Scaling Up to Phase Down: Solutions to Finance the Energy Transition in Developing Countries
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Scaling Up to Phase Down: Solutions to Finance the Energy Transition in Developing Countries
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Low- and middle-income countries need to transform their power sector infrastructure at an unprecedented scale and pace to meet climate and development goals. The World Bank’s new framework “Scaling Up to Phase Down” maps out a 6-step virtuous cycle to help these countries overcome critical barriers that are paralyzing their energy transition and catalyze investments.
Despite accounting for two-thirds of the global population, developing countries receive only one-fifth of global energy investment. They need affordable financing, especially at the start of their energy transitions, to improve sector conditions and attract growing volumes of private capital.
Watch the replay of this panel discussion.
00:00 Explainer video: Scaling Up to Phase Down
04:32 Opening remarks
- Axel van Trotsenburg, Senior Managing Director, World Bank
08:30 Panel discussion
- Leila Benali, Minister of Energy Transition and Sustainable Development, Morocco
- Alexia Latortue, Assistant Secretary for International Trade and Development, U.S. Treasury
- Febrio Nathan Kacaribu, Head of Fiscal Policy Agency, Ministry of Finance, Indonesia
- Paul Bodnar, Director of Sustainable Finance, Industry, and Diplomacy, Bezos Earth Fund
09:39 Morocco: Challenges in the energy transition 13:13 Engaging the private sector 19:00 Facilitating market dynamics for renewable energy 24:03 Indonesia: Phasing down coal 29:31 Morocco: Financing for the energy transition 45:27 How to move faster 47:06 Sustainable use of coal 50:12 Strengthening institutions 52:32 Implications of debt distress
33:05 Presentation of Scaling Up to Phase Down
- Demetrios Papathanasiou, Energy & Extractives Global Director, World Bank
56:13 Closing Remarks
- Guangzhe Chen, Infrastructure Vice President, World Bank
Few years, the world needs a huge transformation of its energy infrastructure by scaling up renewables to phase down coal. But developing countries are being left behind because they simply can't afford the high entry costs. Not only does this negatively affect world climate goals, but it leaves impoverished countries paying more for electricity, unable to access renewables as a low-cost power, and locked into fossil fuels. A triple penalty for energy transition. But there is a solution. It's the first of its kind, it's exciting and it's called Scaling Up to Phase Down. It aims to catapult these countries over the initial hurdle by providing low cost support to cover those steep upfront costs. Ultimately leading to cleaner, healthier cities and people.
So, how does it work? It's a six-step virtuous cycle that starts with government leadership that leads to a supportive regulatory environment, along with increasingly capable institutions. These fundamentals are what will attract private capital that is waiting on the sidelines to prepare and invest in bankable projects at lowest cost through competition and transparency, and most importantly bring results that include more affordable electricity, cleaner air, and new jobs. When that happens, people want to scale up renewables even more and the virtuous cycle gains momentum, Scaling Up to Phase Down is what we need to do for people and the planet for all of us and the next generations. This will ultimately create a greener, healthier world with more affordable energy for all.
Good morning, everyone. I'm Raj Kumar. I'm the President and Editor-in-Chief of Devex. I'm delighted to help guide the discussion today as your moderator. One of the side effects of my job as editor-in-chief of Devex is people often come up to me and ask, what's the news? What's going on? What's the buzz here in Washington DC? I know we're joined by people all over the world who are following this online. You too may want to know what is the buzz in this town in Washington?
Honestly for me, what we're talking about today is the buzz. This is the topic, right? Everyone wants to know how do you take the trillions of dollars of private capital that are on the sidelines and bring them into the development arena? We've been talking about it for a long time, haven't really done it, and it feels like we're at a new moment with new energy and new vision. I think this report and this strategy are all part of that.
If like me as a kid, I grew up with this term load shedding, a lot of you probably know what that term is like or you certainly know brownouts or blackouts, but for much of the world, when you experience the fact that electricity isn't always there, it isn't always reliable, you know that electricity is a key sector for this kind of transformation we're talking about. Because all of the other sectors, whether it's water and sanitation or agriculture or health, can't happen unless this transformation happens.
I love the title, Scaling Up to Phase Down. I don't know how our translators who are translating this into French, Arabic and Spanish today, for those of you who are following online, can possibly translate that line. But it really does encapsulate what we're talking about, not just in this room, but really in the global development sector with large right now.
How do we make a huge transformation? It's a transformation in our personal lives in a way. The way we all interact with our economy, our society, our own use of energy, but it's a transformation that's going to affect every country in the world, including low and middle-income countries that are racing to build needed power infrastructure, but to do it in a way that doesn't make the problems of climate that they are experiencing the most even worse.
That's what we're here to talk about today. We've got a fantastic panel. We're going to get really into the depths of this discussion, and we want to hear questions from all of you. So if you're following this online, there's a way to ask questions. We've already gotten a few in. I'll try to integrate them into the discussion, but we want more.
If you're following online, there's the hashtag #ScalingUp2PhaseDown. Tell us what you think on social media.
We're going to start with a presentation from Axel Van Trotsenburg, the Senior Managing Director of the World Bank.
