An analysis by the International Energy Agency shows a striking contrast: global energy investment will exceed $3 trillion in 2024, but developing regions – with the exception of China – will receive only a quarter of these funds, representing a decline in real terms over the last decade. The commentary attributes this persistent funding gap to a fundamental obstacle: the prohibitively high capital costs in emerging and developing economies, where clean energy projects with significant upfront costs are particularly sensitive to financing conditions. Added to this is a notable lack of reliable and up-to-date data reflecting the real financing conditions faced by project developers in these regions.
The IEA launched the Cost of Capital Observatory in 2022. Its third edition, published in July 2025, expands the scope both geographically and technologically: for the first time, hydropower projects are included, and the scope is extended to Southeast Asia, a region that is projected to account for 25% of global energy demand growth over the next decade. The latest version is based on information from institutions involved in over 1,700 energy projects and reflects the views of key stakeholders, including financiers, developers, and institutional investors.
The data confirms that financing clean energy projects in emerging and developing economies costs at least twice, and sometimes three times, as much as in developed economies or China, with significant differences between countries and technologies. It is noteworthy that the weighted average capital cost for utility-scale battery systems is close to that of stand-alone solar installations, reflecting emerging similar financial conditions for co-located renewable energy solutions. Despite a decline of over 70% in battery prices over the last decade, due to research and development and economies of scale, capital costs remain consistently high.
In a more in-depth examination of risk factors, the IEA highlights three issues that have a disproportionate impact on these costs: regulatory uncertainty, political instability, and weak bank liquidity. Regulatory risk ranks first in most of the markets studied, while political risk is particularly acute in Southeast Asia but relatively weak in India and Brazil, where stronger political frameworks have already stimulated investment in low-cost renewable energy sources. Currency risk further complicates matters: many projects rely on hard currency financing (e.g., US dollars) but generate revenues in local currency, exposing them to the risk of devaluation, compounded by high costs and limited availability of hedging instruments, even though nearly three-quarters of financing is ultimately denominated in local currency.
Looking ahead to 2025, the IEA notes that although global interest rates are on a downward trend, there is no clear consensus among financiers in emerging and developing economies on whether borrowing costs for energy projects will fall. Only about 25% of respondents expect a decline, citing improvements in electricity markets and sector maturity, while over 50% anticipate an increase in costs due to ongoing global uncertainty and higher interest rates in the US. This contrasts sharply with the Observatory’s 2023 data, where 90% expected a short-term increase.
The commentary concludes with a call to action, outlining a path to overcome financing barriers in emerging and developing economies. Local authorities are urged to introduce guarantees, reforms, and public procurement strategies designed to reduce risk for investors. International support remains crucial: development finance institutions can offer preferential loans, guarantees, and technical assistance, but their capacity is threatened by cuts in donor aid. The IEA adds that it has been mandated by the G20 under the Brazilian presidency to develop a roadmap for unlocking affordable private capital for clean energy, building on the lessons and knowledge of the Observatory and its related policy work.
