It’s no secret that renewable energy investments in emerging markets are a smart move for any investor. Impact Investing in South Africa, especially solar and other clean energy sources have started to make inroads. However, recent reports have revealed that investing in renewable energy projects in emerging markets have returns that are higher than those in Europe of North America.
So-called “emerging” markets – such as Latin America, Africa and Asia – now represent half of the countries in the 40-strong index, according to the Renewable Energy Country Attractiveness Index (RECAI), including four African markets featuring in the top 30. Just a decade ago, only China and India were attractive enough to compete with more developed markets for renewable energy investment.
Emerging markets are transforming their energy industries at an unprecedented pace, becoming something of a litmus test for how quickly markets can grow. In this white-paper, we’ll delve into the various renewable energy investment opportunities available within the renewable energy industry, within these emerging markets, and why now is a good time to get involved.
Why Are Renewable Energy Investments in Emerging Markets Growing So Quickly ?
The first thing to look at, is what are the conditions that are making these emerging markets such great examples of how fast renewable energy can grow within a country?
Some of the ingredients for catalyzing clean energy investments in Africa, Asia, and other emerging markets have their own unique recipe: a mix of national clean energy policies with the needs of institutional investors looking for opportunities that are safe and relatively profitable.
In 2018, rapid growth was seen for the development of advanced energy technologies in developing countries, with investment in these markets matching that of developed countries for the first time.
The United Nations Environmental Programme also recently revealed that emerging markets represent the largest source of growth in demand for electricity and growing investment opportunities for advanced energy technologies over the long term. The report found that energy companies are increasingly diversifying across technologies and geography, providing more options for consumers and minimizing risk and capturing more sectors for them.
One of the interesting factors responsible for this unprecedented growth, is the fact that developed nations seem to be more interested in smaller-scale solar projects, while developing nations are looking at larger, utility-scale solar projects. The average project size in Europe is 3 MW, and in North America 11MW. However, the average project size in Africa is 45 MW, in South American 64 MW, and 34 MW in the Middle East.
This is unsurprising, given that existing electricity infrastructure in developed nations means that renewable energy is a transitional energy source, where in developing nations, the underdeveloped electricity infrastructure means that lower cost renewable electricity projects are not only good for the environment, but also an economically more viable option than traditional fossil fuel-based projects.
Why Renewable Energy Investments?
While renewable energy investments in developing countries like Africa and Asia, are growing rapidly, it has been done with minimal help from pension funds, insurers and other institutional investors.
But the momentum could be changing as clean energy environments are ripening worldwide. So far, countries are on track to spend $6.9 trillion by 2040, resulting in an investment gap of $5.2 billion, according to a report at Bloomberg New Energy Finance.
Investors are opening their eyes to the urgency of shifting significantly more capital to clean energy in developed and developing countries. And developing countries are especially in need of capital because their economies, populations and overall carbon footprints are growing far more quickly compared to Europe, the US and other industrialized countries.
Barring major changes, energy-related pollution in developing countries will be more than double that from develop countries by 2040, according to the US Energy Information Administration. The fact that these countries are also working feverishly to provide electricity to the more than one billion people who have no access to power today, further exacerbates the challenge.
DISCOVERING OPPORTUNITIES in RENEWABLE ENERGY INVESTMENTS
While in many markets, fosil fuels and electricity from coal remain cheaper and easier to access – and most investors generally prefer to stick with safe bets – the financial industry has transformed from a reluctant bystander on the topic of climate change, to an active participant in the last few years.
What does this mean? If countries adopt policies to reduce emissions to nearly zero this century, as agreed upon at the Paris climate summit, those who heavily support coal, oil and natural gas will see their returns evaporate.
A recent IFC report showed that due to the global agreement on climate change, nearly $23 trillion in opportunities will open up for climate-smart investments in emerging markets between now and 2030.
And this growing awareness of climate risks and opportunities has seen the private sector urging governments to use the Agreement to provide the clear framework and signal needed to enable investment.
