A whooping $500billion investment is required to close the global energy efficiency funding gap in Africa annually, the World Bank has said.
This investment, which is part of the Paris Agreement, becomes apposite to realise the untapped potential of energy efficiency.
Energy transition in developing countries will require an unprecedented transformation of the power sector infrastructure, with scaling up of energy efficiency and renewable energy as well as a phasing down of coal-fired power generation.
The rate of improvement in global energy efficiency (the rate at which global gross domestic product per unit of energy used increases) needs to nearly double to meet the Sustainable Development Goal (SDG) 7 (energy access) target.
Energy efficiency means using less energy to get the same job done – and in the process, cutting energy bills and reducing pollution. Many products, homes, and buildings use more energy than they actually need, through inefficiencies and energy waste.
Besides, it needs to increase by more than 2.7 times to achieve the ambitions of the Paris Agreement.
In addition, meeting SDG 7, SDG 13 (climate action), and the ambitions of the Paris Agreement—and reaping the other economic and social benefits associated with energy efficiency—requires committed funding the World Bank Group stressed.
Many investment projects attempted to demonstrate outcomes incommensurate with their design and scope.
Yet, when paired with advisory services, cofinanciers, development partners, and intermediary support for global standards (such as the Excellence in Design for Greater Efficiencies [EDGE] standards and certification process), some investments scaled up both vertically and horizontally (for example, in South Africa and Colombia).
Energy efficiency solutions offer massive and exciting potential to help meet our climate and energy goals.
By 2030, energy efficiency can contribute up to 40% in reduction of world-wide green-house gases, while at the same time reducing our energy bills. Scaling up energy efficiency projects globally can also contribute to reducing pressure on public budgets and on achieving socioeconomic impacts such as increases in productivity and job creation. This issue of IEG Insights offers several important lessons from IEG’s recent evaluations of the World Bank Group’s support for energy efficiency projects globally.
The new framework for this energy transition proposed by the World Bank, titled “Scaling Up to Phase Down”, serves as a roadmap to identify financing challenges and develop a comprehensive financing approach.
World Bank Group estimates that low- and middle-income countries host 89 percent of the approximately $1 trillion in global coal-fired power generation at risk of being stranded.
To fund a just power transition will require much higher capital flows than are being mobilised today in order to meet the growth needed in lower carbon electricity production.
“Accelerating the energy transition toward lower carbon sources while providing reliable access to electricity for businesses and people will require verifiable emission reduction financing, close partnership with the private sector, and significantly higher funding, especially concessional resources,” said World Bank Group President David Malpass.
“The World Bank Group is supporting reforms to strengthen the energy sector and business environment, investments in new capacity and energy efficiency, grid upgrades to absorb intermittent renewables, and funding and technical support to address the social challenges of the transition.”
“Scaling Up to Phase Down” sets out the challenges facing developing countries seeking to transition their power sectors, in order to identify pathways to address these issues.
Three key barriers prevent developing countries from accelerating their energy transition. First, renewable energy projects entail prohibitively high upfront capital costs, and many countries lock themselves into costly and high carbon energy choices with inefficient energy subsidies. Second, developing countries face a high cost of capital that distorts their investment choices away from renewables. And third, weak energy sector fundamentals—especially institutional capacities—hinder the scaling of the transition.
The framework distils the energy transition into a “virtuous cycle” of six steps that are foundational for overcoming barriers to renewable energy. The cycle starts with government leadership, which is translated to a supportive regulatory environment, increasingly capable institutions, and instruments to minimise risks, followed by transparent and competitive project allocation, which can deliver renewable energy that serves urgent needs, including energy security, energy affordability, and jobs.
“Widespread energy transformation in developing countries requires continuous, strategic engagement and far more coordination among governments, investors, and partners than exists presently,” said Guangzhe Chen, World Bank Vice President for Infrastructure.
“The World Bank can play a vital role in getting the virtuous cycle started through supporting governments with low-cost and concessional climate finance for transition preparation, utility and network strengthening, and funding affordable clean energy investments.”
The “ Scaling Up to Phase Down” approach also offers solutions for the politically and financially complex challenge of phasing out coal-fired power.
Deeper planning can help mitigate stranded asset risks.