IEA, World Bank and WEF: Financing clean energy transitions in emerging and developing economies
9th Jun 2021
The world’s energy and climate future increasingly hinges on decisions made in emerging and developing economies.
This very diverse grouping – spanning countries in Africa, Asia, Europe, Latin America and the Middle East1 – includes the world’s least developed countries as well as many middle-income economies, emerging giants of global demand such as India and Indonesia, and some of the world’s major energy producers. On a per capita basis, energy consumption in these countries is generally low, but expanding economies and rising incomes create vast potential for future growth. The challenge is to find development models that meet the aspirations of their citizens while avoiding the high-carbon choices that other economies have pursued in the past. The falling cost of key clean energy technologies offer a tremendous opportunity to chart a new, lower-emissions pathway for growth and prosperity. If this opportunity is not taken, and clean energy transitions falter in these countries, this will become the major fault line in global efforts to address climate change and to reach sustainable development goals.
Covid-19 has widened the huge gap between investment needs and today’s flows
Emerging and developing economies are set to account for the bulk of emissions growth in the coming decades unless much stronger action is taken to transform their energy systems. With the exception of parts of the Middle East and Eastern Europe, their per capita emissions are among the lowest in the world – one-quarter of the level in advanced economies. In a scenario reflecting today’s announced and existing policies, emissions from emerging and developing economies are projected to grow by 5 gigatonnes (Gt) over the next two decades. In contrast, they are projected to fall by 2 Gt in advanced economies and to plateau in China.
But a massive surge in clean energy investment in the developing world can put emissions on a different course
Clean power is central to development and transition strategies but cannot provide all the answers in economies undergoing rapid urbanisation and industrialisation. Transitions in fuels and energy-intensive sectors such as construction materials, chemicals and shipping are essential to achieve deep emissions reductions. This requires improvements in the efficiency of industrial equipment and heavy transport – as well as fuel switching, mainly to electricity and bioenergy but also to natural gas in areas where cleaner energy cannot yet be deployed on the scale needed. In parallel, it will be essential to lay the groundwork for a rapid scaling‑up of low-carbon liquids and gases, including hydrogen, as well as carbon capture technologies, although many of these areas lack viable business models for the moment. Major fuel-importing countries, notably in Asia, stand to benefit from downward pressure on import bills. But among the world’s largest oil and gas producers and exporters, clean energy transitions create huge pressures on economic models that rely on hydrocarbon revenue, raising questions about the finance available for energy and non‑energy investments alike.
The average cost of reducing emissions in these economies is estimated to be around half the level in advanced economies. All countries need to bring down emissions, but clean energy investment in emerging and developing economies is a particularly cost-effective way to tackle climate change. The opportunity is underscored by the amount of new equipment and infrastructure that is being purchased or built. Where clean technologies are available and affordable – and financing options available – integrating sustainable, smart choices into new buildings, factories and vehicles from the outset is much easier than adapting or retrofitting at a later stage.
Transitions in the developing world must be built on access and affordability
While clean energy transitions rely on much higher levels of both equity and debt, the capital structure of investments is likely to move towards more debt. This arises mainly from a shift in investment flows towards sectors such as electricity where debt finance is more common, as well as a greater emphasis on funding models that support household purchases of electric vehicles and improvements in buildings and factories. Mobilising investment across all sectors will depend on enhancing financial flows from local sources as well as from international providers. Renewable power offers the most likely route for increased participation by international project developers, commercial banks and other relevant investors. Consumer-based investments or those coming from state-owned enterprises – in fuel supply and grids, for example – rely more heavily on domestic sources of capital, but they also need access to a wider set of fundraising options.
In a more capital-intensive energy system, the cost of capital is key
There is no shortage of global capital, but there is a shortfall of clean energy investment opportunities around the world that offer adequate returns to balance the risks. Coming into 2020, global financial wealth held by investors stood at over USD 200 trillion. There is strong appetite among investors to fund clean energy projects, with global issuance of sustainable debt soaring to record levels in 2020. Most of this is concentrated in advanced economies. If energy transitions are to be successful, then developers and financiers need to increase the amount of capital they allocate to two underserved asset classes – to clean energy in particular, and to emerging and developing economies more broadly. Sustainable finance frameworks should encourage both of these shifts. As things stand, the alignment of investment portfolios with net-zero emissions goals risks excluding countries with higher-carbon footprints or sectors with more challenging transition pathways.
Many emerging and developing economies do not yet have a clear vision or the supportive policy and regulatory environment that can drive rapid energy transitions. Project-specific factors are compounded in many cases by broader cross-cutting issues, which undermine risk-adjusted returns for investors and the availability of bankable projects. For projects, these include the availability of commercial arrangements that support predictable revenues for capital-intensive investments, the creditworthiness of counterparties and the availability of enabling infrastructure, among other challenges. Broader issues include subsidies that tilt the playing field against sustainable investments, lengthy procedures for licensing and land acquisition, restrictions on foreign direct investment, currency risks, and weaknesses in local banking and capital markets. The financial performance of utilities can also be a major constraint, as they underpin investment in networks and serve in many instances as the buyer of renewable output. Debt burdens are on the rise in many economies and few governments in emerging and developing economies have the fiscal space to mobilise resources for a sustainable recovery.
