Executive summary How Emerging Market and Developing Economies (EMDEs) meet their rising energy needs will be pivotal to their and the world’s energy and climate future. This country grouping covers a wide variety of low-income and middle-income economies, many of whom have severe deficits of reliable, affordable energy. All of the 775 million people that lack access to electricity and the 2.4 billion people that lack access to clean cooking fuels live in EMDEs. Cost-effective, clean technologies offer a compelling way forward and their use is growing, but, in most cases, energy demand is growing even faster. In a scenario based on today’s policy settings, one-third of the rise in EMDE energy use over the next ten years would be met by fossil fuels. Much more needs to be done to ensure that all countries, and all parts of societies, benefit from clean energy technologies. At present, some USD 770 billion is invested each year in clean energy in EMDEs, but most of this is in a handful of large economies. China accounts for two-thirds of this total and the top three countries – China, India and Brazil – for more than three-quarters. The concentration of investment is striking: China installed 100 GW of new solar PV capacity in 2022, adding, in a single year, ten times as much as the 11 GW of operating solar PV capacity in the whole of Africa. Growth in clean energy investment is a precondition not only for tackling climate change, but also to help reach a range of other sustainable development goals (SDGs), such as poverty reduction, health and education.

Introduction The world’s energy and climate future, more than ever, is dependent on decisions made in emerging market and developing economies (EMDEs). Reliable, affordable and modern energy in these economies could enable productive industries, well-functioning cities and efficient infrastructure to underpin economic development, as well as support better health and education outcomes. However, if economic growth in EMDEs is carbon-intensive, as historically witnessed among advanced economies, then greenhouse gas (GHG) emissions would be locked in for longer, leading to unavoidably severe impacts from climate change. Although high-income economies account for most of the stock of emissions, without sufficient focus on the transformation of their energy systems EMDEs would account for the largest source of future emissions growth. Accelerated investment in clean energy technologies and infrastructure could lead to greater prosperity and job creation without an associated steep rise in GHG emissions. Prospects to move along this pathway ultimately depend on mobilising investment in EMDEs – the rationale for this report, conducted jointly by the International Energy Agency (IEA) and the International Finance Corporation (IFC). This initiative seeks to bring together the respective strengths of the two organisations and shed light on the critical issue of what it will take to scale up clean energy investment in EMDEs, in particular from the private sector.

Clean energy finance in EMDEs by public and private sources in 2022

There is a strong case for developed economies to deepen their engagement with EMDEs on access to international finance, on a bilateral and multilateral basis, especially given their historical responsibility for the bulk of emissions. This will be essential to catalyse the necessary investment in critical areas and to support longer-term reform processes. A starting point is the commitment made by developed countries at successive United Nations Climate Change Conferences (or Conferences of the Parties) to mobilise USD 100 billion per year in climate finance, a figure which covers bilateral and multilateral public climate finance, as well as climate-related export credits and private finance mobilised by the public climate funds. This commitment was made for 2020 but is now likely to be met only in 2023, three years past the target date. Moreover, the success of this public funding in mobilising private finance has been “lower than anticipated, with most mobilised in middle-income countries with relatively conducive enabling environments and low-risk profiles” (OECD, 2022a).

With EMDEs leading population growth in the coming decades, the need for economic growth to generate sufficient quality jobs will result in further demands for energy. Currently, about 775 million people in EMDEs still lack access to electricity and 2.4 billion people lack access to clean cooking fuels. Moreover, some regions with a lower incidence of poverty or population growth, such as the Latin America and the Caribbean and East Asia, still face large challenges with inequality and the need to reach higher and inclusive economic growth. These challenges reinforce the need for major build-out of clean energy infrastructure to meet the rising demand for energy services in a sustainable way. However, almost all the increase in clean energy investment to date has been in advanced economies and China (see Chapter 2), underscoring the need for faster clean energy transitions in EMDEs beyond China. Clean energy transitions are ready to form a key pillar of sustainable long-term growth. In addition to lowering GHG emissions, the accelerated deployment of clean energy and energy efficiency technologies and policies contributes to facilitating universal access to energy, boosting productivity growth and creating new jobs, while promoting a circular economy that minimises waste and helps improve material efficiency and the reduction of air pollutants.

Select development indicators for EMDEs, 1990-2022, and global population projections, 1990-2035

Many EMDE economies are also particularly vulnerable to climate change, especially those that rely largely on agriculture as the main sector driving economic growth and absorbing large numbers of workers. Evidence across countries suggest that droughts and extreme heat during the period 1964-2007 significantly reduced national cereal production by around 10% (Lesk, Rowhani and Ramankutty, 2016). Without additional action on adaptation, each degree Celsius increase in global mean temperature would, on average, reduce global yields of wheat by 6%, rice by over 3%, maize by over 7%, and soybeans by over 3% (Zhao, Liu and Piao, 2017).

Against this background, inflation appeared to have peaked in most countries by late 2022 and may fall toward monetary authorities’ target levels by later in 2023. There are important exceptions, however, in countries where fiscal imbalances and inadequate monetary policy responses are leading inflation to continue rising toward 100% or more. Overall, the headwinds confronting growth are well known. Factors that cushioned economic activity during the pandemic and early recovery have diminished, including large-scale fiscal stimulus, access to cheap credit, and new and expanded financial support from international financial institutions and multilateral development banks. Most countries face limits to fiscal support, owing to accumulated government debt as high interest rates and tightening credit conditions undermine consumption and investment, and slowing growth in partner countries weakens export prospects. Despite important innovations in recent years, competition has increased for a constrained pool of multilateral funding.

