Multilateral development banks (MDBs) have the unique ability to bring in innovative financing structures, mitigate risks, help the government to drive policy and institutional change, and bring in the knowledge and innovation needed in the market, wrote Annisa Sekaringtias on Foresight Climate & Energy.
Banks and governments can mobilise more funds for the energy transition
Amidst multiple crises where climate action, energy and development are often seen as trade-offs, small-scale clean energy solutions—such as distributed renewables, energy efficiency and storage—have been delivering people-centred benefits rapidly.
Energy solutions that are non-fossil fuels based, decentralised and operate closer to people’s lives, have been enabling affordable energy access, increased employment and improved resilience to energy price volatility and extreme weather events. They provide the fastest, cheapest solution to tackle climate, energy, and development issues—while supporting a people-centred energy transition.
However, persistence towards traditional, larger infrastructure still gets the majority support while global investment in small-scale energy solutions is nowhere near what is needed. This is especially true in emerging and developing economies (EMDE) where perceptions of risk in the small-scale energy sector often prevent investment.
In the wake of the recently concluded Annual Meetings of the International Monetary Fund and World Bank Group in October 2022, there is an important window of time where the World Bank and other multilateral development banks (MDBs) need to show their pivotal role in scaling up these solutions for developing countries.
This can set the scene for constructive dialogues at the nexus of climate, energy and development at COP27. MDBs are distinctively placed to leverage private finance at multiples of what is available through public finance and help build more bankable projects in EMDE.
From 2017 to 2021, MDBs contributed at least 81% of the public finance that was invested in small-scale energy solutions. Yet, the value is only a fraction of what MDBs have in their financing pot and what the world needed in terms of annual investment.
Distributed renewables and energy storage only account for 0.5% and 1% of total MDB energy-related finance, respectively. In contrast, large-scale infrastructure projects still account for more than 90% of all MDB energy spending. Furthermore, over 15% of these investments are still going to fossil fuel projects—widening the gap for finance directed to cheap and clean small-scale renewables.
Geographically, these small amounts of public finance are still largely concentrated in high-income economies. For instance, over the past five years, investment in smart meters across EMDE was only one-fifth of smart meter investment in advanced economies, despite the need and opportunity being far greater in EMDE contexts.
Given all these investment needs, currently MDBs finance only 1.2% of the public investment needs for small-scale energy solutions, estimated to be at least $302 billion.
MDBs have the opportunity to make structural adjustments and shift finance towards small-scale solutions. At the same time, the shareholder governments must be aware of the potential of small-scale solutions and seek opportunities to implement these recommendations in MDBs.
There are seven action points that MDBs and shareholder governments can do to increase this finance and drive substantial development benefits:
- Set out a common pact for unlocking the massive development benefits from small-scale energy solutions, prioritising emerging and developing economies (EMDE).
- Shareholder governments must play a more active role in recognising the benefits of small-scale energy solutions by integrating them into national energy transition and development plans.
- Fill data gaps by establishing a common database to increase transparency and accountability. Harmonisation should occur across MDBs, and other development finance institutions (DFIs), in project development.
- Set clean energy financing targets that align investments with net-zero scenarios. Across public and private finance, $4.5 trillion in annual spending by 2030 is needed to finance the global energy transition—triple the current global investment.
- Target a percentage of energy-related funding to small-scale energy solutions, through forthcoming energy lending policy reviews. MDBs should also support the development of specific financing facilities for this sector, and provide technical assistance.
- Adjust incentive structures in the MDB project development process to allow small-scale energy projects to gain priority over larger fossil fuel projects. This includes fair assessment of small-scale energy’s higher impact and reviewing organisational incentives that penalise spending on small-scale projects.
- Further strengthen partnerships with financial intermediaries, including enhancing transparency and standardisation. Channelling funds via intermediaries helps address the costly preparation and administration of small-scale projects at the MDB level. MDBs should support intermediaries in scaling up investment in small-scale energy and enhancing the availability of investment data.