[Axel van Trotsenburg]
Thank you for joining us today to share perspectives on how to help the world take critical large scale action that will determine how this generation and future ones experience this planet. A secure, resilient and clean energy future requires a major transformation of our economies, industries, and daily lives for all countries. Developing countries face immense challenges and a triple penalty in their clean energy transition. Without access to more affordable sources of capital, they often pay more for electricity, often cannot access clean energy projects and can remain locked into fossil fuel projects. In this vicious circle, the poverty trap is becoming an energy trap that is becoming a climate trap.
Failing to act with urgency risks locking the world into a past with dangerous consequences for climate and development. All hands must be on the act to support developing countries through their energy transition. The World Bank's approach to the energy transition in a report called Scaling Up to Phase Down maps out six steps to support developing countries scale up affordable, clean energy and face down coal.
Today's discussion is how to translate this vision into action to tackle the key obstacles and step up progress. If we want to give countries a fighting chance, we need consistency, concerted action and resources. Let's take the example of coal, to reach net zero emissions by 2050, we need to decommission over a hundred gigawatts per year, the equivalent of decommissioning one coal generator unit per day. There are still over 2100 gigawatt of coal-fired power plants worldwide.
Currently, the world is headed in the opposite direction with cold fire generation reaching an all-time high last year. This needs to change immediately, but the transition is more complex than many people realize.
Coal is deeply embedded in the economies and social fabric of some countries. Therefore the transition must be just inequitable, and help affected workers and communities re-envision their post-coal jobs and livelihoods. At the same time, the retirement of call generators could leave 1 trillion in stranded cost that need to be managed.
The benefits of transitioning away from coal will be globally shared, so the cost should be shared globally too. 60% of the 1 trillion needed per year for cleaning up electricity must come from the private sector. But investors will only come in if governments establish strong foundations to scale their energy transformation. The World Bank and other partners play a critical role in supporting developing countries with more affordable financing to overcome barriers at each stage of the energy transition.
The higher the barriers, the more concessional support is needed. Developing countries cannot overcome the barriers to energy transition alone. The world needs to come together to catalyze affordable finance to strengthen economies and unlock clean energy for all.
We look forward to a rich and productive discussion with our panelists today.
Well, thank you Axel for that introductory set of remarks and I'm glad that that Axel talked about the complexity here, that this is actually a hard problem because there's a bit of a narrative out there that solar power, for example, it's cost competitive now, it's cheap. You might be led to believe this is an easy transition. Let's just switch, pick solar, don't pick coal, but obviously that's not what's happening in the world, right? It's a much more complex picture. This report and the conversation we're about to get into is going to help to underline some of those complexities that Axel referred to and point to some possible policy solutions.
Let me tell you who we have. We have Leila Benali, who is the Minister of Energy Transition and Sustainable Development for Morocco joining us virtually. Welcome minister. We have Alexia Latortue who's the Assistant Secretary for International Trade and Development at the US Treasury. Sitting right next to me, Paul Bodnar, who's the Director of Sustainable Finance, Industry, and Diplomacy, Bezos Earth Fund. Finally, we have Febrio Kacaribu, who's the Head of Fiscal Policy Agency at the Ministry of Finance in Indonesia. So, a truly global group.
We're really pleased to have all of you here and minister, maybe we can just begin with you. I mentioned solar power and when I think of solar power, I think of Morocco. But of course, as I said, it's complicated, right? Morocco is a middle income country. You import a lot of your energy and making the transition isn't so straightforward. Tell us about some of the complexities you face as you try to make this energy transition happen in Morocco and what do you need from people in this room here in Washington DC.
Thank you so much. Good morning, good afternoon, everyone, wherever you are. Well, as you already pointed out, Morocco being a middle income country, I think energy transition is not a luxury, it's really a necessity. We are definitely in the middle of it, and our strategy really is to reduce our dependence on volatile and external energy sources while at the same time trying to reduce as much as possible the cost of energy to our populations and economic issue of the country and why not to the continent as well, Africa, and our partners in Europe. Of course, I mean you thought about solar when you thought about Morocco indeed. I mean we have an undeniable competitive potential for wind and solar.
However, I think you also rightly pointed out, I think Axel rightly pointed out in his introduction that consistency is really key. As far as we are concerned, as far as Morocco is concerned, we are having an ambitious target of 52% of install capacity based on the renewables before 2030.
We are very confident that we are going to reach it because, mind you, we have reached our original target of 40% of installed capacity based on renewable by 2021, and the first 40% were the most painful to reach of course. That's why I'm very confident that the next 10% would be a bit easier to reach.
How are we going to do that? We have to install between 700 megawatts to one gigawatt of capacity every year consistently between now and 2030. That's roughly 1 billion dollars of investment consistently between now and 2030. A large part of it is coming from the private sector, international and national private sector, three quarters of that will be renewables.
We also need to inject more investments in gas and storage and flexible technologies that will enable those investments in renewables in low voltage, medium voltage, and high voltage to penetrate the market. The last point that I would want to raise there in investment in the grid. I think Morocco is not the only country in the world with ambitious renewable target that is waking up to the importance of making sure that you increase the amount of CapEx that is being injected into transportation of energy in its values forms but including electricity of course.
