Barriers for investments
Barriers for the deployment of RE and EE projects in developing countries can be political, economic, financial, legal, regulatory, technical, institutional and even cultural in nature.
There is enough liquidity in global financial markets, with institutional investors (global pension funds and insurance sector, sovereign wealth funds) collectively managing over USD 100 trillion of assets. However, the barriers faced in many emerging markets impede sustainable deployment of these funds. These barriers can be broadly categorised into the following groups:
Type of barriers
Challenges
Barriers related to costs and pricing
• High up-front costs and capital-intensity of RE and EE projects act as significant deterrent for private investment • Comparatively smaller project sizes than conventional energy projects (except large hydro) prevent exploiting scale effects and increase transaction costs • Scarcity of technology-specific know-how and qualified workforce • Relative lack of technology awareness, implementation capacities, comprehensive performance data increases costs through perceived high risks
Barriers related to access to and cost of capital
• Developing countries’ credit ratings are too low (and some countries are not even rated) for international institutional investors, who are restricted from investing in any non-investment-grade instruments • The cost of capital is considerably higher in emerging markets compared to advanced economies • The cost of capital for developing countries is increasing due to their rising climate vulnerability • Lack of local currency instruments poses risks to foreign currency denominated investments. Risk mitigation tools for political, currency, credit, off-taker risks are being deployed by development finance institutions (DFIs) at too small a scale • Underdevelopment of domestic financial ecosystems and their limited ability to raise capital
Barriers related to legal and regulatory framework, including market access
• Climate solution projects suffer from regulation uncertainty. Cost overruns, delays, and permit risk limit the supply of acceptable quality projects • Tariffs do not reflect full costs and scarce public funding is being directed at subsidizing the fossil fuel industry in many developing economies • Subsidised and distorted energy prices create disincentives for investing in EE and RE solutions • Conventional utilities see independent RE producers as potential competitors and complicate their smooth access to the grid • Institutional reform takes time. Many of the underlying risks investors face in developing economies are structural. Risks and uncertainty surrounding exchange rate fluctuation, regulatory environments, demand volatility, and others require long term solutions
Barriers specific to EE investments
• Technical complexity of measurement and verification of energy savings and realised EE benefits, limited availability of reliable data on performance of EE investments • Lack of standardised EE solutions, assessment processes, contracts and financing products impede aggregation and scaling of EE investments • For the development of bankable projects and acceleration of EE financing continuous technical and project development assistance is necessary • Investment payback periods are generally perceived as too long or are longer than tenures of available financing
To overcome the barriers the governments and DFIs are implementing favourable policies and offering incentives and financial support measures.
