Intergovernmental organisation the International Energy Agency (IEA) and several partners have launched a new tool, the Cost of Capital Observatory, to track financing costs for energy projects around the world, with the aim of identifying and addressing risks that have impeded vital investment flows to emerging and developing economies.

The Cost of Capital Observatory will be hosted on the IEA’s website and regularly updated with new data, analysis and features. The IEA website will also host an interactive Cost of Capital Ddshboard to enable users to dig into data for selected countries.

“A high cost of capital is a roadblock for investors, and the data provided by our Observatory is essential to understand how this roadblock can be dismantled. This will allow more capital to flow to clean energy, where it is urgently needed to tackle today’s energy crisis and reach sustainable development goals,” says IEA executive director Fatih Birol.

There is a lack of transparency about the cost of capital, making it harder for investors to price risk and for policy makers to act, and the Observatory has been established to fill this gap.

Specifically, despite having two-thirds of the global population, emerging and developing economies, excluding China, account for less than one-fifth of global investment in clean energy. One of the key barriers is a high cost of capital, reflecting some real and perceived risks about investment in these economies, the IEA highlights.

“Bringing down the cost of capital is a critical lever to attract funds, especially private capital, and policy makers use this information to ensure that investments are remunerated in a fair manner, especially when it comes to sectors or projects that need any kind of government support,” the organisation says.

Bringing down the cost of capital would make a huge difference to the overall costs of energy transitions. According to new IEA estimates, reducing financing costs by two percentage points would bring down the investment needed to reach net-zero emissions in emerging and developing economies by a cumulative $16-trillion over the period to 2050.

The IEA estimates that global clean energy investment will increase by more than 10% this year to reach $1.4-trillion, but this is owing almost entirely to advanced economies and China. Further, despite some bright spots, clean energy spending in emerging and developing economies outside China remains at 2015 levels.

Many countries find themselves in a trap, with underdeveloped financial markets deterring investment, and a lack of projects preventing the establishment of reliable pricing benchmarks, the energy body notes.

IEA analysis, based on surveys of investors and experts in different countries, has shown that the cost of capital for a utility-scale solar photovoltaic (PV) plant in 2021 was between two- and three-times higher in key emerging economies than in advanced economies and China.

As a result, financing costs accounted for around half of total levelised costs of a solar PV plant, notably higher than the 25% to 30% seen in advanced economies and China, the IEA says.

The Cost of Capital Observatory was developed by the IEA together with global finance body the World Economic Forum and universities ETH Zurich and Imperial College London.