Approximately 685 million people worldwide still lack access to sustainable, reliable, and affordable energy, highlighting the critical urgency of achieving Sustainable Development Goal 7 by 2030 in alignment with the broader Sustainable Development Goals. In conjunction with insights from the Power Markets Report, this audio story features World Bank Group research and economic experts Elcin Akcura and Ayo Adewole. They delve into the report's findings and explore actionable ways the private sector can drive progress toward a future where universal energy access becomes a reality.
Join us to learn how innovative solutions and collaborative efforts can make these goals the global standard.
Camryn Billett: Welcome to IFC audio stories. My name is Camryn Billett, and I am your host. Today, we are joined by World Bank Group research and economic experts, Elcin Akura and Ayo Adiwale to discuss emerging power markets and how the private sector can be a part of creating a future where sustainable, reliable and affordable energy is the norm. Ayo, Elcin, welcome.
Elcin Akcura: Thank you.
Ayo Adewole: Thank you.
Camryn: Why launch a new report on power markets now?
Elcin: Well, the timing for this discussion could not be more urgent. As our report highlights, the world is alarmingly off track to achieve sustainable development goal seven, which is about ensuring access to affordable, reliable and sustainable energy for all by 2030. Today, 685 million people still live without electricity and staggeringly 600 million of them are in Africa. Even where electricity is available, it is often unreliable and unaffordable.
Ayo: We're at a tipping point globally where both climate urgency and energy access need to be addressed simultaneously. So we can’t do one over the other. You know, the COVID 19 pandemic and multiple crises have significantly disrupted global progress in in each of these areas.
Elcin: And also important to note that without clean and affordable energy access, every other Universal is at risk. That's why we developed this report to identify actionable pathways to restructuring power markets, attracting private capital and ultimately creating a more just energy future.
Camryn: The report talks about power market systems. Can you tell us which are the dominant models adopted by most countries around the world?
Elcin: For our analysis, I developed a global data set that tracks 230 economies globally from 1989 till now, documenting how each of them transitioned between these power market structures. So the first market structure we looked at was the vertically integrated utility model, or in short, VIU. In this model, a single entity controls generation, transmission and distribution. Overall, this structure does not allow much scope for competition, as one entity dominates the entire sector. Back in 1989 this was the predominant power market structure globally, with about 250 economies using it. Today, only about 72 economies use it, and it's especially common in smaller economies and island states. The second structure we look at in the report is the Single Buyer Model. This structure allows some competition by allowing independent power producers to generate electricity and sell it to a centralized buyer, and this has now become the prevalent model globally. About 89 countries utilize this structure. Our analysis finds that this model has expanded electricity access significantly, particularly in rural areas, but it can lock markets into high carbon pathways, if not carefully managed. The last market structure we look at is the wholesale and retail competition model. This structure encourages active participation of public and private power companies and even consumers in the power market. Electricity prices are based on market forces that reveal the true cost of electricity and provide clear signals for where investments are needed.
Ayo: We have seen that attracts the highest levels of private investment. So countries in this structure, for example, in Chile and parts of Europe, have achieved remarkable success in integrating renewable energy in their energy mix by using this model. But it's important to note that transitioning to a wholesale rate of competition requires strong governance and regulatory frameworks to ensure market stability.
Camryn: The report discusses 3 trends that support the investment into these new power market systems, otherwise referred to as the 3 D’s. Can you tell us about these?
Ayo: The three D’s are decentralization, digitalization and decarbonization are transformative trends that are reshaping the power sector, and I'll take them one by one, starting with decentralization. And this is really about shifting from large, centralized power grids to localized systems such as rooftop solar or mini grid systems. And decentralization, in this sense, really empowers communities and helps to enhance resilience of these communities, particularly underserved regions and for digitalization, what we are referring to is advances like smart grids and digitalized energy management systems that allows utilities and consumers to optimize the supply and demand in real time, and this helps to improve grid efficiency, and also reduces some of the operational costs associated with managing the grid. And the third one, which perhaps is most critical, is decarbonization. And this involves transitioning from fossil fuel based generation systems to using more renewables. And the popular ones, like solar and wind are now amongst the cheapest sources of energy in many countries, and making this not just an environmental imperative, but also an economic opportunity.
Camryn: As with any new venture there are of course risks or in this case barriers that can deter private sector investment. The report refers to them as the four C’s. Can you elaborate?
