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Tracking decarbonization of multilateral development banks’ electricity generation investments
Multilateral development banks’ (MDBs) commitment to the Paris Agreement was expected to induce a shift from fossil fuel-based to sustainable energy sources in the Global South. However, we lack a comprehensive analysis of their electricity generation portfolios and internal policies since then. This paper presents two new datasets on 1,230 electricity generation investments and 215 decarbonization policies adopted by all MDBs from 2006 to 2020. We find a continued decline in fossil fuel investment since the Paris Agreement but no change in pace. The volume of investment in renewables (including hydropower) has not increased enough to compensate for the phaseout, resulting in a downward trend in MDB electricity generation investments over time. The number of renewable projects funded by MDBs, however, has substantially grown. These findings raise concerns about MDBs’ ability to scale up clean electricity investments, particularly in low-income countries, where the energy investment gap continues to grow.
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Florian Egli
Technical University of Munich, Germany
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Why is it crucial to assess the decarbonization progress of multilateral development banks (MDBs) within their electricity generation portfolios?
MDBs are among the most important financiers of power infrastructure in emerging and developing economies, where electricity demand is growing fastest. Whether this demand is met with renewables or fossil fuel-based electricity generation will have large ramifications for global emissions. Since the Paris Agreement, MDBs have been under pressure to decarbonize their portfolios, but transparency at the project level remains challenging. By tracking more than 1,200 electricity generation investments globally across all 10 major MDBs, our study shows that fossil fuel investments have indeed fallen and portfolios have largely decarbonized. However, we also find that total electricity generation investment has declined, and low-income countries receive comparatively little investment. Assessing MDB decarbonization at this granular project level can help inform ongoing debates on MDB reform and effectiveness.
What are the prominent trends observed in MDBs’ electricity generation investment?
We observe two key trends. First, MDB portfolios have become much cleaner: the share of renewables in electricity generation finance rose from about 40% in 2006–2010 to more than 80% in 2016–2020, with coal and oil largely phased out and some remaining fossil investments concentrated on gas. Second, we observe a decline in financing: MDB investment in electricity generation peaked around 2010 and has fallen since, despite rising demand and growing calls to scale up climate finance. While falling costs for renewables mean that more capacity can be added for the same cost, this trend could have enabled much faster deployment of renewables in emerging and developing economies. Finally, there are important differences between banks. Newly founded MDBs such as the Asian Infrastructure Investment Bank and the New Development Bank had almost fully renewable portfolios from the start, pointing to a lever of change via new institutions, while more established banks implemented large policy packages to decarbonize gradually.
What are the key challenges for MDBs to scale up clean electricity investment?
Our results point to two main challenges. One trend we observe is that the number of renewable projects has increased, but their average size has decreased. Ramping up smaller and more decentralized renewables may require new and lean processes to deliver the same capacity. Ongoing debates about MDB capital adequacy and risk appetite can also be linked to the capacity of MDBs to ramp up renewables financing in the coming years and decades. Geographically, MDBs have struggled to decarbonize while maintaining a substantial portfolio in low-income countries. Renewables’ high upfront capital needs; perceived risks in weaker institutional environments; the difficulty of mobilizing private co-finance for small, distributed assets; and low demand may explain why scaling renewables is so difficult in low-income countries. Tackling these constraints, for example, through more flexible risk frameworks, additional concessional capital and guarantees, or further standardization of renewable project pipelines, will be essential if MDBs are to help close the clean energy investment gap in the Global South.
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Global challenges, equitable solutions
Cell Reports Sustainability is a multidisciplinary, gold open access journal that publishes cutting-edge research across natural, applied, and social sciences that seeks to address the world’s grand challenges.
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