Financing renewable energy in developing economies

By Kamogelo Motse, Researcher, Climate Council

In 2015 at the United Nations Assembly, 17 Sustainable Development Goals were established. The purpose of the Sustainable Development Goals is to make sure that everyone has a better and sustainable future. One of them was coined SDG7 and aims to ensure that everyone has access to affordable, reliable, sustainable, and modern energy. SDG7 tracks investments in energy infrastructure for developing economies and has shown that, despite the fluctuations that were seen in 2020, there has been a steady increase in investment in clean energy in developing countries.

Despite this, it is important to note that there is a certain type of investment that is needed for energy infrastructure which is not always accessible for developing economies. That is long term, patient capital that focuses on growth over dividends, is not always available to developing countries because of the perceived political and/or economic risks.

A session called Funding the New Energy Paradigm: Innovative Financing Mechanisms & Clever Capital Structures will be presented during the POWERGEN Leadership Summit in Dallas, Texas on January 28, 2022. 

When investing in any renewable energy infrastructure, long-term capital is required to realize the returns. However, traditionally, private equity investors seek a quicker return that is not always compatible with returns in renewables projects, as opposed to fossil fuel-based energy sources where traders and investors can consider short-to-medium term outlooks.

Development financial institutions and regional development banks are better suited to this type of investment as they can provide long-term financing that private capital investors currently do not. Development financial institutions and regional development banks should be encouraged to provide finance and make strategic investments in renewable energy infrastructure in developing economies to ensure that energy and climate targets are reached, and even more so because their core objective is to develop countries.

Developing economies, which do not have the capital available internally to develop renewable generation and to be able to cover the costs of new infrastructure, find accessing such capital problematic. Providing developing economies with the capacity to further develop clean renewable energy makes sure that these regions are given a chance at modern, reliable energy, in line with the SDG7 objective.

The pressure on governments, corporates, banks, investors, and even individuals to act against climate change is increasing amidst global walkouts, protests, and campaigns, and whilst much action is being taken, this lack of accessible capital is far too often prevalent in developed economies.

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In a recent study, the IEA found that in 2019 the number of people without electricity access was 770 million and 75% lived in sub-Saharan Africa. So whilst the climate change agenda is now taking center stage in parliaments, courtrooms, schools, streets; there are still millions of people in parts of the world living in energy poverty. Developing economies should not be left with the choice between fossil fuel or energy poverty just because a certain type of investment is not readily available to them.

Development financial institutions need to do more in fulfilling their objectives in regards to providing appropriate investment to developing economies to increase access to clean energy and secure a sustainable future. Instead of just tracking the investment flows into renewable energy, the United Nations under their Sustainable Development Goals should put targets in place for development financial institutions and regional development banks to provide capital to investors of renewable energy infrastructure in developing economies.

Below are examples of ways that Development financial institutions can contribute to the investment of renewable energy:

The African Development Bank approved a $20 million investment to Metier, a private equity fund manager that has a Metier Sustainable Capital Fund. Through the banks investment the fund will be able to contribute to production of 178.5 megawatts of renewable power that will be for commercial and residential use.

The European Investment Bank advises the Global Energy Efficiency and Renewable Energy Fund, which catalyzes the private sector into investing in clean renewable energy in developing economies.  The Global Energy Efficiency and Renewable Energy Fund invests in private equity funds with a specific concentration on infrastructure projects that can produce clean renewable power through technologies that have low risk.