1540-7977/12/$31.

002012 IEEE 20 IEEE power & energy magazine may/june 2012

Twin
Peaks
Surmounting the
Global Challenges
of Energy for All and
Greener, More Efficient
Electricity Services
Digital Object Identier 10.1109/MPE.2012.2188666
Date of publication: 19 April 2012
may/june 2012 IEEE power & energy magazine 21
By Marcelino Madrigal, Mikul Bhatia,
Gabriela Elizondo, Ashok Sarkar,
and Masami Kojima
T
THE ENERGY SECTOR FACES TWIN CHALLENGES. THE FIRST IS TO MAKE
more energy available at affordable prices to enable all people to use modern energy to
meet their basic needs. The second is to slow the worlds overall growth of energy con-
sumption through conservation and energy efciency improvement and to make energy
sources more environmentally sustainable, locally and globally.
The International Energy Agency (IEA) estimates in its 2011 World Energy Outlook
(IEA 2011 WEO) that about 1.3 billion people did not have access to electricity in 2010.
Even 1.3 billion, however, underestimates the true extent of energy poverty, because
many with nominal access to electricity face frequent, if not chronic, power shortages.
Power shortages affect not only the welfare of households and the effective operations
of schools, clinics, hospitals, and water suppliesadversely affecting public health and
education, among other areasbut also businesses and the rest of the economy. In World
Banks 2011 surveys of 127 developing countries, rms reported that, on average, they
were losing electricity nearly 50 hours a week, generating more than a fth of electricity
consumption from their own backup generators, and losing more than 5% of the value of
their sales due to power outages. These statistics illustrate how urgently many developing
countries need to secure an adequate and reliable electricity supply as one of their top
priorities for continued economic growth.
The need for clean cooking and heating solutions is just as pressing. Globally, about
3 billion people continue to rely on traditional solid fuels. Indoor air pollution from the
combustion of solid fuels is estimated to kill four people every minute (UNDP and WHO
2009). In addition, where biomass is collected, the time burden on the collectorsmany
of whom are women and childrencan be considerable. Time spent collecting biomass
takes children away from attending school and studying at home, deprives parents of
time that could otherwise be spent on child care, and denies adults alternative productive
activities, including income generation. Where biomass is not harvested sustainably, its
use can lead to the degradation or loss of tree resources.
While developing countries need more energy, the production and consumption of
energy is already the largest contributor to global greenhouse gas (GHG) emissions. On a
per capita basis, developed countries emit disproportionately more: in 2009, the countries
belonging to the Organization for Economic Co-operation and Development (OECD)
accounted for 18% of the worlds population but 41% of the CO
2
emissions from fuel com-
bustion. In contrast, sub-Saharan Africa, with 13% of the worlds population, accounted
for less than 2% of the emissions (IEA 2011). Provided there is a political will, developed
countries are in fact in a position to reduce future energy consumption and GHG emis-
sions in absolute terms. They also have the nancial and technical wherewithal to take
the lead and drive down the costs of emerging energy sources and technologies with low
life-cycle GHG emissions by investing in research and development and taking innova-
tions to the market.
Recognizing the importance and urgency of these global energy challenges, the United
Nations General Assembly in December 2010 declared 2012 the International Year of
Sustainable Energy for All (SE4All). In response, the SE4All Initiative was announced in
2011 and set three goals for 2030. The target of the rst goal, universal access to modern
energy, is developing countries. The second and the third goalsdoubling the rate of

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22 IEEE power & energy magazine may/june 2012
improvement of energy efciency and doubling the global
share of renewable energyare intended for both developed
and developing countries.
Future Evolution
of the Global Energy Sector
Globally announced plans to reduce emission are not enough
to tackle global climate challenges in the energy sector and
bring modern energy and electricity services to under-
served populations. For instance, the New Policies scenario
in IEA 2011 WEOin which recently announced govern-
ment commitments and plans that address the foregoing
twin challenges are assumed to be fully implemented over
time, even if they have not yet been formally adoptedis a
pathway that falls short of achieving modern energy access
for all, efcient use of energy resources, and locally and
globally sustainable energy sector development. In 2030,
under currently announced actions, 1 billion people will still
remain without electricity, and 2.7 billion people will lack
clean cooking facilities. Total global emissions will con-
tinue to increase on a trajectory that has long-term global
temperatures increasing by more than 3.5 8C by 2035, since
power generation capacity increases from 4,957 GW in 2009
to 9,038 GW by 2035 and the share of renewable generation
technologies and nuclear only rises from 32% to 47% during
that time.
