Can the World Bank make renewable energy cheaper?

By Jeff Tyson 02 May 2016

A portable solar system is used in rural Mongolia. What can the World Bank do to help bring down the cost of renewable energy? Photo by: Dave Lawrence / World Bank / CC BY-NC-ND

World Bank President Jim Kim has been a vocal supporter of the Paris climate agreement signed last month by representatives from 175 nations. But Kim is on another climate mission too: to make the specifics of the Paris climate agreement matter less by building the economic case for renewable energy.

Speaking at the World Bank’s spring meetings last month beside Ségolène Royal, France’s minister of the environment, energy and the sea and president of the 21st Conference of the Parties, Kim said that despite a ground-breaking climate change agreement in Paris last year, the international community has to assume that most countries will not live up to their commitments.

“There was a lot of intensity and pressure to make a commitment [in Paris],” Kim said. “But there really was this sense that once you did this, then the pressure would be off.”

What’s important now, he added, is to make renewable energy sources like wind and solar cheaper — to make renewables the best financial option for policymakers around the world so they live up to their commitments not because they are written in a U.N. document, but because it makes the best economic sense.

“So much of the solution is going to be policy change linked to financing, linked to very specific instruments that can bring solar in at [4-5 cents] a kilowatt hour, which would make … the financial argument so powerful that [policymakers] have to move toward renewables,” Kim said.

So what can the World Bank, a multilateral financial institution, actually do to bring down the cost of renewables and make the climate-smart investment case that Kim wants the bank to leverage?

‘Deal teams’ and policy operations

One way the bank hopes to drive down the price of renewables is by making it cheaper and less risky for the private sector to get into the renewable business in developing countries. The bank’s private sector investment arm, the International Finance Corp., set a goal last month to expand its climate investments from $2.2 billion a year to $3.5 billion a year and to leverage an additional $13 billion a year in private sector financing by 2020.

For the rooftop solar sector in particular, the bank is putting in place “deal teams” to facilitate doing business with renewables by combining private sector expertise from the IFC and public sector energy expertise from the bank.

There are a lot of opportunities to install rooftop solar panels in developing countries, said John Roome, senior director of the World Bank’s Climate Change Group, but “often companies that want to install renewable energy find it difficult to access finance at scale.” With so many individual installers trying to break into the industry on their own, costs can be prohibitive.

The bank’s new “deal teams” would work to create a market for these installers. One idea is to develop a fund that smaller companies can access to finance their investments in rooftop solar, without needing to go to an individual retail bank and explain how rooftop solar works, Roome said.

For “deal teams” to succeed in creating promising markets for rooftop solar, they have to tailor their efforts to each individual country, Roome said. This means creating specific instruments like funds for installers, but also working with country governments to identify public sector policy reforms that facilitate such a market.

On the policy side, another way the bank is seeking to make renewables cheaper is through an instrument known as a Development Policy Operation — a tool that encourages countries to reform their policies in exchange for financing.

In Indonesia for example, the bank used a Development Policy Operation to help the government reform its national power utility, making it financially stronger and more credible, allowing in turn more renewable operators to sell their products without risk.

Enabling environments and the case for trade

The price of renewables can only decrease when the appropriate technology and infrastructure is in place to allow them to function effectively. The World Bank is investing in those technological enablers, like battery storage, sensors to predict wind patterns, and evacuation lines that transport power from solar power plants into the main power grid.

Beyond financing and direct investments, the World Bank lends expertise to policy makers working to develop the enabling environment for renewables. Efficient procurement systems in-country, low-interest climate investments and even special trade agreements between neighboring countries can help to make renewables cheaper and more efficient, said Charles Feinstein, director of the World Bank’s Energy and Extractives Global Practice.

Denmark for example, which relies heavily on variable wind power has transmission networks to Norway and Sweden and pays Norway for backup hydropower to keep its power grid running. And places like Vietnam and Pakistan can absolutely replicate such a system with its neighbors, Feinstein said.

The Word Bank also contributes “economic and engineering studies to demonstrate or show clearly to policymakers what the gains of trade would be,” Feinstein added.

Time to act

In his remarks at the World Bank’s spring meetings last month, Kim pointed to Pakistan and Vietnam, where the price of coal is still less than the price of solar and other renewables and warned that if countries such as those invest in “forty gigawatts of coal-based electrical power, that’s a 50 year investment.”

“The thing that I worry about is we’re not yet having the urgent conversations about how to tackle the most urgent issues,” Kim said. “And the good news there is we actually know how to do it, we know how to bring these prices down, but we’re not quite gelled yet.”

Continuing to get that knowledge out, combining it with financing and facilitating private sector investments will over time likely make renewable forms of energy cheaper — strengthening the financial argument for meeting the goals in the Paris climate agreement.

For Kim though, the question is whether the prices will come down fast enough to prevent long-term investments in coal and other alternatives, which at the moment are still all too appealing for policymakers — and on rare occasions, even for the World Bank itself.

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About the author

Jeff tyson 400x400  1
Jeff Tyson@jtyson21

Jeff is a global development reporter for Devex. Based in Washington, DC, he covers multilateral affairs, U.S. aid and international development trends. He has worked with human rights organizations in both Senegal and the United States, and prior to joining Devex worked as a production assistant at National Public Radio. He holds a master's degree in journalism from Columbia University and a bachelor’s degree in international relations and French from the University of Rochester.


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