Business & Industry Papers
Energy & Water
by the International Chamber of Commerce and the World Business Council for Sustainable Development
Access to Energy and Water for a Sustainable Future
About 20% of the world’s population, slightly more than one billion people living in industrialized countries, consume nearly 60% of the total energy supply. The remaining five billion people in developing countries consume just 40%. In the case of water supply, 25-35% of people in developing countries still do not have access to safe drinking water. The situation is even worse with regards to basic water sanitation. Business as usual will not meet the needs of those currently unserved, let alone the 2.5 billion new individuals expected within the next 25 years.
These dramatically uneven resource distributions support the argument that the number one priority in sustainable energy and water development today -- for all decision-makers in all countries -- is to extend access to commercial energy services and safe water to the people who do not have it now…and to those who will come into the world in the next two decades, largely in developing countries.
Business and industry, with its store of managerial, financial, and technical expertise and experience, are prepared to play a leading role in assisting communities, societies, and economies adapt to and adopt a sustainable growth path. Coupled with cooperation from governments to create stable and predictable investment conditions, we can begin to implement investment programs and achieve our goals for sustainable access to energy and water.
For energy, the broad goals are: accessibility to modern, affordable energy for all; availability in terms of continuity of supply and quality of service; and acceptability in terms of social and environmental goals. It is critical to overcome energy poverty wherever it occurs, to enhance the quality and reliability of delivered energy, and to minimize the negative environmental and health impacts of energy development.
For water, the world must work towards water security as an overarching goal, where every person has access to enough safe water at affordable cost, while ensuring that the natural environment is protected and enhanced. Our objectives should be to provide access to hygienic sanitation facilities; provide access to adequate quantities of affordable and safe water; increase water productivity for food production; and implement national standards to ensure the health of freshwater eco-systems.
To achieve these overarching objectives, various investment estimates have been put forward -- none of which carry a small price tag. As much as $15 trillion will need to be invested in the energy sector alone--two-thirds of which is needed in the developing countries. The total annual investment in water in developing countries is currently around US$70-80 billion per year, with necessary investments increasing to US$180 billion per year in 2010. However, contrary to the current distribution needs for global resource investment, over 90% of all Foreign Direct Investment (FDI) takes place between OECD nations or with 13 other rapidly developing nations - effectively leaving a small portion of global FDI for the majority (and largely lesser-developed) nations.
Despite these imbalances, there is an abundance of capital in developed markets and business will go wherever there is an opportunity for profits. Historically most this investment has been domestic where business leaders are very familiar with the framework conditions, including laws and regulatory requirements. Reasons why many countries have been unable to attract foreign direct investment, include not only the fact that markets may be too small to earn a reasonable return, but because there may be social or cultural restraints inhibiting a secure and predicable environment necessary to attract private capital investment.
The Case for
Investment is the direct path toward tackling the global resource challenges for energy and water. Accessibility and affordability will be dependent upon investment in new infrastructure, introduction of new technologies, and maintenance of deteriorated systems.
Investment policies should be guided by three principles:
Rehabilitating rather than creating new investment when possible;
Selecting cost-saving technologies suited to particular conditions;
Developing a participatory approach.
There are a number of energy technologies that offer the potential to assist progress in rural areas. They span generation, transmission, storage, metering and billing, and include lower capacity limited-current supplies, Single Wire Earth Return systems, gasifiers, certain hybrid systems and, longer term, small gas turbines and fuel cells. Energy investment should be directed toward providing modern energy service either as connection to a reliable, affordable electricity supply, or as stand-alone energy sources which are not necessarily grid-based, such as renewable energy systems or other forms of distributed generation.
Water investment should be directed toward developing new distribution infrastructure, improving the efficiency and productivity of irrigation services, cleaning up contaminated waters, and protecting surface waters through the treatment of municipal and industrial discharges to watercourses or aquifers. In doing so, we can provide access to hygienic sanitation facilities and adequate quantities of affordable and safe water.
The energy industry is obviously the key provider of wider accessibility to commercial energy services, of the availability of uninterrupted supply, and of more socially and environmentally acceptable energy products. The speed, scale and nature of these developments depends in part on enabling frameworks, the wishes and support of other social actors, and the deployment of the required technologies and financing.
Lack of awareness, education and commitment relating to clear energy policy goals, as well as the basic requirements for achieving them, are among the largest barriers to success. These barriers affect policy-makers, public authorities, industry and the general public. They increase the reluctance to support innovative policies geared to promoting more sustainable energy development. They discourage consumers from changing attitudes and habits. They inhibit shareholders and other investors from supporting change.
