Most future growth in energy demand is expected to come from developing countries. For this reason, the deployment of energy from renewable sources in developing countries will be an essential to avoid climate change. This is already happening. Renewable energy already accounts for a higher percentage of electricity generation in developing countries than in the developed world; in 2008, non-OECD nations generated 21 percent of their electricity from renewable sources including large-scale hydroelectric power, compared with 17 percent in OECD countries. But this figure must more than double by 2035, to 46 percent, if the world is to prevent its greenhouse gas emissions from reaching dangerous levels.

Deploying such a large amount of renewable energy in developing countries would constitute a transformation of the global energy system. But this will not happen without significantly increased support from developed countries.

This report suggests ways that developed and developing countries working in cooperation can make it happen. It suggests a move away from traditional donor support for renewable energy in developing countries through single projects toward an emphasis on creating the right environment for investments in scaled-up, nationwide deployment of renewable energy: In the long run it will be more effective to help create a predictable policy environment in a developing country than financing an individual wind farm there.

The report identifies the main components of smart renewable energy policy (focusing on the power sector) in developing countries. These include:

• a comprehensive energy policy that creates an enabling environment, from power sector regulations to investment and financing rules, suitable electric grid infrastructure, and technical capacity;
• a clear articulation of policy objectives, whether they are increased generation, access to energy, or economic development;
• an attractive and predictable energy market that will leverage private investment;
• cost-effective interventions, avoiding costly subsidies;
• investments along the entire innovation chain, not just in research and development but also demonstration, deployment, and diffusion;
• an accountable, transparent, and participatory process.

The report is based on a series of case studies from 12 countries, supported by a comprehensive review of the existing literature. It provides recommendations for maximizing the effectiveness of international support for deployment of renewable energies, drawn from these on-the-ground experiences in developing countries. It concludes that development cooperation should move beyond a project-by-project focus and shift to country-wide and sector-based programming addressing all of the elements of smart renewable energy policy. This support will have to cover:

• technical assistance, capacity development, and institution building to help developing countries develop strategies, targets, and policies;
• grant-based international public financing for generation-based incentives to cover additional costs;
• subsidized capital and risk mitigation to address incremental investment needs and higher costs of capital;
• technical capacity building to develop and run renewable energy installations and integrate them into the grid.

These recommendations are directed at bilateral and multilateral development agencies (including the World Bank, bilateral financial institutions, and export-credit agencies), existing multilateral climate funds as well as new ones such as the Green Climate Fund; and international organizations like the UN Framework Convention on Climate Change’s new technology mechanism and the International Renewable Energy Agency.

This paper is published by the German Marshall Fund of the United States in cooperation with the Heinrich Böll Foundation and WRI.