“Today, oil, natural gas and coal provide 82% of the world’s energy. Twenty years from now, their share will be only slightly lower: 75% to 80%,” – says Daniel Yergin, author of several books about the energy industry, including Pulitzer-winning “The Prize”. Although Yergin admits that “recent years have seen a ‘great bubbling’ in scientific research and technological innovation around energy,” he does not expect these technologies to make an impact until “sometime in the 2030s.” Instead, he argues, the countries with emerging economies will be responsible for a new growth in demand for “cheap” coal, oil, and partially natural gas, while experiments with renewable energy sources will be a prerogative of developed countries.
Just a couple of years ago, at the peak of my career in oil and gas analytics, I would have taken Yergin’s words for granted. But the more I learn about renewable energy, the firmer is my belief that developing countries are able to ‘leapfrog’ the emission-intensive growth patterns that developed countries had during their industrialization.
Three reasons influence my conviction. First, there is evidence that some developing countries are already not following the developed countries example in burning solely fossil fuel, but instead power their industry with both renewable energy and hydrocarbons, depending on which is cheaper. China demonstrates this by effectively leading the world both in renewable energy production and in coal burning.
Secondly, non-electrical renewable energy services for transportation, heating, cooling and lighting - if factored into forecasts of energy resource consumption - reveal that a larger amount of renewable energy is employed in developing countries than was previously believed.
Finally, low levels of rural electrification in industrializing countries offer a great opportunity for the proliferation of decentralized grids based on renewable energy. In places like sub-Saharan Africa, they proved to be more competitive than diesel generation. As the Intergovernmental Panel on Climate Change (IPCC) Special Report on Renewable Energy Sources and Climate Change Mitigation (2011) states[1:1], “Under favorable conditions, cost savings in comparison to non-renewable energy use exist, in particular in remote areas and in poor rural areas lacking centralized energy access.”
Developing countries are defined according to their Gross National Income (GNI) per capita per year. The World Bank defines countries with a GNI of US$ 11,905 and less as developing. In this article, I am referring to China, India, South Africa, and Brazil, since they have the biggest and the fastest growing economies in the developing world and also constitute a diversified geography.
Why do many economists believe developing countries will follow the developed nations’ path in energy consumption? Most of these projections are based on the statistics of the late 1990s – early 2000s and thus are very conservative. Among the recently published books, I have encountered only one maintaining this position: The False Promise of Green Energy[1:2] which was issued in 2011 by The Cato Institute, known for its skepticism about Climate Change. All four authors of The False Promise were trained either as lawyers or economists or both, but had zero academic competence in energy technologies. Armed with the Energy Information Administration’s (EIA) statistics on the status-quo in energy source mixture in the US and globally in 2008, the authors boldly extrapolate these data to the coming decades, drawing out an unfortunate forecast for renewable energy. What gives them confidence is outdated information about price and quality of renewable energy sources. Here are the most common myths:
- coal generation that boosted the economic growths in the UK and the USA over a hundred years ago is still the most affordable and reliable;
- renewable energy is prohibitively expensive and not reliable;
- diesel and gasoline will be the cheapest option for the expanding car fleet in developing countries like China.
While these projections might have seemed reasonable 10 years ago, they look less solid today when wind generation is cheaper than coal energy and the car industry is undergoing a hybrid/electro revolution. Even EIA’s predictions on the growing share of energy generated by wind in the U.S. – from 0.8% of total generation in 2007 to 2.5% in 2030 – proved to be too conservative. In 2013, wind power generated 4.13% of all the electricity in America, and the EIA was forced to correct their projections for 2030 attributing 20% of the entire power generation to renewable sources.
What should we learn from this experience? Skepticism can be very instrumental in assessing established markets: luxury cars, Swiss watches, etc. But when it comes to new markets, skepticism doesn’t help much.