Measures needed to secure additional and more effective private investment include:
Continued market reforms (liberalization, trade, privatization) open up energy service (within effective regulatory frameworks) to undistorted price signals, international trade and investment. Substantial and lasting benefits will result if national and regional markets are stabilized through basic public rules that respect specific local, national and regional circumstances and apply to all the players involved in them. These rules should be set and overseen by independent regulators with minimal political interference.
Ultimately, market criteria must prevail in the development of all energy resources. As such, it will be necessary to keep all energy options open in order to balance the development of new (renewable) energy sources with, for example fossil fuels, large hydro, and nuclear energy -- which will remain important components of the near to mid-term energy mix.
It is crucial that water be treated as an economic good and financial practice is realigned accordingly. Sound and fair financial management - based on full cost pricing - is needed to improve the efficiency of services, provide additional resources for reinvestment, encourage demand management, and promote pollution control and prevention. Governments must introduce pricing of water and pollution charges to support investments in water resources, while protecting the poorest citizens. Where water is scarce, this will also require the formalization and clarification of property rights for water. Government should attempt to put these mechanisms in place as soon as possible but not later than 2015 in order to establish full cost pricing for water services in all countries.
Measures needed to secure additional and more effective private investment include:
Strengthen national institutions, with donor support for developing countries, to attract and benefit from private funds; water pricing and a stable investment framework are precursors to attracting private finance.
Introduce economic instruments (charges and tariffs), and use micro-credit and other innovative financing mechanisms to encourage investment at community level.
Develop guidelines for good practice and support capacity building, training and pilot programs for new efficient management.
Establish, in partnership with international organizations, a private sector led International Research Foundation or Water Innovation Fund to carry out research and training
Access to Energy
As the scale of continuing rural energy poverty makes clear, very limited progress has resulted from all the well-intended efforts made to date. A better way forward must be found for the effective use of scarce development resources, in particular:
Energy development must be accorded higher priority by policy makers. Hoping that improvement will "trickle down" from more advanced sectors of the economy or that rural energy poverty can be solved by a "technical fix" is untenable.
Energy development must be decentralized to place rural people themselves at the heart of planning and implementation. Biomass supply and demand, for example, is inherently local in nature and is best understood by the local people. They also have the best insights into rural needs and priorities. Bottom-up, people-led development shows the best promise of achieving sustainable development.
Three Energy Strategies:
Reduce Political Risk of Key Energy Project Investment
Capital investment in energy has two important components:
· A first component (without foreign technology) is the mobilization of national savings for the investment in energy infrastructure (e.g. electricity). Domestic financial markets, bonds and shares, should be developed and guaranteed by strong regulations;
A second component (requiring the transfer of technology) depends
on Foreign Direct Investment. There is a need to protect FDI against
"political" risk. It shouldn’t be more expensive to develop
and invest in projects located in poorer countries. Schemes to lower
this risk and/or to increase the resources of developing countries need
to be created.
Price Energy to Cover Costs and Ensure Payment
End-user prices are the most important determinant of the level of energy supply and quality of service. Unless such prices reflect all costs (variable, maintenance and extension costs), including in some cases the cost of well-identified externalities related to energy security or environmental protection, they will distort individual behavior to the point that the whole economy in which they occur may be unsustainable. The gradual removal of all hidden subsidies that artificially depress fuel and removal of cross-subsidies should be a priority together with the establishment of a consistent energy taxation system.
Promote Greater Energy Efficiency
Energy efficiency programs are an important component of strategies to reduce the consumption of and damage to existing natural resources, while also allowing the economy to grow. Industry and government can work together to implement energy efficiency programs that save energy and money and improve air quality by increasing customer awareness of how to use energy wisely and facilitate wise energy use by increasing the distribution of energy-efficient technologies. A major element of achieving improved energy efficiency depends on the development and diffusion of cost-effective technologies, and therefore the introduction of minimum legal standards in energy equipment and service is critical. Energy efficiency policies that use direct or indirect price mechanisms (e.g. removing subsidies, incorporating externalities) are the most effective in lowering energy consumption trends. However, even without changing the overall price environment, energy efficiency policies should be pursued to correct market failures.
