector Rent Distribution. Efficiency. Mismanagement of energy resources and their uses is a It is clear that the developing world will need to increase contributor to impoverishment and inequity that breeds its energy consumption to meet economic and social unrest and violence and ultimately threatens sustainable development needs. Nevertheless, energy is typically energy delivery. This vicious circle takes many forms, produced, transported, and used inefficiently in both including draining of government resources for health, emerging and transition economies--with, for instance, education, and welfare that go instead to subsidize ratios of gross energy use to economic output inefficient parastatal energy monopolies;5 capture of (energy/GDP) in some of the former Soviet republics being benefits by urban elites at the expense of energy-poor some 5­10 times higher than in Western Europe and rural or periurban populations, who also may be the hosts Japan. Globally, it has been estimated that the developing of disruptive energy resource extraction; and dissipation of countries could improve their energy efficiency by 10­30 energy-generated rents through corruption and diversion percent, given the right set of policy and market incentives. for private gains. Such "win-win" energy efficiency measures could reduce energy demand growth at no loss of useful energy services, and free up economic resources in the process. Moderating end-use energy requirements allows a higher proportion of needs to be secured through domestic and renewable sources, and the corresponding reductions in energy imports normally enhance energy security.4 Note that from an energy security viewpoint, countries can become overreliant on a single domestic resource, as shown by the experiences through recent 4 droughts of highly hydro-dependent economies like Brazil, Ghana, Zimbabwe, Kenya, and Colombia. Subsidies by state governments to state-owned utilities in India, many of whom are politically compelled to sell electricity to the rural sector at fractions of economic 5 cost, amounted to double their level of expenditures on health, half of their expenditures on education, and three times their expenditures on water supply. INTERLINKAGES AND SYNERGIES lessen exposure to indoor air pollution; mitigate GHG emissions associated with biomass combustion; and Although in some cases there are tradeoffs, in many cases decrease pressures on carbon-fixing woodlands. there are clear synergies between the three principal themes of this paper. A number of the interlinkages have · Flows of investment and technology motivated by climate been alluded to earlier, but they warrant restatement and change (for example, through the CDM) provide summary. economic surpluses in the form of carbon offset rents, air quality improvements, and other sustainable development Between Climate Change and Economic benefits to the host partner countries. Growth or Poverty Between Climate Change and Energy Security · In developing countries, where human activities are already close to the margin of tolerance for current · Energy efficiency gains, as part of a least-cost climate variations in climate, the impacts of the projected change abatement strategy, simultaneously reduce energy changes are expected to be far reaching, adversely import requirements and enhance the entry of domesti- affecting the poorest of the poor. Changes in temperature cally based substitutes like renewables. could have a devastating impact on agricultural output, with attendant consequences for food security. Similarly, · Shifts to smaller-scale and distributed technologies can 5 changes in precipitation patterns associated with climate be an integral part of an energy security policy based on change could adversely affect the availability and quality energy portfolio diversity. of water, especially in areas where scarcity is already a problem, or sea level rise could displace millions of · Many emerging and environmentally beneficial technolo- people living in low-lying areas. Preparing for climate gies are modular and naturally adapted to distributed change, and indeed for current climate variability (for energy markets. They enjoy inherent advantages in terms instance, storms, floods), is therefore inextricably linked of lower vulnerability to natural and man-made disruptions, to sustainable poverty reduction.6 including those engendered by climate change itself (e.g., changed rainfall patterns that affect hydro availability · Many technologies that represent appropriate means and pumping demand, or the potential for increased to provide energy services to the rural poor also provide storm amplitude and frequency). climate change benefits. The toehold represented by these early markets can provide a basis for market Between Economic Growth or Poverty and expansion, cost reduction, and capacity building for Energy Security sustainable energy technologies. In addition, the new distributed service delivery means can be provided · Public resources are usually inadequate to finance the by a greater number of enterprises, thus promoting investments needed to meet the energy needs of the competition, private sector entry, and income and poor. Furthermore, the poor are usually the most employment creation. vulnerable to the shocks provoked by energy market instabilities because energy already accounts for a high · Off-grid renewables (such as wind and solar energy) are share of their meager cash income, and government often the least-cost option for providing energy services social programs that benefit the poor tend to be cut to rural populations. Compared with more expensive back at times of fiscal stress. options, such as grid extension to dispersed populations, they thus have financial advantages for both rural · Lack of efficient energy services to fuel development, communities and central governments. poor sector governance, the drain on public resources by poorly targeted energy subsidies, and support to · Poverty reduction measures, such as the dissemination of loss-making monopoly energy enterprises are all part of improved biomass cook-stoves, reduce the time, effort, a downward spiral that breeds domestic instability. The and expenditure devoted to household fuel supply; results may ultimately rebound as threats to domestic Key parties needing to prepare include farmers, water supply and coastal zone managers, and urban planners. 6 energy infrastructure and regional energy market the WBG Board of Executive Directors in May 2001 and is integration. In hydrocarbon-rich developing economies, focused on ways in which the WBG can use its comparative mismanagement and diversion of energy sector rents advantages to exploit the linkages between energy, poverty serve to exacerbate inequalities and domestic tensions. reduction, and sustainable development. The following summarizes the vision to which we are committed. ELEMENTS OF WORLD BANK GROUP (WBG) STRATEGY The Energy Business Renewal Strategy The WBG has been active in the energy sector for five The WBG envisages a transition from traditional to modern decades. For a long period, around 25 percent of total energy use for poor households that will go hand in hand investment lending by the World Bank was in the energy with (1) efficient and environmentally sustainable supply sector. Recently however, this proportion has fallen to and use of energy, (2) increased choices of energy services below 10 percent, despite the clear needs noted in this for consumers, and (3) macroeconomic and fiscal stability. paper. This change reflects a process, which started in the In the World Bank's vision, these anticipated outcomes will early 1990s, to bring and keep the World Bank's policies reinforce the benefits obtained from each of them. They will for its energy practice in line with two separate major also directly contribute to poverty alleviation by generating trends in its operational strategy. productivity gains that will in turn expand economic 6 opportunities for the poor through increased employment First, recognizing the overall assessment of failure of the opportunities, and better access to communications, health public sector to deliver sustainable energy and other care, and education. These outcomes will also markedly services, the 1993 WBG energy policy paper7 oriented improve living conditions through better home illumination; activities toward the liberalization and privatization of energy for health clinics, immunization facilities, and infrastructure markets under a sound regulatory framework, schools; cleaner fuels for indoor cooking and heating; and which involved a move away from the traditional, integrated, reduced local and global emissions. state-owned monopolies whose development the World Bank had previously supported. It also oriented the The WBG also envisages that efficient supply and use of International Finance Corporation (IFC) and the energy would improve the economic growth of developing Multilateral Investment Guarantee Agency (MIGA) to countries by means of the following benefits: expand their energy sector activities toward a greater · Consumers would no longer experience frequent and penetration and use of private investment flows. The World prolonged shortages of liquid fuels and power cuts. Bank would therefore support countries to improve sector · Industrial enterprises would have a choice of suppliers performance in line with sound commercial practice and providing reliable energy services. regulation, and with appropriate roles for competition and · Private ownership and financing would play a dominant private participation. This policy was further developed in role in the energy sector and enable scale-up of 1996, with the publication of a document on the World investments in sustainable energy services. Bank's approach to rural energy,8 and in 2000, when · Regulators operating in an objective, transparent, and another document9 set out the World Bank's strategy for nondiscriminatory manner would oversee natural the energy sector and the environment. monopolies and promote competition in the energy sector. The average CO2 emission intensity of energy Second, the WBG reiterated its focus on poverty reduction production would be reduced from present levels. and sustainable development from the late 1990s · The average energy consumption per unit of GDP would onward.10 Its revised strategy--Energy Program for Poverty be reduced from present levels. Reduction, Sustainability, and Selectivity--was presented to World Bank. 1993. The World Bank's Role in the Electric Power Sector--Policies for Effective Institutional, Regulatory, and Financial Reform World Bank: 7 Washington, D.C. The same year also saw the publication of a policy paper on