Scaling up renewable technologies: incremental or transformational change?

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8 July 2013

As developing countries transition towards low carbon economies, governments must take difficult decisions about how they should scale up their renewable energy sectors. Initiatives, such as the Scaling-up Renewable Energy Programme (SREP), aim to catalyse investments in renewables, often with outside support from the private sector. But they face tough choices between investing in proven or novel low-carbon technologies, and between large-scale and small-scale approaches.

Wind farm outside Adigrat, northern Ethiopia.

Harnessing proven technologies or innovating with unproven ones

The Scaling-up Renewable Energy Programme (SREP) is designed to pilot and demonstrate how scaling up low-carbon renewable technologies can initiate a process of transformational change within developing countries. However differences in opinion exist on the benefits and feasibility of different approaches. 

Some donors and implementers are advising developing countries to invest in newer renewable technologies, such as solar power, geothermal and bio energy (renewable energy from biological resources), through SREP finance. On the other hand, some participating country governments want to scale up renewable technologies that they are experienced with.

Take, for example, the different interpretations and approaches taken by Ethiopia and Nepal to scale up renewables. In Ethiopia, the government is diversifying from hydropower, which they have experience with, to newer technologies: geothermal and wind power. In Nepal, the government is interested in scaling-up proven renewable technologies for providing energy to rural and remote areas, and in opening up the investment environment for hydropower. Nepal’s approach is that the incremental use of ‘proven’ renewable technologies will have a transformational change on its economy and livelihoods.

Ethiopia’s choice of geothermal and wind energy stems from its need to diversify its energy mix to ensure a stable energy supply and to reduce its overdependence on hydropower. However, some donors have raised concerns about Ethiopia’s prioritisation of specific sectors, such as wind projects, when Ethiopia already has two wind farms nationally. These donors suggest using SREP funds to scale up technologies, such as solar. In response, the Government of Ethiopia has said that the country is already investing in renewable energy projects and would like to use the limited additional SREP money to add to its pool of existing projects – arguing that this is better use of the small SREP fund.

So far, the Government of Nepal’s support to the renewable energy sector has been focussed on fulfilling the country’s subsistence and household-level energy requirements. In future it is likely to continue to invest in scaling up proven renewable technologies that can improve the incomes and welfare of rural communities and villages. Technologies include small and micro hydropower stations, which the country already has experience with, and productive renewable technologies that can be used both for domestic uses and also to build the country’s economy. The government believes that it has not yet exploited the full potential of renewable technologies for productive purposes and needs additional finance to realise this goal. The Multi-lateral development banks (MDBs) and Nepal’s Alternative Energy Promotion Centre (AEPC)  have also started promoting investment in technologies that the country has less experience in, such as extended bio gas, a gas produced from waste material and mini-grid solar power. 

Large-scale vs. small-scale approaches

Besides differences in definitions of change, approaches for achieving change also differ. Ethiopia’s investment plan focuses on large-scale energy projects, while Nepal is focused on small hydropower and off-grid mini- or micro-hydropower and solar solutions. 

Ethiopia’s plan has been contested because it includes exporting electricity to other parts of the region. This is seen by some to be more focussed on raising capital rather than providing energy to its poorer citizens, which in turn could help them diversify their livelihoods to help them work their way out of poverty.  Donors have instead suggested the country explore solar power and non-grid projects as better options.

Ethiopia defends its plans to export energy to Kenya and has promised that power generated with SREP funding will be used locally. However, the Ethiopian government also believes that the productive use of energy will also trickle down wealth in the country, as exporting electricity is expected to increase foreign exchange reserves that can be invested back into growth and development efforts (in line with their green growth strategy). 

Nepal, on the other hand, has been able to reach a compromise between the stakeholders. In addition to on-grid small hydropower projects, the government has also focused on off-grid mini and micro hydro and mini-grid solar PVprojects that are aligned with the country’s national renewable energy plan. The government aims to provide greener energy solutions to remote rural populations by providing off-grid micro hydropower systems and improved cooking stoves which burn charcoal more efficiently, thus reducing deforestation and improving the health of women by reducing smoke hazards.