The basic elements sustainable development of water
resources will require full value-pricing to include compensation for
all costs and risks associated with finding processing, conserving and
delivering water to and from end- users. Governments must accept that
there are certain risks that only they can absorb. The private sector
does not have the authority or capacity to accept them, for example.
Acquisition of land and rights of way for the installation of pipeline, and plants at an economic cost.
Efficient performance by Government-owned distribution companies under contracts to purchase water processed by private sector water resources companies.
Costs of the impact of drastic changes in the values of local currencies received by private water companies, which have invested hard currencies in water facilities.
Improve the awareness of the value of water resources and their
use for sustainable development.
Without reliable water supply and sanitation services, sustainable development cannot succeed. The Second World Water Forum in The Hague - March 2000 - included a Framework for Action plan to meet current and future water needs. The business community supports this plan and is prepared to enter into public private partnerships to put this plan into action. Business cannot solve these problems unilaterally. However, business can be an important partner with governments, environmental NGOs and the public to improve water management everywhere.
Formulation and Implementation of sub-national, national and
Countries should be encouraged to formulate sub-national or national strategies for the water sector. These strategies should meet requirements for integrated water resources management (IWRM) and include adaptation and modernization of institutional, legislative and regulatory frameworks, improvement of knowledge of resources and uses, and training in service management and equipment maintenance. The Global Water Partnership has already initiated a series of regional Technical Advisory Committees (TACs) to address IWRM issues. Business supports this initiative.
Mobilization of Financial and other Resources
Countries should mobilize national and local resources and provide incentives to improve water resources use and protection, pricing and financial, as appropriate. Ways and means to facilitate a gradual transition toward full cost recovery should be explored and should be transparent. Subsidies for specific groups, particularly poor people, might be considered in some countries as well. Governments should facilitate access to credit and encourage micro-credit development, and provide public or private investors with appropriate risk guarantee schemes for the financing of investments. Governments could also set up user-pays pricing systems that cover direct or indirect costs of services with costs billed to users who can afford to pay. Additionally, external resources should be mobilized: bilateral and multilateral donors should assist countries in formulating and implementing integrated water resources management strategies.
Access to Energy
Energy resources are plentiful and not expected to be the limiting factor in global economic growth, but their regional endowment and the pace at which they are developed and distributed may not be entirely satisfactory. Increasingly, energy companies rely on market mechanisms and decentralized decision-making to channel investment and technology into developing energy resources. However, market signals are not always efficient in ensuring that all energy needs are met and environmental priorities are respected.
Many believe that the energy sector is not currently on a sustainable path while others believe that, if the energy sector is evolving on a sustainable path, it could move along it more quickly. Both opinions converge in a strong consensus that new policy departures and remedial action are needed. Although we expect no major problem in providing the energy that will be necessary to sustain the rates of economic growth that one might realistically expect in the coming decades, the current situation is characterized by distributional inequalities and detrimental impacts on the global, regional and local environment and on human health.
Access to Water
The myriad components of these water-related problems need to be addressed by governments and peoples acting together. Without such action, our children and our children’s children may confront a planet running dry. ‘Business as usual is not an option’. Alternative approaches are needed - approaches which deploy both tried and experimental solutions in a visionary, dynamic and courageous way. The range of actions needed is as diverse as the problems large and small, and the settings in which they are found. Innovation is needed in institutional arrangements, in technologies and in financing. To plan and implement these actions requires a dramatic change in attitudes governing water-related policy and decision-making, and in the availability and application of investment funds.
Increased reliance on free enterprise, open markets and competition implies less detailed governmental regulation. At the same time, an orderly, stable society able to prosper economically from private entrepreneurship requires a framework of essential rules administered impartially by strong, efficient and transparent government - the “essence of good governance”. Governments and business must work closely together to design the multilateral rules for the rapidly emerging global marketplace.
Clearly, there are a great number of challenges for providing sustainable access to the world’s energy and water resources. In the context of a secure and predictable investment framework, business and industry will be able to furnish not only financing, but also creativity and ideas necessary for building a sustainable future.
