(introduction...)

energy sector emissions contribute the majority of global greenhouse gases

Expenditure on increasing energy supply represents a major economic cost to all countries. In the developing world, the financial and opportunity cost of capital, foreign exchange constraints, and the cost of energy subsidies combine to create severe economic constraints to supply-driven models for expanding energy.

2.3.1 Investment Requirements of Energy

The present level of world-wide investment in the energy supply sector, $450 billion per year, is projected to increase to perhaps $750 billion per year by 2020, about half of which would be for the power sector. Such investment levels cannot be sustained by traditional sources of energy financing.

In recent years the financing of large-scale electric power projects in developing countries has become problematic. With the international debt crisis that began in 1982, investments began to fall. External financing also dropped. Although the level of domestic savings in many developing countries is substantial, there have been widespread political, institutional and cultural barriers to the successful harnessing of domestic savings for energy and many other investment purposes.

energy can play a major role in stemming and reversing the problem of land degradation

Underpricing of electricity has meant utilities have little or no retained earnings. Their shaky financial condition has given them poor credit ratings in international commercial capital markets. Governments that have historically provided much of the necessary capital face mounting fiscal constraints that make it ever more difficult to supply major capital for electric utilities. Also, the multilateral financing agencies are able to provide only a small fraction of the capital needed. All of this undermines self-reliance and leads to deals that reflect the high price of capital arising from the high financial risks involved.

the search for new sources of finance has led to a drive for privatisation in the energy sector to attract private capital

There have also been some significant changes in the sources of energy finance. Official development finance has declined as a proportion of total funding and is expected to diminish further. Consequently, external private financing and domestic financing will need to increase. A substantial increase of private investment in developing countries has occurred in the first half of 1990, not always for the creation of new capacity but for buying existing capacity. The search for new sources of finance has led to a drive for privatisation in the energy sector in order to attract private capital.

2.3.2 Foreign Exchange Impacts of Energy Imports

energy imports represent a significant fraction of foreign exchange earnings for many developing countries

The dependence on fossil fuels has created a wide variety of problems for non-oil producing developing countries, as well as for some industrialised countries and economies in transition. In over 30 countries energy imports exceed 10% of the value of all exports, a heavy burden on their balance of trade often leading to debt problems. In about 20 developing countries, payments for oil imports exceed payments for external debt servicing. This is an important aspect of the energy-foreign exchange nexus.