Energy Access Innovation and Climate Change

By Megan Nicholson and Matthew Stepp

The UN declared the next ten years the “Decade of Sustainable Energy for All,” and there is no better way to kick off the decade than with a compelling discussion about how to actually reach this goal. Recently a number of stakeholders have started to debate the complicated tradeoffs between pursuing global energy access and deploying renewable energy at a large scale to mitigate climate change. It shows the tension between two critically important global challenges, but also the core role innovation can play in addressing both.

The discussion was headed off by the Center for Global Development’s  (CGD)Todd Moss and Ben Leo, who published a paper in January suggesting that 60 million more of the world’s poor could have access to electricity if the Overseas Private Investment Corporation (OPIC) was allowed the flexibility to invest in natural gas projects instead of supporting a renewables-only strategy. OPIC is a U.S.-based development institution that finances projects in developing countries that support domestic businesses and advance U.S. foreign policy. As the authors argue:

“There has been a general bias toward using OPIC to invest principally in solar, wind, and other low-emissions energy projects as part of the administration’s effort to promote clean energy technology. An explicit policy capping the total greenhouse gas emissions in OPIC’s overall portfolio has further pushed the organization’s investments heavily toward renewables. Indeed, over the past five years, OPIC has invested in more than 40 new energy projects and all but two (in Jordan and Togo) are in renewables… Meanwhile, many African countries have significant natural gas deposits and have declared their desire to utilize that resource for domestic power generation.”

The authors suggest that the higher overall cost of renewables and the lower private sector leveraging ratios (or the amount of private sector financing of a project in relation to OPIC’s commitment) for renewable projects compared to natural gas projects limit OPIC’s impact on increasing energy access in developing countries, particularly through the administration’s Power Africa initiative. Moss recently testified before the House Subcommittee on Energy and Power, concluding that “…no one would openly argue that we should fight climate change on the back of the world’s poor. But we must be careful not to burden the poorest nations with romantic notions of an energy future that does not yet exist.”

Critiques of the report have mainly focused on the methodological assumptions for calculating costs and leveraging ratios. In particular Council on Foreign Relations Senior Fellow Michael Levi pointed out that the study only considers capital costs and not operational costs, and that the leveraging ratios used in the analysis are a weak indicator of follow-on private investment because they “don’t tell us what happens at the margin, and they don’t tell us anything about causality.” There in fact may be cases where different clean energy technologies, on net, provide lower cost energy than building a traditional fossil fuel infrastructure depending on a country’s geographic and socio-economic characteristics. Levi concludes that the best way for OPIC to move forward would be to conduct project-by project cost and benefit assessments that could also measure energy access impact.

In a longer analysis, University of California-Berkeley Professor Daniel Kammen criticized the paper for using “obsolete” data that failed to capture the recent cost declines of solar PV projects, overlooking transmission costs of fossil fuel plants, and omitting external costs of fossil fuel production, or the social cost of carbon.

The CGD response to these critiques was fairly simple: operational costs are outside OPIC’s scope, as it is “neither a master planner of energy systems nor a power operator;” and costs of renewable power are definitely falling, but they have not fallen enough to be cheaper than natural gas in developing countries. As Moss writes,

“If we are correct (gas remains cheaper, has higher OPIC leveraging ratios, and thus creates more access), then OPIC should be allowed to invest in gas-fired power.  If Kammen is correct (renewables are really cheaper and thus create more access), then OPIC doesn’t need to ban support for gas-fired power plants—the market will shift toward them anyway.  Both scenarios suggest the cap is unnecessary and OPIC should be given additional flexibility… Most importantly, if we find that Kammen is correct and renewables are really cheaper (or will be very soon) for all un-served or under-served people, then there’s no longer any logical reason to maintain the greenhouse gas emissions cap.  If a solar farm in country X is really more cost-effective than a gas-fired plant, then the initial rationale for the cap—a regulatory mandate for renewables to overcome the higher costs—is no longer necessary.”

This is an idea you’ve heard in this column before —that renewable energy technologies must be as cheap as or cheaper than fossil fuels to compete and in most instances they are not there yet without mandates and subsidies. Achieving additional cost declines necessitates a committed policy focus on breakthrough research and technology development, and not just on incremental technology improvements (though this is important as well). Instead, global energy policy has been dominated by deployment-focused actions that attempt to quickly and aggressively increase the total number of renewable megawatts around the world, but offer declining impact on clean energy innovation.

Yet, while CGD has a sound argument for prioritizing affordable energy for access, we have one sticking point. Moss stated in his testimony:

“Another widely held misperception is that, like cell phones, new technology will make power plants and grids irrelevant. It is true that solar lamps are one way to provide light and perhaps charge a cell phone. But few consumers would be satisfied with this minimal amount of power. And no country would accept solar lamps in lieu of a modern, large-scale energy system required to generate growth and jobs.” 

This is a short-sited view of the power of new and disruptive technology. There is little reason to think that solar lamps are the extent of technology developments that can help developing countries. Lamps are obviously not the single fix for energy poverty, but their affordable and successful deployment in energy-poor countries can serve as a case study for technology leapfrogging—when advanced technologies find applications in markets that have not been exposed to prior versions of the technology— and it can highlight the opportunity for innovation within diverse technological applications in countries with limited energy access. While it is obvious that no country would accept solar lamps in lieu of a modern energy system, it should be equally obvious that no country is expected to.

What has been left out of this debate is the importance of supporting clean energy innovation—the best way to achieve significant cost declines to renewable energy so that an all-renewables future can be within everyone’s reach. It is here that Levi’s argument for a project-by-project analysis of costs and access can be truly impactful. Institutions like OPIC would do well to look at each project through the lens of innovation so that it can leverage opportunities for technology leapfrogging when renewable costs truly are more affordable than fossil fuels, but also have the flexibility not to limit energy access in instances when fossil fuels are still the cheapest option. An argument can also be made that there is also room for a third option where OPIC could finance demonstration of next-generation renewable projects that increase energy access and also facilitate technological innovation.

US climate and energy policies should not deny developing nations opportunities for economic growth or cheaper energy access for the sake of fighting climate change; they should emphasize international collaboration and support for energy innovation to develop the affordable technologies that will lead to its mitigation.