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Closing the Energy Access Gap: Sustainably Addressing Energy Poverty

Closing the Energy Access Gap: Sustainably Addressing Energy Poverty

Whether the worst impacts of global climate change can be avoided and rapidly growing developing nations have an opportunity to expand their economies hinges on how the international community chooses to address the urgent crisis of energy poverty.

Ending energy poverty is one of the 17 ambitious Sustainable Development Goals (SDGs) approved by the United Nations at the UN Sustainable Development Summit in 2015.  The SDGs are intended to guide the international development agenda through 2030. Sustainable Development Goal No. 7 aims to end energy poverty across the globe by 2030, with a mission to “ensure access to affordable, reliable, sustainable and modern energy for all.”

The International Energy Agency defines energy poverty as “a lack of access to modern energy services. These services are defined as household access to electricity and clean cooking facilities (e.g. fuels and stoves that do not cause air pollution in houses).”

The need to address energy poverty is clear. There are 1.1 billion people across the world who lack access to reliable electricity. Three billion people lack access to clean cooking technologies. Approximately four million people die each year from indoor air pollution coming from dirty cooking fuels.

The scale of the energy access problem is not the only reason that it is so important to address; the opportunities from ending energy poverty are notable, too. Energy is foundational to economic development. In the process of development, developing countries often pass through an industrial phase on the path to becoming a fully developed country with a strong and diverse economy. Making the transition to an industrial state is energy-intensive because large-scale economic enterprises require lots of energy.

If policymakers choose to neglect energy poverty, developing countries may grow increasingly unstable. The United States government classifies lack of energy access as a “threat multiplier.” Nigeria is an example of a country that may grow even more unstable if energy access is not expanded. Nigeria will have a larger population than the United States by 2045, but it currently has less than one percent of the US’ electricity production levels. If there is not enough energy to power economic development and create sufficient numbers of jobs for the growing Nigerian population, then restlessness and desperation may spark a degree of instability that opens the door to security threats.

Eighty percent of the electricity access gap is concentrated in 20 countries primarily located in South Asia and sub-Saharan Africa. Of those in energy poverty, 84 percent are in rural areas that are difficult to reach with central grid technology.

There are many reasons that energy poverty persists, including insufficient financing. Closing the energy access financing gap is an area where the developed world can be of assistance. According to Rachel Kyte, the CEO of Sustainable Energy for All, energy poverty finance commitments averaged $19.4 billion between 2013 and 2014. Kyte noted in congressional testimony that this figure is much less than the $52 billion that the International Energy Agency estimated will be needed annually through 2030.

Energy poverty is supposed to be fully addressed by 2030, if the international community maintains its commitment and timeline to achieve universal energy access. However, whether fossil fuels or clean energy sources are chosen to address energy poverty will directly impact the global community’s effectiveness at addressing another key priority: limiting the impacts of climate change.

While SDG No. 7 aims to end energy poverty across the globe by 2030, SDG No. 13 is “take urgent action to combat climate change and its impacts.” In addition to SDG No. 13, the Paris Agreement calls for bold international climate action, committing signatories to a shared goal of limiting global average temperature increase to 2 degrees Celsius above pre-industrial levels.

The need to balance these two goals - achieving universal energy access and avoiding the worst impacts of climate change - leads to the following question: What are the most effective actions that American policymakers can take to assist the developing world escape energy poverty while acknowledging the need for rapid decarbonization and adherence to the Sustainable Development Goals? This essay focuses on exploring this question.

In order to answer this overarching question, three other sub-questions must be posed:

1.) Is multilateral or bilateral finance most effective in addressing climate and energy access development needs?

2.) What energy sources and technologies should U.S. foreign assistance for energy poverty support?

3) Should financing be prioritized for projects that provide energy access to rural populations or to projects that support industrialization?

Is Multilateral or Bilateral Aid More Effective?

