We Need To Get Energy Right in the Developing World

It’s crucial that developing countries expand their energy infrastructure in a sustainable way.

Pretty much everything else hinges on it.

Around 118 million people gain access to electricity each year. If we don’t ensure that clean energy is the default choice for them, we risk jeopardizing all the work that has been done to date. Developing economies will account for a huge amount of the increase in global energy demand over the next few decades. As a planet, we can't afford to follow the same path that developed countries have - relying heavily on GHG emitting technologies. There just isn't enough time for that transition to happen.

Let’s talk about the economics of the situation. As I’ve discussed before, I think this is realistically the only way we can get the kind of wide-scale mass mobilization to a sustainable future in a reasonable amount of time.

In the developed world (e.g. solar PV in Germany), financing costs account for 12-37% of total levelized cost of electricity (LCOE). In the developing world (e.g. PV in India), financing costs can account for ~50% of the LCOE. This stems from the fact that financiers perceive projects in these geographies to be riskier. Therefore, they lend money which needs to be paid back faster and at higher interest rates. There is also the potential expense of hedging currencies. From a macro perspective, if global interest rates rise from their current historic lows, the cost of capital for new clean energy projects will also naturally rise everywhere. It is a substantial difference in project costs, enough to potentially sway the decision of technology used. For a single project, the environmental impact is minimal. On aggregate, it is decisive. Finding ways to decrease the cost of capital is crucial.

One of the issues that has held back wider clean energy investor interest in the developing world is the difference between power purchase agreement prices and the lower cost of conventional grid power. We are essentially talking about cash subsidies that a government might provide to encourage a cleaner grid. Investors are naturally skeptical that host governments will honor their commitments over the life of the project (often 25+ years).

The biggest challenge in emerging countries is weak local capital markets. Not being able to obtain enough financing from domestic investors means that project developers need to look externally. Since power purchase agreements are invariably priced in local currencies, foreign investors always demand a higher yield, to compensate for currency risk. On occasion, it is possible to hedge cash flows into dollars but the cost can be prohibitive and the hedge may not be available for more than a few months. As a result, forward cash flows need to be hedged on a rolling basis which still leaves investors with currency risk.

Ok so there's a lot to try to solve here. Where to start? How can everyday people make a difference?

The way to help grapple with most of these challenges is to help de-risk the projects. Building in a more smaller, modular, and more distributed way will help break down the problem into more manageable chunks. The great thing is that smaller projects have a lower capital requirement, meaning more people can get involved in funding them. Some groups are even enabling everyday people like you and I to play a role in micro-financing small clean energy initiatives. The trend towards distributed energy resources is clear on a larger scale as well.

A comparison can easily be made to the way that mobile phones have completely eclipsed the development of landline telephone service in parts of the developing world. You can find villages in rural Tanzania where nearly everyone has a mobile device and yet expensive landline phone infrastructure never existed. In a similar way, many of these same villages have no concept of a traditional energy grid. Instead, families may have solar panels on their roofs and batteries to store that energy for later use. They are able to trade and use energy even within the small network of the village. It’s rudimentary - but in many ways represents the future of what developed countries’ energy systems could one day look like.

I think one of the main advantages of thinking smaller (more distributed) about the problem is the ability that it affords you and I the opportunity to get involved personally.

TL;DR

So what am I suggesting?

Why not put your money where your mouth is and fund a clean energy project? Why not band together to crowdsource the solution? The internet is the single greatest technological innovation of all time. We’re lucky enough to have the ability to connect with billions of other like minded individuals across borders.

I’m challenging you to put up an idea and get the ball rolling. That’s why I made Collective.Energy. I’ve written about the community at length here if you want to learn more.

Maybe you spark a discussion and get a few people working together to crowdfund a tiny project. Maybe things start to snowball into something bigger. Finding like minded individuals and collaborating can be the first step in a long journey to energy sustainability for the billions of people who will get electricity access in the coming years. Will you play a part?

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