World Bank Lending Priorities Fall Short on Access to Clean Energy and the Climate Challenge

Decentralized solar can provide affordable access to sustainable energy (photo credit: Sustainable Energy for All).

Last week, the World Bank held its annual Spring Meetings, which provide civil society organizations with an opportunity to weigh in on lending priorities and practices. During the week, panel discussions on energy lending raised serious concerns over World Bank financing activities, particularly its continued support for centralized fossil fuel power generation and the shortage of projects aimed at expanding access.

The energy access challenge: Are fossil fuels the answer?

By the World Bank’s own estimates, over 1.2 billion people worldwide still lack access to electricity, and 2.8 billion people lack access to modern cooking fuels. In 2011, UN Secretary General Ban Ki-moon launched the Sustainable Energy for All initiative – co-chaired by World Bank President Dr. Jim Yong Kim – which aims to achieve universal access to modern energy services by 2030, along with a doubling in global energy efficiency growth rates and renewable energy shares.

During a discussion on the future of energy financing, Oil Change International along with fellow panelists from International Rivers and the Vasudha Foundation, challenged the World Bank to redirect its financing for large, centralized fossil fuel and hydropower projects toward decentralized renewable energy aimed at expanding energy access. In particular, it was pointed out that the Bank continues to finance projects that support exploration for additional fossil fuel reserves. These are resources that will not be able to be utilized if the world is to limit warming to 2 degrees C – a generally agreed goal that World Bank President Kim himself has voiced support for.

In response, S. Vijay Iyer, Director of Sustainable Energy at the World Bank, insisted that when it comes to financing energy in developing countries, multiple options need to be on the table – including fossil fuels and large hydropower. He went on to emphasize that the high upfront capital costs of renewable energy technologies like wind and solar result in high financing costs that poor countries are often unable to bear.

While Mr. Iyer presented this statement as an argument against the viability of renewable energy, he actually pointed out a crucial role for the World Bank as a public finance institution – to fill this financing gap. The World Bank can provide loans and loan guarantees for renewable energy projects, which are increasingly financially viable and economically competitive but still may be viewed as risky by the investment community. The World Bank can also support capacity building in local commercial banks to improve their ability to lend to renewable energy companies, and the Bank can promote the development of policies that prioritize clean energy over fossil fuels.

Climate vs. development: A false dichotomy

Although the World Bank has been vocal on the need for all countries to choose “green growth” opportunities to limit global warming, Mr. Iyer framed energy financing choices as a question of climate equity, insisting that even if all low-income countries transitioned to 100 percent clean energy this would not “move the needle on climate.” He stressed that as citizens of wealthy countries, we should avoid making prescriptions for other countries’ development paths.

Of course, no one in the room voiced disagreement that industrialized countries must lead on climate action, and many organizations represented work extensively to secure greenhouse gas reduction commitments and clean energy policies in the United States and other wealthy countries. However, this line of reasoning obscures the World Bank’s institutional focus on developing countries and poverty reduction. The Bank faces a simple choice with its financing: with its limited resources, will the Bank choose to support clean energy projects and energy projects that reach the poor?

Despite repeated appeals to principles of equity and pressing energy access needs, the World Bank’s energy financing track record tells a different story. Only 8 percent of the nearly $7 billion of World Bank energy financing in FY 2013 went toward increasing energy access to the poor. At the same time, $2.7 billion (almost 40 percent) went to fossil fuel projects, only one of which (a $35 million oil project) named energy access as an objective. Similarly, less than 1 percent of large hydropower projects and no natural gas projects targeted energy access. Clearly, the World Bank’s approach of leaving “multiple options on the table” is not working.

Which raises the question, what could the World Bank and other international financial institutions (IFIs) be doing differently?

There is a better way

For starters, the World Bank should shift its focus away from funding projects, financial intermediaries, and policies that promote large fossil fuel and hydropower infrastructure projects, and redirect its resources toward direct financing of decentralized renewable energy projects.

According to panelist Vrinda Manglik of the Sierra Club, decentralized renewable energy funding is just a “drop in the bucket” of the World Bank’s energy portfolio (stay tuned for an upcoming joint Sierra Club / Oil Change International analysis of IFI lending for decentralized renewables). While most rural electrification programs to date – both within the World Bank as well as through national government initiatives – have focused on extending the centralized grid, the International Energy Agency estimates that 70 percent of future electrification in rural areas will require mini-grid or off-grid solutions.

During the discussion on energy access, the lack of commercial financing emerged as one of the biggest hurdles to getting decentralized renewable energy projects off the ground, emphasized by panelists from the United Nations Foundation, World Resources Institute, EarthSpark (an organization working to provide off- and mini-grid renewable energy access to communities in Haiti), and the International Finance Corporation (IFC) – the World Bank’s private sector arm.

Local commercial banks often lack experience lending for renewable energy and are therefore reluctant to provide long-term, low-interest loans for projects they perceive as risky even if they are economically viable. While public financing from the World Bank or other IFIs could fill this gap, these institutions are used to providing tens or hundreds of millions of dollars in financing at a time for large infrastructure projects, and currently lack the capacity to lend on the smaller scale needed for decentralized renewable energy access projects. It is time for international financial institutions to re-evaluate how they provide support to the energy sector.

Put your money where your mouth is

The World Bank must rise to the challenge, match actions to rhetoric, and restructure its energy portfolio to prioritize smaller, decentralized renewable energy projects that actually work to provide sustainable energy access. The Bank must reverse its trend of financing mega-infrastructure projects in the name of energy access. The Bank should instead work to build its own capacity to finance decentralized renewable energy projects, shape policies to create an enabling environment for renewable energy investment, and provide loan guarantees and training to demonstrate commercial viability and spur private financing of sustainable energy access.