Why Building Stronger Institutions—and Narratives—Are Key to the Energy Transition

The World Bank recently released an important new report cleverly titled “Scaling Up to Phase Down: Solutions to Finance the Energy Transition in Developing Countries,” which tackles one of the key challenges facing the global development community: How does the international community help low- and middle-income countries overcome the barriers to transitioning to clean energy??

If you’re on the fence about diving into a heady report before a three day weekend, I’d urge you to take a look—its authors do an excellent job of articulating the challenges of financing the power sector transition and the six-step “virtuous cycle” that governments can use to create the right conditions for change.?

The World Bank also convened a panel to discuss the report, which I had the privilege of moderating. During the discussion, two key points in particular stood out to me.?

The first was focusing on strengthening institutions before financing. We talk often about the lack of access to capital, but less appreciated is the importance of having strong institutions. Alexia Latortue , Assistant Secretary for International Trade and Development at the U.S. Treasury, noted that having utilities that are well-run, transparent and data-driven will lower risk for developers and go a long way toward attracting private sector funding.?

There’s obviously a lot of urgency around decarbonizing the power sector, and strengthening institutions takes time. But the World Bank’s Demetrios Papathanasiou points out that once the cycle is implemented, its results are rapid. Institutions with a pipeline of bankable projects attract a large volume of high-quality investors, which in turn boosts the confidence of the institutions. This motivates the government to dedicate even more resources to the institutions. “When we get the right results then we get to this really positive cycle that moves on and on,” he said.?

The second point is the importance of narrative. Febrio Kacaribu , from Indonesia’s Ministry of Finance, said that a crucial piece of establishing the country’s ambitious Just Energy Transition Partnership (JETP) entailed clearly communicating with stakeholders, ranging from MDBs to the private sector, and ensuring everyone is on the same page.?

“A lot of people talking about blended finance, but a lot of times this is actually about blended effort to come up with the solutions together in terms of pricing discovery, in terms of understanding the contract, in terms of how are going to find solutions together,” he said. In creating the JETP, which aims to mobilize $20 billion in public and private financing over the next three to five years, “we found the common language and we achieved our own consensus in terms of commitment together.”?

The role of government in all of this is two-fold, said Bezos Earth Fund’s Paul Bodnar : A tactical scaling up of resources while strategically phasing down—the latter part, he said, is “the really thorny part in terms of political economy,” and why governments should operate strategically rather than tactically.?

“You have these trillion dollars…of which 550 billion is public capital tied up in assets that we're actually trying to pull out offline before the end of their technical lifetimes or economic lifetimes,” he said. These assets have real value, and the private sector will struggle to lead the way toward solutions. “We're not going to decarbonize emerging economies by pushing money through a straw from north to south no matter how good the channel or how nice the straw,” he said. “So we need to build local financial capacity and build from the bottom up.”

What’s clear from the conversation is that the money for the energy transition is there. The challenge is creating a framework that inspires confidence, and building the narrative that the tools for decarbonization already exist—we just have to use them.