Better addressing global energy challenges requires
actions that are better described by IEAs Energy for All
and 450 scenarios. This combination will be called the
structural change scenario in the remainder of this arti-
cle. The Energy for All scenario adopts the access goal of
the SE4All Initiative. The 450 scenario targets a long-term
CO
2
-equivalent atmospheric concentration of 450 parts per
million (ppm), which is estimated to result in an average
long-term global temperature rise of 2 8C. Although widely
acknowledged to be ambitious, even limiting the tempera-
ture increase to 2 8C will have considerable negative cli-
mate change impacts, such as rising sea levels and increased
oods, storms, and droughts. Some of the policies that lead
to this structural-change scenario are as follows:
For universal access, US$1 trillion is invested in
supply infrastructure between 2010 and 2030. In-
vestments go to grid, minigrid, and off-grid power
systems, as well as biogas digesters, gas stoves, and
advanced stoves for solid fuels.
Carbon pricing is introduced in all OECD countries
(the group includes Mexico and Turkey) by 2025 at
the latest, and Brazil, Russia, and South Africa begin
to introduce carbon pricing in 2020.
All net-importing countries phase out fossil fuels
completely by 2020, and all net-exporting countries
do so by 2035.
The United States reduces its CO
2
emissions by 17%
between 2005 and 2020 and introduces carbon pricing
in 2020.
China reduces its carbon intensity by 45% between
2005 and 2020, sets higher carbon prices than those
in the New Policies scenario, and enhances support
for renewable energy.
India reduces its CO
2
intensity by 25% between 2005
and 2020 and expands feed-in tariffs for renewable
energy.
Europe reduces emissions by 30% between 1990 and
2020 and strengthens the Emissions Trading Scheme
in line with the 2050 road map adopted by the Euro-
pean Climate Foundation.
Carbon capture and storage is a key abatement mecha-
nism and accounts for 18% of emissions savings in
the 450 scenario relative to the New Policies scenario
(note that regulatory, policy, and technical barriers
need to be addressed before this technology can be
deployed on the scale needed).
Under the structural change scenario, global demand for coal
and oil peak before 2020 and decline by 30% and 8%, respec-
tively, by 2035, relative to their 2009 levels. Demand for
natural gas grows by 26%. Four-fths of total CO
2
emissions
table 1. Features of a global structural change capable of providing more, greener,
and more efficient energy services for all (source: IEA 2011 WEO and SE4All Goals).
SE4All Goal Main Feature Results
Access to modern energy US$48 billion is invested every year until 2030
for universal access, more than five times the
investment for access in 2009.
All households have access to modern energy by
2030: households newly connected to electricity
consume 800 kWh in 2030, and all have
adopted clean and efficient cooking options.
Renewable energy
and emissions
Power generation capacity increases from
4,957 GW in 2009 to 9,484 GW by 2035, and
the share of renewable generation technologies
and nuclear rises from 32% to 62%, also by 2035.
CO2 emissions peak in 2020 and decline to
21.6 Gt by 2035, consistent with a pathway
compatible with a 50% chance of limiting the
average temperature increase to 2 8C.
Energy efficiency Global primary energy demand increases by
only 23% between 2009 and 2035.
Annual average energy intensity continues to
decrease in the period 20092035 compared
with 19852009, from about 1.4% to 2.1%
annually for OECD countries and from 1.5% to
about 3.3% annually for non-OECD countries.
may/june 2012 IEEE power & energy magazine 23
in the period 20102035 are already locked in by the existing
capital stock. Table 1 summarizes some of the main features
of the structural change scenario.
To achieve such structural change, the IEA gures
indicate that the global power generation mix needs to
include almost double the share of renewable and nuclear
energy sources in the next 25 years, increasing from 32%
to 62%.
Policy, Regulatory, Technical,
and Financial Requirements
for Structural Change
Attaining universal access and moving to lower-emissions
energy sector development begin with strengthening
nancial sustainability, institutional capacity, and access
to new technologies. Universal price subsidies, such as
tariffs below cost recovery, have been set for historical
and political reasons, but they all too often result in a
downward cycle of poor maintenance, energy infrastruc-
ture in a state of disrepair, poor quality of service, and
declining revenue. Universal price subsidies also reduce
the incentives for improving energy efciency and encour-
age waste. Where subsidies are for fossil fuels, they create
further barriers to the commercial development of renew-
able energy.
Increasing both supply- and demand-side efciency is
another critical component of the access and sustainability
agenda, although, unlike developed countries, demand for
electricity will grow in the developing world even in a highly
energy-efcient society. The remainder of this article dis-
cusses some of the main policy, regulatory, planning, and
technical solutions that will be required to achieve a struc-
tural change in each of the three main areas of a successful
global energy mix: universal access, renewable energy, and
energy efciency improvement.
