The energy turnaround goes hand in hand with climate neutrality, which requires the global community to replace fossil fuels with renewable energies and to re-absorb CO2 emissions by 2050. This calls for the massive expansion of capital-intensive investments (in wind, photovoltaics, heat pumps, etc.). According to estimates by the International Energy Agency (IEA), annual investments need to increase from USD 1.7 trillion in 2023 to USD 4.5 trillion in 2030. Over the coming years, most of the investment in clean energy is expected to be made by private developers, consumers and investors.
Low willingness to invest in emerging countries
This investment objective can only be achieved if access to low-cost financing is improved, especially in emerging markets. Although two thirds of the world's population live there, capital investments in clean energy in emerging and developing countries (excluding China) account for less than a fifth of the total investment. This lack of investment is concerning. If there is no viable path to low-emission growth for these economies, this is likely to be either CO2-intensive or limited by energy shortages. Both scenarios are risky and undesirable.
Costs of capital act like a brake shoe
The biggest barrier to investment in clean energy in emerging and developing countries is currently the high costs of capital. These express the expected financial return or the required minimum interest rate for an investment in a company or project. The expected return is closely related to the level of risk associated with the cash flows of a company or project.
High costs of capital diminish the prospects for returns, especially for capital-intensive investments – including renewable energies – which require high up-front capital costs but have very low operating expenses.
The IEA has analysed the costs of capital for various solar projects in different regions and countries (Europe, USA, China and India) for 2021. The chart below shows that in 2021, the costs of capital in emerging and developing countries (excluding China) were 3.5 to 11 percentage points higher compared to industrial countries.