Emerging markets 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.
Governments and companies must overcome longstanding problems — such as limited energy infrastructure funding and overreliance on fossil fuels — to tap into these resources, says S&P Global Commodity Insights.
Between now and 2040, emerging markets will develop 5,800 gigawatts (GW) of clean energy projects, of which solar photovoltaics and wind assets represent about 60% and 30% respectively. This corresponds to US$5.1 trillion ($6.68 trillion) in clean energy capital expenditure, say S&P analysts Etienne Gabel and Silvia Macri in an Oct 16 research note.
Current average electricity demand per capita, at about 3,600 kilowatt-hours (kWh) per year, is less than a third of that in Organisation for Economic Co-operation and Development (OECD) countries. Excluding China, demand per capita falls to only 2,000kWh 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. According to S&P, population growth, urbanisation, economic development and electrification will create 620 terawatt-hours (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 465TWh per year of this additional supply requirement.
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Energy transition challenges
Decarbonising the power mix under these circumstances creates unique challenges and opportunities for private sector investment in clean energy, says S&P.
“These markets are often marked by longstanding underinvestment in energy infrastructure, scarce public funds and foreign capital, and reliance on fossil fuels to produce more than 60% of electricity,” say Gabel and Macri.
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That said, the analysts note that hydropower is dominant in some South American and sub-Saharan African markets. While these power sources are non-emitting, they are weather-dependent, add the analysts.
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 well-established business models for wind and solar projects.
Still, emerging markets face “a set of policy and market priorities” that will affect the business models of any potential renewable projects, say the analysts. These include maintaining energy access in the face of growing demand, ensuring energy security and affordability, supporting the primary power industry, maintaining government control and ensuring access to capital.
For example, 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.
Meanwhile, companies struggle to obtain attractive financing when facing high inflation (such as in Argentina), high interest rates (Türkiye) or foreign exchange risk (Hungary), say the analysts.
Clean energy investment trends
Emerging markets are already starting their energy transition. Renewable additions averaged 100GW per year over 2010-2023, with a record 356GW of newbuilds in 2023, or 59GW excluding China.
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Trends vary significantly by region, say the analysts. “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.”
Looking forward, however, the pipeline of upcoming projects is “increasingly tilted toward renewables” across most regions, according to S&P. Gabel and Macri list five clean energy investment trends.
First, 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, say the analysts.
Second, high demand growth means high investment needs that are unparalleled in most OECD countries. China will require 4,100GW of additional power capacity over 2024-2040, India will need 600GW, Brazil 160GW, Mexico 80GW and Indonesia 110GW. Most of this new capacity is likely to be renewable, say the analysts.
Furthermore, emerging economies are often dominated by large, energy-intensive industries such as mining, chemical production, oil and gas exploitation and textiles fabrication, they add. “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.”
Third, rising geopolitical tensions are leading governments and companies to pursue “nearshoring” or “friendshoring” strategies, where they seek supply chain partners outside of China.
This creates potential opportunities for other emerging markets, say the analysts. “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 labour costs, will be more attractive.”
Fourth, 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 (PPAs).
Furthermore, the materials and manufacturing sectors that are central to many emerging economies are now the principal offtakers of these clean energy deals, say the analysts. “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 20GW of projects for the direct sale of renewable power to private offtakers.”
Finally, 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 tonnes 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 roadmaps, say the analysts.
Colombia’s roadmap aspires to have 1-3GW of renewable electrolysis capacity by 2030 and nearly US$6 billion in annual hydrogen exports by 2050.
Vietnam wants to produce 10 million-20 million metric tonnes of renewable hydrogen per year by 2050.
According to S&P, 180GW of green hydrogen projects are under development, mostly in early planning, across emerging markets.
