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SYDNEY, AUSTRALIA (24 July 2024)—Pacific island countries have ambitious targets to increase their investments in renewable energy, which will reduce electricity generation costs and improve supply reliability, according to a new policy paper published today by the Asian Development Bank’s (ADB’s) Pacific Private Sector Development Initiative (PSDI).

The policy paper, Powering the Pacific: The Cost Implications of Renewable Energy, examines the impact of transitioning from fossil fuels to renewable energy in six Pacific island countries and provides recommendations to maximize the benefits of renewable energy, including the cost savings. 

“While Pacific island countries are still in the early stages of their energy transition, investments in renewable energy are already lowering the generation costs of electricity,” says PSDI State-Owned Enterprise Reform Expert and one of the authors of the report, Laure Darcy. “As renewable energy becomes a larger part of the energy mix, costs for consumers are expected to decrease, especially as the costs of battery storage systems fall.”

However, because electricity tariffs are well below the cost of service in many Pacific countries, the savings from renewable energy are effectively already factored into tariffs. Five of the six utilities in the paper’s sample experienced financial losses in 2021 due to the cost of service exceeding the costs passed on to consumers. Energy Fiji Limited, which had the highest renewable energy share in the sample, was the only utility with a tariff that fully covered the cost of service.

“Bringing down electricity costs and improving supply reliability involves multiple factors beyond just investment in renewable infrastructure. Utilities also need to follow commercial principles and improve operational efficiencies to curb high system losses,” says report co-author, Renewable Energy Specialist Denzel Hankinson. “International experience has also shown that increasing competition in the energy sector can also reduce the cost to consumers.”

The paper highlights that the transition to renewable energy brings other important benefits beyond cost savings, most notably improved energy security from a more reliable supply and lower carbon emissions. To maximize these benefits, the paper advocates for the transition to renewable energy to be incorporated within a least-cost generation plan, which most Pacific utilities already have. Additionally, aligning sector policy, regulation, and stakeholder oversight to allow utilities to operate commercially, investing adequately in system reliability, and allowing competition where appropriate, are all crucial for ensuring a successful transition.

PSDI is an ADB technical assistance program undertaken in partnership with the government of Australia and New Zealand. It supports ADB’s 14 Pacific DMCs to improve the enabling environment for business and to achieve inclusive, private sector-led economic growth, including through reforms designed to improve the performance of state-owned enterprises and increase private sector participation in infrastructure service delivery.