Extreme weather conditions across the world are no longer unusual. But nowhere in the world are so many people being exposed to extreme weather as in emerging markets, with large economic consequences for the rest of the world. Indeed, global supply chains were recently disrupted because of extreme heat waves and power shortages in south-west China. And India’s recent heatwaves led to crop damages with a knock-on effect on the already elevated global wheat prices.
This only adds to the already enormous pressure to accelerate the global energy transition, requiring a massive and ambitious rollout of renewable energy generation capacity. This puts strong pressure on emerging markets and how they will finance this transition. The International Energy Agency estimates that emerging economies make up one-fifth of clean energy investments in the world, while their share in global population is close to two-thirds, showing that much needs to be done to fill this gap. It will help if the barriers for long-term financing, including project and country risks are lowered.
In the shock waves’ wake
The global recession triggered by the pandemic significantly reduced the demand for oil and carbon, leaving renewable energy the only part of the energy sector that grew. This is understandable, because selective renewable energy technologies are relatively low cost, compared to conventional energy generation. But in emerging markets the pandemic left government budgets quite strained due to the extraordinary spending in health and other pandemic mitigating expenditures, limiting their financial resources to invest in renewable energy.
On top of this, the war in Ukraine is now testing the resolve to reduce fossil fuels and continue the transition towards renewable energy. In several countries, governments are reconsidering their energy strategy, based on security considerations, despite the urgency to adopt policies to mitigate the effects of climate change.
In addition, current energy prices - which have risen tremendously since the outbreak of the war in Ukraine - are stimulating investments in fossil fuels in many countries. And to reduce the impact of the higher energy prices on consumers and businesses, many emerging countries, for example in North Africa, but also in Eastern Europe and Central Asia, have had to increase fossil-fuel related subsidies, despite their already tight budgets. These resources could otherwise have been used to increase the generation capacity of renewable energy.
Although higher carbon prices make renewables more competitive, prices for inputs from renewables have been increasing. Supply chain disruptions and higher shipping costs are affecting the prices of new solar and wind installations. On the positive side, this is also an opportunity to diversify the supply of strategic materials, such as nickel, lithium and titanium by opening new markets. Indonesia and Vietnam, but also smaller economies such as New Caledonia, are well suited supply sources for renewable energy. However, to avoid that a resource boom turns into a resource curse, it is crucially important as to how governments and the private sector will deal with these supply shifts.
Time to push forward
In its 2022 Climate Change report,the Intergovernmental Panel on Climate Change (IPCC) provides guidelines on how to accelerate international financial support for emerging markets. The guidelines include scaling up grants for climate mitigation and adaptation for vulnerable regions - such as Sub-Saharan Africa - and increasing public guarantees and multilateral support, in addition to other measures that call for cooperation and financing climate funds over the next decade. Several of these measures are being implemented in different contexts in emerging markets and the guidance essentially suggests making climate change a priority in domestic and international policymaking.
The International Energy Agency (IEA) emerging markets’ forecasts for 2022 and 2023 suggest that China will lead the renewable energy transition (a much needed step given its strong reliance on coal), while India and Brazil will likely see an increase in demand for renewable energy because of generous government policy schemes in an environment of higher fossil-fuel prices. Smaller countries, including Uruguay, are producing a large chunk of their energy from renewable sources, and are well positioned to export any excess power that they generate.
Meanwhile, countries benefitting from the windfall gains from higher commodity prices, including the Gulf countries, will have the opportunity to reduce their dependence on fossil fuels and perhaps even help other countries to greenify their economies. However, in many cases, the internal pressure to continue the reliance on oil revenues is significant. Let’s hope that this time the opportunity to improve the balance between development and environment is not wasted. Governments, business, and investors must do their fair share to stimulate and enable the global clean energy transition, and especially in emerging countries.
Read more about financing renewable energy in emerging markets.