Energy transitions bring major new economic opportunities, notably through the creation of new jobs associated with clean energy investments and activities. Spending on more efficient appliances, electric and fuel cell vehicles, building retrofits and energy‐efficient construction provide further employment opportunities. Development in these areas can especially support the role of women and female entrepreneurs in driving change and improving gender equality. Governments need to ensure that clean energy transitions are people‐centred and inclusive, helping communities navigate the new opportunities as well as the economic burdens arising from the transition away from fossil fuels and the potential closure of emissions-intensive assets. Addressing transition challenges requires a focus on transparent public dialogue, developing programmes to boost skills in all aspects of clean energy transitions and supporting the growth of new job opportunities in more sustainable economic activities.
Transitions in these economies will falter without more international engagement and support. Actions by policy makers within their countries to address the challenges and seize the opportunities will not, on their own, generate sufficient momentum. Supportive international actions will be essential to catalyse the necessary investments in critical areas and to support longer-term reform processes, starting with the commitment by developed economies to mobilise USD 100 billion per year in climate finance. The current international financial architecture offers some support for sustainable development around the world. However, today’s strategies, capabilities and funding levels do not yet answer the call for a fundamental transformation of the energy sector in emerging and developing economies. The international financial system lacks a clear and unified focus on financing emissions reductions and clean energy – particularly in the developing world. This needs to be done across multiple aspects of energy transitions, with co‑ordinated finance from donors and the provision of technical assistance on the ground. Increasing the effectiveness of the delivery channels for investments is critical.
This special report proposes a clear set of priority actions to mobilise the necessary capital to finance clean energy transitions. This is based on detailed analysis of successful projects and initiatives, including almost 50 real-world case studies – across clean power, efficiency and electrification, as well as transitions for fuels and emissions-intensive sectors – in countries ranging from Brazil to Indonesia and from Senegal to Bangladesh. The priorities focus on financing sectors that are market-ready, based on technologies at mature and early adoption stages, such as renewables and efficiency. They also examine options for financing transitions in fuels and emissions-intensive sectors where decisions taken over the next decade can lay the groundwork for the integration of new technologies – or could potentially lock in emissions for decades to come. We focus on actions that need to be taken between now and 2030 – a pivotal decade for economic recovery, for the realisation of the UN Sustainable Development Goals and for climate action.
Priority actions for financing clean energy transitions in emerging and developing economies
- Give international public finance institutions a strong strategic mandate to finance clean energy transitions.
- Boost and improve the delivery of international climate finance.
- Enhance the deployment of blended finance to mobilise additional private capital.
- Incentivise international capital markets to fund a broader range of clean energy investment opportunities in emerging and developing economies
Tackle cross-cutting issues that affect investment risks and returns
- Make it easier and cheaper to develop viable new clean energy projects.
- Improve domestic access to capital through more robust banking and capital markets.
- Remove distortions in markets and prices that work against sustainable investments.
- Put state-owned enterprises, especially utilities, on a firmer financial footing with sustainable strategies.
- Empower local entrepreneurs and small/medium-sized enterprises to drive change.
- Harmonise sustainable finance frameworks and improve reporting on climate risks.
Scale up private capital rapidly for clean power, efficiency and electrification
- Build equitable and sustainable models for universal access to modern energy.
- Harness the readiness of investors to back renewable power.
- Ease the delivery of reliable and clean power by expanding and modernising grids.
- Embed high efficiency and connectivity into all new buildings and appliances.
- Leap ahead to invest in more efficient and electrified mobility solutions.
Focus already on the hardest aspects of transitions
- Recast the development model for major producer economies.
- Lay the groundwork for scaling up low-carbon fuels and industrial infrastructure.
- Develop innovative strategies to transform emissions-intensive sectors.
- Accelerate the shift away from unabated coal while ensuring a people-centred transition.
|Priority||Case studies and examples|
|Harness the readiness of investors to back renewable power||
|Ease the delivery of reliable and clean power by expanding and modernising grids||
|Enhancing the financial performance of utilities||
|Build equitable and sustainable models for universal access to modern energy||
|Embed high-efficiency and connectivity into all new buildings and appliances||
|Leap ahead to invest in more efficient and electrified mobility solutions||
|Recast the development model of producer economies||
|Lay the groundwork for scaling up low-carbon fuels and industrial infrastructure||
|Boosting innovative strategies to transform emissions-intensive sectors||
|Accelerate the shift away from coal while ensuring a people-centred transition||
- The emerging market and developing economies grouping in this report does not include the People’s Republic of China (hereafter, “China”), as the dynamics of energy investment in China are quite distinctive.