To address the first question regarding the effectiveness of multilateral and bilateral aid towards addressing energy access and climate change, it is helpful to first explore how multilateral aid and bilateral aid are perceived in scholarly discussion.

Arguments supportive of multilateral aid suggest that it is more effective than bilateral aid because it is allocated based on development needs instead of strategic considerations. Bilateral aid is oftentimes delivered with the self-interest of the donor country in mind. Donor countries may choose to place self-serving conditions on the aid that it delivers, which may diminish the cost-effectiveness of the aid for the recipient country. Additionally, multilateral organizations often have accountability mechanisms that enhance the transparency of their practices. For example, the World Bank Group has an Inspection Panel and Independent Evaluation Group. These accountability bodies will investigate the practices and programs of the Bank and report on operational deficiencies and unintentional harm that the Bank may be causing through its actions. Multilateral bodies also tend to have greater specialization and expertise in development issues affecting their recipient countries than bilateral aid entities.

Arguments supportive of bilateral aid suggest that it is more effective because it attracts more funding due to the compelling strategic reasons that donor countries find to provide aid. These strategic motivations include winning and maintaining allies for military and economic cooperation, preventing rebels or adversaries from taking power away from allied governments, and increasing the standards of living among destitute populaces to prevent transnational threats from emerging. While those who prefer multilateral aid may argue that self-interested strategic considerations diminish the cost-effectiveness of aid, those who prefer bilateral aid would argue that such strategic considerations give donor countries an incentive to provide a larger volume of aid. Similarly, historical ties between donor and recipient countries often make contributing to the recipient more compelling for the donor country. Proponents of bilateral aid also argue that recipients are more likely to use their contributions cost-effectively because they are directly accountable to donor countries.

Though there are strong arguments to be made in favor of both multilateral and bilateral aid delivery channels, an analysis of 45 studies on aid effectiveness found “no empirical consensus on the relative effectiveness of bilateral vs multilateral aid in any particular outcome areas.” However, the study also noted that an examination of specific targeted outcomes from sector-specific aid may lead to different conclusions.

Recognizing that there is no consensus on the most effective development aid channel, it now becomes useful to examine specific aid mechanisms for energy access and climate financing to better understand the likely effectiveness of each financing mechanism or institution in this specific area of development.

Where Does Public Sector Energy Access Financing Come From?

As government officials consider where to allocate public financing to address energy poverty, it is important to first evaluate the current state of public sector energy access financing.

Public sector energy access financing comes from a variety of sources, including multilateral and bilateral development finance institutions (DFIs), national public banks, export promotion agencies, and domestic and international governmental institutions.

Public financing for electricity access has not increased substantially in recent years. According to Sustainable Energy for All’s report Energizing Finance: Understanding the Landscape 2018, “Within the public sector, international financing [for electricity access] from various institutions in absolute terms remained broadly the same over 2013-14 and 2015-16, changing only in the overall percentage of electricity finance, given the increased private financing.” The report concludes that multilateral DFIs were the largest public finance provider in 2015-16 (13 percent), followed by bilateral DFIs (8 percent) and export promotion agencies (6 percent).

In terms of financing for clean cooking in 2015-16, “Multilateral development financial institutions provided the majority of clean cooking finance (45%), followed by bilateral governmental agencies and aid providers (22%).” This represented a large increase from 2013-14 in the share of financing coming from multilateral DFIs. With this said, however, “The significant increase in contributions from multilateral development financial institutions is due to a single financial commitment of USD 23 million made in 2015.” Overall financing for clean cooking dropped five percent between the 2013-14 and 2015-16 periods.

Multilateral Energy Access and Climate Aid

Mechanisms like the Green Climate Fund (GCF) and institutions like multilateral development banks provide energy access and climate financing, but each have shortcomings either in the effectiveness of their governance structures or in the extent of their commitments to addressing energy access.

