Uche Cecil Izuora
Capital expenditure from key renewable energy sources could hit $356 billion says a report citing growing trend in emerging markets.
The International Energy Agency (IEA) considering several indices predicts that the renewable share of power generation in 2030 for emerging and developing countries (EMDEs), could reach 42 per cent representing an additional 3,251 GW in the base case.
In the accelerated case, net renewable additions are expected to exceed 4,000 GW. For context, global installed electricity capacity across all sources stood at 10, 195 GW in 2025.
The IEA forecasts that annual grid infrastructure investment of USD 300 billion a year in EMDEs will be necessary to support rising power demand and renewable energy additions.
If current trends continue, capital expenditure for solar and onshore wind projects for emerging and developing countries, as defined by the IMF, is projected to reach USD 356 billion by 2040, according to Rystad data.
This growth represents a significant opportunity in solar and wind projects in EMDEs. However, the high cost of capital, the minimum required rare of return investors seek for a project continues to impede progress in the sector’s development. This slows the energy transition in many EMDE markets.
The environment in which a project is developed and operated has a direct impact on how risky an investment is perceived to be.
Investment risk is reflected in the weighted average cost of capital (WACC), or the cost of servicing debt and equity.
According to the IEA, the average WACC for large solar PV projects in major EMDE countries was up to double that of advanced economies in 2015-2024.2
Credit risk, defined as the probability that a borrower could default on a loan, is a key driver of the high cost of capital for renewable projects in emerging and developing countries.
Data shows that perceived credit risk in emerging markets is often overstated
A lack of data often results in a credit risk premium for an emerging markets. According to a 2025 OECD analysis of African capital markets, 80 per cent of rated African countries are classified as high risk or very high risk.
Perceived credit risk in emerging markets is often higher than recent data suggests is reflected in reality.
The Global Emerging Markets Risk Database (GEMs), created by the European Investment Bank (EIB) and the International Finance Corporation (IFC),aims to mitigate this risk, drawing on over 30 years of data from multilateral development banks (MDBs) and development finance institutions (DFIs) loans to emerging market countries.
New GEMs data covering private sector lending by MDBs and DFIs in emerging markets, show that loans made during 2006-2025 had an average total spread of 377 basis points (3.77%).
Total spread represents the margin demanded by lenders to compensate for underlying credit default risk, construction, country and political risk, etc.
Over the same period, the average realised loss rate was much lower at 90 basis points (0.9%).
This leaves an ex-post spread margin of 287 basis points. The gap suggests that interest spreads have historically provided a cushion against losses, implying that market-perceived risk in emerging market private debt may run higher than actual risk. That is, the risk investors expect is higher than the risk they are taking.
When looking at loans to private entities in emerging markets, GEMs found that the likelihood of default was similar to advanced economies and the likelihood of recovery was higher than expected.
For renewable energy projects specifically, MDB and DFI loans to more than 804 private entities in 159 countries between 1994 and 2025 had an average default rate of 2.61%.
Loans to private entities in EMDE markets for renewable energy projects also showed strong recovery performance at 71.8 per cent meaning that even when a default occurred, MDB and DFI lenders recover the vast majority of their capital.
By region, default rates for renewable projects were lowest in the Middle East and North Africa at 0.17 per cent while the recovery rate in Sub-Saharan Africa was highest of all EMDE regions at 87.5 per cent.
A Moody’s assessment of green use-of-proceeds loans in different economic development categories showed that EMDE countries performed just under advanced economies in terms of recovery rates. A smaller group of EMDE countries that excludes those in the EEA or OECD had a lower default rate Om green loans compared to advanced economies.