Think of what happened to the cell phone market. Africa became the first continent to have more mobile phone users than fixed-line subscribers. The growth was extremely rapid: more Africans have begun using phones since the year 2000 than in the previous century. “In fact, developing countries around the world have leapfrogged past the landline infrastructure of the industrialized world and now have more mobile users than those in high-income nations,” Laurie Guevara-Stone from Rocky Mountain Institute writes[1:3]. I think this exemplifies how developing countries may surpass the carbon-intensive industrialization and jump into renewables together with developed nations.
As a matter of fact, developing states are already neck and neck with the richest countries in the world when it comes to investing in renewable energy. According to the research in Global Trends in Renewable Energy Investment 2015, issued by a collaboration group of Frankfurt School of Finance & Management and United Nations Environment Programme, “investment in developing countries, at $131.3 billion, was up 36% on the previous year and came the closest ever to overhauling the total for developed economies, at $138.9 billion, up just 3% on the year.”[1:4]
Global new investments in renewable energy: developed vs. developing countries, 2004-2014, $bn
New investment volume adjusts for re-invested equity. Total values include estimates for undisclosed deals. Developed volumes are based on OECD countries excluding Mexico, Chile, and Turkey.
Source: UNEP, Bloomberg New Energy Finance
China, thanks to supportive governmental policies, increased their investments in renewables from just $3 billion in 2004 to $83.3 billion in 2014, a record number and 39% more than in 2013. Brazil ($7.6 billion, +93%), India ($7.4 billion, +14%) and South Africa ($5.5 billion) were also in the top 10 countries who invested in renewables in 2014. Also, Indonesia, Chile, Mexico, Kenya, and Turkey were all in the billion-dollar club in 2014 in terms of investment in renewables; and other countries such as Jordan, Uruguay, Panama, the Philippines and Myanmar were in the $500 million to $1 billion range, Frankfurt School and UNEP researchers found.
Economists must note here that the real value of the investments in the developing world is even higher than in developed countries since the purchasing power of 1 USD, say, in China is higher than in the USA.
Why would poor countries invest billions of dollars in the clean energy of wind and sun? Are they so concerned about atmospheric carbon dioxide levels that they would risk their economies with more expensive energy? The answer is yes, they are concerned, and no, there is no risk: renewables are coming to grid parity. While scientists at Stanford are struggling to find the best combination of materials to create a photovoltaic (PV) panel with the installation cost within the US borders below $1 per Watt, China has already successfully scaled the established solar and wind technologies having effectively disrupted both markets. The average for global levelized costs (net cost to install a renewable energy system divided by its expected lifetime energy output) published by Bloomberg New Energy Finance was 31.5 cents per KWh for crystalline silicon PV projects in the third quarter of 2009, but it dropped to 12.9 cents per KWh in the first half of 2015, a reduction of 59% in just five and a half years. The equivalent for onshore wind dropped from 9.6 cents to 8.5 cents per KWh over the same period, a decline of 11.5%[1:5].
In India, where coal makes up to 60% of electricity generation, a shift towards renewables is inevitable. Indian coal is of very low quality, therefore a significant share of this resource used at power plants is imported. This is why coal generation in India is not as cheap as, say, in Australia, where local coal is almost twice more calorific. Natural gas and diesel generation in India is even more expensive than the coal one, because these resources are mostly imported. This is why, “from an economic perspective, large-scale development of coal based generation may not be advisable in the long term,” states the World Institute of Sustainable Energy, Pune (India), in their report on coal electricity in India and sustainable alternatives[1:6]. Even in 2013, when this report was issued, renewable power was price-competitive with the coal-based generation. The price of electricity produced from domestic coal was 6.87 cents per KWh, or 10.65 cents if 90% imported coal was blended (externality costs are not included). Wind power was available in different Indian states in the range of 7.16 – 10.20 cents per KWh; while the lowest quoted price for solar was 12.13 cents. Later, in October 2014, First Solar and Acme Solar Energy won licenses to build PV capacity in Andhra Pradesh state, India, with bids as low as 8.6 cents per KWh. But the record low price in 2014 was 5.85 cents per KWh –the price that Saudi Arabia’s ACWA Power International agreed to sell its electricity for from the future 200MW, $330 million PV plant.
