Innovation has a very tough job of attracting the necessary money to take a concept or idea all the way through to commercialization. There is always that constant asking about the economic return and the associated risks.
Financing game-changing investments, replacing something existing or simply providing something new have tough financial questions always to be answered.
Here I am taking an innovation need in a different way than most are used to reading about. So what are right conditions to invest and realize innovation?
The Energy Transition is one of the toughest innovation challenges ever. We must remove fossil fuel as a source of energy, decarbonize our planet and replace it with clean energy alternatives of solar, wind, hydropower, nuclear and green hydrogen solutions. To make the transformation in just under 30 years is a massive task. So far, we are doing a poor job of this as markets, solutions, opinions, and financial support are all highly fragmented.
Tacking emerging and developing markets is even harder to achieve an energy transition.
Can you imagine what it is like in a developing country that lacks sufficient energy and infrastructure yet is faced with the sizable task of expanding its economy to meet growing population expectancies and the need for rising incomes to give that essential potential for growth that having energy available can provide?
I re-visited an excellent report from IEA, “Financing Clean Energy Transitions in Emerging and Developing Economies“, written in 2021, and I have sustainably drawn down from this report in this post.
Today most developing countries are facing the real challenge of finding the development models that they are increasingly required and encouraged to find, to avoid high-carbon choices, locking themselves on a path that conflicts with the pressing global need for solutions that are built upon clean energy. They are caught as the needed financial support is not provided at the levels needed.
Choosing lower emission pathways for growth and prosperity has great opportunities in Africa, Asia, Latin American and the Middle East to avoid significant decarbonizing like the Developed countries. Today developing and emerging economies account for two-thirds of the world’s population but only one-fifth of investments in clean energy and one-tenth of global wealth.
Global economics, moving towards a global recession, the war in Ukraine and higher energy prices today are undercutting the prospects of any substantial shift being well-funded due to these economic changes and those providing more evident returns on projects are more likely to achieve financing. How can developing countries raise their equal priority to achieve a more sustainable path towards building clean energy solutions?
The need for deliberate, stronger action to contain future emission growth and transform the energy systems in these developing and emerging markets is essential. They come in different forms or challenges and need strong financial support and governance, often with higher risks and uncertainty.
It is estimated that to put developing counties on track to reach net-zero emissions by 2050, the need is for at least an annual spend above USD 1 trillion. Today we spend USD 150 billion per year.
With Electricity consumption growing by around there times the rate of advanced economies in developing countries, the urgency of investing in clean power (wind, solar, etc.) gives energy efficiency and electrification the best chance to avoid emissions and decarbonization caused by replicating the path of developed countries and their reliance on fossil fuel and the higher costs of change.
To achieve this, access to finance becomes essential.
In the parts of the world where extraction of essential minerals, coal, oil and gas takes place, fossil fuel is entrenched in infrastructure, achieving lower cost extraction returns, and the ongoing reliance on hydrocarbons conflicts with the “need” for replacing this with renewable solutions, primarily untested, immature, needing variable scaling options for ‘right sizing’ or yet to be fully commercialized or tested in different environments and conditions. This is where fresh financial thinking needs to be applied to recognize the different issues and seek to find imaginative solutions.
Affordability, Reliability and Sustainable must be embedded in any modern energy solution. We need to solve the estimated 800 million people who still have no access to electricity and often water. 2.6 billion don’t have access to clean cooking options and rely on charcoal or wood, which exposes them to potential health issues.
We have a world where 15 out of 25 most polluted cities are in emerging, and developing countries and air pollution often is dangeruôusly high and a major cause of premature deaths.
So we need to mobilize capital on a massive scale.
We need to find a private sector role alongside a more enhanced one for international and development financial institutions. Clean energy investments need to come far more from private sector finance. In contrast, the public sector, including state-owned enterprises, must focus more on taking the financial lead of grid infrastructure and kick-starting emission-intensive sector switches.
We need imagination and creative and innovative solutions.
Global investment capital is available but needs the (magic) mix of sound projects, incentives and adequate returns to balance the risks. Today many emerging or developing economies do not yet have a clear vision of a clean energy pathway and a comprehensive road map of supportive policy and regulatory changes that can provide the environment to drive and catalyse rapid energy transitions.
Many promising projects fail as the risks associated are not well-underpinned or clarified enough, and the concerns for the ongoing creditworthiness of the parties and all the enabling resources these need remain unattractively too high. Many concepts don’t fully consider all the essential parts of the infrastructure and support mechanisms or the very real political struggles and local constraints.
There is often institutional weakness, licence and acquisition constraints, foreign direct investment restrictions, currency risks, less than robust local banking, and a lack of local capital avenues. The debt burdens of those operating today of (government-owned) utilities, the chronic under-investment in network infrastructures and sheer difficult economic and resource conditions of limited fiscal and mobilizing the understanding and limited specialised resources are significant barriers.
We need to mobilize the capital to finance clean energy solutions or transitions.