We have an interesting question from the audience that I'll bring in soon about that topic of how you actually get the energy to people who need it once you produce it.
But let me bring you into the discussion, Alexia, you know this space very well. You were a deputy CEO at the Millennium Challenge Corporation. You've been around the development space a long time, and so it's not new to talk about crowding in private sector capital. We've been talking about this for a long, long time. What's needed in this space and what this report calls for is a quadrupling of investment to something like a trillion dollars annually. How are we going to actually make that happen? That's a big part of the evolution roadmap. That's a big part of what you and Secretary Yellen are pushing for. How are we actually going to make the private sector come to the table at the level, at the scale we're talking about here?
Thank you, Raj, for that question. Great to be with all of you. It's not a new question, but it's a more urgent question than ever before. What is clear is that to be able to deliver the sums of money needed to help countries accelerate their energy transition so that they can have not only clean energy but enough energy, reliable energy, affordable energy to really spur businesses to provide vital services to households is that they will need all sources of finance available.
The first thing that I would say, Raj, is we really need to leverage the MDBs absolutely. We need the private sector. Without them, we won't get there. We need philanthropy, we need domestic sources of financing as well. So, all sources, and the answer also lies in better policy and in the faster adoption and scaling up of new technologies. Good policy equals dollars actually. The work ahead is on a number of fronts, and I will actually start on the policy space. We need to work with countries to make sure that they have the right policies in place that covers a range of areas from tariff report reform, subsidy reform, land acquisition issues, where are you going to put the solar panels looking at local content requirement for manufacturing as well. That's a huge agenda. Frankly, when you have a more enabling environment, that actually directly reduces the cost of capital and makes it easier for the private sector to come in. I think the second thing I want to say, which the report talks about quite a lot, is the importance of having strong institutions. Those strong institutions having utilities that are run well, that are transparent, that use data for decision making, that will also be something that helps to attract capital. That's an important point.
The third piece is that we need to look at this holistically including looking at the basic infrastructure that investors want to see in a country. For example, if you think about the grid and transmission lines, we need to make sure that those are being developed, those are ready to accept renewable energy, that the right structures are in place. Most governments want to own their transmission lines, but we have the right structures in place in terms of how the public works with the private. Then I will get to the financing. People usually start with the financing, but I think it's important to think about policy, strong institution, strong infrastructure. And then for the financing, it's really about a strong public sector will enable a strong private sector, the two go hand in hand. How do you use concessional financing? How do you use non-concessional financing? How do you use public capital to de-risk the private sector to come in? These are the things that we have to figure out.
One of the things that we've asked the World Bank to do in the context of World Bank evolution is to really help think through how to use scarce concessionality. It's particularly scarce for middle income countries, although they have these needs as well in this space. What are the principles to think about the highest and best uses of that scarce concessionality to have the maximum impact so that other sources can then come in? So that I think is also absolutely critical as well. No magic solutions, but I think granularity and focus on the basics as well as trying to develop innovative financing mechanisms to make our money go further and scaling up proven mechanisms like guarantees.
Certainly the US is trying to do that In our Fiscal 24 President's Budget to Congress, we included things like being able to provide guarantees for the newly created Asia Development Bank innovative financing facility for climate in the Asia Pacific where 1 billion of guarantees dollars can leverage 15 billion of new headroom to support countries, or of course following the example of the UK also with guaranteeing IBRD sovereign loans for the purposes of the just energy transition. Let me stop there, Raj.
Thank you so much Alexia, and it's glad you described the need to have the policy framework to basically make sure the business model and the industry actually makes economic sense before you even think about the financing in a way, I was just talking to someone in the private sector in this space who was saying often they're asked to get in to the market, but then they realize that the amount being paid for power in that market just isn't sufficient to really create a realistic return for them. So, thinking about that entire policy environment is key, and I think that's a big part of the report that we're going to hear from Demetrios in just a few moments.
I want to turn to Paul here to my left, thinking about this private sector side of things. You were at BlackRock where you led all sustainable investing there. In a way, it's been a downgrade for you to go to the Bezos Earth Fund. You've gone from trillions to billions. We're supposed to be going from billions to trillions here, Paul. Now you've got this big philanthropic budget. I think Bezos Earth Fund has spent 1.6 billion so far in grant funding out of this 10-billion envelope. How are you using that to facilitate this market dynamic that we're talking about, to get people to stop investing in coal and start investing in renewables?
Thanks. Great to be here. Thanks for the invitation. Nice to see old colleagues. Alexia, I must make a note to get a fireplace installed in my office. Philanthropic capital is a flavor of concessional capital. So let me just give a sketch of how you might think about this. The title of this report in this session is actually perfect as you said because scaling up and phasing down are tightly related, but I think they're a little bit different as tasks. As someone who's worked in private finance a long time, I do think I have a lot of faith that private capital and private innovation and the private sector can take the lead in scaling up, whether it's renewables or green hydrogen, private innovation, private investment knows how to make big things happen. The role of government in the scaling up I would describe as almost tactical, and I don't mean that with a small T, but it's about funding research and development.
