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Emerging and developing nations need help to fund energy transition

A new report from the International Energy Agency into financing clean energy transitions in emerging and developing economies posits the world’s energy and climate futures are increasingly hinged on whether these economies manage that transition successfully.

The report calls for a complete rethink of global efforts to mobilise and channel the huge surge in investment that is required. The report, Financing Clean Energy Transitions in Emerging and Developing Economies, was authored in collaboration with the World Bank and World Economic Forum.

It spells out a series of actions that should enable emerging and developing nations to overcome the major hurdles they face when trying to attract the financing necessary to build the kind of clean, modern and resilient energy systems that can power their growing economies.

Annual clean energy investment into emerging and developing economies must increase by more than seven times. This means an increase from less than $150billion in 2019 to more than $1trillion by 2030 to put the world on track to reach net-zero emissions by 2050.

Unless much strong action than current investment levels is taken, energy-related carbon dioxide emissions from these economies – mostly in Asia, Africa and Latin America – will grow by 5billion tonnes over the next 20 years.

Dr Fatih Birol, IEA executive director, pointed out emissions are heading upwards in many emerging and developing nations, as clean energy investments are dwindling. This is creating a dangerous fault line in global efforts to reach climate and sustainable energy goals. “Countries are not starting on this journey from the same place. Many do not have access to the funds they need to rapidly transition to a healthier and more prosperous energy future. The damaging effects of the COVID-19 crises are lasting longer in many parts of the developing world.”

The world has enough money to finance clean energy transitions but it’s not flowing

“There is no shortage of money worldwide, but it is not finding its way to the countries, sectors and projects where it is most needed. Governments need to give international public finance institutions a strong strategic mandate to finance clean energy transitions in the developing world,” said Birol.

Recent trends in global clean energy spend highlight a widening gap between advanced economies and the developing world, even though emission reductions are far more cost-effective in the latter. Emerging and developing economies currently account for two-thirds of the world’s population but only one-fifth of global investment in clean energy and one-tenth of global financial wealth.

Annual investment across the entire energy sector in emerging and developing markets have fallen by about 20% since 2016. These economies are further hampered by the fact that they face debt and equity costs that are up to seven times higher than in the US or Europe.

The report says avoiding a tonne of CO2 emissions in emerging and developing economies costs about half as much on average as it does in an advanced economy. That is partly because developing economies can often jump straight to cleaner and more efficient technology without having to refit or phase out polluting energy projects that are already underway.

But the emerging market and developing economies wanting to increase clean energy investment face a range of difficulties that undermine risk-adjusted returns for investors and the availability of bankable projects. Challenges involve 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 project-level factors. Broader issues, including depleted public finances, currency instability and weaknesses in local banking and capital markets also raise challenges to attracting investment.

Unified focus on financing emission reduction and clean energy is needed now

Birol pointed out a major catalyst is needed to make the 2020s a decade of transformative clean energy investment.

“The international system lacks a clear and unified focus on financing emissions reductions and clean energy – particularly in emerging and developing economies. Today’s strategies, capabilities and funding levels are well short of where they need to be. Our report is a global call to action – especially for those who have the wealth, resources and expertise to make a difference – and offers priority actions that can be taken now to move things forward fast,” said Birol.

The priority actions spelt out in the report – for governments, financial institutions, investors and companies – cover the period between now and 2030. They draw on detailed analysis of successful projects and initiatives across clean power, efficiency and electrification, as well as transitions for fuels and emissions-intensive sectors. These include almost 50 real-world case studies across different sectors in countries ranging from Brazil to Indonesia, and from Senegal to Bangladesh.

Demetrios Papathanasiou, the World Bank global director for energy and extractives: “As we expand energy access, we also need a global transition to low-carbon energy. It is critical to develop solutions that make energy systems more resilient to climate change and other crises. With the right policies and investments, countries can achieve lasting economic growth and poverty reduction without degrading the environment or aggravating inequality.

“The broader financial sector can and must play a key role in achieving the goals of the Paris Agreement by mobilising capital for green and low-carbon investments, while managing climate risks. The World Bank will continue to support countries that seek assistance to transition away from fossil fuels and scale up low-carbon, renewable energy, and energy efficiency investments,” said Papathanasiou.

Report includes specific action that can be taken

The report calls for a focus on channelling and facilitating investment into sectors where clean technologies are market-ready, especially in the areas of renewables and energy efficiency, but also laying the groundwork for scaling up low-carbon fuels and industrial infrastructure needed to decarbonise rapidly growing and urbanising economies. It also calls for strengthening sustainable finance frameworks, addressing barriers to foreign investment, easing procedures for licensing and land acquisition, and rolling back policies that distort local energy markets.

It underscores that clean energy investments and activities can bring substantial economic opportunities and jobs in industries that are expected to flourish in the coming decades as energy transitions accelerate worldwide.

The Financing Clean Energy Transitions in Emerging and Developing Economies report calls for clean energy transitions to be people‐centred and inclusive, including actions that build equitable and sustainable models for universal access to modern energy. Spending on more efficient appliances, electric vehicles, and energy‐efficient buildings can provide further employment opportunities, and can especially support the role of women and female entrepreneurs in driving change and improved gender equality.

Day one of the Enlit Africa digital event featured a discussion on Financing the African energy transition which you can watch here.

Theresa Smith
Theresa Smith is a Content Specialist for ESI Africa.