What makes alternative energy prices in developing world so low? Cheap workforce and ideal domestic solar and wind resources is what almost all industrializing countries have in common. South Africa enjoys some of the best sunshine in the world all year round and its electricity is among the most expensive on the planet[1:7]. Most Asian developing states, much like India, have high insolation and are densely populated – an ideal combination for PV energy. South America has both great solar and wind resources, to say nothing about the hydro generation capacity and biomass production potential. In fact, Brazil - one of the biggest developing economies and South America’s largest nation - exceeds most of the developed nations when it comes to renewables, including the USA. Brazilians have only 20% of their energy matrix coming from fossil fuels. At the same time, renewables are responsible for more than 70% of electricity production: 68% comes from hydroelectricity, and the ever-growing share of wind and solar energy constitutes about 5% of the energy mix[1:8] [1:9]. In the transportation fuels sector, biomass, much of which is bio ethanol, holds sway in Brazil.
Finally, developing countries have a great opportunity for decentralized off-grid electricity proliferation. In the developed world, there are extensive and expensive grid systems, utilities lobbies and such, which create a so called lock-in effect. Innovative distributed power systems face great obstacles there. In the developing countries, on the contrary, grids are limited. This is why diesel generation, kerosene, paraffin, and firewood are what more than 1.3 billion people – one-sixth of the world’s population – meet their daily energy needs with. And that energy is not cheap: according to the United Nations Environment Program’s estimates, Africa spends $12-$17 billion a year on fuel-based lighting, Asia spends $9-$13 billion[1:10]. At the same time, residential solar and wind is what perfectly suits off-grid decentralized power generation and in many cases is cheaper than fossil fuel.
Solar panels are not new to Africa. As Richard Hosier, a senior analyst at the World Bank says, African villages are “littered with failed solar projects donated by well-meaning government agencies or nongovernmental organizations that installed the technology but couldn’t afford to follow up with maintenance or battery replacements”[1:11]. But it is only recently that the technology grew mature enough to become a compelling purchase for indigenous people. The Off-Grid Electric, a venture capital funded company based in Tanzania and run by a European serial entrepreneur Xavier Helgesen, installs fully functioning solar home systems – enough to power several LED lights and a radio – for a sign-up fee of only 10,000 Tanzanian shillings ($6).
Considering the households’ average expenses on kerosene of about $15-18 a month, the payoff for customers is immediate. On top of that, the ubiquity of cell phones along with the development of mobile payment technologies in Africa has made the off-grid solar revolution easier. Solar home systems have meters digitally linked to the customers’ cell phone numbers, and customers can pay for their electricity simply by sending a text message. Could skeptics have imagined this was even possible in Africa?
And yet, despite all these revolutions and incremental advances, successful leapfrogging past the fossil fuel ‘dark age’ in the developing countries is not written on the wall. It takes deliberate work, financial instruments, and aspiration to make this happen. As the IPCC report argues, there is a mismatch between opportunities and capacities in developing countries. “The regions with the greatest potential to leapfrog to low-carbon development trajectories are the poorest developing regions where there are few lock-in effects in terms of modern energy systems and urbanization patterns. Also, many countries in these regions have particularly favorable endowments for renewable energy (such as hydropower or solar potential),” the report states. – “However, these regions also have the lowest financial, technological, and human capacities to embark on such low-carbon development paths and their cost of waiting is high due to unmet energy and development needs”[1:12]. Industrialized economies, on contrary, have the largest lock-in effects, but the highest capacities to reorient their energy systems towards low-carbon development. There is definitely a synergy in collaboration of these two actors – developing and developed economies. While rich nations have an excess capital to invest, developing world can offer a higher interest on this investment than many established industries in the developed countries can.