Towards a Sustainable Energy Future

Transcription

1 World Bank Global Issues Seminar Series Towards a Sustainable Energy Future Note for Participants 1 Jamal Saghir and Kyran O Sullivan The World Bank This Note is intended to be a short introduction to issues of sustainable development and does not aim at a comprehensive treatment. A reading list is appended so that participants can refer to these publications which treat the issues in depth. The findings, interpretations, and conclusions expressed here are those of the authors and do not necessarily reflect the views of the Bank s Management, Board of Directors of the World Bank or the governments they represent. 1. Introduction Affordable and reliable energy services underpin economic and social development in rich and poor countries alike. Energy and economic growth. Energy services matters more than ever in the global fight against poverty, because these services underpin economic growth that provides jobs in developing countries where they are sorely needed. Most economic activity would be impossible without energy, even the small scale village and household enterprises in developing countries that are the main source of income for the poor in those countries. The services that hydrocarbons and electricity provide motive power for industry and agriculture; transportation of people and goods; heating and cooling of workplaces, power for appliances increase productivity and economic output. Thus economic growth that creates jobs and raises incomes depends on greater access and more efficient use of energy services and their constituent energy resources. Fig. 1. Energy Consumption and Economic Growth Source: World Bank, World Development Indicators database 1 John Besant-Jones contributed to this Note. Commercial energy use per capita (kilograms of oil equivalent) GNP per capita (US$ adjusted for purchasing power parity)

2 Energy and human development. The importance of energy services for social development is reflected in the association between energy consumption and human development. Figure 2 shows the strong correlation between commercial energy consumption and UNDP s Human Development Index. This index is composed of human development indicators that reflect achievements in the most basic human capabilities leading a long life (life expectancy), being knowledgeable (educational achievement), and enjoying a decent standard of living (income, measured in purchasing power parity terms). Fig. 2. Energy Consumption and Human Development Source: UNDP Far from being affordable and reliable, the reality today in many of the world s poorest countries is that energy services are expensive and often only intermittently available. Lack of reliable energy services in these countries imposes a huge cost on industry and commercial firms undermining their competitiveness and therefore their ability to expand and provide employment. This situation entrenches poverty, constrains the delivery of social services, limits opportunities for women, and erodes environmental sustainability. Much can be done at the national and sub-national levels to ensure sustainable energy development. Governments are responsible for removing institutional and regulatory barriers that prevent energy companies from delivering modern fuels and electricity, to regulate environmental performance of energy supply and consumption and to mobilize financial resources for investments in energy infrastructure and services. Legislators and policy makers in national and local governments should take the lead in linking energy planning to meeting economic and social development goals and in sustaining political commitment to sound energy sector management and governance. However action at the national and sub-national level alone is not enough to ensure sustainable energy development. There are also global aspects to sustainable energy development that require international consensus building, coordination and action. This Note addresses these aspects from a number of points of view: 2

3 2. Energy Security energy security; energy and poverty reduction energy and environment; investment for energy development; energy technology development and deployment; and energy trade The precise meaning of energy security will vary by country. For energy producers, energy security is the ability to secure long term and attractive markets for their natural resources that often underpin their economies. For the developed and developing countries, energy security is the reliable and affordable supply of energy that enables their economic development and supports a high and growing quality of life. For the World Bank, energy security means ensuring countries can sustainbly produce and use energy at reasonable cost in order to: Facilitate economic growth and, through this, poverty reduction; and Directly improve the quality of peoples lives by broadening access to modern energy services. Economic disequilibrium can result if energy supplies do not meet demand. The latest forecast of the International Energy Agency show global energy demand increasing by more than 50% by The IEA concludes that the world s primary energy resources are adequate to meet the projected increase in energy demand. Proven reserves of gas, oil and coal far exceed the cumulative amounts of that will be consumed and more reserves will be added during that time. But developing these resources and ensuring that demand is met will require a huge amount of investment at every point in the energy supply chain. If the investment is not forthcoming or is delayed, then shortages, price increases and price volatility may impede economic growth in developed and developing countries alike. Increasing interdependence should be matched by increasing cooperation between producing and consuming countries. There will be a pronounced shift in the geographical sources of incremental oil and natural gas supplies over the next several decades and energy demand growth will be increasingly concentrated in the developing countries. International trade in primary energy will necessarily have to expand to accommodate the growing mismatch between the location of demand and that of production. As energy markets become increasingly global, integrated and interdependent, enhanced policy dialogue between the governments of importing and exporting countries will be essential in addressing energy security risks over the long-term. For all countries, there is a vital common interest between producers and consumers and between rich and poor countries, in ensuring sustainable supply of the energy needed for a growing global economy. 3

