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FINDING A BETTER USE FOR AID

Increasing demand for power in the Third World and a rising environmental consciousness should lead to long needed changes in the way energy aid from the West is allocated. A new report from the World Resources Institute (WRI) states that unless a massive effort is made, about 70% of new capacity in the Third World will come from fossil fuels, mainly because environmental costs have not yet been incorporated in fossil fuel costs, and not from renewables. The report pinpoints mistakes in earlier aid programmes and stresses the World Bank's tendency to underestimate small scale technologies. Bilateral aid should build sustainable markets and not be used as a vehicle by which donor countries can tie aid to technology supplied by their own industries. Aid should be directed towards commercialisation of renewables technologies in recipient countries. Aid agencies should scrutinise their own methods and means to ensure that the trend towards privatisation also implies more use of renewables. The report concludes that long-term joint ventures with serious commitments should prevail over short-term market share ventures.

Western aid is crucial to the development of renewable sources of energy in the Third World. But donor countries have largely ignored the enormous potential of technologies such as wind power to bring tangible long term benefits to poor countries using local resources. When aid has been earmarked for renewables, it has often been too little, too late, and been poorly invested. Now, with rising demand for power closely followed by increasing environmental concern in the Third World, aid for energy infrastructure needs to be radically re-directed.

In a new report from the World Resources Institute (WRI), "Rethinking Development Assistance for Renewable Electricity," Keith Kozloff and Olatokumbo Shobowale also point out that renewables technology is far more mature than in the 1980s, when overseas wind projects were first funded. "There's a resurgent interest [in renewables] after a period of discontent," says Kozloff of the report's timing. "There's some feeling that renewables had been burned in the 1980s, and that that had carried over to the developing countries." With the restructuring of the power industry towards privatisation around the world -- and with the likelihood of closer political scrutiny of aid donations in the current atmosphere of budget slashing and conservatism in the US -- the time could have come for a change in energy aid policy. "We need to find ways of making it more cost effective," says Kozloff.

The report notes that the developing world's demand for electricity will double in the next 15 years. But unless there is a massive effort to make renewables more attractive, about 70% of the added capacity will be from fossil fuels that exacerbate pollution. This is because conventional technologies appear deceptively good for reasons all too familiar to the wind community -- fuel prices do not include the environmental costs of fuels and conventional power is usually subsidised. China directly subsidises coal transport while India simply subsidies its railways -- on which about one-quarter of the freight is coal being moved to power plants. On average, developing country consumers get electricity 30% cheaper than their industrialised counterparts, even though it usually costs more to provide.

Thus, while polluting emissions are projected to decline in North America and Europe over the next 25 years, in the rest of the world they are expected to more than double -- and increase by as much as eight-fold by 2030. Fuel imports will consume about half of these countries' scare revenues, where renewables could be produced indigenously without so many price risks and foreign exchange problems. Yet only 2.5% of the $80 billion in aid spent on energy went to renewables over the past 13 years -- or just 5% of the $4.5 billion earmarked for energy as recently as 1991, say the authors. Indeed multilateral and bilateral assistance overall tend to ignore renewables.

Past errors

In pinpointing the mistakes of aid programmes of the past, the report examines 11 projects that use technologies such as wind, photovoltaics, small hydro power, geothermal and biomass in nine countries -- Brazil, the Dominican Republic, India, Kenya, Mauritius, Morocco, Nepal, the Philippines and Tibet.

Wind and other small-scale technologies are not a popular choice for multilateral aid, the report points out. One of the main sources of such aid, The World Bank, has traditionally financed large hydro and geothermal projects. And although it now intends to stress other renewables more, it still under-emphasises technical assistance -- for example, gauging the match between the local wind resource and a utility's needs -- putting wind and other renewables at a disadvantage. The World Bank's power planning tools, often adopted by developing countries, are also geared to large traditional technologies and might not, for example, adequately address load-forecast uncertainties. Too much effort goes into getting approval of the design of a World Bank project at the expense of following through on implementation, the report contends. Lesser known or small scale technologies may be under-evaluated because of pressure from the top of such institutions to minimise loan preparation costs.

