Energy for all: The Next Challenge

Dr. Fatih BirolIEA Chief Economist

There are three main global energy challenges that I seein front of us: security of supply, the threat of environ-mental damage caused by energy production and use,and persistent energy poverty.1

In the latest (2011) edition of the International EnergyAgency’s World Energy Outlook (WEO) we examine thechallenges that policy makers are facing as they lookforward. The first two challenges – energy security andclimate change – have justifiably received a great deal ofattention from policy makers, although major steps arestill lacking in these areas. While not losing sight ofthese – especially as the world economic crisis threatensto divert policy attention elsewhere – we need to focussignificantly more effort on the third energy challenge.

Access to affordable and reliable energy services isfundamental for reducing poverty, promoting economicgrowth and improving health. At currently expectedinvestment rates, however, the absolute number of peo-ple without access to modern energy services isexpected to decline only slightly, and in some areaseven increase.

The WEO has helped focus attention on householdaccess to modern energy services for the past decade,beginning in 2002 when we first estimated the numberof people without electricity. In subsequent editions ofthe WEO we have explored other aspects of energy pov-erty, including the continued reliance on traditionalwood fires for cooking. More recently, we have esti-mated the cost of providing universal access to modernenergy services by 2030 (a deadline recommended by anadvisory panel to the UN Secretary General). This year’sedition devotes a special section to the critical issue offinancing such an endeavour.

We estimate that over 1.3 billion people (around 20per cent of the world’s population) currently do nothave household access to electricity, and 2.7 billion(around 40 per cent) remain without clean cooking facili-ties.2 More than 95 per cent of these people are in sub-Saharan Africa or developing Asia, and 84 per cent are inrural areas.

To the best of our knowledge, for the first time inenergy literature, we have estimated the total amount ofinvestment taking place globally to provide access tomodern energy services: a total of US$9.1 billion during2009.3 Approximately 34 per cent and 14 per cent of this

came from multilateral and bilateral development assis-tance respectively, 30 per cent from domestic govern-ment sources, and 22 per cent from private investors.

In the absence of major new policies, we projectannual investment in energy access through 2030 willaverage about US$14 billion, most of which will continueto go to grid electricity connections in urban areas. Atthis level of investment, the share of population withoutaccess to modern energy services will fall, but the abso-lute numbers of those without access will decline onlyslightly, still leaving about 1 billion people without elec-tricity and 2.7 billion without clean cooking facilities in2030.

The good news is that some countries have made pro-gress and others are expected to do so as well. Majorsuccesses can be seen in India and Vietnam, among oth-ers. Recent survey data from India show that 67 per centof the rural population and 94 per cent of the urbanpopulation reported expenditure on electricity during2009, up from 56 per cent and 93 per cent since a simi-lar survey in 2006. In Vietnam, the share of the popula-tion with household electricity access increased fromunder 5 per cent to 98 per cent in 35 years. Bangladeshand Sri Lanka also have carried out successful energyaccess programmes, while progress in Africa has beenseen recently in Angola and Congo, among others.

In our main scenario, increased access to modernenergy services in the future is driven largely by rapideconomic growth in several developing countries,accompanied by rapid urbanisation in some cases. Wehave also taken into account countries’ stated plans. Ourprojections show India reaching an electrification rate of98 per cent in urban areas and 84 per cent in rural areasby 2030. In several other countries, national targets toincrease access are expected to succeed in deliveringimprovements over the projection period, but only on alimited scale. Many targets will not be achieved unlessrobust national strategies and implementation pro-grammes are put in place.

Our analysis of past trends and future investmentplans indicate that sub-Saharan Africa will have thegreatest difficulty keeping pace with its populationgrowth: although the share of the population withouthousehold access to electricity is expected to fall there,from 69 per cent in 2009 to 49 per cent in 2030, the

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number of people without access will rise by 10 per cent,from 586 million to 645 million, and the number of peo-ple continuing to rely exclusively on traditional woodfires for cooking will rise by nearly 40 per cent. Thenumber of people without access to clean cooking facili-ties is also expected to increase in developing Asia(excluding China and India).

We estimate that annual spending on energy accessneeds to increase to more than five times current levelsin order to achieve universal access to electricity andclean cooking facilities by 2030,i.e., from US$9.1 billion to US$48billion annually. Only about 10 percent of the additional funds wouldbe required for universal access toclean cooking facilities. On aver-age, over 60 per cent of the addi-tional funds used for electricityaccess would be invested in minigrids and standalone systems,which would be supplied largely by renewables. Whilethe total amount required to achieve universal access islarge, it represents only 3 per cent of expected globalenergy infrastructure over the period. Successes incountries like China, Vietnam and India suggest that itis achievable.

All sources and forms of investment finance will needto increase, especially private, which we estimate willneed to account for nearly one third of the total, orabout US$15 billion per year on average. To attract theneeded level of private capital, developing country gov-ernments will need to adopt robust investment and reg-ulatory frameworks, in addition to investing about US$15billion per year of their own funds.