energy efficiency and conservation. World Bank. 1996. Rural Energy and Development--Improving Energy Supplies for Two Billion People. Washington, D.C.: World Bank. 8 World Bank. 2000. Fuel for Thought: An Environmental Strategy for the Energy Sector. Washington, D.C.: World Bank. 9 The Comprehensive Development Framework first articulated in 1999 seeks a better balance in policymaking by highlighting the interdependence of all ele- 10 ments of development--social, structural, human, governance, environmental, economic, and financial--and has led to the development of Poverty Reduction Strategy Papers (PRSPs). See http://www.worldbank.org/poverty/strategies/overview.htm#intro. Realizing the Vision: Four Business Lines Figure 2. The WBG Energy Renewal Strategy The Energy Business Renewal Strategy is anchored on four business areas (Figure 2: (1) activities that will have a direct impact on poverty reduction; (2) those that will help Direct Poverty the contribution of the energy sector to the macroeconomic Alleviation and fiscal stability of economies; (3) those that will enhance market development, governance, and the participation of Environmental the private sector; and (4) those that will ensure the & Social Macro/Fiscal Energy environmental and social sustainability of energy services Sustainability Stabilization and uses. Business lines best left to others are investments that do not have a direct, positive impact on any of these four major areas, even if they add capacity, upgrade existing Governance/ Private Sector production and delivery facilities (except post-conflict or Development post-disaster reconstruction), or improve utility operating practices. The strategy proposes that financing, capacity building, advice, and knowledge transfer should be combined to produce the maximum impact. 7 Box 1. The WBG's Energy Business Lines The WBG implements its energy business lines by the Promoting good governance and private sector following means: development by · creating objective, transparent, nondiscriminatory Helping the poor directly by regulatory mechanisms · facilitating access to modern fuels and electricity · introducing and expanding competition and · reducing the cost and improving the quality of energy cross-border trade supplied to low-income households · divesting assets to strategic investors and regulatory · ensuring that energy subsidies are targeted at and markets in a socially responsible and corruption-free way reach the poor · catalyzing private investments by liberalizing entry to · promoting energy-efficient, less polluting end-use energy markets technologies for traditional fuels · strengthening the voice of consumers and communities · creating energy service enterprises run by the poor · strengthening local financial institutions to provide · supporting energy needed for social services long-term financing for rural energy business. (education, communication, health). Protecting the environment by Improving macroeconomic/fiscal balances by · promoting clean transport fuels and switching from · rationalizing energy taxes coal to gas · replacing public investments by private ones · facilitating environmentally sustainable extraction, · managing risks associated with contingent public production, processing, transport, and distribution of liabilities oil, gas, and coal · closing loss-making coal mines and oil refineries and · strengthening environmental management capacity in financing restructuring costs that fall on government the energy sector budgets · internalizing the cost of environmental degradation · enhancing effective payment by all energy users to as a key economic instrument tied to environmental eliminate operating subsidies to state-owned enterprises standards and regional agreements · improving procurement and marketing of imported · removing market and regulatory barriers to renewables and exported energy products. and energy efficiency investments for power and also for biomass (e.g., improved cooking stoves for the poor) · reducing gas flaring and facilitating carbon trading and joint investments to reduce GHG emissions ENERGY AND ENVIRONMENT STRATEGY THE WORLD BANK GROUP AND RENEWABLE ENERGY Fuel for Thought: An Environmental Strategy for the Energy Sector identifies three principles to guide the WBG's work Renewable energy has a special significance for abating on energy and environment: (1) creating a framework for global GHG emissions, as the IPCC and other assessments environmentally sound energy development, (2) addressing demonstrate that long-run climate stabilization cannot be local and regional environmental impacts, and (3) helping attained without a large-scale shift to low- and no-carbon to tackle global climate change. To ensure that these energy forms. However, the role of renewable and other principles become an integral part of the WBG's general alternative energies in the WBG's work in the energy sector business, the sector strategy argues that the Bank Group is linked to all four of its core business lines. Renewables must (1) do more work further upstream in the project cycle; are often the least-cost solution for off-grid electrification. (2) identify how to bring new methods and technologies into There are cases where renewables may make a significant the mainstream of lending operations; (3) improve standards contribution to macroeconomic and fiscal