The Path to Sustainability: Improving Access to Energy

 

Keynote Address to the 19th World Energy Congress

Sydney, 5-9 September 2004

by

José Antonio Ocampo

Under-Secretary-General for Economic and Social Affairs

United Nations



It is a pleasure for me to address the 19th World Energy Congress on delivering sustainability in the energy sector. We at the United Nations are concerned with all aspects of sustainability. Energy is an important driver of economic growth and its efficient use is a precondition for sustainable development. Lack of access to modern energy services undermines the living conditions and productivity of an estimated one-third of the earth’s inhabitants, causes hardships and exacerbates inequalities. It is directly related to poverty and inextricably linked to underdevelopment. Therefore, energy accessibility is an essential component of efforts by the United Nations and others to improve the standards of living and promote economic growth in developing countries, and will thus be the focus of my remarks today.


The link between access to modern energy services and poverty alleviation was highlighted by the Heads of State at the World Summit on Sustainable Development (WSSD) held in Johannesburg in 2002. While this relationship was widely perceived prior to the Summit, it is significant that it is at last on the agenda of the international community, which is now committed to improving access to energy as a condition for alleviating poverty, as embodied in the Millennium Development Goals. At the Summit, it was also recognized that all stakeholders much be involved to achieve sustainable development. This is especially true in the energy field where –apart from the electricity sector– the private sector has long played a major role in the provision of energy services. We are thus very pleased that the World Energy Council has decided to highlight energy accessibility, along with availability and acceptability, at this year’s Congress. And we share with you the challenge of providing greater access to energy services in ways that contribute to, rather than detract from, efforts to achieve sustainable development.


World energy demand is expected to increase considerably during the coming 30 years –by two-thirds, reaching 15.3 billion tonnes of oil equivalent in 2030 according to recent International Energy Agency (IEA) forecasts. In large part, this will be a result of increases in demand by developing countries with rising population and incomes, and rapid urbanization.

 

Electricity is a major area of focus of commercial energy accessibility for economic development. Over the next 20 years, world electricity consumption is expected to continue to grow by a global long-term average of 2.7 per cent per annum (IEA, USDOE).  Most of this additional electricity demand and consumption growth will come from developing countries, at an expected electricity growth rate of 4.2 per cent per annum. China will be a leading player, with its electricity consumption expected to increase, according to different scenarios, at rates between 4.3 per cent and 7.9 per cent per annum.  

 

Although a gradual decline in energy intensities during the 1980s and the beginning of the 1990s has been observed mostly in developed countries, there remains a strong and direct correlation between economic development, energy use and electricity consumption. In many developing countries, there are sizable inefficiencies in the energy system, where some generation plants consume excessive amounts of raw materials, and transmission and distribution losses sometimes exceed one-quarter of the power generated. Thus, energy efficiency investment represents a real potential with long-term cost savings that can be realized by developing countries. Estimates point to a potential reduction of primary energy for a given amount of energy services ranging from 30 to 45 per cent. Adopting comprehensive measures and policies to promote energy efficiency is thus a powerful option available to developing countries. Many energy efficient technologies can be adopted today, often with the resulting savings covering the capital costs. For example, electricity transmission at high voltages could reduce transmission losses by 8 per cent (WEA).

 

            The mix of primary fuels used to generate electricity has changed over the past three decades and this, as you know, has ramifications for the acceptability of energy systems. Coal has remained the dominant fuel for electricity generation. While its share is projected to decline slightly from the current 34 per cent to 32 per cent by 2030, coal use for electricity generation will increase considerably in absolute terms. Continued increases in the use of natural gas for electricity generation are expected worldwide, with more favourable environmental impacts. The role of nuclear power in the world’s electricity markets is projected to lessen as some reactors in industrialized countries reach the end of their lifespans, though major new investments are planned in Asia. Generation from hydropower and other renewable energy sources is projected to grow but, without greater concerted effort, their relative share of the total electricity generated is projected to remain near current levels.

 

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Today two billion people –roughly one third of the world’s population– live without access to modern energy services. Many of these people are living on less than 1 dollar per day, cooking indoors on poorly ventilated and inefficient stoves, spending several hours each day gathering firewood, and living with inadequate lighting, no refrigeration and few labour-saving devices. Moreover, limited access to energy also means limited telecommunications services and poor employment opportunities. It is a life that few of us sitting in this room can even imagine. Such living conditions are associated with respiratory problems, especially for women and children who inhale smoke from the cooking fires, and worsening environmental conditions as local environments are degraded by the use of firewood. It is estimated that 130 million people in sub-Saharan Africa live in areas where fuel wood consumption outpaces the natural regenerative capacity of the forests. Also, time spent gathering firewood often represents lost opportunity for schooling and productive employment. In rural Kenya, for example, some women spend 20 to 24 hours per week collecting branches, cow dung and crop residue to use as fuel.