Universal Access to Sustainable,
Affordable, and Reliable Energy
It is widely acknowledged that the climate impact of elimi-
nating household energy povertyenabling all households
to consume electricity to meet basic needs and adopt clean
cooking and heating solutionswould be negligibly small.
The IEA 2011 WEO estimates that attaining universal
access in 2030 would increase global electricity generation
by 2.5%, demand for fossil fuels by 0.8%, and CO
2
emis-
sions by 0.7%. And even if 2 billion people using solid fuels
were to switch entirely to liqueed petroleum gas (LPG),
global GHG emissions would rise by less than 2%. There is
therefore a compelling case for giving top priority to afford-
ability for achieving universal access to electricity and
cleaner cooking and heating solutions.
IEA estimates that of the additional electricity needed in
2030 for universal access to electricity over and above that
in the New Policies scenario, approximately 45% will be
from national grids, 36% from minigrid solutions, and the
remaining 20% from isolated off-grid solutions. Grid exten-
sion is more cost-effective, and therefore more affordable, in
urban areas and rural areas with high population densities;
off-grid solutions tend to be more suitable in remote areas. In
many circumstances, off-grid systems offer a transition solu-
tion that should be able to adapt efciently when grid con-
nection becomes feasible. IEA further assumes that 63% of
the grid-based electricity needed to achieve universal access
will come from fossil fuels and 14% from hydropower. For
mini- and off-grid solutions, solar and wind power are the
two principal sources (see Figure 1).
Although incremental CO
2
emissions from achieving uni-
versal access to electricity are negligible, it is generally not
possible to generate enough revenue to pay for service provi-
sion costs from newly connected households alone. This is
because many without access are too poor to pay for the full
figure 1. Additional generation supply needed to achieve universal energy access by 2030: (a) on-grid generation and (b)
mini- and off-grid generation (source: IEA 2011 WEO).
Fossil Fuels*
Nuclear
Hydro
Wind
Solar
Other Renewables
Solar
Small Hydro
Biomass
Wind
Diesel
63%
3%
14%
5%
5%
10%
368 TWh
36%
8%
21%
28%
7%
470 TWh
*Coal accounts for more than 80% of the additional on-grid electricity from fossil fuels.
(a) (b)
24 IEEE power & energy magazine may/june 2012
cost of supplyespecially the cost of the rst connection,
and sometimes operational costs as well. The main source of
funds for extending access is the revenue earned from larger
and better-off electricity users. If there are many large con-
sumers (industry, commercial, and high-consumption resi-
dential consumers) and better-off small consumers against
a comparatively small number of poor households without
access, the former can relatively easily cross-subsidize the
latter. If, on the other hand, few large consumers and better-
off small consumers must cross-subsidized numerous poor
consumers, the revenue earned from the former is unlikely
to be sufcient to cover efcient costs of service provision,
according to the World Bank. Making household fuel use
cleaner has unique challenges that require both proper low-
cost technical solutions and proper cost recovery and tariff
mechanisms to ensure that services providers continue to
earn revenue to sustain services while expanding into areas
without service.
Many households, especially those in remote rural areas,
may continue to use solid fuels for the foreseeable future.
Indeed, in the IEAs Energy for All scenario, about 1.3 billion
people are assumed to continue using solid fuels in 2030,
with access being achieved through adoption of advanced
stoves that have considerably lower emissions and higher
efciencies than traditional three-stone res for cooking.
Slightly fewer people would shift to LPG, and about 350 mil-
lion would move to biogas, according to IEA 2011 WEO. In
recognition of the need to nd solutions tailored to those who
will continue to use solid fuels, clean and efcient cooking
and lighting solutions should be pursued in these situations.
Optimizing Electricity Access:
The Local Context
Selecting among the various electricity access solutions,
which encompass grid-based, mini- and microgrid, and off-
grid technologies, can have signicant implications for cost,
ease of implementation, and sustainability. It is important to
select the optimal technology and carefully consider trade-
offs between costs and benets, likely demand growth dur-
ing the planning period, and the prospect of eventual transi-
tion to grid-based access as appropriate. On the last point,
some solutionssuch as solar lanterns and microgrids
may be transitional, eventually replaced by or subsumed into
systems based on larger grids.