The GCF is a recent creation established to assist the developing world with climate mitigation and adaptation. During the 15th Conference of the Parties (COP) in Copenhagen, the developed world pledged to mobilize $100 billion per year by 2020 to support climate mitigation and adaptation in developing countries. The Green Climate Fund was officially established in 2010 at COP 16 in Cancun to help mobilize this financing. The Paris Agreement in 2015 emphasized the need to mobilize $100 billion per year in climate financing for the developing world and it prioritized the GCF as a key mechanism to achieving this mobilization.

Many of the fund’s mitigation projects focus on energy access. So far, $4.6 billion has been committed to the GCF, $1.8 billion is under implementation, and the fund has 93 projects that are anticipated to avoid an estimated 1.6 billion tons of CO2 equivalent and help 272 million people increase their climate resilience.

While this is all positive, the GCF faces several major challenges. First, while the $4.6 billion of committed funding to the GCF is helpful, it is nowhere close to the volume of money needed to reach the internationally-agreed upon goal of mobilizing $100 billion each year by 2020 from the developed world to support developing countries in the fight against climate change. While the developed world has pledged through the Copenhagen Accord and Paris Agreement to leverage $100 billion annually by 2020, only $10.3 billion has been pledged to the GCF so far.

Second, the GCF has an ineffective governance structure that is in need of reform. At its July 2018 board meeting, the GCF did not approve any projects despite $1 billion being in the queue. A lack of confidence in GCF governance may decrease the likelihood of future contributions.

Multilateral development banks have allocated funding to energy access efforts, but they have still been subjected to criticism for failing to prioritize energy poverty in their overall energy portfolios. In a 2016 Sierra Club/Oil Change International report entitled Still Failing to Solve Energy Poverty: International Public Finance for Distributed Clean Energy Access Gets Another “F”, authors graded four multilateral development banks: the World Bank Group, the Inter-American Development Bank, the African Development Bank and the Asian Development Bank. The report assigned them all “F”s for their energy access efforts and assigned each bank a poor score for the share of their energy portfolio dedicated to energy access.

The Trump Administration and current Congress have not been friendly to multilateral efforts to combat climate change and build clean energy systems in the developing world. For multilateral environmental funds in FY18, Congress appropriated $139.5 million for the Global Environment Facility and $31 million for the Montreal Protocol Multilateral Fund. Though this funding is important for environmental causes, neither of these initiatives are specifically designed to address climate change or energy poverty.

The 115th Congress and Trump Administration have decided not to fund other international climate initiatives like the United Nations Framework Convention on Climate Change and the Intergovernmental Panel on Climate Change. These institutions are crucial to fostering climate diplomacy and providing policymakers with high-quality climate science assessments. Expressing little dedication to its success, the federal government has also chosen not to fund the Green Climate Fund.

For multilateral development banks in FY18, Congress appropriated $1.097 billion to the World Bank Group, $32.4 million to the African Development Bank, $171.3 million to the African Development Fund, $47.4 million to the Asian Development Fund, and $30 million to the International Fund for Agricultural Development. Though this funding is beneficial to international development, energy access is only a small portion of what many multilateral development banks support.

Bilateral Energy Access and Climate Aid

Though the Trump Administration is no friend to climate financing and foreign aid, the federal government has still pursued bilateral policies to combat energy access and fight climate change.

Perhaps the most notable bilateral effort the United States takes to combat energy poverty is the Power Africa initiative. This initiative brings together government agencies and the private sector with the aim of confronting energy poverty in Africa and adding “more than 30,000 megawatts (MW) of cleaner, more efficient electricity generation capacity and 60 million new home and business connections.” Since 2014, it has spurred $18 billion of financing, mostly from private capital. It has created over 9,500 MW and 12.5 million new electrical connections with 57 million individual beneficiaries.

Most U.S. climate finance is delivered through bilateral funds. Most is channeled through the State Department and the United States Agency for International Development (USAID).

