This ODI Working Paper examines the financial case behind low-income countries taking low-carbon development (LCD) trajectories. The paper integrates a number of economic concepts: (a) the levelised costs of different technologies, (b) the changing costs of renewable-energy technologies, (c) carbon markets, and the cost of carbon, and, finally (d) rising costs of fossil fuels, into a single economic assessment. The key point of this analysis is to understand at what point in time (if at all) the different renewable technologies could achieve ‘grid parity’ with fossil-fuel-based technologies.
The results of the analysis highlight, through the examination of distinct economic scenarios, that, while additional financing (through carbon markets, subsidies and so on) are important in accelerating the adoption of LCD technologies, they are not a necessary condition. In the absence of vibrant financing markets, grid parity of renewable technologies is still an achievable objective over the next 5-10 years – except in the case of a small subset of technologies. The results are more encouraging when coal is held as the competing benchmark as opposed to natural gas: the latter is witnessing a renaissance of sorts from the emergence of unconventional sources. Nevertheless, the close nature of this debate is encouraging for the long-term prospects of the adoption of renewables-based technologies. The value of carbon markets in accelerating the adoption of these technologies does however suggest a need for some market-based mechanisms to facilitate the migration of low-income countries away from fossil-fuel-based development paradigms.