Onome Amuge
A recent report from the International Energy Agency (IEA) has found that capital flows to clean energy projects in emerging markets and developing economies (EMDEs) are “worryingly low”, putting green schemes in these countries at risk.
The IEA report highlights the need for a significant increase in investment in clean energy technologies, such as solar photovoltaic, wind, grid infrastructure, storage and energy efficiency, in EMDEs if the world is to achieve the goal of limiting global warming to 1.5°C.
According to the IEA report, several factors are contributing to the increased cost of financing clean energy projects in EMDEs. These include political instability, currency fluctuations, regulatory uncertainty, and the lack of access to grids. These factors make it difficult for investors to assess the risks associated with investing in clean energy projects in these countries, leading to higher costs of financing.
The IEA report found that the cost of capital for utility-scale solar PV projects in emerging markets and developing economies ranges from 9 per cent to 12 percent, while the cost of capital in advanced economies is much lower, ranging from five percent to six percent. This significant cost difference creates a disadvantage for clean energy projects in EMDEs, as they must pay more for the same project, or forgo the project entirely.
The IEA report argues that the transition from dollarised, globally traded commodities, such as oil, to locally produced clean energy requires a stable domestic business environment. This is because local clean energy projects rely on revenue from domestic sources, rather than revenue from global commodity markets. It also pointed out that if countries cannot afford the upfront costs of clean energy projects, they may be locked into less expensive but more polluting technologies that require ongoing investment in fossil fuels. This, it explained, can create a lock-in effect, where countries are unable to transition to clean energy due to the high upfront costs.
The IEA says that in order to make clean energy projects in EMDEs more appealing to investors, it is crucial to scale up private sources of financing. The European Investment Bank’s figures indicate that multilateral development banks (MDBs) mobilised just $18.6 billion in private finance in 2022, compared to $60.9 billion in green lending to EMDEs.
Fatih Birol,the IEA’s executive director, noted that reducing risk through clear and timely regulation is a crucial first step to attracting investment in clean energy projects in EMDEs. However, this needs to be accompanied by a significant increase in financial and technical support from the international community.
“We have to build new bridges between investors looking for clean energy opportunities and the markets where this investment is most needed,” Birol added.
According to the IEA, the current level of investment in clean energy in emerging markets and developing economies (EMDEs) is just $270 billion per year. However, the IEA’s pathway analysis suggests that investment must rise to $870 billion by the early 2030s in order to meet national climate and energy pledges, and to $1.6 trillion in a scenario that limits global warming to 1.5°C.
Despite the steep increase in investment required, the IEA noted that the majority of it is needed for mature technologies such as wind and solar power, with only about 5 per cent earmarked for newer and riskier technologies such as hydrogen-based fuels and carbon capture, utilisation and storage.
The IEA suggested that utility-scale solar and wind projects should receive around a quarter of the total clean energy investment over the next decade, with another quarter going to improvements in electricity networks and efficiency in buildings.
The IEA’s analysis indicated that closing the gap in the cost of capital between emerging and advanced economies by 1 percentage point could save $150 billion per year in clean energy financing costs for EMDEs. This is because a lower cost of capital means that projects are more likely to be profitable, which attracts more investment.
It also suggested that one way to reduce the cost of capital for EMDEs is to triple concessional funding, which is money that is lent or given at below-market interest rates. This,it explained, could be used to remove barriers to investment and help improve the risk-return profile of clean energy projects.
In addition to concessional funding, the IEA recommended the use of guarantees to counteract payment delays by off-takers, which are entities that buy power from generators. It also recommended investing in grid infrastructure, which can help to make project timelines more predictable.