Multilateral and bilateral donors and institutions canassist national governments in developing the requiredframeworks, as well as replicable business models suitedto different circumstances. In WEO 2011, we have stud-ied models that may be appropriate for different combi-nations of geographic location (urban, peril urban andrural) and energy expenditure levels, based on what hasbeen used successfully in similar conditions elsewhere.However, much work is still required in elaborating com-mercially viable models for delivering modern energyservices to the rural poor on a significant scale. Untilthese are developed, the lion’s share of public funds(including multilateral and bilateral) will need to be con-centrated on those difficult areas of access which do notinitially offer adequate commercial return, particularlyrural off grid solutions.

Development of end user and dealer finance, particu-larly through local banks and microfinance institutions(e.g. via partial guarantees) should be another importantfocus area for development assistance: poor peopleoften are able to afford the full price of modern energy

because it costs less than the traditional forms itreplaces, such as kerosene lamps and dry cell batteries,but there is seldom credit available to help them toovercome the hurdle of the initial capital cost. Variousforms of risk insurance for international investors shouldalso continue to be developed and offered.

Overall, we estimate that investment for multilateraldevelopment banks and bilateral sources collectivelyneeds to average around US$18 billion per year from2010 to 2030. This is just over 37 per cent of the total

required investment, but more thanthree times the level assumed fromthese sources in our main scenario.Such a scale up in financing frommultilateral and bilateral develop-ment institutions clearly wouldrequire a significant increase inunderlying funds and ⁄ or a reorderingof development priorities withinthem.

Universal access to modern energy services wouldhelp promote social and economic development andcurtail deforestation in the world’s poorest countries,while calculations done in collaboration with the WorldHealth Organization suggest that it would help avoid1.5 million premature deaths per year due to indoor airpollution. Achieving universal access by 2030 wouldincrease global electricity generation by 2.5 per cent,but in the case of mini grid and off grid generation,more than 90 per cent of this additional electricity islikely to come from renewables. Universal access wouldcause demand for fossil fuels to grow by only 0.8 percent, and related CO2 emissions by up to 0.7 per cent –equivalent to the annual emissions of New York Statebut giving electricity to a population more than 50times the size. In order to reach the goal of universalenergy access by 2030, national governments anddonors will need to adopt clear and consistent state-ments that this is a priority. One important way to dothis is by adopting specific, staged national energyaccess targets and allocating funds for their achieve-ment. Currently, the UN Millennium Development Goals(MDGs) do not include targets related to energy access.As suggested already by the UN Secretary General’sAdvisory Group on Energy and Climate Change, suchtargets should be adopted by the international commu-nity in order to focus attention on this important chal-lenge.4 It is also critical that energy access programmesand projects make provision for the collection ofrobust, regular and comprehensive data to quantify theoutstanding challenge and monitor progress towardsresolution.

Energy access is beginning to receive greater interna-tional attention, but still requires a massive increase ineffort to keep pace with other pressing items on the

Over 1.3 billion people (around20 per cent of the world’s popu-lation) currently do not havehousehold access to electricity,and 2.7 billion (around 40 percent) remain without clean cook-ing facilities

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international agenda. The Government of Norway hostedthe Energy for All Conference in Oslo in October2011, and the United Nations has declared 2012 the‘International Year of Sustainable Energy for All’. Weneed to build on this momentum as we head towardsthe United Nations Conference on Sustainable Develop-ment (Rio+20) in Rio de Janeiro in June 2012. The inter-national community has clear economic, political, andenvironmental and energy security interests in helpingpoor countries along the path to energy development:as long as poverty persists, the poorest regions willremain vulnerable to social and political instability andto humanitarian disasters. National governments needto adopt a specific energy access target, allocate fundsto its achievement and define their strategy for deliver-ing it.

Beyond these economic, energy and political consider-ations, access to energy for all is, I believe, an ethicalimperative.

Notes1. Dr. Birol first formulated the issue of energy poverty in these

terms in his acceptance speech at the annual International Asso-

ciation of Energy Economics’ ‘Outstanding Contribution to theProfession’ award in 2004, in Taipei. Available from: http://www.worldenergyoutlook.org/development.asp [Accessed]

2. Clean cooking facilities refer to those that burn less fuel and pro-duce lower emissions than traditional three stone fires. Theseinclude advanced biomass cook stoves, LPG stoves and biogasstoves.

3. Accounting for investments in improved stoves, isolated minigr-ids and standalone electrical systems is relatively straightforward.Deciding what portion of investments in transmission and newgeneration capacity to count as ‘energy access’ is more compli-cated. For current investments, we have generally relied on insti-tutions’ own definitions. For future investments in generation,we have estimated the additional capacity that will be requiredto meet the additional demand from new household connec-tions, with assumptions on the most likely capacity mix by coun-try or region.

4. ‘Energy for a Sustainable Future: The Secretary-General’s AdvisoryGroup on Energy and Climate Change (AGECC): Summary Reportand Recommendations’, 28 April 2010.

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