5. Making It Happen: Energy for Sustainable Development

a fundamental change in energy systems is required: they must be oriented towards sustainable development

A fundamental change in energy systems is required to make them compatible with sustainable development. This change is required due to the social, economic, environmental and security issues discussed in Chapter 2 above.

The transition to sustainable energy systems will be shaped by current trends sweeping the world and operating through, or in conjunction with, strong constraints on traditional actors, and new opportunities. The major trends include globalisation, marketisation, popular participation in decision-making, the changing roles of government, restructuring (and corporatisation) of energy utilities, and the changing magnitude and mix of sources of external funding.

Most governments today work under increasingly austere fiscal conditions. This seriously affects their role as investors in energy and in R&D and as donors of Official Development Assistance (ODA).

In the mid-1990’s, annual investments in the energy supply sector world-wide are of the order of US$450 billion per year. With total annual energy investment requirements projected to increase to around US$ 1,000 billion dollars per year by 2020 (with two-thirds for electricity), mostly in developing countries, it is unlikely that traditional sources of capital will be sufficient. The limited levels of government investments and foreign aid imply that increasing amounts of private sector capital and foreign direct investment will be needed. This is an important driving force in many countries behind the restructuring of utilities towards corporatisation in order to access financial markets more efficiently.

ODA has declined or stagnated. The amount of available funding for ODA is decreasing, even as a number of non-traditional country claimants are emerging. In 1994, net total ODA financing amounted to US$67 billion compared with US$74 billion in 1986 (based on 1993 constant dollars). Flows of private capital to developing countries are increasing, from US$42 billion in 1990 to US$170 billion in 1995. In 1995, foreign direct investment (FDI) in developing countries reached US$100 billion. FDI is very unevenly distributed. The top 10 host developing countries attracted 76% of FDI in 1993-95, and China alone received approximately 40%. In sharp contrast, all of Africa attracted only 5%.

it is unlikely that traditional sources of capital will be sufficient to meet projected energy investment requirements

Thus, the important new constraints are the declining availability of traditional capital provided internally from governments and externally from ODA and drastic reductions in government spending due to cut-backs. Important new opportunities are offered by rapidly growing private-sector activities.

These trends give rise to a set of considerations that must be taken into account in formulating public policies to promote energy strategies supportive of sustainable development. Such a set of considerations would include:

· promoting access to modern energy for all;

· a need for indigenous capacity building;

· a focus on energy services (rather than energy consumption);

· systematic introduction of a mix of the next generation of cleaner fossil-fuel-using technologies, renewable sources, and efficiency improvements;

· the establishment and maintenance of a level playing field (elimination of permanent subsidies and reflection of external (social and environmental) costs in energy pricing);

· the promotion and safeguarding of competition;

· key roles for the private sector;

· roles for stake-holders (environmentalists, current and potential consumers, etc.) outside the private sector; and

· utilisation of policy instruments that are low-cost or no-cost to government treasuries.

High rates of innovation in the energy sector are needed to bring about a sustainable energy future. Fortunately, many promising technologies for reducing emissions, such as fuel cells and most renewable energy technologies, require relatively modest investments in R&D and commercial incentives. This is a reflection largely of the small scale and modularity of these technologies and the fact that they are generally clean and safe.

there are essential market and non-market barriers to sustainable energy which must be identified and specific policies designed to overcome them

A wide range of small-scale, modular technologies, including most renewable energy technologies and fuel cells have favorable prospects for cost reduction via “learning by doing.” This arises because for such technologies energy costs are well-characterised by declining functions of the cumulative volume of production. This technological characteristic implies that the major aim of public policy should be to promote the rapid exploitation of early market opportunities in order to hasten the broad competitiveness of these new technologies.

In this context, it is to be noted that over the last decade, public sector support for energy R&D in member states of the International Energy Agency (IEA) has declined by one-third in absolute terms, and by one-half as a percentage of GDP. Of this support for R&D, over 50% is allocated to nuclear energy. On average, IEA member governments spend less than 10% of their energy R&D expenditure on renewable energy technologies and less than 10% on energy efficiency improvements. R&D expenditures are also falling in the private sector. The declining trend in private sector investment in R&D seems likely to continue in the present market place. Unless the decline in R&D efforts is soon rectified, sustainable energy futures will be difficult to realise.

However well-crafted the generic energy strategies, they will not succeed unless the barriers they face are identified and specific policies designed to overcome them.

There is a sub-set of market barriers, including:

· Subsidies to conventional energy (open and hidden): World-wide energy subsidies in the mid-1990s amount to US$250-$300 billion per year, approximately 1% of world gross domestic product, and more than half of the total annual investments in the energy sector. Most of these subsidies are directed to reducing energy prices paid by consumers and to enhancing the economic appeal of fossil fuels and nuclear energy. In 1992, subsidies in developing countries amounted to approximately US$50 billion, comparable to total ODA from all sources. These subsidies constitute a barrier to new, sustainable energy options.