Development should be based on nancially sustain-
able approaches. Supply-driven approaches to expanding
access often ignore nancial sustainability concerns aris-
ing from the inability or lack of willingness of customers
to pay fully for the service. Experience across several coun-
tries (for example, see Vietnam: A Successful Grid Access
Expansion) has shown that rapid expansion of grid-based
electricity access can best be implemented and sustained
when investments are prioritized based on willingness and
ability to pay and when clear technical guidelines are pro-
vided, in an environment of strong government leadership
In its push for rapid electrification in the 1990s, Vietnam
followed an approach of allowing multiple entities and
financing arrangements to construct, manage, and oper-
ate rural distribution networks without imposing minimal
technical requirements. This approach enabled a rapid
increase in electrification: from 1994 to 1997, access in-
creased from 14% to 61%. Longer-term technical prob-
lems with reliability, the quality of service, and distribu-
tion losses began to emerge, however. Furthermore, the
low efficiency with which some of these networks were
operated, coupled with the lack of financial strength in
some of the community rural distribution utilities, under-
mined the quality and financial sustainability of electric-
ity service. The government responded so as to improve
service quality and the financial sustainability of rural
electricity distribution. A significant feature of the re-
sponse was to define strategies for the system planning,
implementation, and management of rural electrification.
Furthermore, to enhance the development of the power
sector and all electricity activities, the government set
up a new legal and regulatory framework for the sector.
An important recent milestone in this respect was the
prime ministers Decision 21 in 2009, which stipulated a
unified national tariff for all residential consumers. It was
designed as an incremental block tariff, with the first sub-
sidized block being a lifeline block. The decision also en-
abled the takeover of financially weak local distribution
utilities by the larger power corporations, consolidating
the rural electricity distribution and retail business. In
2010, the Vietnam Distribution Code was approved. It es-
tablished the rights and obligations of power corporations
with respect to distribution and retail activities and their
customers, including provisions regarding quality-of-ser-
vice obligations and consumer protection.
In 2010, 99% of the communes and 96% of the house-
holds in Vietnam were estimated to be connected to the
grid. The four tasks that remain are:
to rehabilitate the low-voltage electricity distribu-
tion networks in approximately 3,000 communes
to determine the most suitable way to achieve the
target of electrifying all of the countrys households
to continue to improve the quality of access and re-
liability of supply
to continue to ensure that electricity is affordable
to the poor.
Source: World Bank.
Vietnam: A Successful Grid
Access Expansion
may/june 2012 IEEE power & energy magazine 25
and planning and with proper funding from different
sources, including cross-subsidies and government funds.
Such cases typically benet from higher population density,
greater economic activity, and better transport connectiv-
ity, which allow productive loads and paying demand to be
attained rapidly.
Investment Needs and Financing Sources
IEA estimates that an additional US$30.5 billion, over and
above the US$13 billion committed under the New Poli-
cies scenario (both in 2010 U.S. dollars), would be needed
annually between 2010 and 2030 to achieve universal access
to electricity by the latter date. All urban areas and nearly
30% of the rural households that would be left unconnected
in the New Policies scenario are expected to be connected
through on-grid solutions. The remaining 70% of the rural
households that would otherwise be without service are rela-
tively more remote; two-thirds of them would be connected
through minigrid solutions, and one-third through off-grid
solutions. For cooking and heating, the estimates are US$1
billion annually under the New Policies scenario and an addi-
tional US$3.5 billion for universal access to provide biodi-
gesters, LPG stoves and cylinders, and advanced biomass
cookstoves. The total annual expenditure comes to US$48
billion, compared with US$14 billion in the New Policies
scenario and US$9 billion in 2009. An annual nancing of
about US$18 billion would be required from multilateral
and bilateral sources, US$15 billion from developing coun-
try governments, and another US$15 billion from a diverse
range of private-sector actors.
Institutional and Regulatory Aspects
A strong institutional setup for expanding access to energy
is highly desirable. Designated agencies responsible for
planning, designing, executing (through public utilities and
private players), and monitoring energy access programs
can play a critical role, especially in sub-Saharan Africa and
South Asia. Increasingly, these agencies would have to act as
market developers and policy formulators rather than just as
implementers. In addition, in response to the lack of inter-
est on the part of distribution utilities in rural electrication
and in the hope of minimizing political interference, many
countries have opted to establish a specially designated
institution to manage multiyear earmarked resources so as
to support rural electrication projects. It is necessary, how-
ever, to ensure that these agencies are adequately resourced.
This approach is often accompanied by a rural electrica-
tion fund, managed jointly or by a separate entity.
It is also desirable to adopt tariffs that cross-subsidize
efciently so as to increase nancial performance and access
to funds. Cost recovery through tariffs is critical in building
nancially sustainable systems. In particular, the high costs
of electricity supply in rural areas and the limited capacity of
households to pay for the service make it difcult to attract
investment in rural electrication. To do so requires a system
of tariffs and subsidies that ensures sustainable cost recovery
while minimizing price distortions, but such a revenue gener-
ation scheme is absent in many countries. All too often, tariff
subsidies are designed to favor the large majority of consum-
ers, including the well-off, while failing to offer incentives
to utilities to invest in rural electrication. According to the
World Bank, such ill-designed tariff schemes are found par-
ticularly in sub-Saharan Africa, where subsidies applied to
residential consumers are highly regressive.
