Averting an energy crisis requires bold investment in renewable energy — particularly in developing economies

Mili Fomicov

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A spate of disturbing geo-political events and the growing frequency of adverse climate events have unequivocally proven the need to accelerate the energy transition. These events have also added weight to the viability and impetus to transition toward renewable energy sources.

At a government level, climate change and decarbonization objectives are driving states and investors to consider increasing their portfolio allocations to climate and energy transition assets.

For example, landmark climate legislation passed by the US Senate in August included a $369 billion investment in climate and clean energy. Additional commitments coming from developing economies, such as Indian Prime Minister Narendra Modi’s goal of reaching net-zero emissions by 2070, indicate the level of awareness globally to accelerate the energy transition.

Funding the green transition

For clean energy transitions to be successful, institutional investors, corporates and governments must increase funding for renewable infrastructure globally, particularly in emerging and developing economies. They also need to tap into private markets. India’s net-zero emissions target alone is estimated to need a $10 trillion investment. However, information gaps and short-termism present challenges for investors to originate and invest in clean energy assets. The limited availability of transparent and reliable data on unlisted asset returns and asset-specific and macro-financial risks restrain investor participation.

A recent report demonstrated that investing in renewable infrastructure makes sense from a climate and financial perspective. Compared to the broader unlisted infrastructure market, returns for unlisted renewables are 22% stronger in global markets and 33.5% in emerging and developing economies.

Both renewables and broader infrastructure unlisted assets provide diversification benefits during credit events and against cyclical changes in macroeconomic conditions, such as commodity prices.

However, a number of additional challenges remain — many of which are exacerbated in developing countries. The absence of reliable data, a lack of transparency in the unlisted sector, limited flexibility, credit risk, regulatory hurdles and currency issues represent investment obstacles.

Opportunities in renewable energy

Despite these risks and limitations, the opportunity exists for investors and governments to partner and de-risk early-stage financing for renewable infrastructure, which is needed to build momentum.

One example would be supporting and investing in a dedicated renewable energy yieldco. UK Climate Investments (UKCI), a joint venture between Macquarie’s Green Investment Group (GIG) and the UK Government’s Department for Business, Energy and Industrial Strategy (BEIS), invested in Revego Africa Energy Limited, alongside Investec and Eskom Pension and Provident Fund.

Revego is a dedicated yield company focused on opportunities for equity investors in operating renewables assets in Sub-Saharan Africa, whose portfolio currently consists of 600 MW of solar and wind projects. By blending expertize and finance from a private investor and sponsor, a local public utility pension fund and a public specialist climate finance investor, the fund was able to crowd in the necessary capital by spreading risk.

Climate finance frameworks must evolve further to support channelling clean energy investments into emerging and developing economies.

The Revego yield company invests in renewable energy projects and infrastructure across sub-Saharan Africa. Image: Revego

The Cost of Capital Observatory

One such initiative underway is the Cost of Capital (CoC) Observatory, developed by the International Energy Agency (IEA), Imperial College London, ETH Zurich and the World Economic Forum. It aims to address the obstacles to investing in renewable energy by filling the absence of reliable data and improving transparency in clean energy investments in emerging economies. The Observatory highlights the main drivers leading to higher costs of capital in emerging and developing economies, and where, through reliable empirical data, de-risking efforts have been effective in reducing the cost of capital for clean energy investments.

By 2030, annual clean energy investments in emerging markets and developing economies must be multiplied by more than seven — from less than $150 billion in 2021 to over $1 trillion — in order to put the world on track to reach net-zero emissions by 2050. To support that transition and to meet the climate goals, initiatives such as the Cost of Capital Observatory will reveal where attention should be focused, and highlight the risks that are more prevalent in emerging economies.

Transitioning out of a fossil fuel-based energy system in the emerging and developing economies requires adapting to risks such as stranded assets, off-taker, transmission network and land acquisition risk, as well as preparing for national macro-economic factors, such as domestic regulations and currency fluctuations.

The CoC Observatory Dashboard provides a first-of-its-kind database comparing cost of capital data across energy technologies in five emerging economy countries. It will be published on the IEA website and announced at the Clean Energy Ministerial meeting held in Pittsburgh from September 21st – 23rd.

While the CoC Observatory is a useful tool to populate available cost of capital data for emerging and developing markets, more risk mitigation mechanisms and tools to coordinate efforts that help distribute risk are needed. This platform can support those discoveries by bringing the reliable empirical data needed to curate those solutions. For example, multilateral institutions could play a critical role in de-risking projects in emerging markets by ensuring that projects meet high climate and compliance standards and provide leverage in setting up viable contractual and financing frameworks for renewable energy projects.

To effectively accelerate investment in unlisted renewables in emerging economies, we need accommodative climate infrastructure policies, transparent performance measures, reliable data and risk management mechanisms.

All pillars must come together to scale renewable infrastructure in developing and developed economies to ensure a sustainable future globally — only in this way can we ensure that we hit net-zero by 2050, and avert a catastrophic climate collapse.