Finance

In developing countries, mobilising international finance for the energy transition depends on heavily on government direction. With stable policies, transparent regulation and a credible long-term transition strategy, a national government can reduce investment risk and strengthen investor confidence. Clear alignment between climate objectives and national development priorities further enhances the effectiveness of international funding, ensuring that external capital supports sustainable growth, energy access and structural transformation.

Investments can be de-risked in a variety of ways:

• Stable policy and regulatory frameworks: Predictable energy and climate policies, transparent regulations and credible long-term transition plans reduce regulatory uncertainty and policy-reversal risk. Greater clarity regarding future market conditions lowers the cost of capital and strengthens investor confidence in developing markets.
• National energy transition and investment plans: Clearly articulated strategies outlining sectoral priorities, timelines and investment pipelines improve coordination between domestic institutions and international financiers. Well-defined project pipelines enhance visibility, create bankable opportunities, and facilitate alignment between national development objectives and external funding flows.
• Green public financial institutions: National development banks and dedicated green funds can act as intermediaries that absorb, structure and blend international climate finance with domestic capital. Their involvement can mitigate perceived country and project risks, provide local market knowledge, and crowd in private investment.
• Green bonds: Issuing green bonds can attract long-term capital from institutional investors seeking sustainable assets. Earmarking bond proceeds for renewable energy and climate-resilient infrastructure helps diversify funding sources and potentially lowers financing costs for those assets.
• Public-private partnerships (PPPs): Structured collaboration between public authorities and private investors distributes risks based on capacity and expertise. PPP models help governments mobilise private capital and technical know-how while maintaining public oversight of strategic infrastructure development.
• Blended finance mechanisms: Concessional public or donor capital, deployed alongside commercial finance, can improve project bankability by absorbing first-loss risk and enhancing returns. Blended structures help crowd in private investment in markets perceived as high-risk.
• Guarantees and risk mitigation instruments: Partial risk guarantees, political risk insurance and currency-hedging facilities reduce exposure to regulatory, off-taker and exchange-rate risks. Such instruments can significantly lower financing costs and expand access to international capital.

Developed-country governments could unlock considerable finance for the global energy transition by fulfilling existing climate finance commitments. Additionally, they can contribute to multilateral funds and utilise public-finance tools, such as guarantees and blended finance, to help de-risk private investment in developing countries.

Policy priorities for developed countries to advance the global energy transition include:

• International climate finance commitments: By contributing to mechanisms like the Green Climate Fund and Just Energy Transition Partnerships (JETPs) and by working with multilateral development banks, developed countries can expand concessional financing pools and help fund the transition in developing countries.
• Blended finance instruments: Combining concessional public finance with private capital through mechanisms such as first-loss guarantees, subordinated debt, and risk-sharing facilities can lower financing costs for clean energy projects.
• Technical assistance and capacity building: Support for regulatory reform, project preparation, and financial management enhances institutional capacity to design bankable clean energy projects.

Upfront capital costs remain a major barrier to renewable energy deployment, particularly for capital-intensive technologies such as solar PV, wind, and storage. Fiscal incentives and subsidies can reduce the upfront and ongoing costs of renewable energy projects, directly improving project economics and lowering investment risk.

Fiscal incentives and subsidies can include:

• Tax incentives: Income tax credits or accelerated depreciation schemes are often available to reduce the tax burden and improve financial returns for renewable energy projects.
• Accelerated depreciation: Renewable energy investors may be allowed to deduct capital costs more rapidly than under standard depreciation schedules, reducing taxable income in the early years of a project and improving cash flow when debt service obligations are highest.
• Grants and rebates: Renewable energy projects can benefit from grants or rebates structured as an investment subsidy on each kilowatt (kW) installed or through direct financial support to offset initial capital costs.
• Low-cost capital: Green credit lines or concessional financing from public banks or international institutions can lower the cost of borrowing for renewable energy investments.
• Renewable energy subsidies: Feed-in tariffs or concessional financing (including for off-grid solutions and for power generation by private households or other prosumers) can also lower investment costs, reduce market risk, increase access to community energy solutions, and accelerate the deployment of clean energy technologies.
• Fossil-fuel subsidy reform: Phasing out artificially low prices for coal, oil, and gas improves the competitiveness of renewables and frees public resources, both for clean energy investment and targeted income support, while encouraging the shift to low-carbon alternatives.

Renewable energy projects are highly capital-intensive and depend on long asset lifetimes, making investor confidence in revenue stability essential. Effective management of off-taker risk is thus crucial to secure finance for renewables.

