Promoting global sustainability by investing in the energy transition of developing countries

As global energy demand continues to grow, the production and use of energy will be a critical factor in the future. While developed countries are investing billions of dollars in domestic energy transformation initiatives, allocating a greater share of green energy funding to developing countries may be more impactful. Not only will this ensure high environmental returns, it will help reduce social and economic disparities, foster global cooperation and accelerate the global transition to a sustainable energy future.

A growing demand for energy in industry

Since 1980, global energy consumption has more than doubled, from 78 trillion kilowatt hours (kWh) to almost 168 trillion kWh (OWID 20231). By 2050, the International Energy Agency (IEA 20212) expects global energy consumption to be almost 50% higher than in 2000. In particular, global demand for electricity will rise more sharply as a result of increased electrification in transport, heating and industry. Already, electricity consumption increased by 5% in 2021 and 4% in 2022, and is projected to be the main driver of energy demand growth until 2050 (IEA 20223).

Of all sectors, industry will remain the largest contributor to total energy consumption, contributing twice as much as the commercial, residential and transport sectors combined (see figure below). Strikingly, Asian non-OECD countries will consume more energy than all OECD countries combined by 2050.

The energy divide

Per capita energy consumption varies drastically around the world (see figure below), and approximately 760 million people lack access to electricity (IEA 20234). Energy inequality is further reflected in power generation. In many low-income countries, per capita electricity generation is over 100 times lower than in the richest countries (OWID 20235).

Over the past 15 years, however, the weight of emerging markets and developing countries (non-OECD) in the global energy landscape has increased significantly, as their share of global energy consumption has increased by about 30% (OWID 20236). Electricity consumption in emerging markets and developing countries is projected to grow at around three times the rate of developed countries (IEA 20227).

These global imbalances in energy production and consumption pose serious challenges:

• Health risks: People in developing countries often rely on highly polluting forms of energy to meet their basic needs, such as for cooking and heating. The resulting indoor air pollutants are a leading cause of death in low-income households (WHO 20248).
• Economic inequality: Disparities in energy production and consumption often mirror wider economic inequalities. Developed countries tend to have greater access to abundant energy resources and can afford more efficient technologies, while developing countries struggle with inadequate infrastructure and limited financial resources to invest in energy systems. This imbalance hinders economic growth and reinforces global economic disparities.
• Geopolitical tensions: Unequal energy production and consumption patterns may further lead to geopolitical conflicts. Energy-rich countries often wield considerable economic and political influence, while energy-dependent countries may face vulnerability and geopolitical pressure. This imbalance can lead to resource competition, political instability and unequal power dynamics between nations.

Investing in developing countries’ energy industries

As clean energy is a crucial parameter in efforts to reduce poverty, achieve economic growth and improve living standards, it is important that the prices of green energy technologies become more competitive with those of fossil fuels. There have been promising technological developments in this area in recent years, with prices reduced by at least half (see figures below).

However, outside of advanced economies, the situation is less promising. In terms of per capita investment in clean energy, emerging markets and developing countries have accounted for a mere 10% of the investment in advanced economies (see figure below). In 2022, the IEA (20229) argued that such investment would need to increase more than 7-fold to put the world on track to achieve net zero emissions by 2050.

This underinvestment is due to a number of factors, including limited financial resources, inadequate infrastructure, policy and regulatory barriers, and challenges in accessing clean energy technologies. According to UN Trade and Development (formerly UNCTAD, 202310), developing countries need about $1.7 trillion annually for renewable energy projects, but in 2022 they received only $544 billion. In 2023, there were more than 30 developing countries that had not recorded any investment projects in renewable energy or other energy transition sectors with foreign donors since 2015.

One argument to make investment in developing countries attractive is the cost-effectiveness of sustainable energy solutions. The deployment of renewable energy technologies in developing countries can be cheaper than in developed countries due to factors such as lower labour costs, reduced infrastructure requirements and abundant renewable resources. As a result, the same investment can yield far more clean energy and thus reduce carbon emissions.

The average abatement cost in developing countries is estimated to be around half that of advanced economies (IEA 202211). Emerging economies have the opportunity to design sustainability into new buildings, factories and vehicles from the outset – as long as clean technologies are available and affordable.

Policy implications

Many clean energy technologies have relatively high upfront investment requirements, which are offset over time. The shift to a more capital-intensive energy system means that financing costs need to be held at an affordable level. At present, however, capital in emerging markets and developing economies is significantly more expensive than in advanced economies. Nominal financing costs are up to seven times higher than in the US and Europe, with even higher costs in riskier segments. This makes it relatively difficult for projects to raise debt and earn sufficient returns on equity.

The energy transition in developing countries will require substantial financial support, capacity-building and technology transfer, as well as conducive policy and regulatory frameworks. International cooperation can help developing countries gain access to expertise, technology and finance. Sharing best practices and lessons learned from successful energy transitions can guide policymakers and stakeholders in developing effective strategies, while raising public awareness and engaging public and private partners.

In essence, by co-investing in new energy solutions in developing countries, developed countries can help reduce social and economic disparities, foster global cooperation and accelerate the global transition to a sustainable energy future at relatively low cost.