Conditions for Investment
In order to marshal significant private (as well as institutional) investment funds, a basic framework to ensure security and predictability of the investment must be in place. This framework is generally outlined as: -
Political and economic stability to provide reasonable predictability for making business decisions and mitigate unacceptable levels of risk;
Governments which basically facilitate doing business, and eschew harassment and arbitrary intervention;
Presence of a functioning legal framework and process, security of property and persons, enforceability of contracts, and reliable dispute settlement frameworks;
Sound economic and financial frameworks, including currency convertibility, freedom to remit dividends and other investment proceeds, rational price, tax and subsidy policies, and a regulatory regime, which is independent of the political process;
Make Ethics a Strong Component of Energy System Governance -- Fundamental business ethics, including honesty and the avoidance of corrupt practices, are essential, but the need for ethics goes beyond these. Voluntary energy and/or environment audits, their widespread publication in civil society, common standards for safety, performance, best industrial practices, and respect of energy workers should be fostered in all plants in all countries in which a company operates.
Capacity to supply technical skills, goods and services, and a trainable workforce.
Equally, the domestic governments needs:
Confidence that private companies will not exploit them. While foreign direct investment in developing countries has often had highly beneficial outcomes, there is good understanding of the risks of being a small component in a multinational company’s portfolio of activities. This anxiety affects investment in utilities too.
Mechanisms to ensure that social objectives including protection of the poor from unaffordable tariffs are met. As such, it may be necessary for governments to accept responsibility to absorb part or all of the sunk costs of energy infrastructures needed to serve the poor; design cost-reflective price signals for baseload power at low cost for essential service; and favor decentralized renewable energy systems for rural areas where their lifecycle cost is comparable to or lower than the extension of the grid.
It will be incumbent on governments and international organizations to implement this secure and predictable investment framework. If these elements can be achieved, we will begin to see capital outflows toward developing nations increase sharply during the next decade.
Forging new and innovative partnerships will be the key to creating investment in effective project solutions, and as such a broad range of institutions will have a supportive role to play. Various investor roles and partnerships could include:
·International Private investors: Direct investment, participate in public-private partnerships, and develop consumer services markets.
Develop standardized concession agreements and other balancing mechanisms to reduce private sector investment risk to acceptable levels;
financing partnerships linked to environmental goals-for example
mechanisms, like the Kyoto Clean Development Mechanism (CDM), which have
the potential to stimulate capital flows.
The Clean Development Mechanism (CDM) is a unique opportunity to assist developing economies in achieving sustainable development and lower carbon emissions growth. Private investment can be leveraged for climate-friendly projects across the developing world. However, unless governments take responsibility for clarifying and implementing an effective policy framework, the CDM process will be deprived of its opportunity.
Donors: Build government capacity, underpin basic human needs and social requirements, support ecosystem integrity, and public health; foreign aid should focus on capacity building and on projects that can be developed as longer-term replicable programs.
Government and public sector: Invest in policy-making, institutional, legislative and regulatory frameworks; support equitable access for the poorest.
Create competitive, transparent, and level playing fields whenever possible, coupled with sound rules of the game administered by impartial regulators free of short-term political interference;
Provide direct government guarantees for World Bank or EBRD loans; provide financial support (seed funds particularly);
Provide back-up education and maintenance requirements in co-operation with local communities;
Promote broader regional (energy) markets operating within the same harmonized regulatory context.
Domestic private sector and communities: Direct investments in services, micro-industries and manufacturing; provide service repairs; Non-governmental organizations can assist in articulating and communicating the needs of the people to government and in putting programs and projects into effect.
International Joint Ventures: Joint ventures could be formed between multinationals, international financial institutions and NGOs to increase the international business community’s understanding of a particular country’s sustainable energy and water challenges.
Public-private partnerships and the promotion of business concepts like eco-efficiency and voluntary instruments like the ISO 14000 standards can help improve environmental management practices;
Joint ventures between governments (and governmental organizations) and commercial energy organizations to replace/upgrade technology, install new renewable energy systems, and extend distributed generation capacity are a priority;
Co-operative ventures could be effective in developing smaller-scale distributed energy conversion options, especially for rural energy.
Innovative partnerships like Build-Operate-Transfer (BOT), where business and government work in locally based partnerships to finance projects and then transfer assets and experience to the home country.
This business perspective on Access to Energy and Water for a Sustainable Future is a global perspective not only in addressing resource challenges throughout the world, but as it draws from a diverse range of views, positions, and ideas derived throughout the global business community. In consolidating these many and diverse positions into this paper, the fundamental understanding should be the indisputable commitment business and industry are willing and able to contribute toward creating a sustainable future for energy and water.
This paper draws heavily on the work of the International Chamber of Commerce, the World Business Council for Sustainable Development, the World Energy Council, and the Global Water Partnerships - the guidance and insight of whom we are greatly appreciative.