4 pioneering solutions for clean energy investment in emerging economies

Emerging and developing countries are at the centre of gravity of future global growth in energy demand. Over the next two decades, energy-related carbon dioxide emissions from these countries are on a trajectory to grow by 5 billion tonnes, according to the International Energy Agency. Current levels of investment to ensure more sustainable, affordable and secure energy systems in those regions, however, remain largely insufficient, with only 20% of global clean energy investments being allocated to those regions (excluding China). In fact, in the 2020s, annual investment rates would need to be multiplied by seven, from less than $150 billion to above $1 trillion, to put the world on track to reach net-zero emissions by 2050.

Since 2021, the initiative on Mobilizing Investments for Clean Energy in Emerging Economies (MICEE) has been enabling collaborative actions to scale clean energy finance in emerging and developing markets. Here are four common challenges to clean energy finance encountered in emerging markets, and proposed solutions to overcome them on the ground.

One of the key barriers to investments in emerging economies remains currency exchange risk, which increases the cost of capital and hinders investments altogether. While currency hedging and other options exist, they can be expensive and are lacking for many developing country currencies, particularly at the long tenors, low cost and large scale required to support the needed clean energy investments. In recent months, scholars from Columbia University partnered with the World Economic Forum and the World Bank Climate Change Group to propose a new exchange rate coverage facility: a blended finance mechanism that would issue currency exchange risk protection to international lenders, thus paying any and all shortfalls between value of contracted local currency payments and foreign currency debt repayments. The proposed facility is envisioned to be funded in tranche by a) carbon credits generated by the clean energy project, acting as “first loss”; b) multilateral development banks, including guarantees counter-guaranteed by host countries, and development finance institutions providing funding for defined subsequent losses; and c) international capital, including philanthropies, sovereign wealth funds, and interested private institutions, covering “last loss”.

India is a country that has already seen large investments in renewable energy and has set ambitious goals to further grow to reach 500GW of renewables by 2030. Reaching this will require more than a doubling of current levels of annual installed renewables capacity. To achieve this, all possible “engines” of funding must be leveraged. One such powerful engine is the Indian domestic bond market, which so far has seen limited activity with respect to funding utility-scale renewable energy. Yet it is thought to have the capacity to unlock massive capital flows in this space. A credit enhancement facility for utility-scale renewables has been proposed as a solution to bridge the gap between where credit ratings are for utility-scale renewables loans and where they would need to be to access the domestic bond market in a self-supporting manner and at scale. Together, partners from the Forum and the Council on Energy, Environment and Water of India (CEEW) will take steps to set up such a solution in India in 2023.

In the Brazilian Amazon, there are 257 “isolated systems” – or communities currently not connected to the national grid and that rely on diesel, in stark contrast with a national electricity sector dominated by clean energy. Hybridizing their power generation (introducing renewable power sources in conjunction with existing equipment) represents an easily accessible decarbonization pathway that can also provide economic benefits to these communities. It does, however, make for a small and scattered investment opportunity that traditional private investors will tend to dismiss. To solve for this barrier, a working group convened by the World Economic Forum, in partnership with the Empresa de Pesquisa Energética (EPE), the Inter-American Development Bank (IADB), and Marsh, proposed the creation of an accelerator platform that would allow existing independent power producers in isolated systems to secure necessary financing thanks to the bundling of numerous isolated systems hybridization projects, providing the necessary scale to be financially attractive. The platform would also provide access to technical resources and is thought to encourage the design of specific credit lines for renewable projects in isolated systems.

Attracting debt funding for new technologies is a challenging task in most emerging markets. Energy storage technologies are one such example that need acceleration as renewables ramp up in our energy system. Yet, due to the nascent nature of storage technologies, the lack of viable business models and, very often, policy uncertainties surrounding them, their financing is challenged in many jurisdictions. In India, a technology de-risking fund was proposed to help storage projects implementation, especially in states where variable renewable energy generation is high. At its core, the fund would offer two forms of coverage to participating lenders: A payment security mechanism, to cover any delays experienced by the project developer in collecting invoices from off-takers; and a super senior loan facility, to provide partial coverage for performance-related and other delays arising from technological and operational issues across the project life cycle. These forms of coverage would help facilitate more lending to risky technologies like storage while alleviating the risks of lenders accumulating more non-performing assets on their balance sheets associated with such lending.

These four solutions were developed through an iterative process led by local working groups convened by the World Economic Forum, in partnership with local co-leads and a wide range of stakeholders from the public and private sectors. Mapping out the barriers standing in the way of clean energy finance in a given country allows to find practical solutions that fit within the local context and have an opportunity to drive change on the ground, while, in time, being replicated elsewhere.