4 Oil price increases and volatility impact severely on the poorest countries. The attention directed towards the issue of energy security by the international community has been greatly heightened by the increase of oil prices to record levels in nominal terms since 2002 which has contributed to high volatility and rising energy prices overall (Fig 3). Rising and volatile energy prices pose a risk to the world economy and to all countries, but the poorer oil importing countries are the least able to cope with increased prices. The increase in the oil bill has been particularly severe for a number of countries that combine high energy intensities with a heavy reliance on imported oil as the main source of energy. For these countries, even the relatively modest hike in oil prices between 2003 and 2004 (data for 2005 are not yet available) has implied increases in their oil bills of between 1.5 and 5 percent of GDP. Extrapolating from this for 2005 implies hikes of more than 3 percent of GDP and perhaps as high as 10 percent in some cases. Fig. 3. Crude Oil Prices (Brent) ($/bbl) Source: Platts 3. Energy and Poverty Reduction Energy and the MDGs. Modern energy services that provide lighting, cooking, heating, refrigeration, transportation, motive power and electronic communications are indispensable to increasing productivity, creating enterprises, employment and incomes, and accessing safe water and sanitation, as well as health and education. Energy must play a more prominent role in strategies to achieve the eight Millennium Development Goals (MDGs) which range from halving extreme poverty to halting the spread of HIV/AIDS and providing universal primary education, all by the target date of 2015 that are the agreed basis of poverty reduction actions by all the world s countries and all the world s leading development institutions. 4

5 Some glaring statistics (Box 1) illustrate the scale of energy deprivation faced by the poor. Without access to modern energy services, the poor are deprived of opportunities for economic development and improved living standards. Box 1. Energy and the Poor Fact Sheet 1.6 billion people lack access to network electricity. In the absence of vigorous new policies, 1.4 billion people will still lack electricity access in 2030 only 200 million fewer than today 4 out of 5 people without electricity live in rural areas of the developing world, mainly in South Asia and sub- Saharan Africa 2.4 billion people rely on traditional biomass wood, agricultural residues and dung for cooking and heating. This will increase to 2.6 billion by 2030 without change in policies Poor people in developing countries spend up to a quarter of their cash income on energy As of 2004, the richest 20% of the world s population consume 58% of total energy, whereas the poorest 20% consume less than 4% The world s billion poorest people use only 0.2 tons of oil-equivalent energy per capita annually, while the billion richest those earning on average over US$20,000 a year use nearly 25 times as much High transaction and unit investment costs constrain electricity service provision in rural areas because of low demand and dispersed populations. The cost of connections can range from $400 to $1,000 for households that may only consume $4 of electricity per month 1.6 million women and children die prematurely from indoor air pollution caused by burning solid fuels in poorly ventilated spaces. 40 new million new cases of chronic bronchitis are caused by exposure to soot and smoke every year Low grade fuels and poor environmental controls in transport and industry are a leading cause of severe urban air pollution in the fast growing cities of developing countries. More than 80% of all deaths in developing countries attributable to air pollution-induced lung infections are among children under 5. A range of pro-poor energy policies are available to policy makers. There are many options for improving the poverty reduction focus of current energy policies. These policies would span not only the provision of electricity but all basic energy services in urban and rural areas safe and clean fuels for cooking, heating, mechanical power, and transport; electricity for household lighting, and power for social services and productive uses. Among the more important pro-poor policy options to consider are the following: Establish effective regulatory frameworks and policies for rural and off-grid areas for various types of providers of energy services. These regulatory frameworks would stimulate local community participation; remove barriers and develop the roles of local entrepreneurs in providing energy services under new business models; and mobilize women s groups to find location specific solutions for meeting energy needs. Formulate policies to provide energy services to the poor in close co-operation with electricity service providers, such as establishing power distribution entities 5