balances by of analysis of pollution problems, particularly better substituting for conventional energy. And a country's desire monitoring of projects and communicating the results more to develop its indigenous renewable resources can also be effectively; (d) strengthen its capabilities to help address the a driver for promoting good governance of the energy sector. new challenges of climate change; (e) build new strategic 8 partnerships; and (f) deepen its own skills (Figure 3). Renewables now represent a significant proportion of the WBG's energy work. As of mid-2001, the World Bank's The Energy Business Renewal Strategy draws heavily on the loan portfolio consisted of 26 active investment projects for intellectual underpinning provided by Fuel for Thought in the the development and use of renewable energy, representing energy and environment area. Combined with the growth in about US$4 billion of investment costs and financing from the Bank's energy-environmental portfolio (energy and the Bank of US$1,425 million, from the Global Environment environment now constitutes more than 25 percent of the Facility (GEF) of US$123 million, and from the Prototype Bank's energy business, and some 69 percent of Bank energy Carbon Fund (PCF) of US$2 million. The IFC had US$162 projects address specific environmental objectives.), these million in investments on its own account, plus a further trends are a clear indicator of mainstreaming progress. US$68 million in syndicated loans and US$70 million in GEF funding. MIGA had some 11 contracts outstanding Figure 3. Fuel for Thought: Energy and Environment Linkages for small hydro and geothermal projects. Looking forward, the WBG currently has 47 projects, at different stages of preparation, in 33 countries. To accelerate the development of renewables, the WBG is working with clients and partners on a number of initiatives and financing facilities, which are described below. In addition, the World Bank has been involved in active policy Carbon Trading dialogue with many client countries through sector reform JI/CDM loans and technical assistance activities. For countries Internalizing Global Externalities (supporting engaging in sector reform, the Bank is assisting with the the post-Kyoto process) More More integration of renewables in energy laws, the preparation of Renewables GFF rural and renewable energy strategies, and policy adjustments needed to create a level playing field for renewables. Clean Clean Local/Regional Technology Fuel Pollution Abatement (to be strengthened) The Global Environment Facility (GEF) is a global partnership Economic Environmental Regional in which the Bank has a key role as aan implementing Instruments Standards Agreements agency as well as a trustee. The GEF helps finance activities that support sustainable measures that minimize climate Sector Energy Rural Win-Win change damage. These include removal of barriers to Reform Efficiency Energy (in place) and reduction of implementation costs of commercial and near-commercial renewable energy technologies and reductions in cost of prospective low GHG-emitting Specialized IFC-GEF funds, such as the Small and technologies--particularly renewables--that are not yet Medium-Scale Enterprise Program, the Photovoltaic Market commercially viable. In its May 1999 meeting, the GEF Transformation Initiative (US$30 million, GEF), and the Council endorsed the principles of a World Bank­GEF Renewable Energy and Energy Efficiency Fund (US$265 Strategic Partnership for Renewable Energy. The Strategic million in debt, equity, and GEF grant) are all targeted at Partnership envisions shifting Bank and GEF efforts from an the private sector interested in undertaking renewables individual project approach to long-term, programmatic projects, both off- and on-grid. pathways, thus providing developing countries with the time and resources required to develop renewable energy markets Solar Development Group (SDG), a WBG partnership with and technologies in a comprehensive and sustainable way. several bilateral donors, U.S. and European charitable As an interim target, the WBG proposes US$150 million foundations, and private sector investors, is aimed at annually in GEF resources under the partnership for renewable private photovoltaic and PV-related business in developing energy projects, leveraged at a minimum of 4:1 with WBG countries. SDG consists of two related entities: the Solar and other sources. To date, major multiyear programs have Development Foundation, a not-for-profit organization been approved in China and Uganda, and new strategic offering business development and seed financing, and initiatives are in the design stage in India and Mexico. Solar Development Capital, a US$29 million for-profit private equity fund providing growth capital. Prototype Carbon Fund (PCF), a global public-private 9 partnership capitalized with US$145 million in OECD ENERGY, POVERTY REDUCTION, AND government and private sector investment, is helping to CLIMATE CHANGE: AN ACTION AGENDA accelerate learning about the carbon markets. The PCF supports projects designed to produce emission reductions For a considerable time to come, access to fossil fuels in fully consistent with the Kyoto Protocol and the emerging developing countries offers a considerable advancement framework for Joint Implementation and the Clean over traditional