Cop 27, held in Egypt in November 2022, had a breakthrough in getting developed countries to recognize the loss and damage built up by the pollution from these countries. The impact and future risk are to minimise severe floods and overcome droughts, rising sea levels and harsh storms. This recognition needs “hard” cash, not just pledges. I hope that negotiators from developing nations don’t spend valuable time looking back but put their creative energy into looking forward.
The IEA stated in a report two critically important areas of forward-looking focus.
“The focus should be building imaginative and creative solutions that include measures to enhance financial markets, improve the visibility of public policies, remove distortions from energy markets, enable grids to integrate renewable power better, empower local entrepreneurs to develop smaller-scale clean energy solutions, as in energy efficiency, and build models for universal access to modern energy” (IEA)
“The massive scale of the challenge requires rethinking how we approach it – and major efforts from international financial institutions, their donors, multilateral development banks and many other actors. Many institutions are already seeking to do more, which I (Dr. Fatih Birol, CEO IEA) welcome. But when we look at the numbers globally today, it is clear that we are nowhere near mobilising the level of funds that will be needed. This is why one of the most urgent recommendations is that governments give international public finance institutions a strong strategic mandate to finance clean energy transitions in the developing world“. (IEA)
It is the suggestion of IEA in collaboration with the World Bank and World Economic Forum to build a suggested framing of how to bring developing markets up to a better market-ready condition, based on a growing awareness and understanding of technologies that are both mature but equally at adoption stage for renewables and energy efficiencies that lay the ground for the necessary integration of new technologies.
Finance models need to be highly adaptive and innovative to individual needs.
The suggested priorities are ten broad areas of scope. This list, drawn from exploring case studies from Brazil to Indonesia and from Senegal to Bangladesh, offers the potential pathway forward of finding innovative solutions based on new technologies emerging or fully validated understood in cost, return and necessary infrastructure and local policy support to attract capital and institutional support.
Innovative projects that need to be housed or grouped in a (universal) structured approach
This grouping allows for the beginning of collective investment accordingly. It allows metrics and standard criteria to be established to become global in selected focus areas, emerging into comparable standard practice and making financial assessments more systematic. Categorizing, giving focus, expertise and emerging financial models that tackle the groups mentioned below:
*Harness the readiness of investors to back renewable power
*Ease the delivery of reliable and clean power by expanding and modernising grids
*Enhancing the financial performance of utilities
*Build equitable and sustainable models for universal access to modern energy
*Embed high efficiency and connectivity into all new buildings and appliances.
*Leap ahead to invest in more efficient and electrified mobility solutions
*Recast the development model of producer economies
*Lay the groundwork for scaling up low-carbon fuels and industrial infrastructure
*Boosting innovative strategies to transform emissions-intensive sectors
*Accelerate the shift away from coal while ensuring a people-centred transition
The list above begins the Priority actions for financing clean energy transitions in emerging and developing economies. These can be summarized as providing the necessary frameworks and activities for the investment communities to “pull together” and begin to structure their financial risk, reward and mobilization around the need to achieve global agreement.
– Redouble international support
*Give international public finance institutions a strong strategic mandate to finance clean energy transitions.
*Boost and improve the delivery of international climate finance.
*Enhance the deployment of blended finance to mobilise additional private capital.
*Incentivise international capital markets to fund a broader range of clean energy investment opportunities in emerging and developing economies
–Tackle cross-cutting issues that affect investment risks and returns
*Make it easier and cheaper to develop viable new clean energy projects.
*Improve domestic access to capital through more robust banking and capital markets.
*Remove distortions in markets and prices that work against sustainable investments.
*Put state-owned enterprises, especially utilities, on a firmer financial footing with sustainable strategies.
*Empower local entrepreneurs and small/medium-sized enterprises to drive change.
*Harmonise sustainable finance frameworks and improve reporting on climate risks.
–Scale up private capital rapidly for clean power, efficiency and electrification
*Build equitable and sustainable models for universal access to modern energy.
*Harness the readiness of investors to back renewable power.
*Ease the delivery of reliable and clean power by expanding and modernising grids.
*Embed high efficiency and connectivity into all new buildings and appliances.
*Leap ahead to invest in more efficient and electrified mobility solutions.
–Focus already on the hardest aspects of transitions
*Recast the development model for major producer economies.
*Lay the groundwork for scaling up low-carbon fuels and industrial infrastructure.
*Develop innovative strategies to transform emissions-intensive sectors.
*Accelerate the shift away from unabated coal while ensuring a people-centred transition.
The key here is to mobilize funds by providing the basic framework and desire for financial capital to find higher visibility for enabling investment returns in innovative solutions in a stronger institutional design.
We need to begin structuring investments in developing and emerging countries. Each country needs a plan and a recognition of what it is clearly missing and the constraints, nationally, locally, and at a district level, to begin the ‘honest’ assessment of all of what needs changing, preparing and then exploring so support at Government or International and development institutions alongside the role of private sector investment and what each needs.
Clean power is central to the development and any transition strategies but needs transparency of all those investing and realistic time scales and return expectations and that is extra hard in many political, social and current environments facing economic constraints and qualified people to deliver.
The major resource for this post IEA, “Financing Clean Energy Transitions in Emerging and Developing Economies“, report written in 2021.