6 that have viable mixes of urban and rural power markets, and including public service obligations when granting concessions. Focus subsidies on the public good component of energy services, using transfer mechanisms that are targeted, predictable and transparent to benefit the poor, whilst ensuring full funding of these subsidies. Charge prices for energy supply and services supported by regulatory and tax policies that remove distortions favoring forms of energy or energy technologies in energy markets, by taking account of both economic and environmental costs and benefits. Design and implement grid and off-grid renewable energy programs; programs for sustainable use of biomass resources; and new efficient technological standards aimed at promoting the use of cleaner cooking fuels for the poor and cleaner energy for heating, cooling, industrial processes and power generation. A strengthened focus on household energy, particularly the sustainable production and use of biomass requires special attention since this is often the only fuel available to the extremely poor. Urban power distribution companies can be supported in the formulation of policies targeting the poor. Governance structures should give a voice to those concerned, including poor consumers and the poor who lack any modern energy services. Country-specific energy strategies to help achieve the MDGs will be vital. It is also important to work up-stream for example by supporting evaluations of energy-poverty linkages in country poverty assessments so that long term national energy poverty reduction strategies incorporate energy strategies and plans. In this regard it is important to link actions in the energy sector with complementary activities in other areas (finance, institution building) and sectors such as agriculture, health, education, and enterprise development. International ODA and IFI support for energy programs will continue to be critical. Often this support will be best applied when it leverages the complementary roles of public and private investments (both local and international) and when it facilitates the comparative strengths of different stakeholders to manage different risks through public/private partnerships in a coordinated effort to expand energy services to the poor. Mobilizing and coordinating long-term commitments from development partners to scale up energy investments, transfer knowledge and deploy financing instruments for leveraging private capital and resources, particularly for countries with the largest concentration of the energy poor such as those in Sub-Saharan Africa and South Asia will be key. 4. Energy and the Environment The links between energy and the environment are many and profound and the impacts are both at the local and global levels. The increased supply and use of energy has environmental impacts both locally in the form of pollution from cooking fires inside 6

7 dwellings as well as urban air pollution and globally, through massive increases in emissions of greenhouse gases. Greater use of fossil fuels means increased emissions of carbon dioxide (CO 2 ) the main Greenhouse gas (GHG). However, it is high levels of exposure to the by-products of fuel combustion, particularly dust and soot, that is the more immediate problem for human health in many developing countries. These local pollutants directly affect the health, life expectancy, and quality of life of anyone who is exposed to them at moderate or high levels. 4.1 Climate Change Climate change is a serious and urgent issue. The climate is already changing, and we are already seeing significant impacts. The global mean surface temperature has increased by about 0.6 degrees Celsius over the last 100 years, and is projected to increase by a further 1.4 to 5.8 degrees Celsius by The spatial and temporal patterns of precipitation have already changed, sea levels have already risen centimeters during the last 100 years, glaciers are retreating world-wide and the thickness of sea ice in the Arctic has decreased. The governments of the world face today possibly one of the greatest challenge of the new millennium: how to fulfill the promise of economic growth for the prosperity of all while preventing that growth from irreversibly changing the planet s climate. In fact, the two are irrevocably linked: sustaining global prosperity becomes increasingly difficult with a climate that continues to become warmer and more unstable. But economies cannot grow without increasing energy consumption; and today energy generation is primarily dependent on carbon-emitting fuels that result in global warming. The way that energy and environmental challenges are addressed in the next two decades will, to a large degree, determine sustainable growth, environmental quality, and national security. The main driver of the increase in GHGs is the rise in carbon dioxide from the burning of fossil fuels. The main sources of GHGs, in order of global importance are electricity generation, land-use changes (particularly deforestation) agriculture and transport. Climate change, poses issues for the continued growth in use of fossil fuels that for more than 200 years have been the most convenient and cost effective fuels for modern economic development and are likely to continue to have cost advantages (excluding any consideration of possible externalities) in some important uses for a long period to come. As the impact of climate change disproportionately affects the health and well-being of the poor, this agenda is of a global issue of mainstream importance to the poverty-reduction and economic development agenda. The current pathway of GHG emissions is unsustainable. Energy use, agriculture and deforestation in developed countries has to date largely driven increases in greenhouse gas emissions but much of the future growth in emissions will be in developing countries. Forecasts of increases in energy use under a Business As Usual scenario which assumes the continuation of historical trends into the future and that the structure of the global energy system remains unchanged would see world primary energy demand expand by almost 60% from 2002 to 2030, an average increase of 1.7% per year. Some countries 7