Technology standards for integrating stand-alone mini-
grids with the main grid when the two meet are critical. With
the involvement of several diverse players, ranging from state-
owned utilities to community organizations and private entre-
preneurs, such standardization is in fact indispensable. Apart
from safety and performance considerations, this is especially
important for transition technologies such as minigrids, which
may eventually be integrated into the main grid. Minigrid
solutions need to be designed adequately to be able to sustain
internal demand growth and to include the capability to inter-
act with interconnected grids as this becomes feasible.
Renewable Energy
There are sources of electricity that are low in both cost and
emissions. While the costs of most renewable energy tech-
nologies are highly dependent on the quality of the natural
resource at the installation site, large-scale hydropower tends
to offer the lowest cost and can be competitive with conven-
tional thermal generation. Similarly, geothermal generation
can also be cost-competitive, making it another suitable can-
didate for increasing access and supply reliability in devel-
oping countries. These technologies have challenges of their
own, including large front-end costs and long construction
lead times. At the opposite end of the spectrum, solar tends to
be a more expensive form of renewable energy but could still
be the least-cost option in remote, isolated areas. Table 2 pro-
vides typical characteristics of renewable energy and indica-
tive economic costs, levelized and exclusive of subsidies or
policy incentives. The levelized cost of electricity takes into
account the production patterns for each technology, which
are driven by the particular resources availability charac-
teristics, e.g., solar radiation, wind speed, and water inow
regimes. The characteristic cost estimates demonstrate that
large economies of scale still prevail in power generation.
Figure 2 compares the levelized costs of electricity from
renewable sources and conventional technologies using data
from 190 power plants in 21 countries. The relative costs
show that the median cost for onshore wind power is typically
highersometimes more than doublethat of conventional
technologies but can be cost-competitive with natural gas or
coal in some circumstances, particularly in North America.
Generation options have unique technical characteristics
that help the system as a whole ensure reliable and secure
operation. Therefore, promoting any one particular form of
generation beyond an optimal mix in a given system would
not be economically justiable or technically viable.
26 IEEE power & energy magazine may/june 2012
Planning
Planning reemerges as an important tool in the carbon-con-
strained era. Planning does not preclude private sector partic-
ipation in investment and needs to be guided by clear national
policy goals, such as supply adequacy and reliability, local
and global environmental sustainability, and desired levels of
exposure to various price and nonprice risks. Planning should
always adhere to minimum-cost principles and appropriately
value, to the extent practically possible, all policy goals.
Planning should be followed by implementation by investors
f igure 2. Levelized cost of electricity for some conventional technologies and wind power. Levelized costs computed
at 10% discount rate, 2010. Data are from 190 plants to be commissioned by 2015 in various countries, mostly in Asia
Pacific, Europe, and North America. In this figure: Austria (AUT), Belgium (BEL), Canada (CAN), Czech Republic (CZE),
Electricite de France (EDF), Germany (DEU), Hungary (HUN), Italy (ITA), Japan, Korea, Mexico, Energy Supply Associa-
tion from Australia (ESAA), and the Electric Power Research Institute (EPRI). (Source: IEA.)
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Nuclear
Coal
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Wind
Nuclear
Coal
Gas
Onshore
Wind
Nuclear
Coal
Gas
Onshore
Wind
0 50 100 150 200 250
(US$/MWh)
Median Line
Nuclear
Gas
Coal
Onshore Wind
table 2. Typical characteristics and costs of some renewable energy options (source: REN21).
Technology Typical Characteristics US$/kWh
Hydropower 10 MW18,000 MW 0.030.05
Mini-hydropower 1001,000 kW 0.050.12
Pico-hydropower 0.11 kW 0.200.40
Onshore wind turbine 1.53.5 MW 0.050.09
Offshore wind turbine 1.55 MW 0.100.20
Biomass power 120 MW 0.050.12
Geothermal power 1100 MW, binary, single- and double-flash, natural stream 0.040.07
Concentrating solar power 50500 MW (trough), 1020 MW (tower) 0.140.18 (trough)
Solar photovoltaic (PV), utility-scale 200 kW
peak
100 MW
peak
0.150.30
Rooftop solar PV 25 kW
peak
0.170.34
Biomass gasifier 205,000 kW 0.080.12
Village-scale minigrid 101,000 kW 0.251.00
may/june 2012 IEEE power & energy magazine 27
appropriate to the particular countrys circumstances, whether
it is regulated, integrated utilities that provide the energy ser-
vices or private investors in competitive markets.
