The International Energy Agency's (IEA) Cost of Capital Observatory has indicated that the cost of capital for clean energy projects in emerging markets and developing economies (EMDEs) remains significantly higher than in advanced economies.
In its third update, the observatory, which aims to provide empirical data on financing energy projects in these regions, has expanded its scope to include hydroelectric power and Southeast Asia.
The cost of capital for renewable power projects and batteries in EMDEs is at least double that of advanced economies, with variations across countries.
In 2024, investment in global energy surpassed $3tn, yet only 25% was allocated to EMDEs, excluding China.
The cost of capital has generally increased in all major markets since the previous update in 2023, influenced by local market interest rates and regulatory environments.
The cost of capital for utility-scale battery projects is comparable to standalone solar power projects, reflecting the decline in battery prices over the past decade and the growing trend of pairing solar with batteries for dispatchable clean power.
Investors and financiers have identified regulatory risks, political risks and bankability concerns as the main sector-specific risk factors driving up the cost of capital in EMDEs.
Despite a global trend of declining interest rates, the cost of capital for energy projects in EMDEs remains high.
The survey reveals no clear consensus on how borrowing costs will evolve in EMDEs in 2025, with expectations varying widely.
Local governments can utilise policy and regulatory tools to de-risk investments, and support from international partners, particularly development finance institutions, is crucial.
However, the increasingly constrained development finance environment raises concerns about the scaleability of these programmes.
In response to these challenges, the IEA has developed recommendations to reduce the capital cost for clean energy projects in EMDEs.
The IEA was mandated by the G20 Brazil presidency to develop a strategy for scaling up energy investments in these regions.
