Development finance institutions have approached energy projects in three different ways in the last three decades, according to a recent report.
This reflects the complexity of development challenges and the changing energy systems.
The priority during the 1990s was to demonstrate how energy projects would contribute to the national GDP in developing countries.
The assumption was that energy supply was essential to support economic growth, and economic growth would in turn solve most development problems.
By analogy, the issues in this decade were sort of a linear equation with one variable.
To achieve inclusive economic growth, energy projects in the 2000s focused on the demand side, mainly expanding energy access through rural electrification.
Projects had to make energy affordable for poor households, while maintaining their economic and financial viability.
By analogy, the equation became nonlinear with two variables, becoming much more difficult to solve.
Extreme weather events became more frequent, threatening particularly vulnerable developing countries in the 2010s, thereby changing the priority again to climate change mitigation and adaptation.
Nowadays all energy projects must be designed to be economically sound, socially inclusive, and environmentally sustainable.
Typically, such projects include both supply-side renewable energy such as wind, solar, hydro, and geothermal; and demand-side such as industry, buildings, and commercial energy efficiency projects.
Moreover, they have to demonstrate how much they will reduce greenhouse gas emissions.
This is what is known as the Energy Trilemma, a nonlinear equation with three variables.
A nonlinear energy equation with three variables is very hard to solve, since different countries are at different stages of development and have different energy resource endowments.
Solutions can only be found through technology innovations that can be categorised as the “3 Ds” of distributed, decarbonised and digitalised energy systems.
Distributed systems offer tailor-made energy supply solutions at the consumer level without relying on centralised national grids.
Around 70% of the 1 billion people still without access to electricity can be served with off-grid local micro- or mini-grids.
This is much cheaper to install than connecting the people residing in remote rural areas and islands to the national grid.
Decarbonised systems are distributed systems based on renewable energy.
They do not generate emissions and include energy battery storage, which means there is a 24/7 power supply despite the intermittency of solar and wind.
Digitalised systems regulate and optimise the power supply with minimum human intervention and maintenance.
Deploying blockchain technology, for instance, in micro- and mini-grids would turn rural consumers into “prosumers,” sharing their surplus production among the local community.
Artificial intelligence (AI) can likewise help program and schedule energy use for maximum conservation and efficiency.
Technology innovations have great potential for developing countries to address the Energy Trilemma, but deployment and scaling up will not happen automatically.
Beyond technology, these countries also need innovative business models, financing instruments, and procurement methods.
First, business models should incentivise developers, financiers, operators, local communities, and consumers, to maximise project benefits while sharing the risks in a fair manner.
In this regard, governments should provide policy and regulatory transparency and certainty for businesses.
Second, new financing instruments must be introduced to complement banks, mostly accustomed to financing large-scale energy supply projects with adequate FIRR, or providing concessional resources to socially oriented, government-subsidised rural electrification projects.
Financing micro- and mini-grids in remote areas, however, is much more complex, as they involve innovative technologies and new business models yet are often relatively small in size and deal with multiple stakeholders.
Third, procurement methods that usually favour the lowest-priced bids should be enhanced to give more weight to quality and innovation in project design and specifications.
High technology funds could be established to cover the viability gap when piloting innovative technologies for possible scaling up in future.
With the shift in focus of the global development agenda changing from economic growth to inclusive and sustainable growth over the last three decades, energy technologies have also evolved with increasing sophistication.
Engineers have replaced supply-oriented, large-scale, fossil-based power systems with demand-focused systems characterised by the “3 Ds.”
To further scale up the deployment of such technology innovations, policy makers, regulators, investors, financiers, and other stakeholders must also innovate in business models, financing instruments, and procurement methods.
This will bring a real chance for developing countries to overcome the challenges of the Energy Trilemma and leapfrog to secure, affordable, and clean energy systems.