The estimation of costs and the valuation of benets
entail complex assessments that face substantial limitations
and uncertainties. Policy makers need to be capable of con-
ducting such analyses so as to be able to choose and deploy
appropriate economic incentives where necessary. For
example, the most cost-effective option for reducing emis-
sions in one country could be hydropower, while in others
it may be the combination of new wind and gas. Exploit-
ing lowest-cost options is critical in low-income countries in
order to increase access in an affordable manner.
Within the energy sector, integrated resource planning
can assist in the evaluation of alternatives to satisfy future
demand in an environmentally sustainable way, includ-
ing all supply and demand options. Planning that consid-
ers risks and looks proactively at supply and networks in an
integrated manner is increasingly important for scaling up
dispersed technologies such as wind and solar power.
Investment Needs and Financing Sources
Global investment in renewable power and fuels set a new
record in 2010: investment hit US$211 billion, up 32% from
US$160 billion in 2009 and nearly ve and a half times the
amount spent in 2004. Financial new investment, a mea-
sure that covers transactions by third-party investors (asset
nance and investment by venture capital, private equity,
and public markets) reached US$143 billion in 2010, equally
split between developed and developing countries. The
developing worlds progress in renewable energy develop-
ment is no longer conned to one or two countries. In 2010,
nancial new investment in renewable energy grew by 105%
to US$5 billion in the Middle East and Africa and by 39% to
US$13.1 billion in South and Central America.
IEAs New Policies scenario projects 2,360 GW more
renewable energy capacity by 2035 than in 2009. Of the
increase in renewable power generation, 40% will come
from wind power, followed by hydropower at 26% and solar
at 24%. Correspondingly, annual subsidies for renewable
electricity should increase to nearly US$180 billion by 2035.
Financing poses two serious challenges. The rst is the
volume of subsidies required to support renewable energy
deployment and the availability and sustainability of the s-
cal and concessional sources to nance them. The second is
attracting private-sector investment in renewable energy to
leverage public and concessional nance effectively.
While some developing-country governments may choose
to provide subsidies for more expensive forms of renewable
energy from their own budgets, their scal space is typically
severely constrained in the light of many pressing social
needs. Capital ows to renewable energy investment will
require a combination of grant funding, sovereign guaran-
tees, risk mitigation instruments, and insurance of various
sorts, all depending on project and country conditions.
The second challenge requires designing and imple-
menting effective and efcient policies as well as estab-
lishing an investment climate capable of attracting the pri-
vate sector.
Institutional and Regulatory Support
An increasing number and variety of renewable energy
policies have driven substantial growth of renewable energy
technologies in recent years, especially in high- and middle-
income economies. Policy mechanisms enacted specically
to promote renewable energy include price- and quantity-set-
ting policies, such as feed-in tariffs and renewable portfolio
standards. These price- and quota-based policies have been
complemented by a variety of scal and nancial incentives.
Experience shows that the most effective policy or com-
bination of policies depends on factors such as technology
maturity, availability of affordable capital, and the local and
national renewable energy resource base. High- and middle-
income countries have made frequent policy shifts, and
many are now making combined use of price- and quota-
based instruments to address different segments of the
renewable energy market.
Several studies have concluded that feed-in tariff policies
have been effective in promoting renewable electricity due
to the stable revenue they guarantee to providers. The eco-
nomic efciency (value for money) of feed-in tariff policies,
however, depends on their actual design (whether the instru-
ment provides the minimum subsidy necessary to develop
the market and meet renewable energy targets).
Quota-based policies have favored mature, lower-cost
technologies and have been less effective at scaling up the
market for newer, more expensive forms of renewable energy,
since prices in this mechanism, which are determined by
market forces, tend to be riskier. Over the last few years,
auctions have emerged as a strong mechanism to implement
renewable energy policy, especially in upper-middle-income
economies. Auctions offer an alternative for meeting renew-
able energy targets to traditional, administratively set feed-
in tariffs. When successful, auctions have fostered competi-
tion and pushed prices down. The design of auctions is still
evolving, and their design is critical for success.
Research, development, and innovation continue to be
equally important in developing countries to maximize the ben-
ets of deploying already existing or more mature renewable
technologies. Innovation in developing countries will be criti-
cal for adapting these technologies to local conditions, manu-
facturing the equipment locally, and operating it efciently.