A World Bank fund, the Global Environment Facility (GEF), has rightly attracted the attention of the renewables community, as its brief is to address climate change and other global environmental threats. Three GEF projects involving a significant wind portion were being partially funded in the second quarter of 1994 -- a $38.9 million project of grid-integrated advanced wind power in Costa Rica; a $340 million renewable resource management project in India (the wind component is fully subscribed); and a $4 million project in wind electric power for social and economic development in Mauritania, in west Africa. But although the GEF's contribution to the three is $31.3 million, its total budget for all projects, of $2 billion for three years, will still be swamped by need, says the report. Just in Colombia alone, electric expansion through 2009 will cost an extra $400 million because of carbon constraints.

Bilateral aid to specific renewables projects -- when a donor country provides direct assistance to a recipient country -- is also criticised in the report. Donors too often link aid to renewable technologies in which their industries have a comparative advantage. Denmark is a case in point, often tying its renewables' aid specifically to Danish wind turbines. The authors state that donors must shift emphasis from myopically promoting their own exports -- to building sustainable markets.

Too little

Both multilateral and bilateral aid for renewables has been far too modest. Over 1979-91, money for renewables projects was about $1.3 billion, only some 3% of the total reported aid. Geothermal received the most, followed by small hydro. Other technologies such as wind have received no more than one-tenth of the resources allocated to small hydro. For example, wind received just 2.3% of the assistance between 1979 and 1991.

In America, the US Agency for International Development (USAID) promoted about 200 renewables projects between 1975 and 1988. But research and development technology was overly promoted at the expense of technology diffusion. A bilateral US effort to correct this imbalance, a private non-profit International Fund for Renewable Energy and Energy Efficiency (IFREE), has had little success. Agencies such as IFREE, established as part of an effort to "mainstream" applications of renewables, remain hampered by lack of funding and support within the institutions they seek to influence, says the report.

Many renewable projects were also too small to generate a critical mass of interest and enough local support for economies of scale to win through. And if too much imported equipment is used, the potential foreign exchange savings of renewables can become increasingly diluted as post project imports increase. An import-intensive wind project whose returns are less than the international lending rates may not reduce a country's foreign exchange requirements, the authors argue.

The way forward

Commercialisation of renewables technologies in developing countries holds the key to their market penetration, says the report. Donors, lenders, private companies and developing country utilities should collaborate on international commercialisation -- using the fight to combat global warming as their common platform. At grass roots, aid agencies should involve local people far more in the renewables industry to ensure more local jobs and income. Success could be measured not just by the number of households served, but by the number of local firms involved. Choice of local partner -- a utility, government entity or private company -- should also be done with more care and on a case-by-case basis. The tendency in the past has been to stick to one type of partner, whatever the project.

Aid agencies should also scrutinise their own decisions and methods for evaluating projects as they may be biased towards conventional power. They should also concentrate on demonstrating that a hardware works and do more to build up a society's so-called software -- its technical and management capacities. Of the official development assistance spent on energy projects between 1979 to 1991, the report notes that less than $200 million was invested in technical and managerial skills. Renewable energy needs donor commitment to be longer term to catalyse commercial development and market diffusion. More involvement from in-country stakeholders will eventually lead to better technology diffusion and a greater likelihood of local acceptance of negative aspects of power plants, such as their environmental impact.

The effects of privatisation

Across the world, the trend towards privatisation of the power industry is taking hold -- a trend which development agencies are promoting. Multilateral and bilateral loans will be dwarfed by private capital in the future, stresses the report. Governments are increasingly looking to the private sector to initiate development and aid agencies are seeing their budgets wane. It is within this environment that commercialisation would take place.

