Only 40% of utilities in developing countries are financially sustainable, jeopardizing energy transition and access goals.
WASHINGTON, June 18, 2024 —The majority of electric utilities in developing countries are ill-equipped to meet growing demand for power and add more renewable energy into the grid, hindering global energy transition goals to provide clean, reliable, and affordable electricity to all, says the World Bank in a new report issued today.
The report, The Critical Link: Empowering Utilities for the Energy Transition, examines the performance of over 180 utilities in more than 90 countries. It reveals that only 40% of utilities are able to cover their operating and debt service costs. Low-income and lower-middle-income countries face the most acute challenges as high costs, low tariffs, transmission and distribution losses, inefficient payment collection, and poor planning, perpetuate cycles of underperformance, burdening government budgets while leaving many consumers without reliable power.
These financial and operational hurdles also act as deterrents to investors, preventing many utilities from raising private capital at affordable rates and holding back critical investments in grid modernization and upgrades. The accelerated push to transmit more variable renewable energy, including solar and wind power, coupled with the urgency to provide electricity to nearly 700 million people without electricity access today, will further strain weak utilities’ financial sustainability and test their technical capacity, the report cautions.
“As the stewards of the world’s power grids, utilities will be at the heart of efforts to decarbonize power supply and transmit more reliable electricity that is vital to propel economies, create jobs, and improve the lives of millions of people,” said Guangzhe Chen, World Bank Vice President for Infrastructure. “Policymakers, regulators, and development financiers need to step up to empower utilities through robust policies and more long-term financing to deliver on the promise of clean and accessible energy for all.”
Global energy transition and universal energy access goals also present opportunities to improve utility performance. However, only well-run and well-regulated utilities will be able to provide clean, affordable electricity to an ever-expanding customer base while earning a reasonable return on investment.
Laying the foundations for sustainable power utilities starts with governments, which can craft supportive policies and transparent procurement rules that reduce investor risk and streamline infrastructure development. Regulators must ensure that utilities are able to recover reasonable costs through tariffs and encourage investment in efficient, resilient networks. Even in countries with sound policies and regulations, utilities must improve their billing and metering and embrace better business practices and new technologies to build trust with customers and investors. Given the scarcity of public funding, development financiers have a crucial role to play in offsetting the high cost of the transition through concessional capital for utilities and risk mitigation instruments for private utility investors.