August 13th, 2020
The case of solar in emerging markets has clearly shown how effective the World Bank can be in helping to accelerate the diffusion of renewable energy.
As we saw, when the World Bank entered the solar sector, it had very little prior knowledge it could draw on. Like the profiled entrepreneurs, it was a question of learning by doing. This, however, it did to quite some effect: learning the lessons in India, it developed a strong project in Indonesia that, although thwarted by the Asian economic crisis, was replicated in Sri Lanka. Here it took hold and led to the diffusion of 125,000 solar systems by mid 2008 (representing 7 per cent of unelectrified households). Then the World Bank replicated again in Bangladesh (211,000 systems by mid 2008) and China (500,000 systems by mid 2008). It is an impressive track record, and shows the potential for the World Bank to take the lead in helping emerging markets transition to a new, renewable energy infrastructure.
Why focus on the World Bank? First of all, the World Bank has the ‘reach’, with an infrastructure of offices and staff that extends into virtually every emerging market. Second, it has highly trained, highly skilled staff, who, if properly focused on key targets and winning strategies in the renewable energy sector, will be able to deliver unprecedented levels of diffusion. Third, it has the funding: not only does it have long-term debt capital (some of it at very low rates of interest) for lines of credit for users of renewable energy technologies, but it has access to GEF grants. The World Bank is the ideal global institution to help emerging markets accelerate a renewable energy future.
But we have also seen, in the case of solar and the Bank’s rejection of the Million Solar Homes Initiative (MSHI) proposed in 2002, that there is a reluctance in the organization to seize bold targets pertaining to renewable energy and organize its staff and resources around meeting them. Partly, this is due to the inherent conservatism of a large global bureaucracy. Partly, it is because most World Bank professionals are economists, who still think that solar and other renewable energy technologies do not compete, who do not think it is their job to ‘pick’ winning technologies, and who focus more on economic growth regardless of the energy technologies deployed. But a major reason for the Bank’s reluctance is that it remains primarily a poverty-alleviating organization.
It is true that many of the world’s poorest will be hit hardest by climate change, but Selling Solar has shown that the World Bank’s poverty-alleviating mission can dilute the impact of its renewable energy activities. For example, to ensure smooth passage of the Bank’s second follow-on solar project in Sri Lanka, Bank staff decided to target GEF grants at only smaller solar systems, ostensibly for poverty-alleviating reasons. But GEF grants are intended for global environmental benefits, not poverty alleviation. This shift in policy from the first to the second solar project compromised the entire industry by leading more affluent solar customers towards smaller systems, and thus smaller margins for the supplying firm and less satisfaction for the user. If anything, from a global environment perspective, you want a financially strong solar industry on the ground, and you want customers to be buying bigger solar systems, so that their entire needs are eventually met with solar, their satisfaction levels are very high, and they recommend similar systems to their family and friends.
At the 2008 World Economic Forum in Davos, Switzerland, the UK Prime Minister recognized this tension in the World Bank and called for it to be overcome:
I can’t see why we should not move immediately to the World Bank becoming a World Bank for the environment as well as development. …
We need a global carbon market and we need a climate change agreement… and we need an institution that is global and can provide funds for the developing countries that want to introduce alternative sources of energy.9
For its part, when it comes to addressing climate change through renewable energy and energy-efficiency projects, the World Bank feels it is on track. It issued a press release towards the end of 2007 that proclaimed it had significantly exceeded the targets it agreed to at the Bonn Renewable Energy Conference in 2004. Its Bonn goal was US$913 million of new renewable energy and energy-efficiency projects between 2004 and 2007, and in the end it actually doubled this, delivering US$1.8 billion. Moreover, it said this represented an increase from 12 per cent in the early 1990s to 25 per cent of the World Bank’s total energy-sector lending.10
While on the face of it, these are impressive results, they go nowhere near the amount of lending required by the climate crisis and opportunities for renewable energy in emerging markets. The paradigm shift towards renewable energy that one Bank employee referred to in the early 1990s is still going on. It’s just not clear that the world can afford to wait any longer.
In light of the Bank’s demonstrated success in the solar sector, and in generally increasing its lending for renewables and energy efficiency, it is time for the majority of the World Bank’s shareholders to mandate that 100 per cent of all its energy-sector lending be for renewable energy and energy-efficiency projects. Projects like the 4000 MW complex of coal-fired power plants, called the ‘Ultra-Mega Complex’ in Gujurat, India, would simply be off the table.11 There is no reason why such projects under normal economic conditions cannot be financed by the private sector, independent of World Bank assistance. And if they cannot, then the question should be raised whether a public-sector organization like the World Bank should be financing them in the first place.
Moreover, the Bank will also need to consider some internal restructuring. When it comes to renewable energy, the Bank needs to approach diffusion like a business: select the renewable-energy technologies with the potential for immediate deployment, select the attractive segments where there is a demand, select the strategies that have been show to work, and then allocate and drive resources towards ambitious targets, as agreed between senior management and the Bank’s Board.
The suggestion that the World Bank house and manage a Fund to target 100 million solar homes by 2025 falls precisely into this category of new initiatives. Solar has already shown it is a winning technology in unelectrified areas of emerging markets. Moreover, the World Bank has also identified winning policies to help drive its diffusion forward. The key task now is to roll out a much larger programme that would meet much more ambitious targets than, for instance, 1 million solar connections by 2010 (the current World Bank trajectory). The new targets would instead call for 100 million solar connections by 2025, representing 25 per cent of today’s unelectrified population and equivalent to a hundredfold increase in cumulative solar installations in emerging markets between the years 2000 and 2025. There would be annual targets to be met towards this goal, there would be a dedicated team for consistency and retained learning, and there would be a clear motivating mission and objective for all involved.
In addition to solar, for instance, you could imagine other parallel divisions that were dedicated to achieving 100,000 MW of wind energy capacity (the total current installed capacity globally) in emerging markets by 2025, or the diffusion of 100 million biogas digesters for smokeless cooking by 2025. Similar targets could be set for solar water heating, micro-hydro stations, geothermal units, bio-fuels and so on, and separate divisions, each with a separate executive and dedicated team, would be tasked with delivering the numbers in conjunction with client countries.12
World Bank staff will say their job is to respond to client needs, and not to push solutions on them. But the reality is that, through its negotiations for each project, it is always advocating the technologies or the approaches that are deemed best. When it comes to renewable energy, and accelerating its diffusion, the World Bank would make this implicit approach more explicit. It would become a mission-driven organization, making new technologies and approaches known to its client countries, sharing best practice and the best technological solutions known across geographical boundaries and continents, and actively encouraging the uptake and diffusion of renewable energy. There is no question that its client countries, and their populations, want these solutions. But they may not fully know about their potential, know how to deploy them, know how to accelerate their diffusion, or have the necessary funds. The World Bank would be the source both of this knowledge and of this funding.
This is not how the World Bank works today in the energy sector. But if it is to fulfil its nascent role of helping to tackle climate change, it will have to consider how to dramatically accelerate the diffusion of renewable energy across the emerging markets. In turn, it will need to reform and re-energize itself to properly address this challenge. Some politicians, such as the former President of France, have suggested the need for an independent global institution to tackle global environmental challenges.13 But when it comes to emerging markets, one already exists – the World Bank.