IEA finds high cost of capital still a major barrier for clean energy in EMDEs

The International Energy Agency (IEA) has reported that the cost of capital for clean energy projects in emerging markets and developing economies (EMDEs) remains at least twice as high as in advanced economies. This disparity continues to limit energy investment flows to these regions.

In its third update, the IEA’s Cost of Capital Observatory expanded its scope to include hydroelectric power and Southeast Asia. Despite global energy investment crossing USD 3 trillion in 2024, only 25 per cent reached EMDEs, excluding China.

The report notes a general rise in the cost of capital across most markets since 2023, driven by local interest rates, regulatory conditions, and project-specific risks. Utility-scale battery projects now have cost profiles similar to solar projects, reflecting lower battery costs and the growing trend of co-located systems for dispatchable power.

Regulatory uncertainty, political risk, and bankability concerns were identified by financiers as major challenges in EMDEs. While global interest rates have declined, EMDEs have not seen a corresponding drop in project financing costs.

The IEA highlighted that the absence of clear expectations on borrowing costs in 2025 adds to the uncertainty. It recommends that EMDE governments use regulatory and policy tools to de-risk projects, and called for stronger support from international partners and development finance institutions.

The observatory forms part of a broader mandate by the G20 under Brazil’s presidency for the IEA to develop a strategy to scale up clean energy investment in EMDEs.