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Africa

Africa: How the World Bank and IMF Can Truly Drive a Clean Energy Transition

todayOctober 18, 2024

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The financial institutions’ current approaches to funding renewable energy projects are far too limited, rigid, and opaque.

As ministers around the world gear up for annual meetings of the International Monetary Fund (IMF) and World Bank Group (WBG), on 21-26 October in Washington DC, climate will be high on the agenda again. Many discussions will centre on climate finance, while the World Bank is set to replace its Climate Change Action Plan (CCAP) and implement a new Corporate Scorecard.

But are the IMF and World Bank fit for purpose to drive climate action and a renewable energy transition? The numbers suggest not yet at least. Despite the goal of tripling global renewable energy capacity by 2030, the World Bank’s investments in clean energy have increased by a meagre 26% since the 2015 Paris Agreement. These shortfalls leave developing countries more likely to end up locked in long-term fossil fuel dependence, delaying the transition to renewables and exacerbating environmental degradation.

What is going wrong? And what can be done?

Gaps in renewable energy financing

Despites making some strides in supporting renewable energy, there are several gaps that continue to hinder the IMF and World Bank’s effectiveness in driving a just energy transition.

1) A lack of dedicated funding for renewable energy projects

Though both institutions have programmes supporting clean energy, their overall financing is still heavily skewed toward fossil fuels. The World Bank’s commitments to renewable energy remain small compared to the size of investment needed. The Group claims it increased its climate finance by 22% in its 2023 fiscal year, delivering a record of $38.6 billion, but it has not provided any clarity on how it defines climate finance, which specific projects were financed, and who benefited. In many Global South countries, lack of funding and fiscal space is an urgent obstacle to fulfilling the goal of tripling of renewable energy capacity, transitioning away from fossil fuels, and doubling energy efficiency by 2030.

2) Inflexibility in financing mechanisms

The IMF and World Bank often attach strict conditions to their loans. This not only pushes countries towards austerity and privatisation but also limits their ability to pursue projects that best suit their renewable energy potential. Traditional financing models tend to focus on larger-scale, centralised infrastructure, but these projects are often not feasible or sustainable, particularly in Africa. Meanwhile, the need for the rapid deployment of decentralised renewable energy systems, an approach that would be far more appropriate in many contexts, is overlooked.

3) Limited focus on innovation and technology transfer

To transition to renewable energy, developing countries need access to cutting-edge technologies and innovations as well as the knowledge of how to build and run them. However, the World Bank and IMF financing strategies do not prioritise technology transfer or capacity building. This leaves developing nations struggling to integrate renewable energy solutions and reliant on external firms, making long-term energy independence and sustainability harder and more costly to achieve.

4) Failure to address local contexts

The World Bank and IMF often fund large-scale, one-size-fits-all projects that do not account for local contexts. This top-down approach disregards grassroots solutions and community-led initiatives that have the potential to yield more sustainable and inclusive energy transitions. Renewable energy projects have the best chance of success when tailored to the specific needs, resources, and capacities of different regions.

Reforming the World Bank and IMF

To close these gaps and make meaningful progress toward a just energy transition, the World Bank and IMF must implement key reforms.

1) Establish a dedicated renewable energy fund

Both institutions should create new public finance institutions and transform existing ones to be more democratic, equitable, and ambitious. They should establish dedicated funds specifically for renewable energy projects that are accessible to countries and local communities without the stringent conditions that often come with conventional loans. By increasing grant-based financing, the World Bank and IMF can provide more flexible support, enabling countries to invest in a wider range of renewable projects suited to their needs.

2) Prioritise innovation and technology transfer

A key pillar of renewable energy financing should be ensuring that developing nations have access to the latest technologies and innovations. The World Bank and IMF should implement initiatives that focus on building local capacity, transferring technologies, and supporting innovation in the renewable energy space. Programmes to train local engineers and technicians, alongside partnerships with global renewable technology firms, could ensure the sustainable development of energy infrastructure in the Global South.

3) Shift focus from centralised to decentralised solutions

Developing nations, particularly in Africa, often require decentralised, off-grid, small-scale renewable energy systems like solar mini-grids and standalone wind farms. The World Bank and IMF should shift away from their traditional preference for large-scale, centralised infrastructure projects and instead invest in solutions that prioritise energy access for the most underserved populations. This could also involve microfinancing and direct support for community-owned projects that put power directly into local hands.

4) Integrate climate justice

Beyond the technical changes, the World Bank and IMF must embrace a climate justice perspective that ensures fair and equitable energy access. This means developing strategies that explicitly address the needs of marginalised communities and that ensure accountability for social and environmental impacts, with compensation and remedy where damage is done. This approach can ensure that renewable energy not only reduce reliance on fossil fuels but create jobs, reduce poverty, and empower local populations.

5) Streamline processes and foster collaboration

The World Bank and IMF should streamline their project approval processes, without compromising social and environmental assessments and accountability, to allow for quicker disbursement of funds. This would help nations deploy renewable energy faster. Additionally, fostering collaboration with regional development banks, private investors, and multilateral climate funds would help scale up financing. Collaboration can unlock additional funding streams, making renewable energy projects more feasible and attractive for developing countries.