Finance

Energy transition investment in Emerging Markets and Developing Countries

The BNEF report, commissioned by GFANZ, delves into the state of energy transition investment in Emerging Markets and Developing Economies (EMandDEs). The report highlights that while EMandDEs are responsible for nearly half of global greenhouse gas emissions, the inflow of capital for transitioning to low-carbon energy is insufficient. Capital flows have decreased post-COVID-19, with a diminished pipeline of new clean energy projects, reduced finance from development institutions, fewer policies, and a scaleback of private sector investment during 2020-2021. Despite these challenges, investments in renewable energy capacity in EMandDEs surged 40% in the past five years compared to the period from 2012-2016. Fossil-fuel fired capacity investments dropped by 25%, with renewables attracting 15% more capital than fossil fuels. However, overall energy transition investment remains stagnant, at a critical juncture where escalation is necessary. The report emphasizes the importance of collaborative efforts among policymakers, financiers, and private investors to establish frameworks within nations to foster the transition. Noteworthy advancements in zero-carbon technology and successful cases in some EMandDEs illustrate the potential for rapid progress under conducive conditions. Key findings include: 1. The current level of clean energy investment in EMandDEs falls short of the $1 trillion/year estimated by the IEA to achieve net-zero emissions by 2050. 2. Decarbonizing energy in EMandDEs, especially power generation, is fundamental for global CO2 reduction efforts, with over three-quarters of potential decreases stemming from this sector. 3. An investment gap has widened between developed and developing economies, with low-carbon energy technology investments rising to $785 billion globally in 2021 yet staying flat at under $67 billion in EMandDEs. 4. Public and private foreign direct investment (FDI) in renewables has plunged, reaching four-year lows in 2021. 5. The macroeconomic environment poses challenges, including the COVID-19 pandemic, supply chain issues, inflation, and rising interest rates, affecting overall FDI. 6. Renewable energy investments in EMandDEs increased significantly, led by solar and wind, while fossil fuel investments declined but remained substantial. 7. EMandDEs' current energy transition funding is not commensurate with the need for decarbonization, as developed nations attract disproportionately more investment per metric ton of CO2 equivalent emissions. 8. The COVID-19 pandemic and the Ukrainian conflict have affected emerging markets, with varying impacts depending on whether they are commodity exporters or importers. 9. Renewables are generally more cost-effective than fossil fuels, but financial, regulatory, and policy barriers hinder their deployment in many EMandDEs. 10. A limited number of EMandDEs have the necessary policies to attract climate finance; while many have set CO2 reduction goals, the implementation of concrete policies remains uninspiring. To conclude, the report underscores that effective policies and public-private collaboration are crucial to unleash energy transition investment and accelerate the move toward low-carbon economies in EMandDEs.