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. The People’s Republic of China (hereafter, “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 more than 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.

Both public and private investment need to increase to deliver clean energy at the scale required, but public resources alone will not suffice. In 2022 finance by public entities accounted for about half of EMDE clean energy spending, compared with less than 20% in advanced economies. We estimate that around 60% of the finance for EMDE clean energy investment (outside China) will need to come from the private sector: this requirement for private sector financing amounts to USD 0.9-1.1 trillion annually by the early 2030s, up from only USD 135 billion today.

Bringing in private capital at the scale and pace needed will require developing a much larger flow of clean energy projects that match investors’ risk and return expectations. For the moment, the cost of capital for a typical utility-scale solar project can be two or three times higher in key emerging economies than in advanced economies or China, reflecting real and perceived risks at the country, sectoral and project levels. Tackling these risks and bringing down the cost of capital will require new and better ways of working between the public and private sectors.

Coordinated action on four fronts is needed to mobilise private finance in the scale and timeframe required. (i) EMDE governments will need to create the enabling environment for private investment and strengthen the institutions that are responsible for energy sector operation and governance. (ii) Significantly larger quantities of concessional finance will be needed to mitigate country and project risks, enhance credit quality, and improve financing terms to attract private investors to many clean energy projects; (iii) New green financing instruments and platforms, such as green bonds, sustainability-linked loans, project aggregation platforms, and voluntary carbon markets will need to be enhanced/redesigned  to attract international investment capital at scale in support of credible and robust transition plans; and (iv) Deeper capital markets and financial systems in EMDEs will be necessary to scale domestic private investment in clean energy.

Concessional finance must be significantly scaled up and used strategically to mobilise the largest possible amounts of private capital in support of EMDE development and climate goals. Concessional funds (guarantees, senior or subordinated debt or equity, performance-based incentives, interest rate or swap cost buydowns, viability gap funding or other investment grants) are not a substitute for needed policy action or institutional reforms, but when used judiciously can mobilise private capital for clean energy projects that otherwise would not be financed. This includes projects: that involve new technologies that have yet to scale and are not yet cost-competitive, such as battery storage, offshore wind, renewable-powered desalination, or low-emission hydrogen; that are in frontier markets with higher levels of country and political risk; or that involve macroeconomic risks, such as foreign exchange risk, that raises the cost of the project. 

To enable the amount of private finance required for the energy transition in EMDEs outside China (USD 0.9-1.1 trillion annually), we estimate that some USD 80-100 billion of concessional finance per year will be needed by the early 2030s. These figures are estimated considering the varied shares of public and private financing in different geographies and sectors, the specific types of clean energy technologies that may require concessional finance to be viable, and variations in the amount of concessional finance needed to attract private investment in different types of projects and country contexts. These figures exclude China. 

Finance to clean energy projects will not flow without credible climate transition commitments and planning by governments: a point of departure is country commitment to ambitious Paris-aligned goals, converted into clean energy transition plans and targets. This vision for the energy sector, including universal access to modern energy where this remains to be achieved, needs to be consistent with energy sector reform and planning so that it provides meaningful signals to private markets. A regional perspective can reduce costs, especially in the power sector where cross-border trade creates a wider balancing market for renewable-rich systems.

Integrated planning, policy and regulatory reform, and capacity building can turn high-level commitments into a pipeline of bankable clean energy projects. Strong pricing signals are crucial: a price on carbon, or regulatory and policy measures with equivalent effect, are needed to help steer investment decisions towards cleaner and more efficient technologies. Among issues deterring investors are subsidies that tilt the playing field against clean energy investments, unpredictable procurement practices, lengthy procedures for licensing and unclear land rights; arbitrary or weak contract enforcement; restrictions on private or foreign ownership and poor creditworthiness of counterparties. Support for capacity and institution-building is vital to improve energy sector governance, and enhance clean energy knowledge and relevant skills. 

With the right policy environment, the cost-competitiveness and maturity of renewable technologies for electricity generation mark them out as a major opportunity for scaling up private sector investment. For utility-scale renewables, the key success factors have included competitive auctions for new capacity, combined with long-term power purchase agreements (PPAs) with a creditworthy off-taker and reliable land and grid access. Removing barriers to corporate PPAs, through which companies contract directly with renewable power producers, is another way to unlock strong incentives for privately driven investments. Public financial support can be justified to develop confidence in new markets or to mitigate specific risks, for example, guarantees that limit the risk of non-payment. In coal-dependent power systems, innovative financing mechanisms with international backing that refit, repurpose or retire existing coal plants create room for the beneficial expansion of low-emissions generation. Mini-grids or distributed generation such as residential rooftop solar are likewise a channel for private investment. 

Investments in clean energy generation are dependent on the timely expansion of grids, alongside energy storage and other options to allow for the integration of variable renewables. In many EMDEs, weak electricity infrastructure results in unreliable access for users and is a major risk for investors. More than 90% of investments in EMDE grids are the responsibility of SOEs, many of which are facing severe financial strains and lack access to capital. Private sector participation in electrical grids is limited in most cases to the distribution sector, although private sector financing for energy storage projects is on the rise. Early network investment planning, public support and public-private partnerships, and measures to strengthen the operational and financial performance of utilities can ensure that grid infrastructure becomes an enabler, rather than a bottleneck, for expanding renewables.

Low-emissions fuels are important in the clean energy transition, especially in sectors where direct electrification is not feasible or cost-effective. There is burgeoning investor interest in low-emission hydrogen, especially for production via electrolysis in countries with low-cost solar or wind potential. Commercial viability is in its early stages and, for the moment, supply-side initiatives in Africa, Latin America, and the Middle East are not matched by a comparable level of commitments from buyers, putting a premium on secure offtake arrangements to underpin investments. Sustainable biofuels and CCUS are the other main investment avenues: policy incentives and mandates in Brazil, China, India, and Indonesia have underpinned a strong rise in EMDE biofuels production, encompassing both liquid biofuels and biogases.

Investment in more efficient and electrified technologies in buildings, transportation and industry is a crucial component of energy transitions. Almost 70% of EMDEs have set specific targets for deploying electric vehicles. Regulatory policies such as building codes, minimum energy performance standards (MEPS), fuel efficiency and quality standards, alongside non-regulatory policies such as labels and information campaigns, and financial incentives are important to enable sustainable choices by consumers. Efficient cooling needs to be a particular focus, given rising global temperatures and the huge scope for increased cooling demand as EMDE incomes rise. Many of the investments in this area are relatively small and bespoke; standardisation and aggregation are important to bring in private capital.

Clean energy supply chains, including batteries, solar panels, and wind turbines, represent a growing opportunity for private sector investors in EMDEs. While most countries rely on imports, China manufactures three-quarters of the world’s batteries and solar PV modules and has an exceptionally strong position in processing and refining of critical minerals. Other major EMDE markets for clean energy, such as India, are now providing incentives for domestic clean energy manufacturing. Countries in Africa, Latin America, and Southeast Asia are leading resource holders of battery metals, copper, and rare earth minerals, and are seeking ways to move beyond primary production.