Sustainable Energy Sector Development

1. Sustainable Energy Sector Development The World Bank Group Paul de Sa Manager Oil, Gas, and Mining Sustainable Energy Department The World Bank International Congress Energy Day Lima, 3 July 2012

2. Outline Overview • Key challenges • Main barriers to be tackled • Lessons from past experiences • Opportunities for the future

3. World Bank Group Investing in Energy Tackling the Challenge

4. Challenges Almost $1.5 trillion a year in 2010 US$ is required in energy supply investment to 2035. Source: IEA 2011.

5. Challenges Without further action, by 2017, all CO2 emissions permitted in the 450 scenario will be locked in by existing infrastructure. Source: IEA 2011.

6. Challenges Despite falling prices, renewable subsidies of $66 billion in 2010 (against $409 billion for fossil fuels) will reach $250 billion in 2035 with rising deployment. Source: IEA 2011.

7. Challenges • 1.3 billion people lack access to electricity, majority of them in rural areas. • Access to electricity and per capita emissions are inversely correlated. Note: Size of each bubble is proportional to the country’s CO2 emissions per capita.

8. Principal Challenge The challenge is to balance the twin objectives of greater supply and sustainability Shift to more environmentally sustainable energy sector development Improve access and reliability of energy supply

9. Energy and Human Development UN Sustainable Energy for AllA Global Initiative of UN Secretary General Three goals for 2030:

10. Main Barriers Multiple barriers must be overcome to tackle the twin challenges of adequate supply and reliability, and environmental sustainability • High financing and investment needs • Weak institutional capacity at national and local levels • Lack of enabling policies and regulations • High and volatile oil prices • Untargeted subsidies • Low affordability and willingness to pay for energy services

11. Example of barriers High financing and investment needs Clean energy finance: demand and shortfall • ~$2.1 trillion needed annually through 2035 to meet global energy demand while maintaining 450 ppm pathway • ~$600 billion of this amount needed to cover incremental costs of clean energy technologies – and current global clean energy investment falls far short of this level

12. Example of barriers High and volatile oil prices Oil price increases since 2009 have tempted a number of governments to reverse subsidy reform • Universal price subsidies remain common. • Weaker political legitimacy has led several governments to freeze prices. • Net oil exporters are far less likely to pass through world oil price increases. • LAC as a region has fared well, with least pass-through for kerosene.

13. Example of barriers Untargeted fuel subsidies Hypothetical universal price subsidy for LPG

14. Example of barriers Untargeted fuel subsidies Subsidies deter investment and healthy competition, ultimately harming consumers and the economy • Investments dry up because they are not financially attractive or even sustainable, resulting in refineries and power plants in state of disrepair • Iraq, Iran, and Nigeria are all petroleum product importers • Fuel and power shortages become frequent, requiring expensive back-up power generation • Black markets flourish, and the poor may even end up paying more than in the absence of subsidies • Fuels are smuggled out, with subsidies benefiting neighboring countries • Subsidized fuels are used to adulterate more expensive fuels, damaging vehicles and equipment

15. Access to power Past experience Tackling the Challenge Lessons from past experience offer valuable guidance • No universal institutional model to tackle the electricity access gap – need customized solutions: • Centralized and decentralized • Public or private • Public-private partnerships • Explore all options: off-grid, cooperatives, pro-poor financing methods, affordable lifeline rates, sharply targeted subsidies • Sound operational and financial performance should be ensured through improved institutional and technical capacity and governance • For the very poor, promoting productive applications for energy interventions is most important to improve access and affordability

16. Energy subsidies Past experience Tackling the Challenge • Subsidies are generally damaging and inefficient • Governance: Vulnerable to widespread corruption • Public expenditure efficiency: Inefficient use of limited government resources • Equity: Benefits accrue disproportionally to the rich • Business creation: Deter private sector investments • Environment: Low natural gas and power prices are usually the main reason for gas flaring • Targeted subsidies are possible for electricity and natural gas, but vigilance is needed to discourage subsidy creep • Lifeline rates have a tendency to grow • Targeted subsidies are far more challenging for liquid fuels • Liquid fuels are much easier to transport and store • Chemical markers, dyes, policing, and other means have not been successful in stopping diversion to black markets and other illegal activities • Social protection mechanisms for the poor are much better suited to handle concerns the subsidies are intended to address • For the poor, indirect effects through higher food and transport prices often outweigh direct effects of higher prices of purchased fuel • Cash transfers, school feeding schemes, food assistance programs

17. Options and opportunities Clean energy – action agenda Private Sector Public Sector (Governments, state-owned enterprises, international development banks, bilateral donors) Civil Society

18. Options and Opportunities Expand energy supply base in a sustainable way • Ensure adequate resources to achieve energy goals • Promote energy trade and regional integration • Invest in energy efficient technologies and processes • Phase out distorting subsidies • Diversify energy mix • Accelerate technology innovation and transfer to ensure access to developing countries • Promote greater use of gas and eliminate gas flaring • Develop technologies that can reduce the adverse impacts of fossil fuels (e.g., CCS) Expand energy supply base in a sustainable way • Put in place policies, regulations, and institutions that facilitate private sector investment as well as promotion of clean technologies • Build a new financial architecture by leveraging new financing sources (e.g. climate funds, green funds, pension funds, carbon finance) • Adopt innovative finance mechanisms that improve affordability for the poor (e.g. micro credit) • Foster institutional models to ensure participation of local communities