This article is part of NordSIP Insights – Investing Sustainably in Emerging Markets Read or Download the entire publication here.
by Angeles Toledo Rodriguez, Fund Manager, Impact Private Debt & Equity, Triodos Investment Management and Greig Blackie, Associate Fund Manager, Impact Private Debt & Equity, Triodos Investment Management
The urgency, the underlying trends, and the benefits to your investment portfolio
Emerging markets and developing countries are facing a dual challenge. On the one hand, they are particularly vulnerable to climate change, lacking the financial power to prevent or adequately respond to the impacts of climate change.
On the other hand, a dependable and affordable energy supply is crucial to further socio-economic development. Many countries have underdeveloped energy systems that can scarcely cope with today’s demand, let alone with increased demand in the future. Close to a billion people worldwide have no access to energy at all, especially in sub-Saharan Africa. At the same time, the population of emerging economies is expected to increase by a further 30% (around 1.8 billion people) by 2050 1.
Emerging markets are an increasingly important factor on the global energy market. Between 2019 and 2030 it is expected that the strongest growth in power demand will come from non-OECD countries, due to population growth, economic development, and current electricity deficit.
An interesting business case
Switching to renewable energy sources enables countries to strengthen their energy security and achieve greater independence by harnessing the vast local renewable energy sources that are available. Democratisation of energy through decentralisation of production and distribution is a powerful element in the energy transition. Energy is produced where it is consumed, allowing users such as companies and local communities to gain direct access, thus diminishing their dependence on an unreliable grid or the government and fostering their social-economic development.
Technological innovation and cost reductions have contributed to a faster growth in renewables than any other energy source in recent years. Along with innovative business and financing models, this has created momentum to boost clean, scalable energy solutions in emerging markets, further stimulated by the increasing demand for energy.
Interesting impact, risk and return characteristics
These trends indeed build a strong business case for investing in renewable energy in emerging countries, from the triple perspective of impact, risk and return. Fund managers Angeles Toledo Rodriguez (winner of the Women Powering Smart Energy Awards 2021) and Greig Blackie share their insights.
“Financing renewable energy in emerging markets requires expertise, experience and a strong network. At Triodos Investment Management we have all three, built up in many years investing in many different projects”, says Angeles Toledo. “By investing in renewable energy in emerging markets we generate triple impact with each investment: we stimulate social and economic development and we contribute to a sustainable energy transition.”
Do you want to learn more how investing in Renewable Energy in Emerging Markets benefits your portfolio? Download the strategy paper here.
Thorough risk assessment
“Investing comes with risks. Systemic risks, either economic or political, are inherent in investing in emerging markets. The environmental and social risks also need a careful assessment, especially those of utility-scale projects”, explains Toledo. “Possible negative impacts must always be compensated, for example by replanting trees or relocating people, or by making sure that communities directly benefit from the project.”
“For us, the environmental and social risk assessment is extremely important. There is more needed than simply doing your homework if you intend to have a positive impact on local communities”, adds Blackie. In addition to applying strict ESG criteria, we aim to achieve this positive impact by both improving the access to affordable energy – which is our priority – and by identifying potential development opportunities, together with the developer or owner of the project, which bring social and economic benefits to the community.”
Investment instruments and the role of trust in a good network
“It is crucial to have knowledge about the renewable energy markets in emerging countries – for example about fall-back scenarios or insurances when a client cannot pay back the loan – and have a strong network of trusted partners”, continues Toledo. “This is not something you can build up overnight. We have a track record of more than 20 years of financing projects in emerging countries and more than 30 years in financing renewable energy projects. This combined knowledge is firmly anchored in our funds and in every transaction we do.
“As we usually enter a contract for at least 15 years, we agree on a set price with the off taker of the energy”, Toledo continues. “This is usually the national electricity company, owned or backed by the government. Working with a good network of trusted partners we enjoy strong structures and negotiation power should it be needed. To mitigate currency risks, we always hedge our positions in local currencies. In addition, some of the institutions benefit from a preferred creditor status, which also benefits us when cooperating with them. The combination of a well-balanced portfolio across technologies, financial instruments and geographies results in an acceptable risk profile and a solid return for investors.”
Do you want to learn more on the investment instruments use in investing in renewable Energy in Emerging Markets? Download the strategy paper here.
Make a difference
“But most importantly: we must walk the talk. It is one thing to talk about urgency and opportunities, but we must also act”, concludes Blackie. “Nearly 40 years ago, in the early 80s, we financed the first wind turbines in the Netherlands, and today we are still a pioneer in the energy transition. It is now time to increase our impact on financing the energy transition in emerging markets and inspire others to join us and unlock more funding.”
This article is part of a detailed strategy paper on investing in Renewable Energy in Emerging Markets. The full version can be downloaded here.
Decentralised generation of clean energy
Run-of-the river hydropower in Nicaragua
Nicaragua has made huge progress in improving its energy supply. The electrification rate of the country has increased from less than 50% in 2002 to around 95% in 2018. Compared to other countries in the region, however, this is still relatively low. Especially in remote, rural areas where sometimes less than 40% of people have access to electricity. The country is committed to further improve its energy system by increasing the share of renewable energy in the energy mix. By 2030, renewables should represent 73% of total capacity installed.
In this dual ambition, private initiatives play an important role. One such initiative is the San Martín hydroelectric plant. This is a typical small-scale, 6 MW run-of-the-river hydro project with a dam of around 18 meters high to capture water in a small lake. While maintaining an ecological flow in the original riverbed, water is led through a buried ‘penstock’ (steel pipe) to the turbine house three kilometres further downstream (and 82 meters lower), where it passes through the turbines and back to the riverbed. The electricity generated is around 26 GWh per year. This is equivalent to the consumption of around 43,000 households, based on a monthly average use of 600 KWh. The electricity is delivered to the grid through transmission lines that feed into the substation of the distribution company.
Generating clean energy, the hydroelectric plant contributes to countering climate change by saving up to 20,000 tons of CO2 emissions per year. The energy it produces is a direct substitution for imported heavy fuel which is utilised in outdated plants; the project is the equivalent of 2,000 tonnes of oil-equivalent per annum. The project also increases the reliability of energy supply by adding decentralised generation capacity to the system, facilitating distribution expansion in the poor and remote area where the project is located.
More investment examples can be found in our strategy paper on investing in Renewable Energy in Emerging Markets. The full version can be downloaded here.
Credit:Usukhbayar Gankhuyag on Unsplash