Fitting decarbonization into the power sector priorities of emerging economies | S&P Global

Look Forward — 16 October 2024

Emerging markets must navigate new challenges and opportunities to power their future while advancing their energy transition.

By Etienne Gabel and Silvia Macri

Highlights

Emerging markets must fit decarbonization into the policy and market priorities that have governed their power sectors’ development to date, such as energy access and affordability, leveraging local resources and supporting primary domestic industries.

Renewable project competitiveness, power demand growth, nearshoring policies, corporate renewables procurement and clean hydrogen prospects offer substantial opportunities for clean energy investments in emerging markets.

Population growth, urbanization, economic development and electrification will create 620 TWh of additional power supply requirements in emerging markets — similar to Brazil’s power needs today — every year for the next 15 years.

Decarbonizing emerging markets presents unique challenges and opportunities for clean energy. S&P Global Commodity Insights projects that between now and 2040, emerging markets will develop 5,800 GW of clean energy projects, corresponding to $5.1 trillion in clean energy capital expenditure.1

Average per capita electricity demand in emerging markets is less than a third of that in Organisation for Economic Co-operation and Development countries. Yet emerging markets typically have abundant renewable resources to meet growing energy needs affordably and sustainably. Governments and companies must overcome long-standing problems such as limited energy infrastructure funding and overreliance on fossil fuels to tap into these resources.

Emerging markets2 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. Average electricity demand per capita, at about 3,600 kWh per year, is less than half of that in the more developed OEC countries. When excluding China, demand per capita falls to only 2,000 kWh 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. Population growth, urbanization, economic development and electrification will lead power demand to increase by more than 3% per year over 2024–2040, according to outlooks by S&P Global Commodity Insights, compared with about 2% in the rest of the world. This equates to about 620 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 465 TWh per year of this additional supply requirement.

Decarbonizing the power mix under these circumstances creates unique challenges and opportunities for private sector investment in clean energy. These markets are often marked by long-standing underinvestment in energy infrastructure, scarce public funds and foreign capital, and reliance on fossil fuels to produce more than 60% of electricity (or, in the case of some South American and sub-Saharan African markets, dominance of nonemitting but weather-dependent hydropower). 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 many well-established business models for wind and solar projects.

Emerging markets’ long road toward decarbonization must fit within a set of policy and market priorities that has governed their power sector development to date. These priorities, in turn, affect the business models suitable for private sector investment in their renewable resources.

Emerging markets are already starting their energy transition. Nonconventional renewable additions averaged 100 GW per year over 2010–2023, with a record 356 GW of new builds in 2023 (59 GW excluding China). Trends vary significantly by region — 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. Yet, looking forward, the pipeline of upcoming projects is increasingly tilted toward renewables across most regions. Several market and technology factors will likely accelerate this trend of clean energy investment in emerging markets.

For the private sector, how to invest in the clean energy space of emerging markets will vary substantially with market structure, company capabilities and expertise, and investor risk appetite. However, the size of the overall pie is enormous: S&P Global Commodity Insights projects that, between now and 2040, emerging markets will develop 5,800 GW of clean energy projects, of which solar photovoltaics and wind assets represent about 60% and 30%, respectively. This build-out of generation capacity corresponds to $5.1 trillion in clean energy investment ($2.0 trillion excluding China).

The energy transition will unfold differently in emerging markets than in developed nations given the former’s unique challenges and opportunities. With persistent growth in electricity supply needs, abundant natural resources, diminishing technology costs and a growing body of favorable policies, a transition toward renewable energies is already underway. A diversified power mix using clean, domestic resources will enhance energy resilience and stability, ensuring a sustainable energy development trajectory for these regions.

Look Forward: Emerging Markets — A Decisive Decade

This article was authored by a cross-section of representatives from S&P Global and, in certain circumstances, external guest authors. The views expressed are those of the authors and do not necessarily reflect the views or positions of any entities they represent and are not necessarily reflected in the products and services those entities offer. This research is a publication of S&P Global and does not comment on current or future credit ratings or credit rating methodologies.

1 The S&P Global Commodity Insights definition of clean energy includes renewables — onshore and offshore wind power, solar photovoltaics, concentrating solar power, biomass and waste to energy, geothermal power and ocean power — plus battery storage.

2 In this article, the term “emerging markets” refers to Argentina, Brazil, Chile, China, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Poland, Saudi Arabia, South Africa, Thailand, Türkiye and Vietnam.

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Qingyang Liu Research Analyst, Global Power and Renewables