It's about doing targeted deployment subsidies like in the Inflation Reduction Act or Fit for 55. It's about permitting, it's about creating the conditions under which you can unleash private capital to build this new infrastructure, new systems, new technologies bring down the cost curve. On phasing down, that's the really thorny part in terms of political economy. And I think the role of government there is strategic, not tactical, right? Because you have these trillion dollars as the report points out, a trillion dollars of which 550 billion is public capital tied up in assets that we're actually trying to pull out offline before the end of their technical lifetimes or economic lifetimes. Those assets have value, real value to investors, to workers, to communities, and the private sector will have trouble leading the way in structuring the solutions to do that. This sort of scaling up and phasing down are a little bit different.
If you think about concessional financing and the role of that. I mean we are fortunate to have a funder who's sort of spent his career figuring out how to deliver change at speed and scale in the case of Amazon. We also want to be about delivering change at speed and scale. That's really what we have the capacity to do. But it's tricky to figure out what the role of philanthropy should be in a CapEx story, which is sort of infinite in size. It's easy to think about philanthropy as a catalytic force, a little here, a little there, do some studies, do some pilots, but when we're talking about blended finance or financing a trillion dollars, you're not going to have some sizable percentage of a trillion dollar capital stack provided by philanthropy in the form of grants.
For us, I think to summarize, the agenda here is we need to innovate, we need to increase the quantity of concessional finance including flowing through governments because right now about 15 billion of grant equivalent financing from the OECD is powering the public finance that's tracked in a hundred billion calculation, 15 billion of grand equivalent is not that much. Secondly, we need to innovate on the channels that this finance is moving through. We of course need to have this conversation and result on MDB, wither the MDBs and so on. But also, we're not going to decarbonize emerging economies by pushing money through a straw from north to south no matter how good the channel or how nice the straw. So we need to build local financial capacity and build from the bottom up.
Finally, we need to innovate on instruments. The Bank has done some really great work in this area with a pilot auction facility and it's something that you have inside the walls here, done a lot of work to figure out how at a time of diminishing political appetite for channeling concessional public finance, we can do a better job of demonstrating that can be channeled in ways that are transparent, results based and efficient.
Thank you, Paul. I think this is fascinating the way you described the strategic versus the tactical requirement of government. And maybe I can bring in Febrio Kacaribu on this point because of course Indonesia has a JETP, a so-called JETP, the Just Energy Transition Partnership and a big element of that is to phase down coal. And I wonder how you think about the way that Paul described that and how it's going for you, how you intend to actually phase down coal. It is a tricky situation when you've invested, companies have invested in this capability. It works, people need energy. How are you doing this in Indonesia?
Actually we started back in 2021, COP26, we talk to a lot of people including especially MDBs to start with. We know that we are not going to be able to do this all by ourselves. We know that this is going to be a power of commitment and also strong narratives globally. We start with our commitment. We talked about our NDC commitment first. We know our Paris Agreement commitment, we enhance it. Through this narrative, we know that more than 50% of our commitment actually comes from the forest and then another 45% of our commitment comes from energy and transportation sector. We know the price difference in terms of reducing emission from each of these sectors. By looking at the pricing from the concept of abatement cost, I think we can also build a better narrative because we're going to be talking to a lot of people, talking to the private sector especially. Talking about the same way, are we on the same page looking at the cost of reduction of the emission across sectors?
Clearly in energy we see that this is the most expensive one to abate. We know from the beginning. That's why we started this conversation with a lot of parties including MDBs and also including the private sectors. I agree with what Alexia just mentioned. We start with policies talking about how we are designing our strategy to achieve our targets. We have milestones. First, we have 2030 milestones of achieving our net zero for forest, but also, we're still going to be looking at net zero overall in our economy achieving the 2060 or earlier. One point is I mentioned that more than 40% of our target emission is actually coming from the energy sector, the electricity sector, especially the coal-fired power plants that we are going to retire early. The commitment of this early retirement roadmap and the proceeds in terms of the emission reduction as a result of these projects are still not part of our commitment in our NDC, which means that when we are going to work on the work map and implementing it and working together with a lot of parties, we are actually going to improve, increase significantly in terms of the commitment for achieving our net zero much earlier than 2060.
Having this commitment and also consensus together, we come up with how we are going to tackle this with solutions. A lot of people talking about blended finance, but a lot of times this is actually about blended effort to come up with the solutions together in terms of pricing discovery, in terms of understanding the contract, in terms of how are going to find solutions together. Good news, like you mentioned JETP, we're working together with IPG countries. We found the solution, we found the common language and we achieved our own consensus in terms of commitment together and this is how we are going to scale up.
We know that we are not going to be able to do this alone. We know it's not going to be taking only one particular project and then that's going to be done. This is part of a roadmap, 2030, 2060 or much earlier than 2060. This is taking a lot of effort, collaborating with a lot of parties, MDBs, GFAS, philanthropies, everybody, and finding solutions. One point I want to add before I end is that we should start with projects because a lot of people be talking about financing, but a lot of people will be saying, I have financing, but I don't have projects. So it is actually very crucial for us to look at the projects and how we are going to build and scale up from 1, 2, 3 projects and so on. Back to you, Raj.
