Energy aid volatility across developing countries: a disaggregated sectoral analysis

Abstract

Abstract Empirical evidence on general aid volatility reveals that it is a limiting factor that impedes aid effectiveness. Unlike the previous studies focusing on aggregate aid volatility, this paper seeks to analyze the energy aid volatility across sub-sectors of energy aid in 67 aid-recipient countries during 2002–2019, given that energy aid effectiveness is essential for achieving the targets of sustainable development goals (SDG)-7. Specifically, we examine the contribution of different sub-sectors of energy aid in total energy aid volatility, identify sectoral volatility trends, and explore the interlinkages between the aid shocks of various sectors of energy aid. Volatility measures are based on the squared residuals obtained from a regression of aid on trend and the trend square, calculated separately for each country and energy aid sector. Findings reveal that renewable aid is the most important contributor to total energy aid volatility, particularly in lower-middle-income countries. Policy aid volatility is highest in low-income countries. We hardly observe a decline in the volatility of energy aid and its sub-sectors, except for nuclear aid. Moreover, we notice a lack of sectoral greening of energy aid as donors do not shift disbursement targets from non-renewable to renewable energy generation sources. From a policy perspective, these findings suggest that donors and recipients need to work on reducing energy aid volatility by focusing on specific energy aid sectors that majorly cause volatility to enhance energy aid effectiveness. Findings also call for understanding the factors that inhibit the greening of energy aid in terms of shifting concession resources from non-renewable to renewable energy generation.