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How to accelerate the energy transition in developing economies

Wind turbines produce renewable energy outside Caledon, South Africa, May 20, 2020. Picture taken May 20, 2020. REUTERS/Mike Hutchings - RC272H90E73R

Wind turbines produce renewable energy outside Caledon, South Africa, May 20, 2020. Image: REUTERS/Mike Hutchings

Donald Perry Kanak
Senior Fellow, The Program on International Financial Systems (PIFS)
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Energy Transition

This article is part of: The Davos Agenda
  • The transition from coal to renewables must be a priority if we are to achieve the emission reductions we need.
  • Outside Europe and the US, however, coal still dominates energy production.
  • Energy transition mechanisms could be a way to hasten the shift to renewables in the developing world. Here's how they would work.

As we enter 2021, a growing number of countries are announcing net-zero targets. This is a most welcome set of New Year’s resolutions. But as with our personal commitments to get in shape and lose weight, experience shows that most resolutions will fail, unless they are accompanied by short-term actions and targets.

This is equally true for climate goals. Like delaying the start of a diet, each day that we exceed the earth’s capacity to absorb CO2 increases greenhouse gas (GHG) concentrations and requires even deeper cuts in subsequent years to keep warming below 1.5°C or 2°C.

Figure 1 (below) shows the implications of the delay in starting GHG reductions. The purple line shows the gradual reductions projected in the IPCC’s First Assessment Report (1990) to keep global warming below 2°C. But the delay in action, and the overshoot of actual emissions over the past two decades, means that the world must now make deeper and more rapid cuts – about 2.7% per year to 2100. Put into context: COVID-19 is projected to cause GHG emissions to fall by 4.6% in 2020. This means that achieving the 2°C scenario will require emission reductions equivalent to about one COVID-19 pandemic every two years until 2100 — but without the associated human and economic losses.

Figure 1: Global greenhouse gas emissions and warming scenarios
Figure 1: 0Global greenhouse gas emissions and warming scenarios

To avoid falling further behind, leaders need to match long-term net-zero pledges with short-term goals for reductions that are achievable with currently proven technologies, and buy time until longer-term strategies like hydrogen, carbon capture and storage, or direct air capture are proven economical and scalable. Fortunately, there is one huge opportunity that can be implemented economically at scale with existing technology now, and on which there is broad agreement: accelerating the transition away from coal.

The IPCC’s 1.5°C warming targets acknowledge the key role of reducing coal-fired electricity. They call for a reduction from 36% of generation today to 9% by 2030 and virtually 0% by 2050, and to replace this with renewables. This transition is well underway in the US and Europe – but in the developing world, where energy demand is rising, the gap between coal-fired electricity and renewables is barely closing (see Figure 2, below).

Figure 2: Coal still dominates outside of the US and Europe
Figure 2: Coal still dominates outside of the US and Europe Image: BP Statistical Review of World Energy

COP26 in Glasgow this year must move beyond vague promises and include concrete proposals for large-scale measures for accelerating energy transition, especially for low-income countries that depend on coal. In many developing countries (see Figure 3, below) coal still dominates and the change in the energy mix has been slow at best. We know from the experience in European countries, such as Germany, that it can be a multi-decade challenge to win over the various stakeholders to accelerate retirement of carbon-intensive power assets, and to scale up demand for renewable energy. To encourage developing countries to move away from coal electricity in the next decade will require a massive unified effort to finance, equip and enable energy transition. To be politically feasible, that will have to include financial resources to enable a just transition for workers and local communities, and fair compensation for owners for the value of power facilities to be closed, according to the rule of law.

Figure 3: Coal-fired electricity still overwhelms renewables in many developing countries
Figure 3: Coal-fired electricity still overwhelms renewables in many developing countries Image: BP Statistical Review 2020, Ember Global Electricity Review 2020

An energy transition mechanism

Experts have put forward ideas to accelerate the energy transition. The Rocky Mountain Institute has proposed a refinancing plan that could generate net financial savings of over $100 billion by 2025. A report by IEEFA suggests that repurposing coal plants into solar and battery in India could be more economical than decommissioning them. These and other ideas would benefit from large-scale pilots in developing countries to prove their feasibility and thereby assuage local stakeholder concerns, paving the way for even larger scale rollouts to tackle the climate change challenge head-on.

To help finance ideas like the above, leaders in government, development finance institutions (DFI) and the financial sector should consider creating COP26 energy transition mechanisms (ETMs)— large public private partnerships that would enable countries to remove political and socio-economic barriers, create sustainable jobs to support a green post-COVID recovery, and move much faster to achieve a just energy transition ( see figure 4, below).

Figure 4: Schematic of an energy transition mechanism
Figure 4: Schematic of an energy transition mechanism Image: Author’s illustration

An ETM would be formed for a specific country in order to be effective and based on that country’s energy needs and nationally determined contributions. It would be composed of two complementary financial facilities: a carbon reduction facility (CRF) and a clean energy facility (CEF). Current owners agree to transfer their carbon-intensive power assets to the CRF in exchange for cash and possibly equity interest in the ETM. Those utility asset owners, which in many cases are state-owned power companies, would be expected to invest the cash they received into renewable power, grid upgrades and so on, and for a just transition for workers and local communities. The coal-fired power assets would continue to operate for an agreed period that is shorter than the current expected lifetime, but long enough to pay back the ETM investors/lenders.

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In parallel, the CEF collaborates with national authorities and the power sector to build up renewable energy capacity and storage. As renewable power expands, the ETM retires CRF assets.

The economics and speed of transition will vary because each country has a different set of challenges. Now is the perfect time for leaders to consider bold initiatives like the eTM, given the vastly improved economics of wind and solar power and record low/negative global interest rates. Modelled financials suggest that with low-cost funding, a large percentage of existing coal-fired electricity could be replaced in 10-15 years on an economically affordable basis without waiting for technological breakthroughs. The ETM can accelerate demand for renewables by 2-3 times. (see Figure 5, below).

Figure 5: How ETM dramatically accelerates demand for renewables
Figure 5: How ETM dramatically accelerates demand for renewables Image: Author's illustration

What is urgently needed now is for experts and DFIs to do the groundwork to prove that the ETM and other similar energy transition mechanisms are feasible and can work on a large (national, for example) scale. By doing so, COP26 can pave the way for developing countries (and their energy and climate authorities) to make real progress in replacing coal-fired power, without compromising energy availability, access or security. Only by accelerating this transition can we move renewables from the margin to the mainstream and avoid any further overshoot of climate targets.

Donald P. Kanak is the Chairman of Prudential Insurance Growth Markets, Co-Chair of the Steering Group of the Sustainable Development Investment Partnership (SDIP) ASEAN Hub, and a Senior Fellow of the Program on International Financial Systems affiliated with the Harvard Law School.

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