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A Vision for Clean Energy in Asia

This piece is adapted from a speech that was delivered on June 25th at the 5th Asia Clean Energy Forum: Meeting the Technology Transfer Challenge. The forum, hosted by the Asian Development Bank (ADB), the US Agency for International Development (USAID) and the World Resources Institute, is the premiere knowledge sharing platform on best practices in policy, technology, and finance for clean energy in the Asian region.

There once was a legendary industrialist who was notoriously protective of his privacy. So it came as a shock to a young reporter when he granted her request for an interview - on one condition: she could only ask three questions.

When the day of the interview arrived, she sat down and said: “You are one of the most successful people in the world and your business has redefined industry. What has made you so successful?”

He replied: “Good decisions.” She waited and waited but he said nothing else. She reflected a bit and then asked: “Well, how did you make such good decisions?”

He replied: “Experience.” She was beside herself. Two questions and he had answered with only three words!

So she thought long and hard about her last question: “How did you get this experience?”

The man replied, with a wry smile, “Bad decisions.”

This story captures an important message for me from this conference. Bold goals and big success require the ability to take risks and learn from mistakes. This will be especially true for all of us here committed to working towards a virtually zero-carbon economy.
However, the challenge we face is that we don’t have much time.

  • According to the IPCC, global GHG emissions should peak by 2015 – that is in 5 years—if we want a fighting chance to keep climate change below 2 degrees.

  • According to the International Energy Agency (IEA), investment in clean energy will need to exceed $2.2 trillion dollars over the next 10 years above the reference scenario.

  • We must meet these goals while still addressing major development and energy poverty challenges, including the spiraling energy needs of developing countries.

This conference has been a terrific platform to share what works, what doesn’t and what we can learn from each other. I’d like to offer a few lessons and insights that came through for me – and which I believe are essential if we are to succeed in fostering a clean energy revolution.

1. “Loud, Long and Legal”: The Right Policies for Clean Energy

To meet this challenge, we need clear and ambitious policy to promote clean energy, and we need to be able to learn as we go. The message of the Bonn Conference on Renewables about six years ago showed that policy needs to be loud, long and legal if we are to drive investment in clean energy.

We need processes to allow us to adapt and improve policy over time while providing the necessary level of predictability to investors.

This message is consistent with recent research from WRI and the Peterson Institute for International Economics on the wind and solar sectors. We found that new wind and solar investments were tightly correlated to government support policies. When strong and predictable incentives for clean energy were put in place, investments went up. When incentives expired or were canceled, clean energy investments collapsed.

We know that policy is critical for building clean energy markets. But we also know that we won’t always get policy design right from the start. Spain is a stark reminder of this. In 2007, Spain introduced ambitious feed-in tariffs that stimulated solar investment. But the scale of the subsidy was seen by some as too expensive, and there was pressure to remove it. When the government drastically reduced the tariff and set a rigid annual capacity cap to limit the number of eligible projects, solar investment collapsed. That is why we need processes to allow us to adapt and improve policy over time while providing the necessary level of predictability to investors.

In this regard, one thing that the ADB can do is scale up its efforts to help client countries improve the transparency, inclusiveness and accountability in policy and regulatory processes. This was one of the main conclusions reached at the dialogue on clean energy governance earlier this week.

2. Economic Cost-Benefit Analysis is at the Heart of Energy Planning

Even though I am an environmentalist, my next point is about economic cost-benefit analysis. Good economic analysis should be at the heart of energy planning, and at the heart of the ADB’s decisions about which projects and technologies they will support.

The problem is that most governments rarely use cost benefit analysis. Even MDBs don’t take economic analysis seriously. I was an economist at the World Bank for nearly a decade and led several cost-benefit studies for major energy and water projects. The incentive was to show that the project met the 12% hurdle rate, what was considered an acceptable rate of return. We never used economic analysis to internalize the full range of environmental and social costs, or to find ways to include non-monetary benefits such as jobs or energy security, or to assess alternatives or options in a meaningful way.

I would urge governments and the ADB to rigorously apply economic cost-benefit analysis to help inform the energy policy and investment decisions they take. They should do this in a transparent manner inviting public scrutiny to help test assumptions. Better policies and better investments will emerge from such open, inclusive processes. If the ADB seriously commits to this, it could open up new possibilities and investments for meeting the region’s energy needs.

3. Energy Efficiency: The Low-Hanging yet Hard-to-Pick Fruit

My third point is about energy efficiency. At this conference we have heard inspiring stories about how much is happening on renewable energy in Asia. By contrast, for all the talk of energy efficiency as a “low hanging fruit,” progress has been slow. A couple of observations emerged during this conference:

We need to connect energy efficiency projects with the right kind of financing. There are many groups working on this issue, and there is a need to share ideas on successes and failures as models are explored. One promising idea is to convene a workshop at the next ACEF to help find scalable business models to support the deployment of energy efficiency projects.

