Tens of billions of dollars in investment will be necessary for emerging and developing nations to fulfill their energy development and net-zero climate targets. This is much more than can be expected to be raised only through public money, thus private capital must make up the gap.
However, numerous barriers to private capital deployment in clean energy projects in emerging nations persist, since they can entail additional risk and expense, dampening investor enthusiasm.
A new International Energy Agency report, co-authored by the World Bank and the World Economic Forum, states unequivocally: “The world’s energy and climate future increasingly depends on whether emerging and developing economies are able to successfully transition to cleaner energy systems, calling for a step change in global efforts to mobilize the massive surge in the required investment”.
We have identified five main areas that may be addressed to reduce these barriers and, as a result, assist encourage investment.
Power arrangements that are regulated and transparent. Broadly speaking, rules must create openness and predictability, giving investors confidence in the capacity to recover investments in electricity generating.
Allowing independent power producers (IPPs), having bankable, standardized power purchase agreement (PPA) templates, holding transparent auctions, and having transparent and equitable tariff changes and public involvement are examples of such policies.
A recent transmission line auction in Brazil, for example, failed to attract investors when it was initially announced in 2016. BTG Pactual and other investors were enticed to join by revised conditions, which included higher maximum tariffs and a clear tariff revision mechanism based on inflation and long-term interest rates.
Specific incentives for renewable energy/climate change. Having an integrated, multi-year energy strategy with short-term objectives for retiring fossil fuel facilities and constructing renewable energy, if available, helps establish the groundwork for favorable legislation.
The establishment of a carbon market or other carbon-pricing system, as well as governance/legislation relating to carbon removal, is also beneficial. Chile is one example: it enacted a binding decommissioning timetable for coal-fired power facilities, collaborated with private power plant owners to design coal phase-out plans, and enacted a carbon price on bigger coal-fired power stations.
General pro-business initiatives There are various broad (not necessarily energy-specific) policies that might encourage investment. These include fiscal policy (for example, no withholding taxes on earnings and no VAT on renewable energy sales), enabling foreign direct investment (FDI), improving licensing processes, and foreign currency/ability to repatriate profits.
novel funding techniques Different forms of financing mechanisms can be beneficial in minimizing risk, increasing return potential, or expanding investment options. Masala bonds, which are Indian Rupee-denominated bonds issued in foreign countries for investment in India, provide an example of risk management (in this case providing a currency hedge).
Separately, the cost of funding, and therefore the financial return on a project, might be conditional on meeting decarbonization objectives. For example, the European Bank for Reconstruction and Development’s €56 million bond investment in Tauron Polska Energia’s €233 million offering involves lower financing costs if Tauron fulfills its 2030 decarbonization targets.
Other financial technologies under consideration aim to increase investment prospects.
Examples include: 1) synthetic corporate power purchase agreements (CPPAs), which can provide a hedge against fluctuations in power costs for a corporate buyer while also providing demand for renewable energy; and 2) an energy transition mechanism (ETM), which allows investors to purchase high carbon-emitting assets, retire them, and replace them with renewable energy.
The World Economic Forum Taskforce on Mobilizing Investment for Clean Energy in Emerging and Developing Economies is working on operational specifics for some of these technologies.
Assumption of early risk. Several successful enterprises have had an early sponsor ready to take on varied risks. The sponsor was able to obtain additional, or less expensive, funding once certain hazards in the project were mitigated. BTG Pactual was one such example in the aforementioned transmission project in Brazil.
The firm initially carried entire equity risk, but was able to secure loan funding once construction was done. International development groups can also play this function, or at least augment it. InfraCo Asia’s early-stage stake in a smart solar network in the Philippines, for example, financed the first 4,000 houses of a 200,000-home pre-paid mobile-based metering clean energy project before finding another investor.
The government has a large portion of the responsibilities in these five areas. Emerging-market governments must implement supporting laws to mitigate some of the risk and increase the financial return possibilities for energy investments. They should ask multilateral development banks and other international financial institutions to expand their risk instrument offering and funding capacity.
They must also collaborate with the private sector to establish the criteria and objectives for investment possibilities. They should also be open to financial innovations that boost the flow of private foreign money to renewable energy projects. Meanwhile, governments in wealthy economies must commit to raising more cash for climate financing and providing more technical support.
Given the compelling need to invest in low-carbon energy access internationally in the short future, governments in both industrialized and emerging countries must move swiftly. Actions made this decade have the potential to lock in emissions for decades — or they may pave the way for the world to meet its sustainable development objectives.