General government debt in EMDEs as a percentage of GDP

The June 2023 edition of the World Bank Group report Global Economic Prospects projects global GDP growth to decline from 3.1% in 2022 to 2.1-2.4% in 2023-2024. Outlooks for individual economies vary widely, however. Growth in Asia is expected to rebound strongly, while growth in Africa may remain around 2022 levels (with widely diverging performance within the region). Growth in Latin America and the Caribbean, the Middle East and Central Asia, and Europe is not expected to pick up. In all regions, full recovery of the ground lost during the pandemic is not likely to happen soon. By the end of 2024 real GDP in EMDEs would be about 6% lower than the levels projected before the pandemic. This provides a difficult context for moving forward with clean energy transitions.

Concessional funding When considering which projects should have priority for concessional funding and how much may be required to crowd-in private finance, factors to consider include the relative importance of country-, sector- and project-specific risks and costs, and the project’s return (including all environmental and social co-benefits relative to other investments). The “concessionality” gradient illustrates these trade-offsin a simplified manner (Figure 1.6). The vertical y-axis represents the degree of “concessionality” needed to crowd in private investment in a particular energy transition project. Concessional resources here refer to resources that are extended at below-market terms. They may include domestic and global public or philanthropic funds extended on below-market terms both directly as project finance and indirectly by using concessional capital to catalyse investment in the project (e.g. through the use of a guarantee or a grant for project preparation). The latter, discussed in greater detail in Chapter 4, are termed “blended finance” when they mobilise multiples of additional private capital.

The concessionality gradient

The horizontal x-axis represents the state of the technology used in the project – how established it is. Newer, untested and explorative technologies such as novel forms of lowemission hydrogen and CCUS are closer to the y-axis. These have greater risk of failing to achieve sufficient cost reductions that would allow them to scale and be competitive with other available technological options; accordingly, expected returns are lower, all other things being equal. Concessional resources, by reducing the loss the investor might incur and/or enhancing the return, can make them attractive enough to invest in.

Scaling up clean energy investment to 2035 In IEA scenarios clean energy investment in EMDEs needs to grow from USD 770 billion in 2022 to between USD 2.2 trillion and USD 2.8 trillion by the early 2030s in order to meet growing demand in a sustainable way, to achieve energy-related UN SDGs and to get on track with the targets in the Paris Agreement. This more than tripling in clean energy investment goes well beyond a reallocation of existing investment from fossil fuels to clean technologies. It means attracting new sources of funding for the energy sector. Large increases in clean energy investment are needed across the board, but the increases are particularly striking in many countries and regions outside China. While China “only” requires a doubling of current clean energy investment over the next ten years, other EMDEs typically need to see a six- or sevenfold increase. This is an enormous challenge as well as a huge opportunity to bring economies and energy systems onto a more sustainable path.

Annual clean energy investment in EMDEs to 2035 to align with sustainable development and climate goals

Risks affecting energy transition investment Improving risk-adjusted project returns for EMDEs across the power, fuel and energy enduse transitions depends fundamentally on mitigating risks related to domestic factors.1 This subsection looks in greater detail at measures to mitigate risks that are relatively common across these energy transitions, starting with political and macroeconomic risk and risk associated with insufficiently developed local capital markets, regulatory risk, technology related risk, offtake and curtailment risk, and risk related to insufficient available data and information These risks determine the cost of capital for clean energy projects, which can vary significantly across countries.

Risks affecting variations in the LCOE and the role of risk management options in improving the LCOE

Clean electricity generation In addition to the multi-sector regulation and policy frameworks highlighted in the previous section, a policy framework is needed that supports private investment in clean electricity generation. Key to this are predictable revenue streams, with pricing policies central to the viability of projects. A number of different regulatory measures have been applied in EMDEs to support renewables, including demand creation (targets and obligations/quotas), pricing policies (feed-in tariffs, feed-in premiums and auctions) and non-regulatory policies (financial and fiscal incentives, and voluntary programmes). The most appropriate policy mix will depend on the scale of the generation (utility, distributed or decentralised for energy access), country-specific considerations and technology maturity.

Policies in the power sector that can help crowd-in clean energy investment

While nuclear and carbon capture, utilisation and storage (CCUS) will also play an important role in decarbonising the electricity sector, this section focuses on policies to support private investment in renewable electricity technologies in EMDEs. Given the individual investment costs and the political and security considerations relating to nuclear and CCUS, public financing will need to play a much larger role in those low-carbon power technologies.

Policies to promote clean energy deployment in end-use sectors

The development of alternative clean fuels (e.g. low-emission hydrogen, ammonia and bioenergy) and storage would require more blended finance given the sector’s current state of development. While transmission and distribution are one of the key bottlenecks in attracting private investment to clean energy transitions in EMDEs, most of the investment in them is expected to come from public sources since utilities are often SOEs. However, due to risk of deliberate reductions in output to balance supply and demand of electricity (i.e. curtailment risk) as well as a lack of transmission capacity, private renewable generators or industrial offtakers are increasingly incentivised to build their own transmission lines. We therefore assume that private investment (and blended finance support) in transmission and distribution would increase moderately in the second half of the forecast period (2031-2035).

Blended finance to support private sector finance under the NZE Scenario for 2026-2030 and 2031-2035

Regional and country groupings Advanced economies: Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus1,2,Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Türkiye, United Kingdom and United States. Emerging market and developing economies (EMDE): Africa, Developing Europe, Eurasia, Latin America, the Middle East and South and Southeast Asia. For the purposes of this report, the EMDE grouping includes four member countries of the Organisation for Economic Co-operation and Development (OECD): Chile, Colombia, Costa Rica and Mexico.

Main country groupings

Source:http://IEA