 

As you know, meeting the challenge of providing energy services is not an easy task, but requires a huge effort and significant levels of investment. People living on less than 1 dollar per day cannot afford to pay for the enormous investment needed to extend the electricity grid to remote rural areas with widely dispersed population centres. Innovative solutions are needed, but will invariably involve subsidies for the poor. And the right solution in one country may not work in another –owing to varying economic, social, cultural and institutional characteristics found among countries, and even among regions of the same country.

 

For the most part, developed countries succeeded in achieving universal electrification during the 20th century. They accomplished this feat with significant subsidies to the electricity sector. These subsidies were, by and large, well designed with tariffs set by an oversight board, a guaranteed return for investors and required capital improvement plans. However, even in developed countries, privatization has led to unexpected difficulties, and changes to these well-thought-out institutional structures have resulted in serious disruptions in service, often as the result of inadequate investment in capacity. This experience does not give confidence to developing countries.

 

In the past, electricity subsidies were also widely employed in developing countries, where public sector provision has tended to be the rule. As generation and transmission costs have risen faster than revenues, government treasuries have been overwhelmed, with these subsidies competing with priority social expenditures. Such subsidies are criticized as benefiting the rich more than the poor, since wealthier people generally consume more power and lower prices actually encourage higher consumption levels. With low cost recovery, investments in additional generation and distribution networks to bring the service to the poor have been affected. Repairs, improvements and upgrades have also suffered, resulting in inadequate capacity and disruption of service.

 

Privatizing the electricity sector provides instant cash into the Treasury and puts the problem of capital investment squarely on the shoulders of the private sector, but does not ensure increased access to energy. While developing countries can establish regulatory authorities to oversee tariffs, environmental regulations, labour conditions and the like, they cannot force investment by the private sector to take place where incomes are too low to secure an adequate rate of return. Thus, subsidies to poor consumers are an essential instrument for improving access to electricity and other modern energy services, and should be properly designed and funded either from public sector budgets or by cross-subsidization from tariffs on consumption by the rich.

 

The trend toward privatization and market liberalization has given rise to differing strategies related to markets for energy services in developing countries. Some countries have adopted successful policies aimed at developing a strong domestic energy services sector as a stimulus to economic development. Others have developed a strategy to attract foreign firms who can contribute to the development and strengthening of domestic capacities. In any case, for effective liberalization of energy service markets to occur, there must exist an enabling environment involving transparency, the avoidance of anti-competitive practices, and fair access to the transmission and distribution networks. And the public sector may continue to play a role in all areas of service provision, but particularly in those where natural monopolies prevail, such as with transmission networks. Furthermore, it is possible to design systems in which public and private providers compete among each other, and in which different types of partnerships among them are formed. Indeed, the critical issue from the point of view of the consumers is efficiency and competition in service provision rather than ownership.

 

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While constraints and barriers sometimes seem insurmountable, especially in developing countries, progress is being made. Brazil, for example, has many problems common to other developing countries such as growing densely-populated urban areas and high levels of poverty. Yet it has taken steps to exploit its natural resources in conventional and non-conventional ways that significantly improve access to energy. As you know, Brazil is blessed with natural hydropower resources that it uses extensively for electricity generation, and has promoted for decades the development of ethanol production that contributes significantly to energy used by the transport sector. It has also been able to tap deep-water offshore oil reserves utilizing innovative technology. Today, Brazil meets its energy needs from national production with minimal contribution to global CO2 emissions. Yet, it has faced financial problems similar to other developing countries as well as electricity shortages, which led to rationing not long ago. Its partial electricity sector privatization programme was recently reformulated and the Government is now providing financial assistance to improve reliability and expand capacity. It is also committed to investing $2.4 billion to provide electricity to 13 million people currently without access, mostly in the northeastern part of the country where electrification rates are low.

 

            China, the most populous developing country, faces considerable challenges in improving energy access and providing energy services to its more than one billion inhabitants. China’s high rates of economic growth along with recent closures of small inefficient power plants, have put strains on capacity. It is estimated that China will need to invest $2 trillion to meet the rapidly increasing demand for electricity over the coming three decades. It began reforming the electricity sector in 1985 in part to overcome shortages, and has encouraged the private sector to invest in capacity expansion. But government financing covered 65 per cent of power sector investment during the latter half of the 1990s and, unless tariffs are raised, its contribution will have to remain high. China relies heavily on coal, but is investing in hydropower. The famous Three Gorges Dam is scheduled to be fully operational by 2009, when it will supply 10 per cent of current electricity demand. In its effort to ensure a diversified energy base, China also plans to increase its nuclear and natural gas power generation capacities, and expand generation from renewable, mainly wind and solar, sources in rural areas.

 

            In fact, renewable energy can play an important role in improving energy accessibility, and many developing countries are developing this option. Along with Brazil and China, Egypt, India and Morocco have major national programmes for renewable energy. As part of their regional initiative for sustainable development, Latin American and Caribbean countries have agreed that, by the year 2010, the use of renewable energy in the region as a whole should amount to at least 10 per cent of the total energy consumption. Most notable is, of course, the commitment by the European Union to achieve a 20 per cent share of the total energy mix from renewable sources by 2020.