Thank you so much Febrio. I'm intrigued by this theme that seems to be coming out from your comments today, from all of your comments that you don't want to start with the financing. Your point here about blended finance, maybe we need to think about blended effort is a good one because blended finance is so small it's hard to find. We've talked a lot about it, but we haven't succeeded much in doing it and maybe it's because we haven't done those blended efforts, which I think is a big part of what we'll hear from Demetrius on in a moment. But I know we have Minister Benali just with us briefly, so I want to go back to you if we can minister and just get your take on this issue. Many of us will be in your country in October. The World Bank is going through this transition. What do you want to see from the World Bank, from the evolution roadmap, from the changes this institution is making to better direct financing for the energy transition you're trying to make happen in your country?
Well, thank you Raj. This is a very broad question and I think we're having multiple discussions with the World Bank and the IMF on the evolution of the Bretton Woods institutions to accompany us in tackling climate issues and making sure that we are all on the right track in our energy transition journey. Maybe before I leave you and thank you for making the time for me, and sorry I have to step up to another meeting. I think what has been said was very interesting about the role of governments between the strategic and tactical by Paul. I just want to understand whether Paul was really realizing what he was saying because you will end up having governments willing to leave aside the political benefits of the scaling up and paying the political cost of phasing down. In most of our democracies, Morocco being one, the United States being another one, I think it's a different type of government that would create, but I really like the idea and I think if we can push this model of political economy that Paul has put in front of us, I think if we can find a way to reward consistency in our public policies that will help especially the middle-income countries in their journey toward energy transition. I really like the idea about capacity building particularly when it comes to local finance because even if we don't want to start with finance, we end up having, I think, the ability to produce better projects to produce scalable and bankable projects with better return investments is definitely key there.
I really like the idea of making sure that those projects in the future are economically feasible and viable because that will help close that gap between the pool of funding that is available and the projects that we are lining up in our respective countries to tackle the energy transition challenge. I think if there are a few things that the World Bank can think about between now and October when everybody will be in Morocco, in Marrakesh, for our Annual Meetings, I think that's one key area that we will definitely discuss.
Thank you so much minister and thanks for your participation today. I want to pass the microphone now to Demetrios Papathanasiou, who is the Global Director for Energy and Extractives at the World Bank and he's going to take us a little bit through what the report actually says.
Thank you so much to the minister connecting all the way in the evening from Indonesia, Minister Benali in the afternoon from Morocco, and Alexia, good to see you again today. I think we both started our day early in the morning discussing pretty much similar issues. I will give you a brief overview of about 10 minutes of our report of Scaling Up Phase D own and then in true spirit of the evolution of the World Bank, the report is 40 pages. We tried to keep it short and even our printers, when we asked them to print a few copies for us, were surprised that this was a short World Bank Report. We're moving in the right direction, and we issued this about 10 days ago and I understand that we have a few thousand downloads happening already, so please give this opportunity to spread the message about this work and make sure that more people can access it.
As Raj said, we focused a lot on the title and the title demonstrates our priorities as a development institution. We feel that for the world to be able to face down the significant amounts of coal power that are primarily operating and they're set to be operating according to their technical life for a very long time, too long for the planet's climate, we focused as we first need to scale up energy supply. Demand for energy is growing very fast in our countries. This is to accompany their economic growth and we need to make sure that we provide good alternatives that will then allow countries to face down their coal power plants faster and more effectively. We start by doing this in the power sector because it is the decarbonization of the power sector that comes first and then drives everything else.
A lot of messages are already in the title of our report and in terms of where we extend today. First of all, we are at a time of crisis in the energy sector, affordability is an issue and the urgency of the energy transition is more important than ever. As a reminder and I think the numbers stock for themselves. If we want to remain within one and a half degrees Celsius, the available space we have in the atmosphere is about 380 gigatons of CO2 emissions. The rate of emissions today in the world is about 40 gigatons. We have less than 10 years to go to zero emissions, net zero emissions, if we want to stay at one and a half degrees. The urgency is there, and it is really massive. To get this done and make sure that we have the alternatives available, investments in the developing world need to grow from 240 today to about a trillion annually, and this needs to happen in too short seven and a half years that are left.
We believe that 60% of that needs to be from the private sector because the fiscal space is simply not available. Now the flip side of that and part of the good news is that indeed the spending, and this is mostly spending from the private sector for fuels, fossil fuels, in the power sector is already half a trillion year after year. What we need to do is find a way to translate this half a trillion of recurrent spending into servicing the debt and the equity that comes for the massive scale up of the capital that we need for the energy transition. As a reminder, about half of this 500 billion is still used to burn coal, and about another third is going into natural gas. The money is definitely there and what we see is that we have a lot of recurrence spending on fossil fuels rather than using the funding to service clean energy financing needs.
What happened today, and as Axel mentioned in his earlier remarks, what we are facing today is that low income countries and middle income countries pay much more for less clean energy. One of the main reasons for that is that clean energy has a significantly higher upfront capital investment and the access to capital for low and middle-income countries is very short. They have a very high cost of capital and in many cases barely have access to capital. So that is already one of the main constraints and our estimate is that this just on the high cost of capital without touching other issues, these countries end up paying 15 to 30% more for clean energy compared to what it costs in the higher income countries. The result of that of course is that the countries where we work in are locked out of economics of clean energy and they're locked into higher cost fossil fuels, they're locked into pay as you go and burning coal and gas rather than going into the longer term clean energy investments.