· Market prices that do not reflect environmental damage: When market conditions do not fully take into account external costs, the striking environmental advantages of the new and cleaner energy options are not rewarded adequately in the marketplace. Such environmental costs include air pollution affecting human health, land degradation, acidification of soils and waters, and climate change. Against this background, some countries have adopted energy taxes as well as taxes on certain emissions (e.g., sulphur). Some governments also use emission standards that must not be exceeded (e.g., for sulphur and nitrogen oxides and particulates) to reflect some of the externalities not taken into account in market prices. However, much remains to be done to adequately implement the “polluter pays” principle agreed upon at the Rio Conference.

· Access to information: Customers often have very limited information on the energy performance of buildings and equipment, thereby effectively eliminating considerations of energy efficiency in decision-making.

· First cost sensitivity: Sustainable energy options are often initially expensive for the consumer. This implies a barrier that can, however, be overcome if credit for borrowing capital is available (and the life-cycle cost is lower than that of the alternatives).

· Split incentives: The common “landlord-tenant” problem, whereby the landlord has no incentive to invest in energy efficiency because it is the tenant who pays the fuel bills.

· Indifference to energy costs’. Energy costs are often a small fraction of total costs, leading to limited attention to alternative energy options.

Another sub-set of barriers consists of non-market barriers, including:

· The supply-biased paradigm: Producers and distributors of energy carriers tend to be so focused on the supply of their “products” they tend to devote little attention minimizing the cost of energy services that their products can provide, and thus to improving efficiency. When increased sales of energy lead to enhanced profits energy efficiency “takes a back seat,” even if it would be beneficial to consumers or to society.

· Vested interests: These interests, which exist both in the private and public sector, benefit from business-as-usual approaches and practices and, therefore, resist change and seek to belittle the opportunities which are emerging.

· Institutional obstacles: These obstacles include the monopoly position of utilities and the lack of appropriate fora for interaction between relevant stake-holders.

· Declining R&D expenditures

There are encouraging examples of energy policies consistent with major global trends that are designed to overcome market and non-market barriers to the advancement of sustainable development objectives. The examples in Boxes 2-5 represent a small selection of what can be considered.

environmental advantages of newer and cleaner energy options are often not rewarded in the marketplace

Concerted efforts are needed at the international level between multilateral institutions, private sector investors, government, civil society and the energy industry to promote a sustainable energy path to ensure that energy becomes an instrument for sustainable human development.

Internationally, no one organisation is responsible for energy. Within the UN System there are numerous agencies that support diverse activities in both conventional and renewable energy. The World Energy Council, representing world energy industries, has called on various occasions for new partnerships between government, the private sector and consumers to facilitate the changes required to move the world to a path of sustainable development. Many other NGOs, primarily motivated by environmental and social concerns, have advanced similar propositions.

a public sector-led reorientation to promote and adopt sustainable energy is essential to meet the commitments of the global conferences

The ability to move towards a sustainable energy future depends on building coalitions around common development, economic, technological and energy service interests that are part of a sustainable approach to energy. No new international institutions need be established. Rather, a framework through which sustainable energy strategies are promoted and interested parties convened, could be developed to address common interests. A mechanism that encourages better dialogue between governments, the private sector and NGOs on the mobilisation of investment funds, technology transfer, management and training is needed.

In contrast to the past, most investments in the future in energy systems are likely to be in developing countries. It is of considerable financial and environmental interest to developing countries that new technological opportunities become available to them. If they were to have these opportunities, they would be able to leapfrog to the new generation of cleaner energy technologies, without going through the same unsustainable path that the industrialised countries have followed.

This sets the stage for development cooperation. It can contribute to implementing sustainable energy futures and thereby work toward poverty reduction, job creation, the advancement of women and protection of the environment. Key elements in this regard will be human capacity building, the formulation of legal and institutional frameworks supportive of these developments, the demonstration of key new technologies, and national action programmes for sustainable energy.

The international community has dealt with numerous aspects of social, economic and sustainable development through the UN global conferences of the 1990s. They have identified targets and goals and concluded international agreements, platforms of action, declarations and resolutions adopting these commitments. Energy issues must be squarely dealt with if these commitments are to be fulfilled, and the leadership must come from governments. Within an appropriate framework, the private sector, energy companies, investors and civil society can all contribute and support each other to meet the goals of sustainable development. A public sector-led reorientation to promote and adopt sustainable energy is essential to meet the commitments of the global conferences.

Energy can become an instrument for sustainable development. The point is, while the future may be difficult, a continuation of present trends cannot be sustained.