Repurposing Power Markets —
The Path to Sustainable and Affordable Energy for All
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At a Glance
How can emerging markets extend access to electricity while maximizing use of sustainable power sources? A new IFC report suggests that bringing more competition into power markets can result in better outcomes, both in terms of widening access and boosting sustainability.
The report examines how electricity systems have evolved globally since 1989. It uses a new dataset to pinpoint the main obstacles to improving access and sustainability and charts a path for overcoming them.
The analysis shows that the overall trend, including in emerging markets, is that of countries transitioning from state-owned monopolies to more market-friendly systems that allow various levels of competition and private sector participation. Liberalization is generally associated with better outcomes on the two metrics studied— access and sustainability.
But the findings are nuanced. For example, when some countries moved to what is known as a Single Buyer Model, where different electricity producers compete to supply a power utility, it led to extended access to electricity, especially in rural areas. However, in certain places, switching to this model also resulted in increased greenhouse gas emissions, possibly due to more sustainable energy sources being pricier than high-emitting ones like fossil fuels at that time. When countries went a step further in how much they open power markets, notably allowing it on the retail end too, the outcome tended to be positive both for expanding overall power generation capacity and lowering emissions.
While the share of electricity generated from renewable sources is rising worldwide, there are major differences between regions. China, for example, enjoyed a 63 percent rise in installed capacity of renewable-sourced power in 2023, while Africa only saw a 4.6 percent increase. Renewables’ share of the power mix is projected to grow in the coming decade and solar is set to outpace coal as the top energy source feeding power grids in 2027. Renewable energy investments topped $570 billion in 2023. While the trajectory is positive, the growth curve needs to steepen if the world is to lower emissions to a level that avoids catastrophic climate change. An estimated $1.55 trillion in investment is required each year, on average, by 2030.
Mobilizing private capital at scale is crucial to meeting the enormous climate financing needs of developing economies. Innovative financial instruments and platforms can help attract greater private investment. Green, social, sustainable, and sustainability-linked bonds have emerged as an important mechanism to channel private climate financing to developing countries. Even so, their issuance has been relatively constrained in developing countries given how much climate financing is needed, with only around $136 billion issued in 2022, of which China accounted for half.
As more renewables flow into grids, this is creating new challenges to ensuring grid stability and continuity of supply given renewables’ intermittent nature. The sun does not always shine, and the wind does not always blow. Therefore, developing and expanding battery storage technology is a vital complement to ramping up renewables. Other power generation sources like hydropower and energy-efficient gas power plants can also help by providing extra capacity when demand exceeds the capacity of the most sustainable energy sources.
Promoting Investment
The report highlights three major trends—decentralization, digitalization, and decarbonization (the ‘3Ds’—that are shaping the electricity sector’s current evolution. These overarching trends require a major rethink of how power markets are structured. Alongside the 3Ds, four major constraints—cost, complexity, corruption, and lack of cost recovery—the ‘4Cs’ are disincentivizing the private sector from engaging in the power sector, especially in less established markets. The 3Ds have disrupted the need for a linear progression from one market stage to another, and created diverse opportunities to engage the price sector along the full spectrum of market structures - thereby allowing countries to (partially) bypass the constraints presented by the 4Cs.
In the face of these trends and constraints, the report provides practical solutions for policymakers, private investors, and development finance institutions to repurpose their power markets: innovate, integrate, institutionalize, incentivize, invest, and identify—the ‘6Is.’
Financial instruments that can be deployed to boost private investment include securitization, where different financial assets are combined and sold as tradeable securities to investors. Côte d’Ivoire has been rolling out securitization with IFC’s support and is expected to create 800,000 new connections with the money raised. Digital payment platforms can be harnessed to improve customer creditworthiness and elevate them to become market players. For example, one South African company’s pay-as-you-go mobile payment system has 4.3 million customers who, after a certain period, become owners of their solar panels.
Cross-border trade in electricity should be encouraged as this can help economies increase access and sustainability. Several regional wholesale power markets have been established in Africa, a region that should be prioritized as 600 million of the 685 million people in the world without electricity live there. In India, meanwhile, a power-sharing system between states has brought more renewables into the nation’s grid.
The public sector needs to continue to invest alongside the private sector in critical infrastructure and institutions, especially in transmission infrastructure. Policymakers should reflect and identify how development finance institutions can support them in meeting their goals.
Authors
Elcin Akcura, Senior Energy Economist, World Bank
Ayooluwa Olusola Adewole, Infrastructure Economist, IFC
Emelly Mutambatsere, Manager, IFC