Elcin: In terms of four C's, the first C is cost. So upfront, high investment costs can deter many stakeholders from investing in emerging markets. The second is complexity, so it can be very challenging for a private entrant to structure a power project in less established markets, where perhaps the technical expertise or access to financial markets are scarce, or perhaps in countries with complicated bidding or permitting requirements. The third C is corruption, so weak governance usually undermines investor confidence. And last C is the cost-recovery. Subsidized non cost reflective tariffs in many countries lead to financial instability in utilities that can deter investors.
Camryn: Despite the barriers that might deter private investment, the report does detail some pretty impressive incentives to invest in power market structures. For companies looking to move forward, what are some steps that they can take in this direction?
Ayo: So as a way forward, in our report, we do outline about six actionable steps for various stakeholders that play in this power market space to use. The first one, is kind of innovation, right? So we talk about the need to deploy new, innovative solutions like the smart grid technology that I talked about. The second one is integrate, where we talk about how we can now expand access to renewable energy in honor of communities by using this a decentralized solutions, but also by integrating countries power grids by leveraging the power of what we call regional power grids, right and regional power pools, whereby countries can now exchange energy amongst each other. The third one, talks about institutionalizing investor friendly practices, which includes introducing transparent regulation, procurement practices, strengthening the regulatory capacity and enhancing the credit worthiness of these power utilities so that they are now credit worthy institutions. They are bankable institutions that the private sector can actually invest in.
Elcin: And then the fourth i is incentivized. So here we look at how governments can enhance and incentivize private sector engagement through targeted procurement, creating predictable revenue streams for the private sector, as well as utilizing risk mitigation tools. The fifth I is invest. So here we look at how both the public and the private sector can invest in critical infrastructure, such as transmission networks, which are really critical to ensure renewables are integrated into the grid. And the last I we look at is identify. So here we look at ways that policy makers could identify opportunities for development finance, institutions like IFC, to provide technical advisory support, to help mobilize early stage capital and to create investable platforms.
Camryn: Investing in power markets not only has holistic benefits, like Sustainable Development Goal Seven, but it also has environmental benefits. Can you tell us about those?
Elcin: Absolutely investing in power markets delivers a range of environmental and holistic benefits that extend beyond just meeting SDG seven. Instruments like green bonds have become pivotal now in driving renewable energy investments. In 2023 alone, green bonds raised about $198 billion globally, helping to finance solar, wind and storage projects. Secondly, I like to mention emission reductions. For example, each year a country spends in their wholesale competition market structure corresponds to a decrease of almost two metric tons of CO2 emissions per person. This highlights the direct environmental benefits of aligning market incentives with clean energy goals.
Ayo: With better energy access underserved populations can now engage in economic activities that were previously impossible when they did not have access to electricity, such as running businesses for extended hours, improving access to health care and enhancing education. Where, for example, kids can now study at night because there's light for them to use to study, as opposed to being in the dark. And this creates a sort of ripple effect of development across various communities.
Camryn: Thank you both for those answers. So to wrap this up, I would just ask you all for just a piece of advice that you would give to a potential investor who is on the fence about investing in newly designed power markets.
Elcin: My advice to any investor is not only to think about the financial returns on investment, but also to consider the legacy and the impact of the investments. Our report highlights that achieving SDG seven by 2030 will require doubling of global investments in renewables, amounting to some $1.5 trillion annually. This isn't just an opportunity, but it's really a responsibility. However, we're seeing an alarming trend between 2010, and 2023, emerging markets received just 20% of total private investment in global power markets. Even more concerning is that the share of private financing flow into emerging power markets has dropped from 36% to just 12% during this period. The real impact of investments goes far beyond financial returns. Imagine being part of the solution to electrify 685 million people who currently live without power.
Ayo: Elcin is absolutely right, and I'll add that the risks associated with these markets, whether it's policy uncertainty or infrastructure challenges are being actively mitigated through innovative financial tools like we mentioned earlier. And also instruments like green bonds and blended finance mechanisms are specifically designed to align private capital with Sustainable Development Goals and so development finance issues like the World Bank Group, we're actively working closely with governments, with private players to provide guarantees, technical assistance and CO investment to make these opportunities more secure.
Elcin: They're creating a future where sustainable, reliable and affordable energy is the norm, not the exception, and that's a legacy worth investing in,
Camryn: A legacy worth investing in. Wow. Thank you, Ayo and Elcin for your remarkable contributions.
For access to more information regarding this report please visit ifc.org and search “repurposing power markets.” Once again, I am your host, Camryn Billett and this has been another episode of IFC Audio Stories. Please join us again next time.