 

            Renewable energy may be a feasible solution to provide energy especially where populations are dispersed and where an alternative is needed to the use of wood for cooking. This could be the case for many parts of sub-Saharan Africa where access to modern energy services remains very low and rural electrification is estimated at only about 8 per cent. Sub-Saharan Africa consumes the lowest amount of energy per capita –about 0.60 tonnes of oil equivalent (toe) per year– compared to 4.68 toe in OECD countries, 1.07 toe in Latin America and 0.72 toe in Asian developing countries. Moreover, 60 per cent of sub-Saharan African energy consumption is met from traditional biomass sources. There are also plans under NEPAD (New Economic Partnership for Africa’s Development) to expand the interconnection of electricity grids in African sub-regions and develop more of Africa’s hydropower potential.

 

            Meeting expected increases in energy demand, including the implementation of ambitious electricity-capacity expansion plans in developing countries, will contribute to improving energy accessibility but will require large investments from the public and private sectors. Recent estimates by the IEA indicate that a $10 trillion investment in the electricity sector is required by 2030. Appropriate investment environments and greater international cooperation are essential if these capital investment goals are to be realized. 

 

            Many developing countries will continue to require financial assistance in particular for the expansion of energy supply, including electricity, in rural areas. Over the past 15 years, support for infrastructure including energy projects from official development assistance (ODA) has been overtaken by foreign direct investment (FDI). However, FDI is directed to the most profitable energy markets such as China and Brazil, and thus many developing countries, often those most in need, receive no benefit from it. And, as I have emphasized, such private investment will not provide services for the poor, unless it is accompanied by subsidy schemes, which in low income countries will require significant amounts of public sector budget funding.

 

            Innovative financing mechanisms to promote renewable energy are currently being explored. One interesting proposal by the EU is the establishment of a Global Renewable Energy “Fund of Funds” to address the financing gap for renewable energy in developing countries, through a market-based arrangement that would leverage public and private funds. Some innovative micro-financing schemes have met with success especially for the poor in rural areas, and the now famous Grameen Bank of Bangladesh has opened a special fund for renewable energy to serve those without energy access. Community-based funding of small-scale grids in rural areas has also been successful.  Other options include extending credit on attractive terms to electricity cooperatives, as well as franchising or licensing agreements that provide incentives for small-scale providers in the private sector.

 

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            Finally, I would be remiss if I did not point out the chilling effects the current high price of oil will have on access to energy if it continues at current levels. Oil importing developing countries are trying to meet the astronomical costs needed to maintain and expand their energy infrastructures, but higher prices mean deteriorating balance of payment positions and lower economic growth. Producing countries have argued, on the other hand, that the international community should be concerned not only with high but also with low oil prices. If we have learned one thing from the past energy crises, it is that there is a need for cooperation between the producers and consumers of energy to work towards achieving stabilization of the price of oil throughout, not just in one phase of the business cycle.

 

            The United Nations remains committed to working with you and other energy service providers worldwide along with governments and civil society in the pursuit of energy accessibility, availability and acceptability in order to achieve the Millennium Development Goals and the goals of sustainable development. While our specific roles may differ, only by working together can we hope to leverage our skills and resources to improve human, technical and institutional capacities so that everyone has access to basic energy services. The United Nations system, including the Department of Economic and Social Affairs, currently has a number of capacity-building projects in the energy sector in developing countries, many of which are members of the World Energy Council and are represented at this Congress. We have worked closely with the Council on the World Energy Assessment in 2001 and have just agreed to continue this collaboration in preparation for further deliberations on energy issues at the 14th and 15th sessions of the United Nations Commission on Sustainable Development in 2006 and 2007.

 

            Our post-Summit experience has shown that there are many ways for the public sector, the private sector, non-governmental organizations, research institutions and regional and international organizations to work together. There are many different forms of public-private and even public-public and private-private partnerships that can be utilized as we cooperate to implement the ambitious goals of Agenda 21 and the Johannesburg Plan of Implementation.

 

            Before closing, I would like to leave you with a modest proposal. It should be clear by now that while there are many developing countries that will be able to survive and even prosper in the new global economy, there are others ─the least developed countries, in particular─ that will continue to need economic assistance for a considerable period. Most of these countries are in Africa, where modest deposits of natural gas are known or suspected. And natural gas is a flexible fuel that can be used for electricity generation, domestic cooking and transportation, and that releases considerably less CO2 than other fossil fuels. Assisting these countries in locating and developing these reserves of natural gas, even if small, would be the worthy goal of a new partnership between the private sector and the international community. Therefore, I challenge you to consider launching a Natural Gas Exploration and Development Initiative for the Least Developed Countries. The funds for this initiative could come from a variety of sources: donor governments, international organizations, private corporations and foundations. This would be a concrete step toward promoting energy accessibility for those who need it most and would give substance to our meeting here in Sydney.

 

            I thank you for this opportunity to address you and look forward to continuing this association, and working closely with you on energy projects and activities to achieve the goals of sustainable development.