4 ways to finance the energy transition in emerging economies

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Chris Hamill-Stewart, Writer, Forum Agenda, Spencer Feingold, Digital Editor, World Economic Forum

• Trillions of dollars will be needed to decarbonize emerging economies each year.
• Financing the energy transition is the “faultline” of the global fight against climate change, said the head of the International Energy Agency.
• From de-risking to encouraging shared standards, here are four approaches experts say can help generate capital in emerging economies.

At COP28 a consensus emerged: the international community must cut emissions and deliver on the transition to clean energy. Today, the question is how best to fund that transition, particularly in emerging economies.

Studies show that trillions of dollars will be needed each year to decarbonize emerging economies quickly enough to meet climate goals. The bulk of the financing, experts note, will need to come from the private sector. Yet the public sector also has a key role in catalyzing investment.

“How do we finance the clean energy transition in emerging and developing countries? This is the faultline of our fight against climate change,” Fatih Birol, Executive Director of the International Energy Agency, said at the World Economic Forum’s 2024 Annual Meeting in Davos, Switzerland, earlier this month.

The question of funding the clean energy transition loomed large in Davos this year, with industry leaders and policymakers coming together to explore the issue. Here are four concrete suggestions from the experts on how to mobilize capital in emerging economies:

1. Get creative with de-risking investments

De-risking is critical for mobilizing private capital — and multinational development banks (MDB) can be pivotal in this, experts say.

In Davos, Bill Winters, Group Chief Executive of Standard Chartered Bank, called for “much more creative use” of MDB guarantees, noting that MDBs can “provide that difficult-to-address capital layer” for projects that might be a financial or political risk for the private sector.

De-risking funding is already in action in some places. In Chile, for example, the Green Climate Fund has mobilized $60 million in anchor equity to encourage a further $1.1 billion in investment from the private sector. In sub-Saharan Africa, the African Energy Guarantee Facility, which is funded by the European Development Bank, Munich Re, the African Trade Insurance Agency and others, provides insurance against political risks for green energy projects across the region that adhere to EU green guidelines.

2. Standardize climate assessments for financing project

Advancing a shared baseline in developing countries at a national level can help unlock local financing, experts maintain. Already, development banks like the World Bank and the European Bank of Reconstruction and Development (EBRD) have committed to aligning investments with the Paris Climate Agreement.

“We are fully Paris-aligned,” EBRD President Odile Françoise Renaud-Basso added in Davos. “What we are trying to do is work with financial institutions in the emerging countries to help them bring in this kind of assessment on their projects.”

Standardizing climate assessments, Renaud-Basso said, will also help to mobilize domestic private finance for energy transition projects: “It’s not only our financing, but also how local banks work on their own financing to [small and medium-sized enterprises].”

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3. Adopt a jurisdictional approach to carbon credits

Launched at COP28, the US’ Energy Transition Accelerator mobilizes carbon finance to direct private capital toward the energy transition across emerging economies.

Critical to the success of this programme — and others like it — is the programme’s jurisdictional approach, Rick Duke, Deputy US Special Envoy for Climate, said in Davos.

“Looking at a power system-wide approach allows integrity when it comes to additionality,” Duke said during a Davos session on decarbonizing emerging markets.” It insures against leakage, and it also is a way to ensure that governments and utilities can get resourcing to do everything they need to do — they can do transmission, they can new renewables with that transmission and storage.”

The jurisdictional approach, Duke explained, injects confidence into voluntary carbon markets by drawing on rigorous, grid- or power system-wide data, and using it to ensure carbon reductions are “real reductions that are above and beyond what would have happened without the Energy Transition Accelerator.”

DISCOVER

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4. Prioritize energy efficiency

Energy efficiency could be the unsung hero of the climate transition, experts say, noting that increased efficiency is a low-cost way to reduce energy demand.

“It’s a myth that you need financial sacrifices for [energy efficiency],” Anish Shah, Group CEO and Managing Director of the Mahindra Group, said in Davos while speaking on a panel about transforming energy demand.

Mahindra Group, a multinational manufacturing company in India, has cut energy usage by half in its production of automobiles and agricultural equipment like tractors through 3,600 efficiency projects over 16 years, Shah said.

“The payback period is typically 12 to 18 months. There are no financial sacrifices in doing that,” he added.

Energy efficiency, experts say, can be encouraged from the top down. In India, for instance, the government’s UJALA programme is helping to replace hundreds of millions of light bulbs in homes and businesses with energy-efficient LEDs through policies, including a tender for large-scale LED bulb procurement.