The Overseas Private Investment Corporation, a self-sustaining government agency that helps American businesses make investments in the developing world, provides the largest volume of U.S. climate financing at an average level of $1 billion per year for renewable energy projects. OPIC provides support through direct loans and guarantees, political risk insurance, and investment funds. The agency claims that more than half of its new project commitments each year involve a small business. OPIC takes part in the federal government’s Power Africa project.

What Energy Sources and Technologies Should the U.S. Support?

In addition to a determination about the effectiveness of multilateral and bilateral financing, American policymakers interested in addressing energy poverty must also ask themselves: what energy sources and technologies should U.S. foreign assistance for energy poverty support?

This question can only be answered by exploring whether energy access financing should be allocated for fossil fuels or renewables and whether it should be allocated for centralized or decentralized solutions.

Those who believe that energy access financing should be used to promote the use of fossil fuels argue that fossil energy sources are cheaper than clean energy sources and therefore can lift more people out of poverty. An argument for this theory can be found in the Center for Global Development’s 2014 paper Maximizing Access to Energy: Estimates of Access and Generation for the Overseas Private Investment Corporation’s Portfolio, in which authors “conservatively estimate that more than 60 million additional people in poor nations could gain access to electricity if the Overseas Private Investment Corporation were allowed to invest in natural gas projects, not just renewables.”

Those who believe that energy access financing should be used to promote renewable energy argue that energy poverty can be addressed more quickly and sustainably with decentralized renewable energy solutions. As Rachel Kyte argued in congressional testimony, an understanding of both Sustainable Development Goal No. 7 and the Paris Agreement show that the world must combat energy poverty sustainably. She argues that this path will be driven by decentralization, digitalization, and decarbonization. Proponents of renewables argue that clean energy can be easily deployed in the decentralized forms that are needed to reach the 84 percent of energy poor living in hard-to-reach rural areas.

Proponents of investing in decentralized energy sources argue that though centralized grid extension appears to be the current de facto solution to energy poverty, the grid has failed to reach rural areas, is unreliable in many areas, and is unaffordable for many poor households. They point to the 84 percent of energy poor residents who live in rural areas where grid extension is expensive. To reach SDG No. 7 by 2030, they argue, decentralized clean energy solutions must be utilized. The International Energy Agency has reported that achieving universal energy access by 2030 will require new investment for energy solutions according to the following proportions: mini-grid (40 percent), grid extension (36 percent), and off-grid (24 percent). Totaling the funding percentages needed for mini-grid and off-grid solutions shows that 64 percent of additional investment needs to go to decentralized solutions.

Proponents of centralized grid investments believe that small-scale, off-grid and decentralized energy technologies cannot meet the needs of high energy consumption associated with rising standards of living. They argue that energy consumption rather than energy access is associated with high human development outcomes. They suggest that decentralized solutions can exist where they supplement grid extension or otherwise support industrial economic enterprises or promote agricultural productivity. However, they insist that decentralized energy sources cannot replace energy and infrastructure needed for industrial-scale enterprises. To end energy poverty, this line of thinking goes, energy access financing must prioritize central grid development for large-scale enterprises.

Should Development Finance Prioritize Rural Populations or Industrialization?

With limited resources, policymakers must consider whether to prioritize energy projects for industrialization or for rural populations. Industrial-scale projects require much more energy than projects for rural households.

Those who support development finance for industrial-scale projects argue that industrialization is the main hope for developing countries to grow their economies. They point to rapid urbanization and the large numbers of developing country residents that have descended upon cities and left rural areas behind. Though rural populations suffer from energy poverty disproportionately, supporters of industrial-scale projects suggest that urbanization is necessary to achieve universal energy access. They suggest that industrial-scale investments will pay long-term dividends that will create more economic opportunity and material wealth.

