Renewables are booming. How can we pay for the energy infrastructure needed?

Energy is essential for many human activities, notably to heat, cool and light buildings, to cook, to produce industrial goods and infrastructure, and to travel. But the global energy system is the largest source of carbon dioxide (CO2) emissions. It still largely relies on fossil fuels and is responsible for 34 gigatonnes (Gt) of CO2 emissions in 2022, including 15 Gt from the production of electricity and heat. Thus, the world must transition towards practices that minimize the environmental impact of the extraction, transformation, transportation and use of energy – and in particular reduce the related emissions.

In order to transition away from fossil fuels, the coordinated development of all steps of the energy value chain is needed. Developing energy scenarios, including demand projections and planning of power generation capacity and enabling infrastructure, is a crucial starting point. It is particularly important to anticipate how transmission and distribution systems need to evolve, because infrastructure projects typically take five to 15 years to complete, compared with one to five years for new renewables projects and end-use applications. Ensuring this enabling infrastructure is financed and deployed in a timely way is key to avoid delaying the entire transition.

In 2024, global investment in clean energy and infrastructure is expected to reach $2 trillion, driven by renewable power ($771 billion), energy efficiency and end-use ($669 billion) and grids and storage ($452 billion). This is almost twice the total spending on oil, gas and coal value chains the same year. While this trend is promising, there is still underinvestment in power-related infrastructure.

Over the last decade, investment in power grids globally amounted to $300-400 billion per year. The International Energy Agency (IEA) believes this should double by 2030. Indeed, the world needs to expand its power grid infrastructure, as growing electrification, integration of variable renewable energy, and adaptation to climate change all require larger and more modern electricity networks. Significant investment is needed in transmission infrastructure to connect new power generation to grids, as well as to support system-wide electrification of all sectors including electric vehicles and heat pumps. At the same time, existing, often ageing, infrastructure will need to be upgraded.

Financially stretched utilities – and, depending on the context, transmission system operators (TSO) or governments – often cannot accelerate investment in power grids to keep up with the necessary transition. The World Bank studied 182 utilities in emerging markets and developing economies (EMDEs); it estimates that 60% of them do not collect enough revenues to cover their operating and debt service costs, and would need to reduce costs or increase tariffs.

Meanwhile, an increasing number of utilities across the world are exploring a larger spectrum of alternative financing models – from full public financing to full privatization, including merchant lines, minority private participation in the equity of a transmission project, as well as public-private partnerships (PPP).

The Independent Transmission Project model (ITP) is an interesting example of PPP, whereby private sector actors are invited to bid for the financing, construction and operation of a specific power transmission asset, and the auction winner receives a stable, long-term fee from the public sector. The project developer is paid a revenue stream that usually rewards availability rather than traffic (meaning private investors are not impacted by changes in the amount of power transmitted through interconnecting networks), and the costs are spread over time for the public TSO.

In India and Brazil, which have run such schemes for more than 10 years, the number of bidders stimulated competition, showing that ITP can optimize the risk allocation and system costs. These schemes also succeeded in attracting inexpensive capital from pension funds and insurance companies with appetite for the low-risk profile of these long-term investments. Furthermore, in India, ITP assets proved quite liquid, allowing private transmission companies to monetize them to free up capital for new projects.

Good planning can overcome most of the challenges faced in implementing the ITP solution. The public sector has to organize the right permitting regime, land acquisition or leasing, strong technical specifications, cybersecurity, fair compensation for additional capital and operational expenditures, selection criteria and credible revenue regulation, to foster competition. In a context of pressing investment needs and limited financial capacity, the ITP solution is a useful proposition, if the public sector has enough time and capacity to prepare.

Closing this investment gap for power grids requires innovative solutions, and public investment will need to be seconded by private finance, mobilized through blended finance and other catalytic levers, as well as through new business models such as the ITP. Here, EMDEs are often starting from a lower baseline, generally with smaller, weaker and less modern networks, which currently experience significantly more outages compared to high-income countries. This lower technical baseline compounds wider challenges surrounding investment in EMDEs.

In an effort to help solve such investment barriers, the Network to Mobilize Clean Energy Investment in EMDEs has developed a Playbook of Solutions, showcasing more than 100 policy measures, de-risking tools and finance mechanisms that have successfully helped unlock clean energy finance across 47 EMDEs.

The playbook demonstrates how several countries have taken steps to embrace and overcome this investment challenge: for instance, South Africa has included transmission lines and grid deployment as an investment focus area under its Just Energy Transition Partnerships (JETPs), and Egypt aims to finance the upgrade of the electricity transmission grid under its Nexus Water, Food & Energy (NWFE) initiative.

Similarly, by leveraging evidence-based analysis, through its Clean Energy Finance and Investment and Mobilisation (CEFIM) programme, the Organisation for Economic Co-operation and Development (OECD) supports selected EMDEs in unlocking finance and investment for clean energy. This includes development of transmission grid financing, through demand-driven, tailored analytical work, knowledge-sharing and capacity-building activities.

Working in close collaboration with governments, financial institutions, international organizations and energy actors, the OECD assesses how to mobilize finance and investment in transmission lines and grid development in various country contexts. The multilateral development banks increasingly focus on leveraging public finance, while organizations such as the World Economic Forum (WEF) or Glasgow Financial Alliance for Net Zero (GFANZ), bring together private sector companies and financial institutions willing to contribute to this vital endeavour.

All these initiatives can contribute to closing the knowledge gap and improving legal and regulatory frameworks, revenue models and financing structures for national transmission and distribution grids, as well as fine-tuning the assessment of applicable financing models for transmission grids.

This work, as well as any data and map included herein, should not be reported as representing the views of the OECD, including both its member countries and its secretariat. The opinions expressed and arguments employed are those of the authors.