8 are taking measures to promote clean energy development including the development of non-carbon technologies but it is clear that we will have to go far beyond the kind of actions currently underway if greenhouse gases are to stabilized at an acceptable level. Collective and sustained collective action will be required. An effective response to climate change based on international understanding that its causes and potential impact require collective action. 4.2 Air Pollution and Its Impacts Air pollution from energy use is a global public health hazard. Most industrialized countries-which used to have high levels of urban air pollution have managed to clean the air in their cities, despite high per capita energy use. However in developing countries local air pollution is an immense problem. Exposure to smoke and soot has been estimated to cause as many as 4 million premature deaths each year, 40 million new cases of chronic bronchitis, and widespread cases of other respiratory illness. Particles less than 10 microns in diameter cause cardiovascular disease, chronic bronchitis, and upper and lower respiratory tract infections. Significantly, poor children are disproportionately affected because of their exposure to dirty cooking fuels. Pollution by small particles is particularly harmful. Lead exposure from use of leaded gasoline is another global public health hazard. Lead is one of the most toxic substances that large populations around the world are exposed to from the exhaust gases of vehicles and other sources. It is a treacherous poison: at lower levels of exposure, no obvious symptoms may occur, but children exposed to lead become less able to learn and build social contacts, becoming disadvantaged during their life. The use of lead additives in gasoline has been one of the main sources of exposing urban populations to lead. Ecosystems are also affected by pollution form energy use. As well as harming human health, air pollution damages ecological systems. Emissions of SO 2 and NO X, react with other chemicals in the atmosphere to form sulfuric and nitric acid, falling back to the earth mixed with rain. This acid rain-which sometimes falls thousands of kilometers from the original source of pollution-has been found to damage crops, forests, rivers, and lakes. Air pollution likewise has a detrimental effect on agricultural production. National actions to reduce local pollution. In addressing local pollution the first step is to capture the win-win opportunities that, through economically attractive solutions, provide environmental benefits at no additional cost. These opportunities include, at the very least, energy sector reform and restructuring; energy-efficiency improvements, both on the supply and on the demand side; and a switch to less polluting energy sources. Energy sector reform that introduces competition between alternative energy forms and suppliers and that allows market prices give the right signals to producers and consumers alike, promotes the shift from polluting to clean energy use. Reducing local air pollution beyond the level of win-win implies additional cost. Usually the financial cost of abatement (e.g. for emission standards in power generation) is small compared to the 8

9 value of the health and environmental damage that can be avoided. It is therefore important for policy makers to factor in these externalities. However, when moving beyond win-win measures, careful analysis of relative costs and benefits of alternative policies is essential in helping countries pursue a least-cost path. Scope for international action in addressing local environmental impact of energy use. Although dealing with local air pollution that does not have trans-boundary impact is largely a matter for national-level activities, there is still considerable scope for international action. Lead phase out from gasoline is an example. The adoption of harmonized regional specifications for transport fuels and pricing is desirable, as it helps eliminate the occurrence of fuel smuggling and fuel adulteration. Furthermore one of the critical factors inherent in achieving the regional lead phase out is the timing of the promulgation of revised fuel quality specifications by governments. Regional agreement on the timing permits oil companies (that supply regional markets) make informed investment decisions on refinery reconfiguration. 5. Investment Converting the world s resources into available supplies will require massive investments. According to the IEA meeting projected demand will entail cumulative investment of some $16 trillion from 2003 to 2030, or $568 billion per year. The electricity sector will absorb the majority of this investment. Developing countries, where production and demand are set to increase most, will require about half of global energy investment. Those countries will face the biggest challenge in raising finance, because their needs are larger relative to the size of their economies and because the investment risks are bigger. The global financial system has the capacity to fund the required investments, but it will not do so unless conditions are right. The power sector in developing countries will account for more than half of global investment through World electricity demand is projected to double between 2000 and 2030, growing at an annual rate of 2.4% To meet the expected growth in electricity demand through 2030, cumulative investment of $10 trillion in power-sector infrastructure will be needed equivalent to 60% of total energy-sector investment. The power sector in developing countries will require more than half of the global investment, exceeding $5 trillion. There is scope to reduce the barriers to investment in the power sector in developing countries. Governments in developing countries cannot themselves finance investments of the magnitude required. They will increasingly have to rely on domestic and international capital markets. However many developing countries still face significant barriers to investment. While most of these barriers affect the investment climate in the country as a whole others are power sector specific. A survey carried out by the World Bank in 2000 concluded that the most significant barriers to investment in the power sector in developing countries is weak legal protection for investors, absence of multilateral guarantees and weak consumer payment discipline. The study pointed to 9