Well-structured power purchase agreements (PPAs) provide predictable revenue streams, clarify risk allocation among different parties, and reduce exposure to payment, regulatory and operational uncertainties. By ensuring the credibility of off-takers, robust PPA frameworks lower financing costs, improve the project bankability, and help mobilise private investment in renewables.

Off-taker risks can be addressed in several ways:

• Ensuring off-taker creditworthiness: The off-taker, typically an electric utility, might face financial challenges. Audited financial statements or support mechanisms such as government guarantees, letters of credit, or escrow accounts can all improve the off-taker's (and in turn the project's) creditworthiness, particularly if the off-taker is a special-purpose entity formed for the project.
• Diversification of off-takers: Corporate PPAs, merchant market participation, and engagement with multiple off-takers all avoid or reduce dependence on a single public utility. Diversification spreads project risk and improves overall system resilience.
• Inflation and currency risk mitigation: Tariff indexation or pass-through mechanisms, local-currency financing, and hedging or guarantee facilities can all help address inflation and currency risks, protecting project revenues and debt servicing against macroeconomic volatility.
• Compensation for curtailment: PPAs manage curtailment risk through clear compensation rules, often via provisions on deemed generation, which ensure renewable power producers are paid for any energy they would have delivered, assuming any curtailment was beyond their control.
• Dispute resolution mechanisms: Clear and transparent arbitration procedures and adherence to international dispute settlement norms reduce legal uncertainties. Predictable enforcement frameworks strengthen contract credibility.

Electricity tariffs are a central part of the policy framework for renewable energy deployment. They influence how much electricity is consumed and when, how costs are shared between consumers, and how predictable revenues are for utilities and investors. Effective pricing frameworks can support cost recovery, encourage efficient and flexible use of electricity, and facilitate the integration of variable renewables while keeping basic consumption affordable.

Tariff and pricing options include:

• Cost reflective and transparent tariffs: Tariffs that progressively reflect the costs of efficient generation, transmission and distribution improve the financial sustainability of the power sector and reduce reliance on public subsidies. Transparent and clearly structured tariff components enhance consumer understanding and strengthen investor confidence in revenue stability.
• Time-of-use and dynamic pricing: Time-varying tariffs signal the real-time value of electricity, encouraging demand to shift toward periods of high renewable-based generation and away from peak demand. Such pricing structures reduce system stress, limit the need for costly peaking capacity, and improve overall efficiency.
• Tariffs rewarding flexibility: Pricing frameworks that recognise demand response, storage and controllable loads support system balancing in grids with high shares of variable renewables. Valuing flexibility services reduces curtailment, lowers integration costs and enhances reliability.
• Network charges and distributed generation: Well-designed network tariffs ensure fair cost recovery for grid infrastructure while maintaining incentives for distributed generation, self-consumption and storage. Balanced approaches prevent cost shifting between consumer groups and support continued investment in both centralised and decentralised assets.
• Equity and affordability: Lifeline tariffs, connection subsidies for households with new grid access, or increasing block structures can protect access to essential electricity services for low-income households while maintaining cost recovery from higher consumption levels. Such mechanisms help reconcile financial sustainability with social policy objectives.
• Stable, rules-based regulation: Clear tariff-setting methodologies and predefined adjustment mechanisms, overseen by an independent regulator, reduce uncertainty. Predictable regulatory processes strengthen investor confidence and give consumers more clarity about future prices.

Carbon pricing can serve as a powerful enabler of the energy transition, particularly in emissions-intensive sectors such as industry. By assigning a cost to GHG emissions, it internalises the environmental externalities associated with fossil-fuel use and improves the relative competitiveness of renewable energy and low-carbon technologies. When designed to be credible and predictable, carbon pricing provides clear long-term investment signals, reducing policy uncertainty and supporting innovation, energy efficiency and the deployment of clean energy and infrastructure.

Carbon pricing mechanisms include:

• Emissions trading: An emissions trading system (ETS) provides environmental certainty through a fixed emissions cap while achieving reductions at less overall cost by allowing firms to trade allowances and respond flexibly to a market-based carbon price.
• Effective cap-and-trade systems: An effective ETS sets a clear, enforceable cap that declines over time, ensuring alignment with long-term climate targets. Auctioning of emission allowances, limiting free allocations, and preventing market manipulation all serve to improve efficiency, increase transparency and provide price signals.
• Carbon taxes: An alternative to the ETS is a carbon tax. A transparent tax rate that increases over time can give firms and households sufficient certainty to plan investments and reduce emissions efficiently. Applying the tax across sectors and fuel types ensures emission reductions occur where they are cheapest.
• Revenue recycling for equity and support: Carbon-tax and allowance-auction revenues under an ETS can help lower other taxes or support compensation for low-income households. Thus, revenue recycling can improve fairness and strengthen public and political acceptance.