Energy Efficiency
Planning
The effective implementation of energy efciency poli-
cies around the world could potentially contribute to more
than one-third of avoided GHG emissions by 2050. Though
the savings would occur in both developed and developing
28 IEEE power & energy magazine may/june 2012
countries, is it is estimated that more than two-thirds of the
efciency-based potential emissions reduction could come
from demand-side interventions across different end-use sec-
tors in developing countries.
Scaling up energy efciency is less a technology chal-
lenge than an implementation challenge. Most supply-side
and demand-side energy efciency measures are already
commercially available, and the interventions are feasible
in the short term with current technology and at relatively
low life-cycle costs. Estimates suggest that currently avail-
able technologies alone should be able to achieve 3040%
improvement across many sectors and countries, a poten-
tial not matched by investments. For example, updating
70% of the installed lighting base (which accounts for
20% of total global electricity consumption) could save
50% of the energy consumed for this purpose using exist-
ing technologies.
While the benets of increasing energy efciency are
well recognized, there are several barriers to implementa-
tion that hamper the realization of its potential. These bar-
riers tend to be especially prevalent in developing countries
and particularly on the demand side. The barriers can be
institutional, nancial, technological, and/or policy-related
and lead to higher risks for investments and transactions. For
example, even nancially viable energy efciency projects
are often unable to obtain funding, because nanciers per-
ceive higher technical and credit risks. The viability of the
project is judged according to the estimated savings, which
are seen to have large uncertainties and hence raise perceived
technical risks. At the same time, energy efciency projects
do not entail asset-based nancing (which is what bankers
are accustomed to in terms of appraisal) and lack collat-
eral guarantees for performance failure, thereby increasing
credit risks. In addition, the small size of many good energy
Improving energy efficiency has been a cornerstone of Chinas
energy policy since the early 1980s. But China faces barriers
to energy efficiency measures, like most other countries. As
China approached the millennium, its government deployed
a variety of sophisticated policies that were well suited to the
developing market economy, including:
economic reform of most enterprises through price
mechanisms
regulation (with the passage of the Energy Conservation
Law in 1997 and a revision in 2007) in support of appli-
ance standards and labeling programs, building codes,
and industrial benchmarking
research and development and/or technology transfer
of new and more energy efficient technologies
market-based initiatives, through development of new
investment mechanisms.
Since the early 1990s, several interventions have been
made in China to remove market and implementation bar-
riers. The China Energy Conservation Project, Phases I and
IIan effort supported by the Global Environment Facility
(GEF) and implemented by the World Bankhas been suc-
cessful in creating an enabling environment for domestic
investment in energy efficiency projects through aggressive
development of Chinas nascent industry for energy ser-
vice companies (more commonly known in China as energy
management companies). The succeeding stages of support
involved another World Bank project, the China Energy Ef-
ficiency Financing Project (also with two phases), which has
been implemented to strengthen the lending capabilities of
domestic banks for energy efficiency and reduce barriers for
large industries.
Under the 11th Five-Year Plan (20062010), China pledged
to reduce energy intensity by 20%. Prominent and comple-
mentary energy efficiency programs in the plan included:
the 1,000 Large Industrial Enterprises Energy Conserva-
tion Action Plan to develop and implement specific en-
ergy efficiency improvement programs in the top 1,008
largest industrial energy consumers, which together ac-
count for about 0.33% of Chinas total primary energy
consumption
a set of programs to encourage a structural shift in in-
dustry away from energy intensity, including efforts to
adjust fiscal policy towards export-oriented, energy-
intensive industry and major programs to restructure or
close inefficient energy-intensive plants
establishment of special energy efficiency funds to
provide additional incentives for energy conservation
investment
the ten key projects, covering major energy efficiency
improvement technologies in manufacturing, transpor-
tation, commercial and residential buildings, and public
facilities.
The targets set in the 11th Five-Year Plan were either met
or exceeded: energy consumption per unit of gross domestic
product (GDP) decreased by 19% during the plan years. Mov-
ing forward, the 12th Five-Year Plan (20112015) continues to
attach great importance to actively coping with climate change,
controlling GHG emissions, and further improving energy effi-
ciency. Under the plan, China is committed to reducing energy
intensity by 16% and CO
2
emissions per unit of GDP by 17%.
Source: World Bank
China: Successful Energy Efficiency Improvement Measures
may/june 2012 IEEE power & energy magazine 29
efciency projects leads to higher transaction costs for the
banks and, unless there are credible energy service compa-
nies that can bundle these small projects effectively for the
nanciers, the potential remains untapped.
While the private sector has acted on opportunities to
improve energy efciency where they are nancially viable,
penetrating the public and residential sectors and small and
medium-size enterprises has been difcult and will require
public sector support. Some large developing countries, such
as China, have successfully begun implementing important
energy efciency measures (see China: Successful Energy
Efciency Improvement Measures).