10 several priorities for governments seeking to attract and retain international investment in the power sector. The findings apply equally to attracting domestic private investment. Ensure adequate cash flow in the sector. Among the highest priorities identified by investors were adequate tariff levels and collection discipline. Investors are unlikely to consider an investment if these conditions are not present. Maintain the stability and enforceability of laws and contracts. A clear and enforceable legal framework is important for investors. They require that the rules of the game to remain credible and enforceable not altered at the government s convenience once they have made investment decisions based on those rules. A government s willingness and ability to honor its commitments are key. Improve responsiveness to the needs of investors. Investors identified government unresponsiveness to their needs and time frames as the most important factor in the failure of investments. And they considered the administrative efficiency of a host government one of the top factors in their decisions to invest in a country. Completing better preparation of transactions before inviting investors to participate can help reduce processing delays and the related opportunity costs for investors. Minimize government interference. Investors are most satisfied with investment experiences when they are free to realize returns from their investments without government interference. Where investment experiences were successful, investors pointed to their ability to exercise effective operational and management control of their investments as a key factor. And when investors consider investing in a country, they give much weight to the independence of regulatory processes from government interference. 6. Energy Technology Development and Deployment Achieving a truly sustainable energy system will call for technological breakthroughs that radically alter how energy is produced and used. These new forms of energy and associated technologies that may radically transform energy systems are yet to come into clear view (hydrogen, fuel cells etc). In the meantime, the enhanced energy technologies that are available today can be fostered by government action so that they gain market share which in turn will make them more cost effective. Fossil fuels are expected to remain the backbone of primary energy supply for several decades unless radical changes occur in the energy spectrum. This underscores the need for high-performance technologies permitting continued use of existing fuels and exploitation of new fuels, as well as abatement of greenhouse gas emissions, particularly in power generation. New and less costly technologies for fossil fuel use are being developed including CO 2 sequestration. 10

11 Energy efficiency can help GHG emissions. Energy-efficient technologies in homes and in the workplace can significantly reduce CO 2 emissions from power generation and dependence on energy imports. Sizeable fuel efficiency gains are within reach in the transport sector. Renewable energy has the potential to contribute to sustainable energy development in several respects. Given the forecast massive increase in energy use by 2030 the world must become radically less carbon intensive. Essential for this change are significant increases in the use of renewable energy and gains in energy efficiency. Renewables can also contribute to energy security by broadening the portfolio of options for energy resources and for reducing dependence on fuels with significant price volatility and availability concerns. For countries that import a large share of their primary energy requirement reduced dependence on imported fuels improves their balance-of-payments accounts and can free fiscal space for other needed spending. Renewable energy in power generation solar photovoltaic systems can play a part in increasing electricity access especially in areas where cost considerations rule out grid extension Geothermal, hydro and wind account for most of renewable s share in energy demand today. Renewable today energy still accounts for only 3% of the world s total primary energy demand. Hydropower is the largest renewable source, while new renewables such as solar and wind each accounts for only a small fraction of global energy demand 2 and under current policies will increase to just 4% by European governments currently favor using renewables as a way to reduce CO 2 and have national targets for increasing the use of renewables. Several developing countries such as China and Brazil also have programs to promote renewables. However new government policies that push for faster deployment of more efficient and less polluting technologies will be important to achieve a much bigger share of renewables than the 4% currently forecast in the future as under present conditions, renewables are, on average, more expensive than fossil fuels in large grid-connected power generation. More vigorous policies to deploy renewables in power generation will likely cause their unit costs to fall. Many developing countries have begun to focus on renewables in rural electrification. Several renewable energy technologies are potentially the least-cost option for mini-grid applications. Mini-grid applications are village- and district-level networks with loads between 5 kw and 500 kw not connected to a national grid. A 2 Biomass in some countries is a sustainable renewable energy source but in many countries its use is unsustainable over the long term. Biomass accounts for 11% of world primary energy demand in 2002 (IEA.2004) 11