Supporters of energy access investments in rural areas note that 84 percent of those in energy poverty live in rural areas. While cities have access to at least some energy supply, rural populations often have very little or none. Those who prioritize rural energy access suggest that urbanization is not necessary for universal energy access. They suggest that rural populations are being neglected as a disproportionate percentage of energy access financing is allocated to centralized grid technologies that primarily benefit urban areas. Energy access is foundational to economic opportunity and social mobility, and supporters of rural energy projects believe that rural residents deserve opportunity and mobility just as urban populations do.

Recommendations for U.S. Policymakers

As American policymakers consider how to respond to the challenge of energy poverty, they should prioritize investment in decentralized renewable energy sources for rural areas through bilateral channels.

Certainly, the U.S. should continue to support multilateral institutions and mechanisms like the Green Climate Fund and help to facilitate centralized grid extensions and connections where it makes the most sense. However, making bilateral investments in decentralized renewable energy solutions is likely the optimal way to proceed for American policymakers concerned about energy poverty.

Multilateral initiatives and institutions like the Green Climate Fund and multilateral development banks are addressing energy poverty, but sustainably addressing energy poverty is not the driving mission of many of these organizations. The GCF must address its governance challenges before the U.S. should see it as a stable mechanism to address energy poverty with low-carbon sources. Multilateral development banks must increase their contributions to energy poverty projects and the share of their energy portfolios dedicated specifically to energy access. If multilateral institutions can demonstrate greater stability and attentiveness to energy poverty, then American policymakers concerned about energy poverty can allocate more money to them with the understanding that they will be effective partners in the fight against energy poverty. In the meantime, however, American policymakers would be better off scaling up and replicating the model of Power Africa. Such bilateral initiatives also have the benefit of giving the U.S. direct control over how to spend its own money.

U.S. policymakers should primarily allocate financing to decentralized renewable solutions. Decentralized renewable energy is the best hope to effectively address energy poverty and climate change at the same time. As population and energy consumption increase in the developing world, it will become more important to identify opportunities for the developing world to avoid the fossil fuels that powered the economic rise of countries like the United States. If the developing world cannot develop sustainably, then global average temperature increase will likely surpass the internationally recognized limit of 2 degrees Celsius above pre-industrial levels.

Though they will not all support large-scale industrial and economic enterprises, decentralized renewable solutions can deliver energy access to those most in need at a far faster rate than the centralized grid can. The energy access problem primarily lies in rural areas, with 84 percent of those in energy poverty residing in rural regions. Granting rural residents access to distributed renewable energy solutions supports better health, education, and economic outcomes. Such opportunities may not come along for many years if rural communities are forced to wait for expensive and logistically-challenging grid extensions and connections. While the amount of energy provided to rural households may be insufficient to transform the economic outlook of a country in the short term, providing even minimal energy access to rural areas can provide the foundation for these communities to begin a path towards greater economic growth and innovation.

As the IEA reported, 64 percent of energy access must come from off-grid and mini-grid solutions in order to achieve universal energy access by 2030. With its limited development finance resources, the U.S. should help grow the proportion of energy access financing dedicated to distributed solutions to a level proportionate with the needed share of such investment.

Conclusion

Energy poverty and climate change are two of the greatest challenges currently facing the international community. By deploying distributed renewable energy solutions across the most energy-poor countries in the world, both issues can be confronted at the same time. Bilateral initiatives like Power Africa should be prioritized as the main method to deliver energy access financing because many multilateral institutions and funds are either facing governance challenges or failing to prioritize energy access. While providing bilateral climate and energy access financing, the U.S. should also support governance reform of the Green Climate Fund and encourage multilateral development banks to pay greater attention to energy poverty. The U.S. should prioritize rural distributed renewable energy projects in its energy access financing. Investments in these technologies will address the energy access problem sustainably and in the rural regions where most of the world’s energy poor reside. By providing bilateral aid for rural distributed renewable energy, the U.S. can do its part to sustainably solve energy poverty.

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