Conflict between brown and green growth can be narrowed, says study

Asia’s governments must make tough choices in energy investments that can provide affordable energy while meeting pressing environmental objectives, especially on climate change, says a study by the Asian Development Bank’s (ADB) Independent Evaluation Department.

Although some trade-offs are inevitable, these can be reduced by reforms to energy pricing, technological innovation, and access to financing for environmentally sustainable growth.

ADB forecasts that developing Asia’s share of global energy consumption will remain higher than its share of the global economy. Developing Asia accounted for a third of global energy consumption in 2010 which, under one ADB scenario, is projected to rise to 56% by 2035, when the region’s share of the world’s gross domestic product is forecast at 44%.

Yet amid surging energy consumption and strong economic growth, 18% of developing Asia’s population, nearly 630 million people, still do not have access to electricity.

Providing affordable, clean and secure energy will require hard choices between brown and green growth. And these are examined in a special chapter in Independent Evaluation’s Annual Evaluation Review 2014 of ADB’s operations.

“The higher start-up costs of many renewable energy resources are raising issues of affordability at a time when governments across Asia are under pressure to keep energy prices from rising,” says Vinod Thomas, director general of Independent Evaluation at ADB. “Fortunately, the cost of renewables is starting to fall, which is easing tensions between vital environmental objectives and those of an affordable and reliable energy supply. This emerging trend presents countries with an opportunity to step up policies and investments for switching to a low-carbon path.”

The report identifies the win-win option of eliminating fossil fuel subsidies, as this would cover a significant portion of the mitigation likely required to limit global warming to 2 degrees Celsius above preindustrial levels, the target agreed under the United Nations Framework Convention on Climate Change.

This makes energy a good place to start addressing climate change and environmental sustainability. Developing Asia already accounts for more than 35% of global CO₂ emissions, and this share is set to increase to 47% by 2035, primarily due to energy use. At the same time it remains necessary to blend renewable energy with clean conventional generation.

Countries vary widely in their level of access to electricity. In the People’s Republic of China (PRC) and Viet Nam, this is close to universal, but where it is not, providing this level of access is a priority for governments and their development partners. The high cost of connecting isolated communities by extending electricity grids is an opportunity for small-scale renewable energy technologies. In Bangladesh, for example, this low-cost option is being actively followed, with close to 3 million households achieving a minimum access to electricity over the past decade with small photovoltaic systems for solar generation.

“Encouragingly, the expansion of the market for new and renewable technologies is stimulating innovation and economies of scale, which are bringing down costs,” says Thomas. “So this is the right time for governments to put in place policies to encourage investment in renewables.” The cost of solar photovoltaic generation has fallen much faster than anticipated just a few years ago, and the cost of producing power from wind generators from some sites in the PRC and India is approaching parity with conventional sources.

The increased use of renewable resources for electricity generation should both reduce Asia’s heavy dependence on imported fuels and lead to more trade in electricity among countries, if politics permit.

“There is substantial potential for this kind of trade in South Asia and the countries of the Mekong basin for hydropower; in the case of wind power, an example would be Mongolia and the PRC,” says Walter Kolkma, team leader for the report.

As renewable energy sources grow, smart grids that integrate renewables into the electricity network will likely play a bigger role in regional energy cooperation and integration.

 “ADB and other multilateral banks have an important role in helping countries provide affordable energy in an environmentally responsible way, not just through financing support, but also through knowledge sharing and promoting regional energy cooperation,” adds Kolkma.

ADB’s energy operations rose to $16.8 billion in 2008–2012, accounting for 26% of the institution’s total loan portfolio, up from 16% ($5.8 billion) in 2003–2007. In the seven countries that account for more than 80% of ADB’s energy loans, the share of financing for renewable energy and energy efficiency rose to 27% in 2009‒2012 from 5% in 2001‒2008.

Independent Evaluation’s review of ADB’s energy operations found no indication that the shift to a greener energy portfolio negatively impacts the financial sustainability of projects or their success rate. But the real test of this shift will be the “buy-in of governments and businesses to ADB-financed projects,” says the review.