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Reaching net-zero hangs on big clean energy investments in emerging markets

Emerging markets and developing economies which currently account for around two-thirds of the world’s carbon emissions need clean energy investments to rise 7 times to over $1trillion by 2030 to meet global net-zero ambitions

Though the share of clean energy investments is rising in these emerging economies, the adoption of clean energy technologies is a critical imperative for achieving global sustainable development goals, according to the new IEA report, Financing Clean Energy Transitions in Emerging and Developing Economies.

Annual clean energy investment in these countries will need to increase by more than seven times, to over USD 1 trillion, by 2030 if global net-zero emissions are to be reached by 2050, the IEA projects. This would represent more than 40 percent of total global energy investment by 2050.
Eleven percent of the investment deals for clean energy technology start-ups in 2019-20 were for companies founded in middle and low-income countries.

China in particular, has grown its share of the deals in recent years, especially in electric mobility, and India has a stronger presence across a range of sectors.
The potential market for clean energy technologies is set to expand rapidly in emerging markets and developing economies in the coming decade. If innovators in these countries are to capture market share for their own technologies, much more domestic and international venture capital (VC) will be needed to support start-ups, alongside a ramp-up in R&D spending, the IEA says.

The report says that commercialisation of a novel technology via a new start-up company is one of several possible routes to bring cleantech2 to the market, but not the only one.
Countries also depend on government agencies, educational institutions, and corporations for scaling up some technologies without launching any new private companies.

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“However, this path is often more limited in lower- and middle-income countries, compared to advanced economies. Nonetheless, many emerging markets and developing economies possess a very strong entrepreneurial business acumen, which can provide a foundation for energy innovation ecosystems that attract VC funds as well as an array of investment vehicles available from governments and international finance institutions,” said the IEA.

The report said that start-ups have typically been most suitable for disruptive ideas for digital, small-scale and consumer products. However, many new start-up firms increasingly represent a significant share of promising clean energy technologies and there is rising appetite for allocating risk capital to early-stage, high-potential innovations for tackling climate change. Recent signals of this trend have come from major corporations, philanthropists and institutional investors.

The success or failure of new start-ups will depend on factors beyond the ultimate performance and costs of the technologies they are striving to scale up. The readiness of the market, determined in large part by government policies, will play a central role, including by influencing the perceptions of investors who might provide follow-on funding.
The report also said that investing in early-stage start-up companies is notoriously high risk given steep failure rates.

The IEA report in a bid to understand likely success factors and follow the progress of recently funded clean energy start-ups from middle- and low-income countries, has explored the available data from a decade ago.

It said the year 2010 was a watershed for Venture Capital funding for cleantech start-ups, driven by an array of dynamic issues. New ideas for energy-efficient technology proliferated as oil prices trended higher, hovering around USD 80 per barrel in 2010 and then going on to breach the USD 100 per barrel threshold in early 2011. The Deepwater Horizon oil spill disaster in the US Gulf of Mexico in April 2010 contributed to an even more positive mood among investors for fossil fuel alternatives.

The clean energy technology start-ups funded in 2010 were mostly offering solutions in the areas of solar, energy efficiency, bioenergy and transport. There were differences in technology focus depending on the stage of the deal, with a larger share of money flowing to transport and fossil fuel-related technologies in the more mature growth equity stage.

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