Rethinking Development Assistance for Renewable Electricity

By Keith Kozloff, WRI, U.S.A.

The developing world's demand for electricity is expected to double in the next 15 years. As a concrete example of what this surge will mean, consider China, where officials talk about increasing power plant capacity by 15,000 to 17,000 megawatts each year for more than a decade. Unless there is a massive effort to make renewable energy economically attractive in developing countries, about 70 percent of the electric capacity they add will come from fossil fuels.

Besides curbing environmental damages, shifting toward renewables promises economic boons. For the 65 countries that import at least half their commercial energy, two factors are most prominent: stemming their hard currency outlays and avoiding the price risks that arise from fuel imports. Renewably generated electricity performs well on these counts. These are some of the conclusions of a new report from World Resources Institute: Rethinking Development Assistance for Renewable Electricity.

Only a Foothold

When renewably-generated electricity is so promising, why hasn't it gained more of a foothold in developing countries? One reason is that renewables have gotten short shrift in development assistance - only 2.5 percent of the funds earmarked for energy over the past 13 years. Another is that what little money has gone to renewables has failed to stimulate lasting markets for them. In the "parachute" approach of the 1970s and early 1980s, donors funded one-shot projects and then moved on, neglecting follow-up. By the mid-1980s, renewables' prospects looked dim, as disillusionment set in among donors and world oil prices plummeted.

New Interest

- Lessons of the Past

Now that environmental concerns are rising - along with the recognition that billions of people will not be hooked up to a conventional power grid anytime soon - the development assistance community is once again interested in renewables. How can past lessons beapplied to make future funding more effective? What kind of financial and technical assistance would lower renewables' costs and demonstrate their true worth as sustainable energy options?

It is hard to generalize when renewable technologies and developing countries' needs are both so diverse, but assistance agencies can spur lasting markets for renewably generated electric power if they learn from experience. Paramount among the lessons to be learned are the following:

1. Development assistance that promotes a comprehensive commercial development strategy is more likely than "one-shot" demonstration projects to result in technology diffusion. To encourage widespread use of a particular renewable technology, assistance agencies must address factors that sap its market potential. Agencies should do more to build up a society's "software" - its store of technical and managerial skills. Of the official development assistance spent on energy projects from 1979 to 1991, less than 10 percent was invested in developing these skills.

2. Donor countries often tie aid to renewable technologies in which they have a comparative advantage, but unless these technologies create local jobs, sustainable markets are unlikely to develop.

3. Conventional energy options look deceptively good because fuel prices do not fully reflect the differing environmental costs of "various", fuels and because conventional electricity is often subsidized. On average, developing-country consumers get electricity at a rate 30 percent lower than those in their industrialized counterparts - even though it usually costs more to provide.

If development assistance is spent in countries with heavy subsidies for conventional electricity, the investment will be wasted because renewables won't be able to compete.

Of course, what the development assistance community does is by no means the whole story: its leverage is waning as its budgets shrink and needs in other sectors grow. Multilateral loans will be dwarfed by the private capital flowing into developing country power sectors - capital that renewables must attract if they are to gain significant market share.

Ultimately, renewable energy's prospects will hinge on the actions of the private sector and developing country governments - which is why development assistance should do a better job of enhancing demand for renewables now.

Recommendations

To see how development assistance affects renewables, WRl's research team examined 11 projects using photovoltaics, geothermal power, wind, small hydropower, or biomass in Brazil, the Dominican Republic, India, Kenya, Mauritius, Morocco, Nepal, the Philippines, and Tibet. By assessing each project's success in creating an enduring market for a particular technology, the team gained insights that can help development assistance agencies target their funds effectively. Among its recommendations, the following stand out:

Donors, lenders, the private sector, and developing-country utilities should collaborate on international commercialization strategies. If such collaboration involved pooling market demand across countries, it would

World Bank Financing for Power Generation Projects (U.S. Millions) lower the risks of scaling up manufacturing capacity and investing in technical innovations.

Figure

Development assistance agencies should stress local involvement. Local entrepreneurs should be given the chance to help adapt technologies and meet service needs, activities that not only produce jobs, but also raise the odds of technology diffusion.

International lenders should "mainstream" cost-competitive renewable electricity options. Multilateral development banks need reforms to ensure that their loan evaluation criteria, management reward structures, and analytical as well as planning tools are not biased toward conventional power generation technologies and against renewables.

Assistance should be aimed at countries in which renewables can compete fairly. A level playing field may require not just reforming electricity pricing, but also revamping planning processes so that they fully value the benefits that renewables offer to a utility system.

Donors should emphasize building sustainable markets. An effective development assistance program selects a technology commercialization strategy based on the human resources available in a particular country, rather than simply seeking to expand its own market share in the short term.

For the time being, development agencies still exert considerable leverage over which technologies will meet growing needs for electricity. By making the right investment decisions now, they can enhance humanity's prospects for a long time to come.

Dr. Kozloff, senior associate in the Climate, Energy, and Pollution program at the World Resources Institute in Washington, D.C., is the lead author of Rethinking Development Assistance for Renewable Electricity (see publications).