How can we stop this? How can we get out of this poverty trap that has become an energy trap and it is at risk of really becoming a climate change trap for the planet? We came up with this scheme at a high level and this scheme is something that we have studied both in OCD countries and we have seen it working in practice in some of the countries where we manage to kickstart the energy transition. This is not theory, this is practice, and it is a summary and a highlight of what we have learned all these years working on the power transition.
First of all, we start with a government that commits and has targets for the energy transition. This then needs to be translated into the right legal policy and regulatory framework. The paperwork needs to be in place and then this needs to start feeding into institutions that can deliver what is on paper. We feel that this is something that has been underappreciated in a lot of the analytics and the debates about why the transition is not happening and we will come back to that as well. But focusing on the institution and using on some occasions concessional financing to strengthen institutions is I think one of the contributions that we have made in this support that we would like to highlight. A lot of people say that we're missing the projects. There is a lot of capital, but we don't have projects and we will argue that it is through stronger and increasingly stronger institutions that you begin to have a pipeline of bankable projects. Someone needs help to prepare the projects. We cannot stop just in the enabling environment. We need to deal with issues of permitting, of identifying the land, identifying connections, making sure that projects are going into the right place with the right priorities. A lot of that, at least in the beginning of the cycle, needs to be handled by increasingly capable institutions of the government or wherever we have markets or the regulators of these markets that enable the transition. Once we have a pipeline of bankable projects, what we can then do is start with transparent, competitive processes that will allow us to see what the market is able to deliver for these types of projects. We need competitive and transparent processes, not just because this is an issue for legitimacy and doing things right, but because we want to move concessional financing in de-risking some of these projects. It's very hard for people to deploy concessionality when projects are not done in a transparent and competitive manner. Again, this is tied back to institutions, but it's a key part of the virtue cycle that we're trying to kickstart.
Whenever we have gone through these steps and we run competitive auctions transparently, competitively, we have gotten very good results. Some of the most competitive power has been delivered like that and it is clean energy power. Of course the result of that then is that the ambitions of government turn to become even higher and then we can start the cycle again and be more ambitious, have more bankable projects, have institutions learning by doing the process and we can deploy more of our capital in better ways.
The private capital comes right there once we have bankable projects, once we can deploy de-risking instruments and they're the ones who will deliver the result, we do believe that two thirds of the investments will be private capital. It is absolutely necessary. It is willing to come in, but they are looking for the right enabling environment and what we're finding for the right projects which are prepared in the right wave from stronger institutions.
It is important to talk a little bit about the phase down, where does it come from and how does it work? Indeed, we have found out, especially from our experience, our recent experience on helping the government of South Africa with closing down the commodity, that there are important issues, especially on socioeconomic impacts that we need to take care of. Most of these things include costs with little revenue. Nevertheless, there is still value, as Paul mentioned, in the assets of the coal power plants, even the dirties of them. We have found out, and the report talks a lot about that, that it is possible to minimize the costs and then direct concessional financing through every step of the cycle and make sure that we can enable more and more and a faster way of doing things.
What I would like to highlight is that as you look at this virtue cycle, the right hand part of it is where a lot of the costs are low, but the effort is very significant. We believe that with small amounts of concessional financing, we can have a big impact in preparing the right regulations and strengthening institutions. As we go to the left part of the cycle, that's where concessional financing and our own financial sophisticated instruments can be used for de-risking and delivering the scale that we need. We certainly need concessional financing to deal with the socioeconomic impacts of phasing down coal. How do we work with support from our funding? We believe that we need to work for stronger transition preparation financing. We need additional financing to strengthen the utilities. We talked about strengthening the networks investments in infrastructure and how we can bring more private capital in that part of infrastructure as well.
Then we need preparatory funding for visibility studies, preparing the first project, preparing the right documents, the contracts, the part purchase agreements, then we can deploy our risk mitigation instruments and the Bank has a lot of long experience on how to do that. We have even been burned a few times, so we have learned what not to do as well and what else needs to be done when we deploy a risk mitigation instrument. Then of course that is the critical part on the phase down of coal power plants especially, we need to bring in concessional climate financing to deal with the socioeconomic impacts. Again, we think that the cost there and the report goes into depth are not as high as people believe, but still there are costs that have to be financed and they need to be financed through concessional climate financing. That was my 10 minutes review of a 40 pages report. You can Google Scaling Up to Phase Down and have access to the report. It's publicly available and I'm looking forward to the rest of the conversations. Thank you.
Thank you so much Demetrios, and I congratulate you on not only a short report but a very clear one, your argument's really clear. Let me go to you quickly with one question. We don't have much time left so we're going to try to have a rapid fire series with our panelists, but you talked about the urgency, but on the other hand you say the key here is strengthening institutions. Urgency sounds like something we have to do fast, strengthening institutions sounds like something that takes a lot of time. What do you say to people who are impatient, they want to move this agenda faster. How long is this going to take?
