Sustainable Energy Sector Development

Paul de SaManager

Oil, Gas, and MiningSustainable Energy Department

The World Bank

International CongressEnergy Day

Lima, 3 July 2012

The World Bank Group

Overview

Key challenges Main barriers to be tackled Lessons from past experiences Opportunities for the future

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Outline

Tackling the Challenge

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World Bank Group Investing in Energy

2007 2008 2009 2010 2011 -

2,000 4,000 6,000 8,000

10,000 12,000 14,000

Bank Group

Policy lendingTransmission & distributionThermal generationEnergy efficiencyRenewable energyUpstream oil, gas & coalU

S$ m

illio

n

2007 2008 2009 2010 2011 -

500 1,000 1,500 2,000 2,500 3,000

International Finance Corporation

Transmission & distributionThermal generationEnergy efficiencyRenewable energyUpstream oil, gas & coal

US$

mill

ion

Almost $1.5 trillion a year in 2010 US$ is required in energy supply investment to 2035.

Challenges

4Source: IEA 2011.

Genera-tion; 58%

Transmission; 11%

Distribution; 31%

Power, $16.9 trillion

Up-stream;

87%

Transport; 3%Refining; 10%

Oil, $10 trillion

Up-stream;

71%

LNG chain; 6%

Transmission & dis-tribution; 23%

Gas, $9.5 trillion

Mining; 94%

Shipping & ports; 6%

Coal, $1.2 trillion

Without further action, by 2017, all CO2 emissions permitted in the 450 scenario will be locked in by existing infrastructure.

Challenges

5Source: IEA 2011.

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.

Challenges

6Source: IEA 2011.

• 1.3 billion people lack access to electricity, majority of them in rural areas.

• Access to electricity and per capita emissions are inversely correlated.

Challenges

7

0 10,000 20,000 30,000 40,000 50,0000

20

40

60

80

100

GDP per capita in 2005 US$ at PPP

% o

f hou

seho

lds

with

ele

ctric

-ity

Note: Size of each bubble is proportional to the country’s CO2 emissions per capita.

&

Improve operational and financial performance

Strengthen governance

Improve access and reliability of energy supply

Shift to more environmentally sustainable energy sector development

The challenge is to balance the twin objectives of greater supply and sustainability

Principal Challenge

UN Sustainable Energy for AllA Global Initiative of UN Secretary General

Three goals for 2030:

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Energy and Human Development

Universal energy access (electricity

and modern cooking fuels)

Double the renewable energy

share in global energy mix

Double the global rate of

improvement in energy efficiency

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

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Main Barriers

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

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Example of barriers High financing and investment needs

Current Needed0

500

1,000

1,500

2,000

2,500

200600

1500

Current vs. needed annual global investment in clean energy

Billi

ons o

f US$

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.

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Example of barriers High and volatile oil prices

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

0

5

10

15

20

25

30

35Crude oilDieselCoalNatural gas, Europe

US$/MMBtu

Hypothetical universal price subsidy for LPG

Example of barriers Untargeted fuel subsidies

05

10152025303540

% o

f sub

sidy

reac

hing

bo

ttom

40%

Albania Brazil Guatemala India Indonesia Kenya Nepal Pakistan Peru Sri Lanka0

20

40

60

80

100

% o

f the

poo

r rec

eivi

ng

subs

idy

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

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Example of barriers Untargeted fuel subsidies

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

Lessons from past experience offer valuable guidance

Tackling the Challenge

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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

Access to power Past experience

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

Tackling the Challenge

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Energy subsidies Past experience

Clean energy – action agenda

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Options and opportunities

Action Area Stakeholders and Commitments

Scaling up investments (both public & private sources)

Strengthening the enabling environment:

• Overcoming legal and regulatory hurdles

• Pricing and other policies consistent with financial sustainability

• Capacity building

Focus on high-value, replicable targets and game changers

Civil Society

Public Sector

(Governments, state-owned enterprises, international development

banks, bilateral donors)

Private Sector

Expand energy supply base in a sustainable way

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 18

Options and Opportunities

Ensure adequate resources to achieve energy goals