We need a constituency for energy efficiency at the national and international levels. Right now it does not exist as it does for other industries. This is due in part to the particular characteristics of the energy efficiency sector – it is creating something less (energy savings) rather than something more, which can make it intangible and abstract. The sector is also more fragmented and less visible than other industries. Perhaps we need to help create a coalition of consumers and civil society organizations who have a stake in improving existing energy systems.

As we focus on the clean energy revolution, we must not forget that we are still fighting the battle against energy poverty. More than a billion people in this region alone lack access to clean, modern energy services. This is unacceptable.

4. Energy for All: Financing Small and Medium Enterprises (SMEs)

As we focus on the clean energy revolution, we must not forget that we are still fighting the battle against energy poverty. More than a billion people in this region alone lack access to clean, modern energy services. This is unacceptable.

Over the past days, we heard a call for more emphasis on how to support and scale solutions promoted by small and medium enterprises (SMEs). The problem is that many of these SMEs lack access to the capital that they need to implement and scale their business ideas. Their financing needs are above the reach of microfinance but below those that attract private equity. This is what ADB President Haruhiko Kuroda referred to as the “missing middle” during his opening speech.

The ADB can help lower perceived risks around SMEs and clean energy, through partial loan guarantees to debt funders or patient (long-term) capital to equity funders. This is an important frontier for ADB’s work with its financial intermediary partners throughout the region.

5. Reality Check: Country Ownership for Clean Energy

My final point is about the importance of country ownership. Back in the 1980s and 1990s, Structural Adjustment Lending was popular with the World Bank and the IMF, yet these programs failed in large part because they were never truly owned or supported by the governments on whom conditions were imposed, or their citizens. Though I and many others around the table care deeply about clean energy, we do not want to repeat that same mistake. Clean energy support must be deeply owned within countries. This is the only way we will mobilize the radical and sustained changes needed for a clean energy revolution. Through its work on the Electricity Governance Initiative, WRI has been working with civil society, policymakers and regulators across Asia to improve transparency, inclusiveness and accountability in policy and regulation of the electricity sector.

For its part, the ADB needs to proactively engage in-country stakeholders and tailor its clean energy investments to meet their sustainable development needs. Our interventions to support clean energy must respond to the realities of implementation within Asian countries – and the diversity of circumstances and capacities that exist within this region. There is plenty of room for dirty business in clean energy, and so the ADB should emphasize the importance of good electricity governance when it makes its investments.

Conclusion: The Time for Political Leadership

Asia leads the world in the concept of "frugal innovation"... Imagine what could happen if you unleashed that entrepreneurship to focus on renewable energy technologies.

I remain incredibly impressed by the bold policy leadership demonstrated by Asian countries. China and India get lots of attention, but many other countries, notably our host country the Philippines, are taking action as well.

I believe that Asia will be the source of low-cost clean energy solutions to the world. As we know, many of the technologies already exist. The problem is that they are still too expensive. Asia leads the world in the concept of frugal innovation. Indian companies, for example, have been leading innovators – they have developed the $2,000 car (the Tata Nano), the $70 refrigerator, and the $30 cataract surgery. Engineering skills and big markets but relatively low purchasing power creates incentives to drive down costs in a radical manner and this fuels incredible innovation. Imagine what could happen if you unleashed that entrepreneurship to focus on renewable energy technologies.

When Asian companies see the size of the future market in clean energy, they will, I believe, lead the technological revolution that is needed. This revolution will radically reshape the energy sector in ways that current projections only begin to suggest.

I’d like to close with a story that may help inspire the bold political leadership that will be needed if this clean energy revolution is to succeed.

A few months ago, US Treasury Secretary Tim Geithner called a meeting with the leaders of the U.S. Climate Action Partnership (USCAP) – a coalition of businesses and environmental organizations that have been instrumental in pushing for mandatory climate legislation in the United States.

The meeting, over breakfast, took place in the middle of a severe snowstorm in Washington DC. It was therefore quite small as only a few USCAP members could attend. Secretary Geithner asked Jeff Immelt, the CEO of GE, why he supported mandatory climate legislation and when GE would start seriously investing in the United States again.

Immelt replied: “When I look to invest in energy, I look for 3 things":

  • Scale of potential market: both the U.S. and Asia are at the top of my list;
  • Availability of credit: this is bouncing back in U.S. and already available in Asia;
  • Clear policy: The U.S. does not have clear policies to encourage clean energy. Asia does. We can do a cost-benefit analysis to assess our return on investment in Asia with confidence. Money will flow where risk-adjusted returns are highest. That is not the United States, it is Asia.

[!]Note:[/!] Resources and presentations from the 5th Asia Clean Energy Forum are now available online!

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