I think our approach is that this is a cycle that moves fast and can accelerate every time you pass it on. What we have seen is that there is learning by doing at all levels of the cycle. We have seen in fact, especially when you get to the point where institutions auction projects and they see first of all the tremendous interest that the private sector brings in, the quality of investors and sponsors that are interested in the projects, that indeed gives a lot of confidence in institutions. It accelerates the ability of the government to put further resources and attention to these institutions. When we get the right results then we get to this really positive cycle that moves on and on.
Again, at the end of the day, we all want to move to a situation where things are governed by markets where government intervention is not really needed, and getting there can happen fast as long as we deliver the results. Our focus should be on delivering results. We don't need to get everything right to move to the next phase of the cycle, but the important thing is to get it started, get a few things right first and that will then kickstart the whole process. We have seen this happen again and again. It can happen.
I want all the panelists to share any reactions you have to what you've heard, but I want to also bring in a question from the audience to you Febrio, if I can. Somebody in our audience is asking, is it possible to sustainably use coal in the transition to cleaner energy? Obviously, we are talking about a transition and since some of these things may take some time, as we just heard, there are countries that are going to be building more coal plants or using more coal. Is there some way to sustainably do this or not? What do you think Febrio?
That's why the power of strong narratives is very important here. That will also couple with strong sense of directions from the government when we set our commitment and we follow through and we work in detail. Fortunately, here and there, you also see some supports that you didn't expect before. For example, we have this pilot project that we are hopefully going to be able to finalize in terms of the financials by COP28 this year. This is a 660 megawatt power plant, a coal-fired power plant and we already announced this back in November last year back in G20 Presidency of Indonesia in Bali. Interestingly, this project of early retirement of a coal-fired power plant will be without any government support. It is going to be pure private driven. It is going to involve about seven years or more number years of operation of the coal-fired power plant to be cut, and this is going to be coupled with transition finance.
This is another very important milestone for us because we introduced transition finance narrative back in G20 and we actually put it to the test. We revised our ASEAN Taxonomy for Sustainable Finance to include transition activities in it and that also gives some room for the private sector to be able to take part of this project by saying that they are going to be part of transition activities and the financial market will be able to categorize themselves as transition activities financed by transition finance. There are a lot of strong narratives. Interestingly in answer to your question about sustainably, is it going to be sustainably done? It is interesting that you also followed, I hope you also followed that there are some projects of qualifier power plants and new ones not really getting any financing from the market. So there is a lot of support here and, sometimes unexpectedly, but this is because we have a strong sense of direction.
It's fascinating how much you're using this idea of narrative. I think it's a key theme that we should pick up on how, and even just the focus on the title of the report, getting the narrative right so people and populations and the public can understand what we're actually doing here is so key.
Alexia, just briefly, what is your response to this idea, central to the argument that Demetrios is making that if you want bankable projects you have got to first focus on strengthening institutions. Does that resonate with you?
Absolutely. It was. I think one of my four opening points is that you need strong institutions, you need the utilities to be strong, you need the execution capacity to be strong. The point resonates incredibly strongly. If I may, Raj, I'd like to just echo a few other things that I heard. First of all, the narrative point that Febrio just made that you picked up on, I think the whole power of the just energy transition partnerships that have sort of brought forward the net zero power sector emissions in Indonesia by 10 years. That has doubled the ambition for renewables to 34% by 2030 for Indonesia is a narrative about a north star climate and ambition from a country that takes the policy changes, that takes public sector money coming in, including from the country itself. That takes the private sector commitment with the GFS coming in strongly.
I think that really resonates with me. I think on the coal phase down just a point I wanted to make is I think trying to make it a sort of viable investment for private investors to come in and to hold on to coal assets in order for them to decommission faster is really tricky. When we think about the commitment that financial institutions have made, the net zero commitments that holding onto broad assets they need to be able to get credit for that is something that we have to sort out for them to really come in. That's part of what's on the agenda for us is working with others to help sort that out.
I think Demetrios's point about there is money in the 500 billion that needs to be reoriented to another purpose is also really important when the numbers seem overwhelming about what we need to do on the financial side. So that was really important to hear from him as well as the thinking really smartly about where concessionality is needed and having concessionality go to the thorniest of obstacles and also very much to protecting the most vulnerable and low income populations during this transition.
Thank you so much Alexia. Paul, just a final thought from you. I want your take on the report of course. We also had a question about the fact that there's a lot of countries in debt right now, in debt distress. Given that the fiscal space is so tight for many countries. What is that? What are the implications when you think of trying to execute on a lot of what we just heard? So your overall take on the report, anything you think is missing and this question about debt, would be great to take your comments on it.
Sure. Well, it's a fantastically clear framework and totally agree with it. I think I would pick up as my next question what Alexia just mentioned, which is what do we do about this 500 billion? Where does that live in this framework? Because what we've seen is in the US there have been some very creative coal phase out transactions rate payback bond securitization, which basically in a regulated power market, where the taxpayer is the same person as the rate payer, allows you to refinance and retire a coal plant and provide clean power and it's a net benefit to the rate payer taxpayer. I don't have a scintilla of doubt that we can find a way to structure this 500 billion and this is partly an answer to your question. How do you, not just in a financial engineering sense, but in a narrative sense, capture this 500 billion and repurpose it in ways that increase the confidence, political confidence and constituency confidence that this is worth doing. Because 500 billion a year is a very significant percentage of the missing capital in the capital stack.
