The Challenge of Low-Carbon Development - World Bank Internet ...

esettlement plans has been ineffective. About two-thirds ofhydropower investment volume now goes to run-of-riverhydropower (that is, without substantial reservoirs), whichhas less potential for local social and environmental damagebut is more vulnerable to climate change.Direct WBG investments in wind power have been modest.On average, wind power offers significantly lower economicand carbon returns than hydropower because ofhigh capital costs and often low capacity utilization. Manufacturingcost reductions at the global level, together withbetter siting and maintenance, are crucial to increasing thecompetitiveness of wind and other new renewable energytechnologies.The largest single area of off-grid renewable energy investmenthas been in solar photovoltaics, mostly for home use.Since 1992, the WBG has contributed $790 million to solarhome system (SHS) components in 34 countries, almostall using GEF-funded subsidies. World Bank efforts, usingquality-contingent producer subsidies and relying onmicrofinance for consumers, have been more successfulthan those of IFC. These projects can have economic ratesof return of 30–90 percent but have little impact on GHGreductions because off-grid households use so little energy.At current prices, SHSs have been successful in a narrowniche market: the off-grid household that is either relativelywell-off by rural standards or can access good microfinanceservices.Energy efficiencyPhase I of this evaluation (IEG 2009) assessed the most importantbarrier-removing policies: energy price reform andpromotion of energy efficiency policies such as building andappliance standards. It noted that the Bank had pursuedprice reforms in energy but had relatively few—and modestlyfunded—projects dealing with energy efficiency. Sincethen, there has been increased attention to policy-efficiencylinkages, including Bank-IFC support for a recently adoptedenergy efficiency law in the Russian Federation, supportfor a G20 study of energy subsidies, and a recently approvedVietnam power sector development policy operation.Owners of factories and buildings often fail to borrow forapparently highly profitable energy efficiency opportunities.The WBG’s diagnosis: Borrowers lack information, andlenders lack experience and comfort with energy efficiencyproject finance. The largest WBG response has been tosupport financial intermediaries—banks, special-purposefunds, and energy service companies—with guarantees andtechnical assistance. These programs have appropriatelybeen directed to China and Eastern Europe, where energyinefficiency has been high.Parallel programs have been implemented by the WorldBank and IFC, both supported by the GEF, and withoutmuch communication between them. Yet, contrary to expectations,loan guarantees have turned out not to be atemporary, market-transforming measure that could bediscontinued once the banks gained familiarity with energyefficiency lending. Inadequate lending for energy efficiencyoften reflects wider credit market failures, including onerousrequirements for collateral.Guarantees have triggered energy efficiency lending tocredit-strapped small and medium enterprises. Becauseborrowers achieved high rates of return, guarantee programscould achieve higher impact through tighter targetingon less creditworthy companies.World Bank-supported projects have been successful inintroducing energy service companies (ESCOs) to China,with high returns, significant GHG impacts, and spontaneousreplication. However, further replication and scaleupmust address the ESCOs’ own credit problems andrecognize that energy performance contracting, the standardparadigm for ESCOs, may require major adaptationsin many developing countries.IFC also lends directly to industry for energy efficiency.IFC’s program of screening its clients for energy efficiencyopportunities supports mostly small loans with low GHGimpacts.Three areas of existing activity stand out as having highimpact and high potential for scale-up: first, proactive IFCsupport for energy efficiency in the atypical but importantcases of large, carbon-intensive factories that face credit orinformation barriers; second, increased support for transmissionand distribution loss reduction, which offers economicrates of return of 16–60+ percent and lifetime carbonreturns of 7–15 kilograms per dollar. Third, substitution ofcompact fluorescent lamps (CFLs) for incandescent lampsoffers estimated direct economic returns (in saved energy)of 50–700 percent, together with deferred construction ofpower plants and emissions reductions of 27–134 kilogramsof CO 2per dollar. These returns would be further magnifiedif initial projects catalyzed spontaneous diffusion of CFLs.However, rigorous evaluation of CFLs is lacking.ForestryForest loss, especially in the tropics, generates a quarter of developingcountries’ emissions. The local and global values ofstanding forests often greatly exceed the gains from destroyingthose forests. Tapping this value could therefore offerlarge economic and GHG gains. The Forest Carbon PartnershipFacility is a pilot that explores options to monetize thevalue of standing forests. However, the mechanisms to usethe funds to conserve forests are still being planned. WorldBank experience provides some models for scaling up.Payment for Environmental Services programs also seekto reward property owners who maintain forests. WorldExecutive Summary | xi