Page 28 - bne_July 2021_20210602

28 I Companies & Markets bne July 2021
That is partly because developing economies can often jump straight to cleaner and more efficient technologies without having to phase out or refit polluting energy projects that are already underway.
But emerging market and developing economies seeking to increase clean energy investment face a range of difficulties, which can undermine risk-adjusted returns for investors and the availability of bankable projects.
Challenges involve the availability of commercial arrangements that support predictable revenues for capital-intensive investments, the creditworthiness of counterparties and the availability of enabling infrastructure, among other project-level factors.
Broader issues, including depleted public finances, currency instability and weaknesses in local banking and capital markets, also raise challenges to attracting investment.
The report calls for a major increase in private investment in clean energy in emerging economies, but only if it is supported and leveraged by the public sector.
“There is no shortage of money worldwide, but it is not finding its way to the countries, sectors and projects where it is most needed,” Birol said. “Governments need to give international public finance institutions a strong strategic mandate to finance clean energy transitions in the developing world.”
Put simply, while more cash from the private sector is needed, the public sector, in the form of multinational development banks (MDBs) and DFIs, has to reduce risk and create new innovative financing instruments.
While today EMDEs rely heavily on public sources of finance, the IEA found that if the 2050 global net-zero target is to
be met, then 70% of clean energy investments, mostly renewables and efficiency, must be privately financed.
Public actors have a role in developing less attractive areas such as transmission grids and emissions-intensive industries.
For emerging economies alone, the IEA calls for the private sector to account for 59% of energy investments. Meanwhile, domestic sources of financing must account for 75% of total investment, while 54% should be equity investment and 46% debt.
DFIs’ ability to act as catalysts, for example through blended finance, will be critical to attracting capital to emerging markets and sectors at early stages of readiness, or with hard-to-mitigate risks.
For the moment, capital is significantly more expensive
in emerging and developing economies than in advanced economies. Nominal financing costs are up to seven times higher than in the United States and Europe, with higher levels in riskier segments. This points to a relatively high bar for projects to raise debt finance and offer sufficient returns on equity, the IEA said.
Electrification
The best way to decarbonise the energy sector in EDMEs is to push forward electrification.
The report forecasts that electricity consumption in EDMEs will grow at three times the rate of advanced economies, although of course starting at a far lower level.
Here the falling cost of renewable technology, such as solar panels, battery storage capacity and wind turbines, will play a crucial role.
The falling cost of renewable technology, such as solar panels, battery storage capacity and wind turbines, will play a crucial role.
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