Clean energy investment is rising fast but it’s leaving emerging economies behind. Here’s how we can narrow the gap

The world’s energy and climate future hinges on how emerging and developing economies (EMDEs) meet their rising energy needs, according to a new report from the International Energy Agency (IEA) and the International Finance Corporation (IFC).

Many EMDEs lack access to reliable, affordable electricity – all of the 775 million people in the world who suffer from such supply problems live in these countries.

The solution is a rapid move towards cheaper, cleaner energy technologies. But energy demand is growing faster than these supplies are coming online, meaning a third of the increase in EMDE energy demand is on track to be met by fossil fuels, the IEA says.

“Today’s energy world is moving fast, but there is a major risk of many countries around the world being left behind,” says IEA Executive Director Fatih Birol. “Investment is the key to ensuring they can benefit from the new global energy economy. The investment needs go well beyond the capacity of public financing alone, making it urgent to rapidly scale up much greater private financing for clean energy projects in emerging and developing economies.”

Around 2.4 billion people in EMDEs do not have access to clean cooking fuels, and hundreds of millions lack basic energy supplies. Policies that encourage the use of clean energy technologies can not only boost living standards, but can also improve resilience to climate-related shocks in these countries and boost economic productivity, says the IEA and IFC’s report, entitled Scaling Up Private Finance for Clean Energy in Emerging and Developing Economies.

The global pace of clean energy innovation is promising, the report says, but much of the progress is happening in advanced economies and China. Many developing countries are left struggling to catch up because of factors including the high cost of capital.

Scaling up clean energy is a priority, but it will require more finance across the board, be that public or private, domestic or international. Last year, about half of EMDE energy spending came from public entities, compared with less than 20% in advanced economies, the report says.

The current slowdown in global economic growth, rising borrowing costs and record levels of public debt mean EMDEs require more private-sector financing to support clean energy investment.

The IEA and IFC say that the $100 billion promised to emerging economies by developed ones – initially due in 2020 – is a good starting point, although external financing should be nearer $500 billion-700 billion per year by the early 2030s, from both public and private sources.

The World Economic Forum’s Fostering Effective Energy Transition 2023 report echoes the need for the mobilization of $100 billion of climate finance a year. It also says a robust regulatory framework and ability to attract and deploy capital on a large scale are critical.

The world needs to “massively increase clean energy investment in emerging and developing countries”, according to the IEA’s Fatih Birol. Annually, it needs to triple from $770 billion in 2022 to $2.2 trillion-2.8 trillion by the early 2030s to meet EMDEs’ growing energy demands in a sustainable way, the IEA and IFC report says.

Current investment is not just falling short, but it is also geographically patchy. China accounts for two-thirds of energy investment in EMDEs, and the top three spenders – China, India and Brazil – account for over 75% of the total.

On top of this, excluding China from the statistics shows practically no growth in EMDE spending on clean energy in recent years, which the report highlights as “a worrying trend”. Excluding China also means there needs to be a sevenfold rise in annual clean energy investment in EMDEs by the early 2030s.

EMDE governments need to create the right investment climate for private investment, as well as more concessional funds – such as investment grants, guarantees or performance-based incentives – to de-risk projects. New green financing instruments, such as green bonds and voluntary carbon markets, need to be designed to attract international investment, and EMDEs need to develop better financial systems that enable domestic private investment, the report concludes.

Policy-makers can make EMDEs more attractive to private investment by building the right frameworks. This starts with having a vision for an economy’s energy transition.

With the right energy sector policies, the right governance and the right financing conditions, EMDEs can be attractive investment opportunities. But the report also recommends addressing fossil fuel subsidies and unclear pricing policies, as well as lengthy licensing processes and unclear land use rights.

Transparent and predictable policies have paved the way for private investment in EMDEs in the past, but new policies in Europe, the US and in other more advanced nations are potentially making investment in emerging economies less attractive.

To meet the goals of the Paris Agreement, the energy transition has to happen globally, not just in advanced economies. The added benefit of opening up the path to net zero in EMDEs is that it can also create jobs and underpin sustainable economic growth.