fuels in terms of economic growth, health Development Mechanism. PCF managers expect that the improvements, and cost-effectiveness for the world's poorest. majority of funds will be used on renewable energy and energy The provision of energy for productive and social uses in efficiency projects identified from Bank, IFC, and third parties. developing countries must be a priority, and the lack of a cost-effective renewable option in the near term must not Energy Sector Management Assistance Programme be a barrier to meeting these needs. But in many cases, (ESMAP), a multidonor partnership under the joint umbrella especially in rural and distributed applications, renewable of the United Nations Development Programme (UNDP) energy technologies--such as wind, solar, small hydro, and the World Bank and managed by the Bank, is a global and modern biomass--make eminent sense and are the technical assistance program that focuses on the role of least-cost option. energy in economic development with the objective of contributing to poverty reduction and economic development, Going forward, the WBG and partners face a number of improving living conditions, and preserving the environment. challenges to fulfill their energy access and environment It has been particularly active in developing the intellectual mandates. As previously asserted in this paper, many basis for renewable energy investment and in testing new paths to the achievement of these poverty reduction and institutional and business models for the delivery of small- environment goals will additionally reinforce energy security. scale energy services. The first challenge is providing a framework for building Asia Alternative Energy Program (ASTAE) helps identify and private sector and entrepreneurial skills, which are often in implement commercially viable alternative energy projects short supply in client countries. Second, poor rural and and components for Bank lending in the East Asia and peri-urban households have only limited capacity to invest Pacific and South Asia regions of the Bank. and to service debt. There is limited international experience that can be called upon for developing financing and risk Africa Rural and Renewable Energy Initiative (AFRREI) is a mitigation instruments that could best meet the needs of multi year partnership with donors intended to help deal these populations. Third, there is a clear need to better with the high transaction costs of rural and renewable integrate energy access and environmental considerations energy projects in the Africa region of the Bank. in the sector reform process. THE ACTION AGENDA and enforced through a combination of regulations, economic instruments (e.g. taxes and pollution charges), The following action agenda for energy development and market-based mechanisms. This will in turn require a assistance, based on the lessons of the WBG's experience strengthened environmental role for energy sector regulators, to date, is proposed to promote sustainable energy-related with concomitant needs for institutional strengthening and outcomes that will support the broader mission of poverty capacity building. reduction. Technology Markets Energy Access The WBG is promoting market-pull and market aggregation A key need is to integrate rural and periurban modern mechanisms to facilitate market entry of new, more efficient, energy access into the energy sector reform dialogue. and less polluting technologies. Several support mechanisms The private sector is the main engine for scaling up service being adopted in OECD countries (e.g., Renewable provision, generating income in rural areas, attracting Portfolio Standards, Non-Fossil Fuel Obligations) offer innovation, and promoting competition. Thus, as govern- alternatives to less sustainable practices in developing ments withdraw from the direct provision of energy services, countries for promoting entry of new technologies. it is critical to work toward removing barriers to entry while 10 developing an enhanced environment for the private sector Public-Private Partnerships in providing energy solutions for the rural and peri-urban poor. Beyond this leveling of the playing field, evidence The WBG is expanding support for dedicated investment increasingly suggests that incentives will be required to vehicles and new forms of public-private partnerships. motivate the private sector to invest in service provision to A number of promising new public-private investment often remote and underdeveloped areas where the poor vehicles have recently been launched (e.g., the Renewable reside. Subsidies to enhance access should be well targeted Energy/Energy Efficiency Fund) and should be supported in at the poor and subsidize the capital costs of initial provision order to demonstrate their full potential. Facilities such as of service and not ongoing consumption and maintenance. the SDG mobilize both "hard" capital for investment and "soft" concessional funds from governments and foundations Productive/Social Uses to finance needed business development and business advisory assistance. Energy assistance programs to the developing world need to be realigned around the theme of integrating energy Global Carbon Markets services (with emphasis on lighting, motive power, telecom- munications, heat supply, and modernized cooking) with The WBG is promoting the development of an