Renewable Energy Investment In Emerging Markets To Hit $356bn By 2040

Capital expenditure on solar and onshore wind projects in emerging and developing markets is projected to reach $356 billion by 2040, according to data from Rystad, as rising demand for renewable energy creates new investment opportunities.

The projection comes amid growing investment prospects in emerging markets, although high financing costs and perceived credit risks continue to constrain the development of renewable energy projects.

The International Energy Agency (IEA) estimates that renewable energy could account for 42 per cent of power generation in emerging and developing countries (EMDEs) by 2030 under its base-case scenario, representing an additional 3,251 gigawatts (GW) of capacity.

Under an accelerated scenario, net renewable energy additions are expected to exceed 4,000 GW. For comparison, global installed electricity capacity from all sources stood at 10,195 GW in 2025.

The IEA also forecasts that emerging and developing countries will require annual investment of $300 billion in grid infrastructure to accommodate rising electricity demand and additional renewable energy capacity.

Despite the investment opportunities, the high cost of capital remains a major obstacle to renewable energy development in many emerging markets. Investors demand higher returns to compensate for risks associated with financing and operating projects in these economies, slowing the energy transition.

Investment risk is reflected in the weighted average cost of capital (WACC), which measures the cost of financing a project through debt and equity.

According to the IEA, the average WACC for large solar photovoltaic (PV) projects in major emerging and developing economies was up to twice that of advanced economies between 2015 and 2024.

Credit risk, or the likelihood that a borrower will default on a loan, is a major factor driving up financing costs for renewable energy projects in these markets.

However, available data suggest that perceived credit risks in emerging markets may be higher than actual losses experienced by lenders.

A 2025 analysis by the Organisation for Economic Co-operation and Development (OECD) found that 80 per cent of rated African countries were classified as high-risk or very-high-risk borrowers, reflecting concerns about the availability of reliable information and the assessment of investment risks.

To address the information gap, the Global Emerging Markets Risk Database (GEMs), established by the European Investment Bank (EIB) and the International Finance Corporation (IFC), draws on more than 30 years of lending data from multilateral development banks (MDBs) and development finance institutions (DFIs).

New GEMs data covering private-sector lending in emerging markets show that loans issued between 2006 and 2025 attracted an average total spread of 377 basis points, equivalent to 3.77 per cent.

The total spread represents the margin lenders charge to compensate for risks, including potential defaults, construction challenges, country conditions and political uncertainty.

However, the average realised loss rate over the same period was 90 basis points, or 0.9 per cent, leaving a difference of 287 basis points between the average lending spread and realised losses.

The gap suggests that interest margins have historically provided a substantial cushion against losses, indicating that the risks perceived by investors in emerging-market private debt may exceed the losses lenders ultimately experience.

GEMs data also found that private-sector borrowers in emerging markets had default probabilities comparable to those in advanced economies, while recovery rates were higher than expected.

For renewable energy projects, loans provided by MDBs and DFIs to more than 804 private entities across 159 countries between 1994 and 2025 recorded an average default rate of 2.61 per cent.

The projects also recorded a recovery rate of 71.8 per cent, indicating that lenders recovered a substantial proportion of their capital even when borrowers defaulted.

Regional data showed that renewable energy projects in the Middle East and North Africa recorded the lowest default rate at 0.17 per cent, while Sub-Saharan Africa had the highest recovery rate among emerging and developing regions at 87.5 per cent.

Similarly, a Moody’s assessment of green use-of-proceeds loans across different economic development categories found that emerging and developing economies performed slightly below advanced economies in recovery rates.

A smaller group of emerging and developing countries, excluding those in the European Economic Area (EEA) or the OECD, recorded lower default rates on green loans than advanced economies.

The findings point to the potential for improved access to reliable credit-risk data to help investors better assess renewable energy projects, reduce financing costs and unlock greater investment in emerging and developing markets.