Achieving the UN Sustainable Development Goals and getting to net zero will be impossible without a huge push to make access to clean electricity a worldwide reality.

Renewables are needed to replace the most polluting fuels, especially coal, which remains a dominant source of electricity generation in some of the world’s largest emerging market economies. At the same time, entirely new capacity is needed to extend electricity to those who currently live without a connection, which is estimated at 800 million people globally.

Yet emerging markets receive only one-fifth of global clean energy investment, according to a June 2021 report from the International Energy Agency. This is despite accounting for two-thirds of the world’s population. The IEA warns that annual investment in clean energy in emerging markets needs to increase by more than seven times by 2030, or else net-zero targets will slip out of reach.

Major infrastructure funds headquartered in Europe and North America have long been tepid about investing in emerging markets generally. And although investors are enthusiastically investing tens of billions of dollars in renewables in developed markets, they remain cautious about incurring exposure to the myriad complexities of renewables in the Global South.

“Investors in these assets need to be comfortable with the legal risk, regulatory risk, as well as local operating risk,” says Pooja Goyal, chief investment officer at Carlyle Global Infrastructure. “The market believes that there should be a premium versus investing in OECD markets on a fully hedged basis. And that premium doesn’t necessarily always exist.”

Meanwhile, longstanding concerns over currency volatility have worsened considerably in the last year as the dollar has strengthened. Several major emerging market economies have faced currency crises. Given that renewables assets are typically long-term investments, this volatility can have a major impact on funds denominated in dollars or euros. “Especially in non-OECD markets, for long-duration infrastructure assets, the FX curve can be quite punitive,” Goyal warns.

The apparent unreliability of off-takers is another problem for investors in emerging markets, those economies towards the lower end of the income spectrum.

“The general issue is the price of the power and the ability to pay,” says Roland Janssens, director at Ninety One, which manages the Emerging Africa Infrastructure Fund. “People put the tariff very low to make it socially affordable, and then say they’ll provide a subsidy. But in reality, the subsidy doesn’t show up and therefore the utility doesn’t have cost-reflective tariffs and struggles to pay its suppliers.”

In India, as in many emerging markets, local governments and their state-owned utilities have sometimes been reluctant to procure renewable capacity from the private sector.

Vibhuti Garg, India lead at the Institute for Energy Economics and Financial Analysis, says some states have tended, at least until recently, to favour state-owned thermal coal plants over independent renewables operators. “They were buying expensive power from these plants, rather than asking renewable energy generators to dispatch.”

Garg says the situation has improved in recent years, although she warns that even now not all states are “behaving properly”.

Overall, India has seen mixed success in its roll-out of renewables. On the one hand, the country is set to miss its target, set in 2016, of installing 175GW of renewables capacity by the end of 2022. On the other, investment in green power did reach record levels in 2021, with large Indian conglomerates and international investors – including sovereign wealth funds – entering the market. The country remains committed to generating half its power from renewable sources by 2030.

Successes in South Africa

One country that has been able to attract significant investment in its renewables sector is South Africa. The country relies on coal – generated by Eskom, the state-owned utility – for around 80 percent of its electricity. Since 2018, however, South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), in which private operators bid for contracts to develop renewables and sell the power to Eskom, has gone from strength to strength.w

“The general issue is the price of the power and the ability to pay”

Roland Janssens
Ninety One

“It’s a really successful project and process,” says Vuyo Ntoi, co-managing director at African Infrastructure Investment Managers. A sixth REIPPPP bidding round is currently underway, and the country’s government announced in July that the amount of renewable generation capacity procured would double to 5.2GW. There is little doubt that South Africa will be able to find bidders for the increased capacity. “Projects get reliably paid for the power they generate,” says Ntoi. “Every round has been more competitive than the prior round in terms of tariffs.”

It remains to be seen whether these successes can be emulated by other countries on the continent, few of which can match South Africa’s economic sophistication. Ntoi believes the overall direction of travel is away from state-owned utilities commissioning large-scale projects and towards off-grid and embedded generation schemes. “Reliance is now moving away from the fiscus and more towards end consumers and corporates,” he says.

Although there are few easy solutions to the challenges of financing the renewables roll-out in emerging markets, there is little doubt that wind, solar and other green sources of power represent the future. The International Renewable Energy Agency says that around two-thirds of renewable energy capacity installed in 2020 outcompeted fossil fuel alternatives on cost.

Now, with skyrocketing oil and gas projects, investors in emerging markets will “look a little harder to see if they can overcome the risks that they perceive”, predicts Janssens. “The equation may tilt further in the direction of renewables.”