Development Finance Institutions Play A Crucial Role In Global Energy Investments – Analysis

In a recent analysis, the International Energy Agency (IEA) has underscored the pivotal role of Development Finance Institutions (DFIs) in driving global energy investments, particularly in emerging markets and developing economies (EMDEs). Despite accounting for only 1% of total energy sector financing, DFIs are vital in enabling long-term, transformative changes through targeted financial and technical assistance.

DFIs, specialized financial institutions aimed at supporting economic and social objectives, provide essential funding for projects that may not attract commercial financing. The IEA’s World Energy Investment report highlighted the imbalance in clean energy investments, with 85% of projects concentrated in advanced economies and China. DFIs are seen as key players in stimulating clean energy projects in EMDEs, attracting more private capital to these regions.

Between 2019 and 2022, DFIs disbursed an average of USD 24 billion annually for energy sector projects, with 80% directed towards clean energy. Africa, Asia, and Latin America were the largest recipients. DFIs primarily rely on debt instruments, which account for over 90% of their financing, complemented by smaller amounts of grants and equity. This approach ensures financial sustainability and maximizes impact.

The IEA’s analysis revealed that DFIs are crucial in mobilizing additional capital for climate initiatives from private sector participants. For every dollar disbursed by DFIs into energy-related fields from 2016 to 2022, approximately 33 cents were mobilized from the private sector. To meet the investment needs under a net-zero by 2050 scenario, each dollar of concessional funding must unlock an additional seven dollars in private capital by 2035.

While there has been progress, the distribution of private capital mobilized by DFIs remains uneven. Only 3% of private capital reached the 48 lower-income countries, despite 40% of Official Development Assistance (ODA) targeting these nations. DFIs and local governments must improve capital utilization to de-risk private investments in EMDEs, especially for lower-income countries.

In 2022, global climate finance exceeded USD 100 billion for the first time, with DFIs playing a significant role. However, the IEA and International Finance Corporation estimate that USD 80 billion to USD 100 billion in concessional funding is needed annually in EMDEs to mobilize the required private finance for energy transitions by the early 2030s.

To accelerate clean energy transitions, DFIs must balance investments between mature technologies like wind and solar and emerging technologies such as energy efficiency, storage, and clean fuels. Supporting underfunded technologies is crucial for the next phase of the energy transition, particularly in regions with large funding gaps.

Beyond financing, DFIs enable sustainable investments and private capital growth by supporting the development of country and sector-level strategies, providing technical assistance, and facilitating programs like competitive bidding for renewable energy projects.

As DFIs hold a unique position between the public and private sectors, their influence in global energy investments is unparalleled. By catalyzing transformative change, DFIs are instrumental in creating a sustainable and inclusive energy future.