However, multi-lateral development banks which would fund the efforts have leaned more towards large-scale grid-based energy projects due to the quicker returns on their investment and the better economies of scale. The small-scale projects are often scattered in sparsely populated remote areas with more cumbersome maintenance providing fewer and slower returns on their investments.

Although large-scale investments may make more economic sense, they typically cater to the energy requirements of urban and semi-urban populations who already have access to energy, even if it is sporadic. Small-scale energy projects, however, reach remote rural populations who are currently going without access to any energy at all. Small-scale renewable energy projects also reduce the number of large players, such as bigger energy companies and insurance companies, making it easier to execute and show results quickly.

The Nepalese government has indicated that it will prioritise the energy needs of its rural population in a recent announcement that rural renewable energy will be focus of the next  fiscal year running from July 2013 to 2014 July.

What role can the private sector play?

The private sector is critical for scaling up renewable energy investments. This is reflected in Nepal’s investment plan, which aims to leverage approximately 50% of the total planned investment from private sector equity and other sources. As per SREP definitions, transformation towards a low-carbon economy could occur by improving the investment climate for private investors.

Drawing from Ethiopia and Nepal’s experience, proposals for private sector investments focus on three main areas:

  1. creating a good investment climate for the private sector by demonstrating the commercial viability of projects;
  2. leveraging finance and contribution from the private sector;
  3. encouraging local private actors to generate and service renewable technologies by producing electricity, as well as manufacturing and trading  renewable products such as, manufacturing mini-micro solar kits.   

The International Finance Corporation (IFC) in Nepal aims to create an enabling environment for the private sector to invest in a grid-based small hydropower sector. If they can secure it, the Scaling-up Renewable Energy Programme financing will provide funding to local financial institutions and demonstrate that hydropower projects are technically and commercially viable, which in turn could mobilise the private sector to invest further in the future. This is a manageable challenge. However, leveraging finance from the private sector in off-grid projects will require justifying their commercial viability.

In Ethiopia, the only private sector-led component of the SREP is the clean energy- SME Capacity Building and Investment facility component. The facility aims to provide “targeted support” to build the capacity and provide financing to small and medium-sized enterprises (SMEs), which are carrying out work to develop cleaner energy products and services within local households and commercial entities. 

There are multiple ways in which the private sector can support the transition to a low carbon and energy accessible future. But two questions remain unanswered:

  • Is the public sector prepared to share the financial burden with the private sector?
  • Will the private sector be interested in investing in projects that benefit the poor and are less commercially viable?

The Public sector has a critical role to play in nurturing the private sector. Public-private cooperation is important to discourage parallel or silo’ed investment efforts. However, some developing country governments are currently a bit estranged from the private sector. 

Most of the Ethiopian plan is public sector led because the Ethiopian government believes it should invest in a publicly-owned power sector and because it thinks engaging an inexperienced national private sector in the renewables programmes at this stage is too premature.  While the private sector is expected to play a fairly large role in Nepal’s SREP, the government also sees this predominantly as a public sector-led effort.

The proposed Central Renewable Energy Fund (CERF) in Nepal, a mechanism that will support subsidies and credit to Nepal’s renewable energy sector, is one such recent attempt at bringing together the public and private sector to jointly deliver projects to promote renewable energy technologies for productive use in rural areas. This is still in its infancy, and has yet to start distributing funding.

Although approaches differ in each country, both country governments aim to bring change in their preferred ways, whether it’s by speeding up economic growth, or by reaching out to the rural poor.

The Green Climate Fund (GCF), aims to financially support developing countries as they move towards low-emission and climate-resilient development to limit or reduce their greenhouse emissions. No doubt lessons could be learned and applied from the early days of SREP implementation to other finance mechanisms, like the Green Climate Fund.

We’ll be watching developments closely in both countries over the next few years.

This blogs draws on research carried out by our in-country partners in Nepal and Ethiopia and is part of a broader political economy study of climate investment funds, with a particular focus on the Pilot Programme for Climate Resilience (PPCR) in Nepal and Bangladesh, and the Scaling-up Renewable Energy Programme (SREP) in Ethiopia and Nepal.

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