Sorry for jumping in, Raj. One quick point I wanted to make is that the 500 billion is money that we have measured, and we know has been spent to burn coal and gas. There is an additional significant amount of money that goes in misdirected subsidies, and we are putting the numbers together, especially last year because of the war in Ukraine, the costs of fossil fuels have been way too expensive, and the number of subsidies has been enormous throughout the world. It is not just this half trillion there that we know it's been spent to burn fuel. There's a significant amount of funding as well that goes year after year after year into the wrong type of subsidies. And we are working on this, we're doing some analytics on the subsidies, and we will be setting them up as we go forward. Thank you. Yeah,
That's a great point and some of those subsidies are very significant in certain countries. I'm not going to try to summarize this whole conversation before I pass it to our last speaker. I'll just mention a few terms and ideas that popped up that I think are fascinating. One is narrative. Getting the narrative is so important. I think the report really tries to do that. Another is political economy. Let's not forget that these are highly politicized issues, and we need to be thinking about the political economy if we want to make the transition happen. The strategy and tactics as you describe Paul, the other is institutions. Alexia said let's not start with finance and clearly your report doesn't, you say we’ve got to start with the institutions.
The pacing and the way we frame the framework in our own minds, the mental framework around how we get to the transition is so key. Those are just some of the key points I think that floated up for me. I'm sure there are many others. I'd love to hear from those of you in the room and online on social media what you thought.
But let me pass it now to Guangzhe Chen who took over the Vice Presidency for Infrastructure here at the World Bank just a couple of months ago. We'd love to hear your closing thoughts.
Well, thank you. Thank you, Raj. I would also like to thank the distinguished panelists for investing time and helping launch this great report. I think the conversation regarding this international community, how we can work together to really better support lower middle-income countries to address this particular challenge in the power sector. How do we can scale up renewable energies but also face down coal in the power sector? This is obviously really needed for meeting climate goals. I think we all agree on that. The challenges we all discussed are daunting. I think it's important to repeat that message that has been said a couple times. The so-called triple penalty facing the low and low middle income countries. Because of the lack of access to affordable capital. They're paying more for electricity and our lockout of the economic use of clean energy but also lock into a fossil fuel path, and which very well as Demetrios mentioned, I think about particularly last couple years and all speaker agreed that no modern energy, there will be no modern economy and it's not just about energy. We must expand clean, affordable, renewable and just energy. Energy transition will enforce security and development. The report introduces this cycle to create conditions to scale investment in new energies and translate momentum for retiring coal plants and addressing the economic and social environmental impact surrounding the coal phase down.
In conclusion, I think the foundation for the rhetoric cycle for energy transition needs to be set by the government. I think Paul mentioned that strategic role of the government and supported through concessional finance to break down the barrier they face with the goal of priming the plum for private financing.
Through the discussion. I think the key thing though wearing my infrastructure head is that this discussion about energy can actually be equally applied to other sectors or in the infrastructure. Wearing my previous hat is overseeing the water practice.
In fact, I see this Victoria cycle key equally applicable to water utilities, what we're talking about, water scarcity challenge, water security challenge, is the same thing. I think this is really an excellent exercise we've been discussing today, and I really want to thank all the audience and participants for all those connected online for this discussion. We certainly hope that the idea discussed today can lead to a much more systematic and coordinated approach for supporting energy transition in low income countries. We might all be able to digest the report, disseminate message, and support all of us together for this journey ahead. Thank you.
Thank you. I think that concludes our session. Thank you so much for being with us. Thanks to our panelists and everyone who's joined virtually. Enjoy the rest of the day.
“All hands must be on deck to help developing countries through their energy transition. Failure to act with urgency risks locking the world into a path with dangerous consequences for climate and development.”
— Axel van Trotsenburg, Senior Managing Director, World Bank
“The energy transition is not a luxury; it is a necessity.”
— Leila Benali, Minister of Energy Transition and Sustainable Development, Morocco
“A strong public sector will enable a strong private sector – the two go hand in hand. When you have a more enabling environment, that reduces the cost of capital and makes it easier for the private sector to come in.”
— Alexia Latortue, Assistant Secretary for International Trade and Development, U.S. Treasury
“Poorer countries are stuck in a vicious cycle where they pay more for electricity; cannot afford the high upfront cost of clean energy; and are locked into fossil fuel projects. In essence, they are paying a triple penalty for the energy transition. The poverty trap is becoming an energy trap that is becoming a climate trap.”
— Demetrios Papathanasiou, Energy & Extractives Global Director, World Bank
“The energy transformation is going to affect every country in the world, including low and middle-income countries that are racing to build needed power infrastructure.”
— Raj Kumar, President & Editor-in-Chief, Devex
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Senior Managing Director, Development Policy and Partnerships, World Bank
Assistant Secretary for International Trade and Development, U.S. Treasury
Director of Sustainable Finance, Industry, and Diplomacy, Bezos Earth Fund