Investment Needs and Financing Sources
Though the incremental costs of energy efciency measures
pay back fairly quickly, the higher initial costs of energy
efciency technologiesparticularly when those costs are
borne directly by consumerscould be a major barrier in
some countries and sectors. Competition for nancing from
alternative projects with higher risk-adjusted returns, along
with the scale and dispersed nature of projects, also deters
investment in energy efciency improvement.
Private-sector nancing will therefore be absolutely
critical. The McKinsey Global Institute reports that invest-
ing US$170 billion annually in energy efciency worldwide
could generate an average internal rate of return of 17% and
produce energy savings of up to US$900 billion per year.
Estimates by IEA and the Global Energy Assessment of the
International Institute for Applied Systems Analysis indi-
cate that current global annual investments of US$200 bil-
lion in energy efciency will need to be increased by another
US$258 billion to US$365 billion in order to achieve the
SE4All energy efciency goals.
Institutional and Regulatory Support
Despite numerous attempts, including signicant efforts
by development institutions and national governments to
scale up energy efciency improvements, results to date
have been modest. Transforming energy markets to raise
efciency requires both regulatory policies and nancial
incentives. There is no single one-size-ts-all model for
scaling up energy efciency, especially on the demand
side. The greatest contributions come through efciency
improvements in technology, rational energy pricing free
of generalized subsidies, market liberalization, and sys-
tematic efforts to reduce the energy intensity of specic
end-use sectors. Good governance and strong internal
capacity reduce risk to private-sector investors. But many
countries lack the human resources and technical capac-
ity to enforce energy efciency regulations and develop
appropriate policies. The institutional frameworks, robust
implementation infrastructure, and effective governance
mechanisms that enable such change need to be strength-
ened for regulatory policies to have a larger impact in
developing countries.
Acknowledgments
The ndings, interpretations, and conclusions expressed in
this article are entirely those of the authors and should not
be attributed in any manner to the World Bank, to its afli-
ated organizations, or to members of its Board of Executive
Directors or the countries they represent.
For Further Reading
International Energy Agency (IEA), World Energy Outlook
2011. Paris, France: OECD, 2010.
International Energy Agency (IEA). (2010). Projected
Costs of Generating Electricity, 2010 Edition. Paris, France:
OECD. [Online]. Available: http://www.iea.org/textbase/
nppdf/free/2010/projected_costs.pdf
International Energy Agency (IEA). (2011). CO
2
emis-
sions from fuel combustion statistics. [Online]. Available:
http://www.iea.org/co2highlights/co2highlights.pdf
International Energy Agency (IEA). (2011). Organization
for Economic Co-operation and Development (OECD), Orga-
nization of the Petroleum Exporting Countries (OPEC), and
World Bank. Joint Report by IEA, OPEC, OECD and World
Bank on fossil-fuel and other energy subsidies: An update
of the G20 Pittsburgh and Toronto Commitments. [Online].
Available: www.oecd.org/dataoecd/14/18/49006998.pdf
REN21. (2011). Renewables 2011 global status report.
[Online]. Available: www.ren21.net/Portals/97/documents/
GSR/GSR2011_Master18.pdf
United Nations Development Programme (UNDP) and
World Health Organisation (WHO). (2009). The energy ac-
cess situation in developing countries. A review focusing on
the least developed countries and sub-Saharan Africa. [On-
line]. Available: http://www.who.int/indoorair/publications/
energyaccesssituation/en/index.html
United Nations Environment Programme (UNEP). (2009).
Catalysing low-carbon growth in developing economies: Pub-
lic finance mechanisms to scale up private sector investment
in climate solutions. [Online]. Available: www.unep.org/PDF/
PressReleases/Public_nancing_mechanisms_report.pdf
United Nations Environment Programme (UNEP) and
Bloomberg New Energy Finance. (2011). Global trends in
sustainable energy investment 2011: Analysis of trends and
issues in the financing of renewable energy. [Online]. Avail-
able: bnef.com/WhitePapers/download/50
World Bank. (2010). Addressing the electricity access gap.
[Online]. Available: http://siteresources.worldbank.org/EX-
TESC/Resources/Addressing_the_Electricity_Access_Gap.pdf
World Bank Group. (2011). Enterprise surveys. [Online
database]. Available: http://enterprisesurveys.org
Biographies
Marcelino Madrigal is with the World Bank.
Mikul Bhatia is with the World Bank.
Gabriela Elizondo is with the World Bank.
Ashok Sarkar is with the World Bank.
Masami Kojima is with the World Bank.
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