Financing energy transition in developing countries

Financing energy transition in developing countries

To meet climate and development goals, low- and middle-income countries need to transform their power sector infrastructure at a scale and pace that is unprecedented. The World Bank framework “Scaling Up to Phase Down” maps out steps to support developing countries, with the help of development partners, to scale up affordable, secure, and reliable clean energy and phase down coal-fired electricity generation. 

Poorer countries are stuck in a vicious cycle where they pay more for electricity; cannot afford the high upfront cost of clean energy; and are locked into fossil fuel projects. In essence they are paying a triple penalty for energy transition. The poverty trap is becoming an energy trap that is becoming a climate trap.

Developing countries struggle to overcome critical barriers that are paralyzing their power sector transition: high upfront costs of clean energy, costly capital, and weak energy sector fundamentals.

These countries receive only one-fifth of global energy investment despite accounting for two-thirds of the global population. They need affordable financing, especially at the start of their energy transitions, to improve sector conditions and attract growing volumes of private capital.

“Scaling Up to Phase Down” outlines a 6-step vision to help developing countries create a virtuous cycle to accelerate the clean energy transition.  

Scaling Up to Phase Down: Financing Energy Transitions in the Power Sector

Executive Summary

The energy transition in low- and middle-income countries (LICs and MICs) will entail an unprecedented expansion and transformation of power sector infrastructure. This transformation will require a massive scaling up of renewable energy and energy efficiency to meet rapidly growing demand, followed by a phasing down of coal-fired power generation. Analyses on decarbonizing the power sector carried out as part of the World Bank’s 2021–22 Country Climate and Development Reports found that the pace of deployment of renewables-based electricity must accelerate considerably. The installation rate of solar photovoltaic (PV) capacity will have to double or triple in the next decade in Bangladesh, Ghana, Morocco, and Vietnam, compared with current development trajectories. Similar growth will be required in installations of onshore and offshore wind generation capacity, which will have to increase by 30 to 500 percent in the decarbonization scenarios of Bangladesh, Egypt, Jordan, Morocco, Türkiye, and Vietnam. Simultaneously, energy efficiency and demand-side management will need to be reemphasized to reduce capital requirements of the transition and buy time. In Türkiye, energy efficiency investments that could halve the rate of growth in demand would save $1.3 billion annually in new generation capacity, cutting the cost of decarbonization by 20 percent. Once adequate volumes of affordable and reliable renewable energy and energy efficiency materialize, LICs and MICs will also need to retire their coal-fired power plants. Presently, they collectively host 89 percent of the global coal power capacity that needs to be retired or repurposed before the end of its technical lifetime; this puts an estimated $1 trillion in capital costs at risk by 2040. To finance a just transition that is consistent with both the goals of ensuring universal access to affordable, reliable, sustainable, and modern energy by 2030, and the 2015 Paris Agreement on Climate Change, developing countries will have to mobilize far more capital than they do today. (tbc)

Scaling Up to Phase Down (worldbank.org)

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Factbox: Chile lithium move latest in global resource nationalism trend

By Matthew Chye

April 21 (Reuters) - Chile's President Gabriel Boric announced on Thursday he would nationalise the country's vast lithium industry to boost the economy and protect the environment.

The shock announcement is the latest in a trend as countries look to assert greater control over key resources amid intensifying competition for materials that are crucial to the energy transition.

Recent moves by governments globally to take more control of their natural resources:

CHILE

* Home to the world's largest lithium reserves, Chile said it will over time transfer control of its vast lithium operations from industry giants SQM (SQMA.SN) and Albemarle (ALB.N) to a separate state-owned company.

Chile is the world's second largest producer of lithium, a key component in batteries used in electric vehicles.

Last July, Chile's finance minister introduced a tax reform bill that increases copper mining royalties on companies that produce more than 50,000 tonnes a year and raises taxes on high-income earners, increasing state participation in mining income.

In January, a Chilean congressional committee approved the mining royalty bill, putting it a step closer to final approval, despite having drawn strong criticism from industry.

MYANMAR

* In April, Myanmar's ethnic minority Wa militia said it will suspend all work at mines in areas it controls from August, a move that triggered a surge in the price of tin, a material used in electronics and semiconductors.

Myanmar accounted for 77% of China's tin ore imports last year, Chinese customs data showed. The Wa-controlled region is estimated to have accounted for over 70% of Myanmar's tin production in 2022, according to the International Tin Association.

INDONESIA

* A resource powerhouse, Indonesia is tightening controls over various materials in a push to develop local downstream operations and extract greater value.

Once one of the world's biggest exporters of nickel, in June 2020 Indonesia banned exports of the metal's ore while it sought to develop a full nickel supply chain, starting from extraction, processing into metals and chemicals used in batteries, all the way to building electric vehicles.

Last October, President Joko Widodo said Indonesia was exploring a possible ban on tin exports, and calculations about its potential impact had begun, after the world's top tin exporter had already moved to halt shipments of a number of other metals in order to develop more processing at home.

In December, Widodo confirmed an export ban for bauxite starting in June 2023 as scheduled, to encourage domestic processing of a material used as the main ore source of aluminium.

More export bans will also be announced in the coming years in order to develop resource processing industry onshore, he said, speaking at an economic forum.

MEXICO

* In February, Mexican President Andres Manuel Lopez Obrador signed a decree handing over responsibility for lithium reserves to the energy ministry, after nationalizing lithium deposits in April 2022.

ZIMBABWE

* In December 2022, Zimbabwe imposed a ban on the export of unprocessed lithium, in a bid to stop artisanal miners who the government says are digging up and taking the mineral across borders.

Reporting by Matthew Chye Editing by Tony Munroe and Susan Fenton

Factbox: Chile lithium move latest in global resource nationalism trend | Reuters

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Concil on Foreign Relations. Daily News Brief

April 21, 2023

U.S. Treasury Secretary: Decoupling From China Would Be ‘Disastrous’

In a speech yesterday on U.S.-China economic ties, U.S. Treasury Secretary Janet Yellen said (FT) that “a full separation of [the countries’] economies would be disastrous.” While the speech offered a shift in tone from months of heightened tension between the countries, Yellen said that Washington would still prioritize security concerns over economic policies. However, the United States wouldn’t aim to “stifle” China’s development, she said. She also announced plans to visit China, but did not give a timeline.

Meanwhile, Bloomberg reported that Taiwanese officials have asked Washington to tone down its warnings against relying on Taiwan’s world-leading chip sector; some U.S. officials have warned against overdependence on Taiwanese chips given the possibility that China could invade the island. 

Analysis

“Though [Yellen] emphasized that wherever US national security collided with economics, the former would always take priority, her address ought to be interpreted as an olive branch to Beijing,” the Financial Times’ Edward Luce writes.

“Yellen puts highest priority on national security in laying out guiding principles for the US-China relationship. [Chinese President] Xi Jinping did the same in the 20th [Chinese Communist Party] Congress last Oct. This dual focus on security does not provide an off-ramp for conflict escalation!” Yale University’s Stephen Roach tweets.

This Backgrounder "The Contentious U.S.-China Trade Relationship" unpacks the contentious U.S.-China trade relationship

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