The transition to clean energy is crucial for achieving sustainable development and combating climate change. However, emerging and developing economies face significant challenges in mobilizing the necessary private finance to scale up clean energy investment. To address this, governments, high-income countries, development finance institutions (DFIs), and private investors must collaborate and take strategic actions.
As a core pillar of Reneum’s ethos and part of the problem we hope to solve, we look at the key points from the latest International Energy Agency (IEA) report titled “Scaling Up Private Finance for Clean Energy in Emerging and Developing Economies” which addresses the topic directly. We also published an opinion piece a few weeks ago on how we thought the issue can be tackled.
You can find the full IEA report here, and read on below for our summary of high-level takeaways.
Enabling Policy Environment and Strengthening Institutions
Whether we like it or not, governments play a pivotal role in creating an enabling policy environment that encourages private investment in clean energy. Supportive regulations, incentives, and frameworks are needed to remove barriers to entry and promote clean energy technologies. According to the International Energy Agency (IEA), countries with strong policy frameworks attracted over 70% of global renewable energy investments in 2019. According to the World Bank's Regulatory Indicators for Sustainable Energy (RISE) report, as of 2020, 92% of countries had renewable energy targets, and 85% had policies to promote energy efficiency.
Concessional Finance and Green Financing Instruments
Significantly larger quantities of concessional finance are required to mitigate country and project risks, enhance credit quality, and improve financing terms. Concessional funds, such as guarantees, debt or equity investments, or performance-based incentives, can mobilize private capital for clean energy projects. The International Finance Corporation (IFC) estimates that every dollar of concessional finance can mobilize up to $20 of private investment in clean energy projects.
Additionally, the development of green financing instruments and platforms, such as green bonds and sustainability-linked loans, can attract international investment capital at scale. In 2020, global green bond issuance reached a record $269.5 billion, a 9% increase from the previous year, indicating growing investor interest in sustainable investments. According to the Global Sustainable Investment Alliance, sustainable investment assets reached $35.3 trillion globally in 2020, a 15% increase from 2018.
Deepening Capital Markets and Credible Transition Planning
Developing deeper local capital markets and financial systems is necessary to scale up domestic private investment in clean energy. According to the World Bank, as of 2020, only 17% of emerging and developing economies had well-developed local capital markets, highlighting the need for further growth and expansion.
Governments must also demonstrate credible climate transition commitments and planning, setting ambitious targets and converting them into robust transition plans aligned with energy sector reform. The United Nations Environment Programme (UNEP) reports that as of 2020, 126 countries have committed to achieving net-zero emissions by 2050, providing a clear signal to investors and creating a conducive environment for clean energy investments. However, the IEA estimates that emerging and developing economies need to invest around $1 trillion per year in clean energy by 2030 to achieve their climate targets.
Collaboration and Knowledge Sharing
High-income countries can provide financial and technical support to emerging and developing economies for clean energy projects. DFIs play a crucial role in mobilizing and leveraging private capital through concessional finance, risk mitigation instruments, and innovative climate finance approaches. The International Renewable Energy Agency (IRENA) estimates that DFIs provided $21.4 billion in climate finance for clean energy projects in 2019.
Private investors can contribute by investing in clean energy projects, collaborating with DFIs, and supporting the development of local capital markets. According to BloombergNEF, global clean energy investment reached a record $1.1 trillion in 2022, driven by the energy crisis and more competitive cost of wind and solar.
Scaling up private finance for clean energy in emerging and developing economies requires a collaborative approach. Governments, high-income countries, DFIs, and private investors must work together to create an enabling policy environment, provide concessional finance, develop green financing instruments, deepen capital markets, and share knowledge and expertise. By leveraging the strengths and resources of each stakeholder, we can accelerate the transition to clean energy, achieve sustainable development goals, and combat climate change.
You can find the full IEA report here.