Reducing the cost of capital through international climate finance to accelerate the renewable energy transition in developing countries

Abstract

Despite a vast potential, the accessibility of low cost finance remains a critical barrier to the deployment of Variable Renewable Energy (VRE) in many developing countries. High financing costs threaten the competitiveness of renewable energy technologies and impede progress in the energy transition. This study aims to assess the extent to which international climate finance could help reduce the cost of capital for VRE investments and accelerate the renewable energy transition in developing countries. We employ the IMACLIM-R multi-regional Integrated Assessment Model (IAM) to examine various climate finance scenarios, factoring in the interaction between public and private capital through a dedicated model for the average cost of capital (CoC). The results show that international climate finance can significantly enhance the adoption of renewable energy in regions that receive this support. For instance, Africa could achieve +43% electricity generation from VRE by 2030 in a scenario with deep risk sharing and mitigation for VRE investments, compared to a no-policy scenario. Our study demonstrates that reducing the financing costs of VRE investment through international climate finance encourages clean and affordable energy development. However it must be complemented by other policies to achieve more ambitious climate and sustainable development objectives.