To meet the growing energy demand while aligning with the goals of the Paris Agreement, the annual investment in clean energy, both from public and private sources, will have to increase by more than triple from $770 billion in 2022 to approximately $2.2-2.8 trillion per year by early 2030, according to a report by International Energy Agency (IEA) and International Finance Corporation (IFC).

While meeting the growing energy requirements of emerging markets and developing economies (EMDEs), the clean energy investment levels should be sustained until 2050 to support sustainable energy practices.

Excluding China from this calculation, the increase in investment becomes even more substantial. It could rise sevenfold, from $260 billion to an estimated $1.4-1.9 trillion annually.

Around $770 billion is invested annually in clean energy within EMDEs. However, most of this investment is concentrated in a few large economies.

China alone accounts for two-thirds of this total, while the top three countries – China, India, and Brazil – make up more than three-quarters of the investment.

In 2022, China installed 100 GW of new solar photovoltaic capacity, ten times the total operating solar capacity in the entire African continent, at 11 GW.

The surge in clean energy investment presents a valuable opportunity to drive sustainable economic growth, create job opportunities, and ensure universal access to energy.

The increase in clean energy investment in EMDEs primarily focuses on three main areas: clean electrification, grid infrastructure, and efficiency improvements. These components play a crucial role in achieving climate and sustainable development goals.

The energy needs of EMDEs are crucial for their development and the global energy and climate future. The group includes a range of low-income and middle-income countries, many of which lack reliable and affordable energy. In fact, all 775 million people without electricity access and 2.4 billion people without clean cooking fuels reside in EMDEs, the report notes.

While cost-effective and clean technologies are gaining traction and offer a promising way forward, the demand for energy in these countries is growing even faster.

According to the report, in the current scenario, if we continue with existing policies, one-third of the increase in energy use in EMDEs over the next decade will be met by fossil fuels. This highlights the need for significant efforts to ensure that all countries and all segments of society can benefit from clean energy technologies.

Public and Private Investment

Public and private investments must increase to deliver clean energy on the required scale. Public resources alone will not be sufficient to meet the demand. In 2022, public entities accounted for approximately half of the clean energy spending in EMDEs; in advanced economies, it was less than 20%.

The report estimates that around 60% of the finance for clean energy investment in EMDEs (excluding China) must come from the private sector. This translates to a requirement of $900 billion-1.1 trillion annually from private sector financing by the early 2030s, a significant increase from the current level of $135 billion.

Attracting private capital at the required scale and pace necessitates the development of a larger pipeline of clean energy projects that align with investors’ risk and return expectations. Currently, the cost of capital for utility-scale solar projects in key emerging economies can be two or three times higher than in advanced economies or China. This reflects both real and perceived risks at the country, sectoral, and project levels.

The report suggests that addressing these risks and reducing the cost of capital will require collaboration between the public and private sectors, innovative approaches, and an enabling environment for clean energy investments.

Tailoring Strategies to Country-Specific Circumstances

According to the report, strategies to accelerate the energy transition in EMDEs should be tailored to each country’s unique circumstances. Low- and lower-middle-income countries, despite housing a significant portion of the global population, account for a small share of global clean energy spending. These countries face specific challenges, such as limited access to finance, weaker institutional capacity, and inadequate infrastructure.

Countries with a high dependency on coal, such as Indonesia, Mongolia, China, Vietnam, India, and South Africa, require innovative approaches to integrate cost-effective and cleaner energy options while addressing associated social challenges. This may involve a combination of renewable energy deployment, energy efficiency improvements, and just transition strategies for affected communities and workers.

EMDEs that are significant producers and exporters of oil and gas need to reduce their reliance on hydrocarbon revenues and transition to alternative sources. This transition can present economic opportunities for these countries, such as diversifying their energy mix, fostering innovation and technological development, and attracting investment in clean energy industries.

Leveraging Critical Metals and Minerals

Some EMDEs possess valuable reserves of critical metals and minerals needed for the clean energy transition. These resources include lithium, cobalt, nickel, and rare earth elements crucial to producing batteries, electric vehicles, renewable energy technologies, and other clean energy applications.

The report recommends developing their mineral resources sustainably and responsibly, so these countries can leverage their position in the clean energy supply chain to secure economic benefits and contribute to global decarbonization efforts.

However, it is essential to ensure that the extraction and production of these resources adhere to social and environmental standards to avoid negative impacts on local communities and ecosystems.

Challenges in the current international context

While the potential for clean energy investment in EMDEs is significant, there are challenges in the current international context. New policies and initiatives in advanced economies, such as ambitious renewable energy targets and carbon pricing mechanisms, are attracting substantial investments in clean energy. This intensifies competition for private capital, making it more challenging for EMDEs to attract the necessary investment.

Also, the rise in global interest rates adds to the debt burden of EMDE governments and increases the required returns for investors in clean energy projects. This raises the financing costs and could potentially deter private investment.

To mobilize private finance at the necessary scale, coordinated action on four fronts is crucial:

The report suggests that by pursuing these strategies and addressing the challenges, EMDEs can significantly increase their clean energy investment and accelerate the energy transition. This will contribute to global climate objectives, unlock economic opportunities, promote sustainable development, and improve energy access for all. The scale of investment required demands a concerted effort and collaboration between governments, international organizations, financial institutions, and the private sector to achieve a sustainable and resilient energy future.

IEA had earlier found that global energy investment is expected to reach $2.8 trillion in 2023, of which more than $1.7 trillion is likely to go to clean technologies, including renewables, electric vehicles, nuclear power, grids, storage, low-emissions fuels, efficiency improvements, and heat pumps.

In March, the International Renewable Energy Agency stated that the lack of adequate progress in the global energy transition would require even more investment, and a systematic change in the volume and type of investments is necessary to prioritize the growth.