According to an IFC’s report, key climate-smart investment opportunities in these countries include:
- Clean energy in Africa: Cote d’Ivoire, Kenya, Nigeria, and South Africa’s total investment potential is nearly $783 billion, which is spread across renewable energy generation ($123 billion) and buildings and transportation ($652 billion).
- Renewables in the Middle East and North Africa: Egypt, Jordan, and Morocco’s total climate-investment potential is $265 billion, over one-third of which is for renewable energy generation, while 64 percent is for climate smart buildings, transportation, industrial energy efficiency, electric transmission and distribution, and waster solutions.
- Climate-resilient infrastructure in South Asia: Bangladesh and India have an investment potential of $2.2 trillion, which is concentrated in the construction of green buildings, ports and rail transport infrastructure, and energy efficiency.
While barriers remain in holding back real progress in terms of the world’s climate-smart renewable energy investments and it’s potential, the potential is still there. Climate-smart investment is an overall smart investment, especially in these emerging markets, as the investment potential is only going to grow in the upcoming years.
Interestingly, venture capital firms are increasingly directing their attention towards emerging markets, recognizing the immense potential for innovation and growth in the renewable energy sector. Lets look at some of the reasons for this.
- Growing Energy Demand in Emerging Markets:
Emerging markets are experiencing rapid industrialization and urbanization, leading to a surge in energy demand. Venture capital firms recognize the opportunity to invest in renewable energy solutions that can address this growing demand while offering a sustainable alternative to traditional, often fossil fuel-based, energy sources.
- Government Initiatives and Incentives:
Many governments in emerging markets are implementing policies and incentives to promote renewable energy adoption. These measures, such as tax credits, subsidies, and favorable regulatory frameworks, create an environment conducive to venture capital investments, reducing risks and enhancing the financial viability of renewable energy projects.
- Technological Advancements and Innovation:
The renewable energy sector is characterized by continuous technological advancements. Venture capital firms are drawn to emerging markets where innovative solutions, such as solar, wind, and hydropower technologies, are being developed to address local energy challenges. These advancements present investment opportunities in cutting-edge technologies with the potential for significant returns.
- Decentralized Energy Solutions:
Many emerging markets face challenges in establishing centralized energy infrastructure. Venture capital firms recognize the potential of decentralized renewable energy solutions, such as off-grid solar installations and microgrids, to provide reliable and sustainable power to underserved communities, contributing to increased energy access.
- Environmental and Social Impact:
Sustainable investing has become a priority for many venture capital firms. Investing in renewable energy projects in emerging markets aligns with environmental and social impact goals. These projects not only contribute to mitigating climate change but also address energy poverty, fostering inclusive and sustainable development.
- Economic Viability and Long-Term Returns:
Renewable energy projects in emerging markets offer attractive economic prospects. Venture capital firms recognize the potential for long-term returns as the cost competitiveness of renewable technologies improves. Additionally, investments in projects with scalable and sustainable business models contribute to the financial success of venture capital portfolios.
- Access to Untapped Markets:
Emerging markets present venture capital firms with access to untapped and underserved markets. By investing in renewable energy projects, firms can position themselves as key players in the emerging energy transition, capturing market share and establishing strategic partnerships in regions poised for growth.
- Global Transition to Clean Energy:
The global consensus on the need for clean energy solutions is influencing investment decisions. Venture capital firms investing in renewable energy in emerging markets are not only contributing to local development but also participating in the broader global transition towards sustainable and low-carbon energy systems.
The convergence of rising energy demand, supportive government initiatives, technological innovation, environmental considerations, economic viability, and access to untapped markets makes renewable energy in emerging markets an attractive target for venture capital firms. As these firms strategically invest in clean energy projects, they not only drive economic growth and innovation in emerging markets but also play a crucial role in advancing the global transition to a sustainable and resilient energy future. The symbiotic relationship between venture capital and renewable energy in emerging markets holds promise for transformative change, ensuring that the power of investment fuels progress towards a cleaner and more sustainable world.
As more and more projects and government solutions come into place in these emerging markets, the more opportunities that will open to further increase your investment potential within renewable energy.
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