Fitting decarbonization into the power sector priorities of emerging economies

Emerging markets² house more than 50% of the world’s population and hold about half of its power generation capacity, yet their energy demand potential remains largely untapped. Average electricity demand per capita, at about 3,600 kWh per year, is less than half of that in the more developed OEC countries. When excluding China, demand per capita falls to only 2,000 kWh per year, or roughly the same as a refrigerator.

From this starting point, the power needs of emerging markets will grow considerably in the coming decades. Population growth, urbanization, economic development and electrification will lead power demand to increase by more than 3% per year over 2024–2040, according to outlooks by S&P Global Commodity Insights, compared with about 2% in the rest of the world. This equates to about 620 TWh of additional power supply requirements in emerging markets — similar to Brazil’s power needs today — every year for the next 15 years. China and India alone account for 465 TWh per year of this additional supply requirement.

Decarbonizing the power mix under these circumstances creates unique challenges and opportunities for private sector investment in clean energy. These markets are often marked by long-standing underinvestment in energy infrastructure, scarce public funds and foreign capital, and reliance on fossil fuels to produce more than 60% of electricity (or, in the case of some South American and sub-Saharan African markets, dominance of nonemitting but weather-dependent hydropower). In contrast, developed economies tend to offer ample government subsidies, such as the tax credits of the US Inflation Reduction Act; capital at more attractive interest rates; and many well-established business models for wind and solar projects.

Emerging markets’ long road toward decarbonization must fit within a set of policy and market priorities that has governed their power sector development to date. These priorities, in turn, affect the business models suitable for private sector investment in their renewable resources.

• Energy access: The demand growth expected in emerging markets places huge pressure on energy infrastructure. Long-standing underinvestment in the grid further complicates the deployment of variable renewable resources. Not all supply resources and business models are scalable at a fast pace, especially in emerging markets, where access to capital is often challenging.
• Energy security: The availability of local resources has been a main determinant in emerging markets’ fuel choices. Domestic coal is cost-effective in South and Southeast Asia, conventional hydroelectric power is abundant in Latin America and sub-Saharan Africa, and oil and gas are economical in other parts of Africa. Conversely, price swings in global LNG have constrained exposed Southeast Asian markets. Although emerging markets often have abundant renewable resources — and today, new wind and solar projects are typically competitive compared with existing conventional assets in terms of megawatt-hours supplied — the intermittency of these energy sources poses the problem of greater grid instability (an issue that has equally affected developed markets), thus accentuating concerns around reliability of the energy infrastructure.
• Energy affordability: This pressing need can dictate policy direction, with many countries offering subsidies that keep retail power prices artificially low for end users. This, in turn, can create market distortions and financial burdens for project developers, utilities, capital providers and governments in a way that does not occur in developed nations. These factors then alter the risk profile of investments. For example, in India, distribution companies incur losses from the gap between the average cost of supply and the average revenue realized from the retail sale of electricity. Government subsidies only partially compensate for these losses.
• Support of primary industry: In most countries in South and Southeast Asia and South Africa, coal is central to the broader economy and employs a large local workforce. In India, the government already indicated that coal would remain the backbone of the country’s energy mix to support energy security. Business models for deploying renewables must regularly look to coexist with, rather than replace, these ingrained industries.
• Government control: The power sectors of many emerging markets can be highly regulated, limiting the role of private players. However, these markets also often require huge private capital injections, typically from abroad. This contrasts with most developed economies, where prices and private capital flow more freely to reflect market conditions. Emerging markets often require major reforms, such as clarifying the role of private players (South Africa), opening the wholesale market (Vietnam) or implementing tariff reforms (India).
• Access to capital: Companies struggle to obtain attractive financing when facing high inflation (Argentina), high interest rates (Türkiye) or foreign exchange risk (Hungary). Other barriers to investment include limited government incentives, offtaker risk and a history of low contract sanctity in some markets. As such, developing a project in an emerging market requires a different business evaluation than in developed nations that allocate billions of dollars in clean energy funding and tax rebates. Financing from multilateral institutions is often key, but delays in the distribution of funds, such as in Vietnam or Indonesia, can cause issues.