12 recent economic assessment carried out by the World Bank (Fig 4) indicates that numerous renewable energy technologies (biomass, biogas, geothermal, wind, and microhydro) are the potential least-cost generation option for mini-grids, assuming a sufficient renewable energy resource is available. Two biomass technologies biogas digesters and biomass gasifiers seem particularly promising, due to their high capacity factors and availability in size ranges matched to mini-grid loads. Since so many renewable energy sources are viable in this size range, mini-grid planners should thoroughly review their options to make the best selection. Fig. 4. Current (2204) and forecast (2015) generating costs 5kW- 500kW (mini-grid) 7. Energy Trade Trade binds suppliers and customers in mutually beneficial dependence. In many regions, neighboring countries are seeking to develop energy trade for a number of reasons. Energy trade can advance regional economic integration. Regional power trade helps build institutions and relationships that, as part of a wider network of institutions, can help integrate a region economically and politically. Joint 12

13 energy project development can help build closer ties between countries through closer collaboration and increased economic inter-dependence. Trade can underpin energy security. Trade can increase reliability of energy supply by making lower cost supplies in neighboring countries available Cross-border energy supply often also provides greatly enhanced diversification of energy sources - a key component of energy security. Stable long term agreements between countries are necessary for trade to flourish. Many national markets, especially in Africa, are too small to justify the investment needed to develop particular energy supply opportunities. Joining national markets can provide the economies of scale to overcome this. As markets mature and competition is introduced, the integration of small neighboring markets can provide the scale necessary for competition to be effective. Interconnection of contiguous power networks can capture significant economies of scale. The price of electricity generation in grid-based systems varies enormously from one country to the other, depending on the availability of hydroelectric resources, the cost of fuel, and many other factors. Significant benefits can be achieved through interconnecting electricity transmission networks and integrating power system operations. In a regionally integrated power system, the direct benefits accruing to each power sector include reduced operating costs, increased efficiency, lower energy costs and increased system reliability. In an interconnected network, operating costs are lower due to development of the least-cost regional energy resources. In addition, a large capacity energy resource that requires additional infrastructure costs for transmitting the power can be justified to serve a larger regional demand that would otherwise be too large to meet national demand. Through aggregating national demand of contiguous systems, regional integration creates sufficient demand to justify large investments that would otherwise not be economically feasible at a purely national level. 13

14 World Bank Global Issues Seminar Series Towards a Sustainable Energy Future Reading List Fuel for thought : an environmental strategy for the energy sector. World Bank, Stern Review on the Economics of Climate Change; HM Treasury, UK, The Impact of Higher Oil Prices on Low Income Countries and on the Poor, ESMAP, World Bank, World Energy Outlook, International Energy Agency, Paris, Energy and Poverty: Myths, Links, and Policy Issues, Jamal Saghir, Energy Working Note No 4, World Bank, Renewable Energy for Development. World Bank Website ~theSitePK:336806,00.html The Energy Challenge for Achieving the Millennium Development Goals, United Nations, $File/UN_ENRG_paper.pdf Sustainable Power Sector Reform in Emerging Markets - Financial Issues and Options Joint World Bank/USAID Policy Paper Deloitte Touche Tomatsu, What International Investors Look For When Investing In Developing Countries. Results from a Survey of International Investors in the Power Sector. Discussion Paper No. 6, Ranjit Lamech and Kazim Saeed. World Bank ~theSitePK:336806,00.html Mobilising Energy Technology International Energy Agency, Technical and Economic Assessment: Off Grid, Mini-Grid and Grid Electrification Technologies, Discussion Paper, Energy Unit, Energy and Water Department, The World Bank, November ~theSitePK:336806,00.html 14