It’s no secret that renewable energy investments are a smart move for any investor. However, recent reports have revealed that investing in renewable energy projects in emerging markets have returns that are higher than those in Europe or North America.
According to the Renewable Energy Country Attraction Index (RECAI), so-called “emerging” markets – such as countries in Latin America, Africa and Asia – now represent half of the countries in the 40-strong index. 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 whitepaper, we’ll delve into the various investment opportunities available within the renewable energy industry, within these emerging markets, and why now is a good time to get involved.
WHY ARE THESE MARKETS GROWING SO QUICKLY?
Some of the ingredients for catalysing clean energy investments in countries 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 2015, 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.
But probably the most interesting factor that’s 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 SHOULD YOU INVEST?
While clean energy investments in developing countries like in Africa and Asia, are growing at a rapid clip, it has been done with minimal help from pension funds, insurers and other institutional investors who manage enormous amounts of capital.
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 moving significantly more capital to clean energy in developed and developing countries. 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 industrialised areas.
Barring major changes, energy-related pollution in developing countries will be more than double that from developed 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.
For investors, the opportunities are especially enormous after the recent climate accord in Paris, which aims to limit average global temperature rise to well before 2 degrees Celsius. But the true question is, which of these developing countries have the necessary policy frameworks in place that will induce institutional investors to open their wallets?
DISCOVERING INVESTMENT OPPORTUNITIES
While in many markets, fossil 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 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 waste 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 there are a few barriers still holding back real progress in terms of the world’s climate-smart investment potential, that potential is still there. Climate-smart investment is an overall intelligent investment, especially in these emerging markets, as the investment potential is only going to grow in the upcoming years.
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 projects.