Emerging markets are already starting their energy transition. Nonconventional renewable additions averaged 100 GW per year over 2010–2023, with a record 356 GW of new builds in 2023 (59 GW excluding China). Trends vary significantly by region — China leads the world in many segments of the clean energy industry, Brazil and Chile attract substantial foreign capital for renewables, India and Southeast Asia promote renewable tenders and ambitious goals and other markets such as Saudi Arabia and Peru still lag. Yet, looking forward, the pipeline of upcoming projects is increasingly tilted toward renewables across most regions. Several market and technology factors will likely accelerate this trend of clean energy investment in emerging markets.

• Renewable project economics: The governments of many emerging markets are enacting policies to stimulate renewable investments despite limited funding or technical capacity. India, South Africa and Saudi Arabia recently completed renewables tenders, and various fiscal incentives are in place in India and Colombia. Meanwhile, the overall declining cost of renewable technologies, the increasing frequency of financing renewable projects and the rich natural resources of most emerging markets create commercial opportunities without the need for government support.
• Power demand growth: High demand growth means high investment needs that are unparalleled in most OECD countries. China will require 4,100 GW of additional power capacity over 2024–2040, India will need 600 GW, Brazil 160 GW, Mexico 80 GW and Indonesia 110 GW. Most of this new capacity is likely to be renewable. Furthermore, emerging economies are often dominated by large, energy-intensive industry such as mining, chemicals production, oil and gas exploitation and textiles fabrication. This creates new commercial opportunities to replace these traditional production methods with low-carbon intensity ones instead, contributing to both environmental goals and economic growth.
• Nearshoring and friendshoring policies: Rising global geopolitical tensions are leading governments and companies to gradually pursue “nearshoring” or “friendshoring” strategies, where they seek supply chain partners outside of China, creating potential opportunities for other emerging markets. As supply chain de-risking agendas take hold and the EU’s Carbon Border Adjustment Mechanism begins, the low-cost and low-emission energy of renewables in several emerging markets, along with their low labor costs, will be more attractive.
• Corporate clean energy procurement: Corporations worldwide are increasingly procuring clean energy to reduce their emissions, including major players in Asian emerging markets signing new corporate renewable power purchase agreements. Furthermore, the materials and manufacturing sectors that are central to many emerging economies are now the principal offtakers of these clean energy deals. Several emerging markets are opening to the private sector to supply renewable PPAs. For example, in Southeast Asia, the governments of Malaysia, Indonesia, Thailand and Vietnam are opening third-party access to the grid to enable direct power trading between buyers and sellers. New regulation in South Africa has unlocked more than 20 GW of projects for the direct sale of renewable power to private offtakers.
• Hydrogen export hubs: Renewable energies in emerging markets may deliver large volumes of clean hydrogen and its derivatives to import-dependent markets, such as Europe, Japan and South Korea. For example, the EU aims to employ 20 million metric tons of renewable hydrogen per year by 2030, of which half is expected to be imported. As a result, governments in several emerging markets are announcing hydrogen strategies and road maps. Colombia’s road map aspires to have 1-3 GW of renewable electrolysis capacity by 2030 and nearly $6 billion in annual hydrogen exports by 2050. Vietnam wants to produce 10 million-20 million metric tons of renewable hydrogen per year by 2050. According to S&P Global Commodity Insights, 180 GW of green hydrogen projects are under development, mostly in early planning, across emerging markets.

For the private sector, how to invest in the clean energy space of emerging markets will vary substantially with market structure, company capabilities and expertise, and investor risk appetite. However, the size of the overall pie is enormous: S&P Global Commodity Insights projects that, between now and 2040, emerging markets will develop 5,800 GW of clean energy projects, of which solar photovoltaics and wind assets represent about 60% and 30%, respectively. This build-out of generation capacity corresponds to $5.1 trillion in clean energy investment ($2.0 trillion excluding China).

The energy transition will unfold differently in emerging markets than in developed nations given the former’s unique challenges and opportunities. With persistent growth in electricity supply needs, abundant natural resources, diminishing technology costs and a growing body of favorable policies, a transition toward renewable energies is already underway. A diversified power mix using clean, domestic resources will enhance energy resilience and stability, ensuring a sustainable energy development trajectory for these regions.

¹ The S&P Global Commodity Insights definition of clean energy includes renewables — onshore and offshore wind power, solar photovoltaics, concentrating solar power, biomass and waste to energy, geothermal power and ocean power — plus battery storage.

²  In this article, the term “emerging markets” refers to Argentina, Brazil, Chile, China, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Poland, Saudi Arabia, South Africa, Thailand, Türkiye and Vietnam.