Programmes such as the US IFREE initiative will help renewables penetrate developing country markets. Technology diffusion, says the report, is more likely to result from assistance that promotes a comprehensive commercial development strategy rather than one-shot demonstration projects -- the "parachute" approach of multilateral agencies such as the World Bank that prevailed from the 1970s to mid-1980s. In hydro-power development in Nepal, an incremental approach to manufacturing capability, access to credit, stake-holder partnerships and attention to institutional capacity has already proved its worth.

Like IFREE, USAID is also beginning to emphasise private sector programmes to stimulate market-driven applications, for example by funding the Export Council for Renewable Energy (US/ECRE), a consortium of trade associations that works with the inter-governmental Committee on Renewable Energy Commerce and Trade (CORECT).

But privatisation can also be dangerous for renewables if new legislation is driven by the lure of cheap short term power at the expense of long term environmental considerations. As of 1992, privately financed power projects under development exceeded 100 GW, which will increase installed capacity in developing countries by about 10%. But few of them have the equivalent of the US's public utility commissions to oversee the market. As a result, renewables are coming up short. The International Finance Corporation (IFC), the World Bank's private sector lending division, has directly lent about $2 billion to private developers. But only about $200 million has been approved for small hydro -- and absolutely none has been approved for any other sort of renewable, whatsoever. Ultimately, the success of renewables will depend upon the private sector and developing country government. But to date, the impact on renewables of a developing country's procurement policies is given short shrift by USAID and the World Bank, says the report. Indeed, the World Bank seems unsure of its role in commercialisation. It is the GEF that comes closest to having the needed catalytic role in multilateral commercialisation, although its current resources and mandate are inadequate.

Attempts have been made to direct bilateral assistance, too, towards encouraging private development. But even though USAID helped Indian utilities evaluate private proposals, and even though the US Export-Import Bank, which now has a project finance group, did authorise $1.5 billion in loans last fiscal year (about one-quarter of which went to biomass and geothermal projects), renewables were ignored. The report estimates that of the private plants proposed in 1992, only a minuscule 3% were renewable projects other than hydro-power -- while 43% were coal and 19% gas.

A new focus for aid

Aid agencies can help attract private funding to renewables by addressing factors that sap a renewable technology's market potential -- such as the World Bank's promotion of "vertically unbundling" generation, transmission and distribution. The report warns that promotion of unbundling and competition could be premature especially in a developing country.

By paying more attention to the market forces which influence choice of technology, aid agencies can help ensure that the trend in privatisation also becomes a trend towards more use of renewables. Aid should do a better job of enhancing demand for renewables -- moving from supply-push to demand-pull strategies as privatisation increases. Agencies could, for example, give preference to countries with energy policies that allow renewables to compete on a level playing field, where hidden subsidies to coal and other conventional technologies have been removed.

Specifically, multilateral agencies, such as the World Bank and the Organisation for Economic Co-operation and Development (OECD), could establish standards for sectoral reforms -- such as power industry privatisation -- and encourage co-operation among donors both in working with public and private entities. At the same time, agencies administering bilateral aid should give renewables higher priority. Already there is a US government-backed private equity fund that can fund renewables projects with investments of $5 million to $10 million, while in 1994 the US Import-Export Bank began offering financing enhancements for renewables. Renewables are also eligible for the World Bank's fund to mitigate greenhouse gas. If the hundreds of millions of dollars that the World Bank is pouring into bringing electricity to Indonesia, for example, prominently featured off-grid photovoltaics, the cost of the technology would be dramatically lowered. The report concludes that the IFC, as well as bilateral export-import banks, should actually extend favourable financing terms to renewables

If countries agreed on co-operative strategies for commercialisation of renewables -- with multilateral aid organisations working with their bilateral counterparts -- the globally-shared problem of greenhouse gases could be seriously tackled; investments would be made which are beyond the reach of an individual donor or recipient; and a better synergy between technology-push and market-pull strategies would be created. The authors reiterate, in their conclusion, that near-term market share should not be at the expense of longer-term strategies for building markets, such as joint ventures with a commitment to training, energy management, and renewable technology integration with conventional sources.

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