Could wealthy nations fund the energy transition in emerging markets?

– High-income countries are exploring ways to fund Indonesia’s energy transition

– Energy transition partnerships have been used in South Africa to help with decarbonisation efforts

– Despite recent progress, the scale and cost of switching to renewables remains a challenge

– Emerging markets have begun leveraging the environment to fund net-zero plans

As emerging markets continue to add capacity to generate renewable energy, some of the world’s wealthiest countries could help fund their energy transitions.

In recent months officials from a number of developed nations have visited Indonesia to discuss the country’s decarbonisation efforts.

This included the visit of Janet Yellen, the US secretary of the Treasury, who met with Luhut Binsar Pandjaitan, Indonesia’s coordinating minister for maritime affairs and investment, in late April to discuss the potential for an accelerated transition away from coal in the power sector.

The pair also discussed the potential for Indonesia to participate in a Just Energy Transition Partnership (JETP), an initiative that would see donor governments, development banks, climate-focused organisations and the private sector fund projects to accelerate the country’s transition away from fossil fuels.

Indonesia is seen as a key player in the global effort to phase out the use of high-polluting sources of energy.

As the world’s largest exporter of thermal coal and the eighth-biggest carbon emitter, decarbonising Indonesia’s energy mix would contribute significantly to reducing global emissions.

Furthermore, given that Indonesia currently holds the G20 presidency, it has been reported that several developed nations would like to agree to a JETP with the country before the annual G20 summit in Bali in November.

A future funding model?

If negotiations with Indonesia are successful, the JETP model of wealthier countries helping to finance the energy transitions of emerging markets could become more widespread.

In November last year France, Germany, the UK, the US and the EU announced such a plan to help fund South Africa’s decarbonisation efforts.

With an initial commitment of $8.5bn, the partnership aims to save 1bn-1.5bn tonnes of emissions over the next 20 years by accelerating South Africa’s shift away from coal and towards low-emission sources of energy.

In addition, the EU has confirmed that it is exploring the possibility of developing similar energy transition partnerships with India and Vietnam.

These efforts demonstrate the desire of the global community to collaborate when it comes to lowering emissions, and the extent to which some wealthier nations will finance pathways to achieve it.

In addition to global efforts to limit the rise of average temperatures to 1.5°C above pre-industrial levels, the attempts to switch to low-carbon sources of energy are likely to have a positive economic effect, with a recent report from Standard & Poor’s finding that low- and lower-middle-income countries are likely to experience 3.6 times more economic damage as a result of climate change than high-income countries.

Transition challenges

While progress is being made in advancing the energy transition, significant challenges remain.

For example, while the $8.5bn in funding for the initial phase of South Africa’s JETP will facilitate the implementation of a series of important projects, the country will require additional financial support to complete its sustainable transition.

In May a report by academics at South Africa’s Stellenbosch University – in conjunction with the Blended Finance Taskforce, an organisation set up to mobilise private capital to achieve the UN Sustainable Development Goals – found that the country will need around $250bn over the next three decades to transition to a low-carbon energy system.

Indonesia also has a unique set of challenges. Coal generates around 60% of its electricity and is the dominant economic sector in a number of regions.

While the government has pledged to shut down coal-fired power plants by 2055 and be 100% dependent on renewable sources by 2060, it will need significant investment to achieve these goals.

A government study estimated that the country will need $150bn-200bn – or roughly 3.5% of GDP – in annual investment in low-carbon programmes through to 2030 to meet its net-zero targets.

At present, Indonesia has around 210 MW of installed solar capacity, one of the smallest solar footprints in the world. Although planning has begun for solar projects with up to 17,000 MW in capacity, just 3300 MW of this is expected to be used by the local market, with the bulk to be exported abroad.

Innovative funding

While the JETP model could set a precedent for climate-focused development funding in the future, it is just one example of how lower-income nations have been exploring innovative ways to finance renewable energy projects.

As OBG reported, in April the Bahamas became one of the latest countries to seek to leverage its natural surroundings to fund projects to protect its environment, announcing plans to sell blue carbon credits before the end of the year.

This followed news earlier in 2022 that the World Bank had issued the world’s first wildlife conservation bond, which raised money to protect endangered black rhino populations in South Africa.

Meanwhile, in March Chile became the first sovereign to sell sustainability-linked bonds, which incentivise climate-positive solutions by incorporating a number of environmental objectives, along with a series of penalties for issuers if they fail to meet the goals, into the deal.