efficient and income-generating and social uses to make the critical link equitable international carbon market to finance energy to direct poverty reduction. This will imply expansion of efficiency and renewable energy technologies in developing energy applications identification efforts outside the energy countries. In particular, there is a need to establish sector and into other high-value social and productive sectors, appropriate project certification and emissions verification such as education, health, water supply, communications, rules for the CDM that are consistent with the requirements and agriculture/rural development. of assessing multiple installations of small-scale or distributed energy systems. Environment Environmental concerns must be integrated into the energy PLAYERS AND ROLES sector reform dialogue. Despite the critical role of the private sector and civil society in minimizing the environ- The magnitude of the poverty and sustainable energy mental impacts of energy production and use, governments challenge requires bringing new skills and resources to must continue to play key roles by ensuring that appropriate bear from a variety of actors. Envisioned roles are outlined environmental standards are set, monitored for compliance, in Table 3. CONCLUSION markets (for energy importers and exporters alike). Added to this top-level worry are perceptions of a dependence (or Until recently, energy for development, energy security, and overdependence) on imported energy technologies, as well climate change have been pursued as separate themes, as concerns about the vulnerability of energy systems to each attracting its own constituencies. However, as this natural disasters (floods, droughts, earthquakes, storms) paper has attempted to illustrate, there are many points of and man-made calamities (regional conflicts, poor intersection between the three agendas, and the case for management, corruption). Finally, many poor developing each can be strengthened through reference to the others. countries already believe that they are beginning to suffer For example, energy security provides an important rationale the early effects of changing climate driven by energy-related for actions that, through fuel diversification, form the emissions, and thus they already think of climate change starting point for moderating growth in GHG emissions as closely linked to development sustainability. Energy and combating climate change. Remote areas in the security can be enhanced in the developing world by: developing world, where provision of conventional energy · lowering the vulnerability to external shocks through fuel services is expensive or simply unavailable, are among the and source diversification most feasible early market opportunities for renewable · reducing the need for net additions to energy supplies energy as a key class of technologies for climate change through supply- and demand-side energy efficiency mitigation. A growing number of geopolitical analysts are measures pointing out the linkages between underdevelopment, · lessening energy infrastructure risks through distributed 11 domestic unrest, and global security; misallocation of energy energy systems resources can be an important contributor to a lack of · reducing political and social divisions through good economic opportunity and disenchantment. governance and equitable energy sector rent distribution. Developing countries have long been aware of the Through the Energy Business Renewal Strategy, energy relationships, and have a more acute daily awareness of access and environmental sustainability are now the interdependencies. Developing and transition established as cornerstones of WBG energy development economies have a different concept of energy security from assistance. Going forward, the World Bank Group and its that in the industrialized world, and it is fundamentally partners face a number of challenges to fulfill these grounded in the implications for development of the mandates that will, in addition, reinforce energy security. macroeconomic and fiscal consequences of volatile energy The WBG looks forward to continuing and extending its partnerships in these important areas of mutual interest. Table 3. The WBG's Energy Business Lines Players Emerging roles Governments · Liberalizer of energy markets · Policymaker and regulator Consultants and advisers · Providers of technical expertise · Generators of knowledge Consumers · Greater say in the development of energy markets · Arbiters of energy service quality Strategic investors · Mobilizers of investment resources for private supply of energy services · Key actors for developing competition in energy markets · Catalysts for developing domestic capital markets Multilaterals and bilaterals Focus on comparative advantages: · World Bank on sector policy reforms and macro/fiscal stability · Regional multilaterals on project lending · Bilaterals on supporting public interventions NGOs · Advocates for disadvantaged groups · Promoters of public policy issues · Supporters of alternative strategies for meeting energy policy objectives · Data gathering and empirical analysis Equipment suppliers and entrepreneurs · Technology innovators · Partners with strategic investors 12 THE WORLD BANK GROUP The Energy and Mining Sector Board The World Bank 1818 H Street N.W. Washington, D.C. 20433 USA