Financing Sustainable Energy for All

©World Bank/Graham Crouch 

For the global community, universal sustainable energy must be a top priority. We owe it to the 1.1 billion people still living without electricity and the 2.9 billion people still using polluting biomass fuels for cooking and heating. Energy is fundamental to ending poverty as it underpins economic growth and progress in all areas of development—from food security to clean water, education, jobs and health care.

With the declaration of 2012 as the United Nations International Year of Sustainable Energy for All, a number of themes emerged that have formed the basis for our work on energy at the World Bank Group. They also underpin the Sustainable Energy for All (SE4All) initiative, a United Nations-led multistakeholder partnership between Governments, the private sector and civil society. We are aligning the work of World Bank Group with the SE4All agenda so that countries can mobilize finance and move faster towards the targets set for 2030. These goals are: ensuring 100 per cent access to electricity and modern cooking solutions; doubling the share of renewable energy in the global energy mix from 18 to 36 per cent; and doubling the rate at which we use energy efficiently.

SE4All has helped raise the profile of energy-related issues, which was reflected in the inclusion of the Sustainable Development Goal on energy (SDG 7) in the 2030 Agenda for Sustainable Development, unanimously adopted by the United Nations General Assembly in 2015. SDG 7 aims to “ensure access to affordable, reliable, sustainable and modern energy for all.”

PROMISING SIGNS AND CHALLENGES AHEAD

Tracking progress on the three objectives of SE4All highlights promising trends. Between 2010 and 2012, the global electrification rate increased from 83 to 85 per cent, and 220 million people got energy access for the first time. Among other promising trends, modern renewables (hydro, wind, solar and geothermal) grew from 8.4 per cent in 2010 to 8.8 per cent in 2012 of total global energy consumption, while global energy intensity fell more than 1.7 percent a year over the two years of tracking. Still, we need to dramatically accelerate these gains if we want to meet the goals. For renewables, despite enormous strides driven largely by lower technology costs, we need to see annual growth of 7.5 per cent a year, up from 4 percent in 2012. We need to improve efficiency and lower the world’s energy intensity by at least 2.6 per cent a year. And regions with the greatest energy deficits—sub-Saharan Africa and South Asia—need our help to improve energy access.

SE4All’s Finance Committee has made it clear that the current pace of investment in sustainable energy is not sufficient to meet the SE4ALL goals by 2030. Investment in clean energy needs to nearly triple from the current US $400 billion a year to more than US $1 trillion a year.

We believe that this level of private capital is available, but investors tend to be wary to enter new markets that they regard as risky. That's where development partners like the World Bank are making a difference. Working closely with Governments, we are helping reduce risk and build strong, reliable energy institutions. It also means laying out energy-investment prospectuses to attract private capital and identifying a range of financial instruments, such as guarantees, that give investors the confidence they need. In Myanmar, for example, we have been part of a broad effort with a host of other development partners to get the US $700 million National Electrification Plan off the ground. Another World Bank Group initiative, Scaling Solar, is helping countries in sub-Saharan Africa develop utility-scale solar power inexpensively and quickly—in as little as two years—through a "one-stop shop" of advisory and financial services.

Scaling up Financial Flows

The SE4All Finance Committee has explored and adapted a diverse range of interventions to address the overlapping and divergent needs of renewable energy, energy efficiency and energy access projects. The Committee identified four thematic areas that could help to scale up financial flows towards sustainable energy, both in member countries of the Organisation for Economic Co-operation and Development (OECD) and emerging markets.

Scaling up green bonds: Development Finance Institutions (DFIs) have deployed green bonds for renewable energy and energy efficiency to the tune of US $20 billion, comprising approximately two thirds of all issuance since 2007. The Green Bond market has a potential to grow investment rapidly over the next five years. Investors receive the full faith and credit of the DFI issuer, which makes them attractive to OECD investors.

DFIs and private sector risk-sharing structures: The lending capacity of DFIs is not sufficient to finance the global market opportunity for sustainable energy. With the right structure, private sector institutional investors can provide a much-needed additional source of financing. In particular, structuring of cash flows and use of DFI risk mitigation tools, including credit enhancement, could attract institutional investors.

Potential financing structures that can be explored further to catalyse lending could be a DFI and institutional co-investment structure focused on state-owned enterprise borrowers, private project borrowers in emerging markets or a DFI facilitated structure with focus on private sector project borrowers in developed markets. Most of these structures would target local or regional utilities and private developers as loan recipients.

Additionally, multilateral development banks may face capital and balance sheet constraints as they seek to grow their lending activities for sustainable energy. A work-in-progress proposal is to sell or “participate” existing loan inventory, creating a diverse pool of assets, which, with the benefits of a range of de-risking mechanisms, could issue investment-grade securities, tailored specifically for long-term institutional investors.

Enabling new solutions with insurance: Ultimately, the route to lowest cost capital for projects is to lower their risk. Insurance and guarantee products can play an important role in allowing project risks to be identified and managed, and have the potential to play an increasingly important role if addressing specific risks in the project finance process.  The World Bank has already demonstrated success in mobilizing over US $31 billion in financing through US $5.9 billion worth of guarantees in transformative projects, primarily in sub-investment grade and perceivably high-risk countries.

Aggregating small-scale opportunities: Aggregating covers a broad range of financial clustering mechanisms that allow projects to be bundled, with the intention of lowering the overall financing costs or, in many cases, attracting finance to begin with.  It can convert a range of small projects into large pools that can reduce transaction costs and the need for investors, both local and international, to meet requirements such as diversification, scale and liquidity. Some key enablers for aggregation can include grants and concessional credit, feasibility and due diligence studies, and technical assistance.

GETTING TO WHERE WE NEED TO BE

Focusing on all of these approaches could catalyze US $120 billion of incremental annual investment by 2020. Even though these recommendations do not address the identified funding gaps, they do represent achievable opportunities to expand structures that enable public-private collaboration, including innovative risk-sharing that will increase the prospects of mobilizing investment.

Helping partners unite to pool ideas and expertise is the sort of catalyzing effect that SDG 7 will greatly accelerate. And as the world mobilizes to meet SDG 7, there will be direct benefits to progress on other goals, particularly in health, gender equality, jobs and education. These are exciting times to be part of a global community looking for real-world solutions to urgent development challenges. At the World Bank we're confident we can make it happen.