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Capital flows to clean energy projects in emerging market and developing economies (EMDEs) are “worryingly low”, putting green schemes at risk, the International Energy Agency (IEA) has found.

Investment in technologies such as solar photovoltaic (PV), wind, grid infrastructure, storage and energy efficiency – currently clustered in advanced economies – would need to increase by more than six times in EMDEs if the world is to limit warming to 1.5°C, the IEA, an intergovernmental organisation, says.

But country-related perils, like currency fluctuations and political instability, and the risks associated with clean energy sectors, including regulatory uncertainty and access to grids, are hiking up the cost of financing.

The cost of capital for utility-scale solar PV projects in EMDEs comes in at between 9% and 12%, compared to 5% to 6% for advanced economies, according to the IEA’s survey of financiers and investors.

High interest rates and incentives provided by subsidy schemes like the US’ Inflation Reduction Act are also dampening appetite for investment in EMDEs, meaning some countries must face paying more for green projects or forego them entirely.

The IEA points out that moving away from “dollarised, globally traded commodities, such as oil, towards clean energy projects that rely on domestically generated revenues” makes it more vital to have a predictable domestic business environment.

“If countries cannot afford high upfront costs, they can be locked into polluting technologies that might initially be less expensive but require persistent spending on – and combustion of – fossil fuels for their operation,” the IEA says.

A scaling up of private sources of financing is needed to create appealing risk-adjusted returns, the IEA says, citing figures from the European Investment Bank that show multilateral development banks mobilised just US$18.6bn in private finance in 2022, versus US$60.9bn of their own green lending to EMDEs.

“Reducing risk through clear and timely regulation is a first step to attract investment. This needs to be underpinned by a significant increase in financial and technical support from the international community,” says IEA executive director Fatih Birol.

“We have to build new bridges between investors looking for clean energy opportunities and the markets where this investment is most needed,” Birol adds.

The current level of investment in clean energy in EMDEs stands at US$270bn, but according to the IEA’s pathways, annual capital investment in clean energy must “rise to US$870bn by the early 2030s to get on track to meet national climate and energy pledges, and to US$1.6tn in a 1.5°C pathway”, by the same deadline.

In spite of the steep hike required, the IEA says the majority of the investment is needed for mature technologies, with around 5% earmarked for newer, riskier technologies such as hydrogen-based fuels or carbon capture, utilisation and storage.

Almost a quarter of the total clean energy investment over the next decade should be pumped into utility-scale solar and wind projects, while another quarter should go to electricity networks and making efficiency improvements in buildings.

The IEA estimates that reducing the gap in the cost of capital between emerging and advanced economies by 1 percentage point could save US$150bn in annual EMDE clean energy financing costs.

One of the ways to bring down the cost of capital for EMDEs includes tripling concessional funding to remove barriers to investment and help improve the risk-return profile of clean energy projects.

The IEA also suggests that guarantees be used more widely to counteract delays in payments for power purchased by off-takers, as well as investing in grid infrastructure to make project timelines more predictable.

In another report released this year, the IEA reported a jump in renewables capacity in 2023, but again pointed to a significant lack of financing for developing economies.