Cost of Capital for Renewable Energy Investments in Developing Economies And the need for a Global Credit Guarantee Facility

The research identifies a significant gap between solar radiation potential and installed capacity in lower-income countries, driven by high costs of capital linked to sovereign, political, and off-taker risks. To address this, the authors propose a Global Credit Guarantee Facility (GCGF) with a suggested capitalization of USD 6.6 billion to provide partial guarantees for cross-border debt. The paper models two approaches for the GCGF's impact: one reducing overall risk premiums by an average of 6% and another reducing them by 3% by focusing solely on default rates. The facility aims to mobilize approximately USD 120 billion in debt to meet the 2030 solar targets of shortlisted emerging market and developing economy countries.

• There is a disconnect between solar potential and actual installation: lower-income countries often have significantly higher solar radiation potential but lower installed capacity per unit land area compared to high-income countries, which have higher installed capacities despite lower radiation potential.
• The cost of capital for climate projects is significantly higher in riskier economies; for example, the required rate of equity return for a climate project in Argentina is 59.7% and in Zambia is 51.0%, compared to 8.3% in Germany.
• To meet the 2030 solar installation targets of the analyzed countries, approximately USD 175 billion in capital is required, with debt accounting for 70% (USD 120 billion) of that total.
• The proposed Global Credit Guarantee Facility (GCGF) would require a size of USD 6.6 billion, consisting of USD 0.7 billion in funded capital and USD 5.9 billion in unfunded/callable capital from donor countries, creating a 250x leverage on funded capital.
• Under a model where the GCGF reduces overall risk (Approach 1), the average reduction in risk premium for the sample set of countries is 6%, with an average credit rating improvement of 5-6 notches.
• Under a more conservative model where the GCGF only lowers the expected default rate (Approach 2), the average reduction in risk premium is 3% and the average rating improvement is 2-3 notches.

APA

Gautam, K., Purkayastha, D., & Widge, V. (2023). Cost of Capital for Renewable Energy Investments in Developing Economies And the need for a Global Credit Guarantee Facility. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2023/06/Discussion-Paper-EM-Cost-of-Capital-for-RE-and-GCGF-FINAL-Jun-2023.pdf

Chicago

Gautam, Kushagra, Dhruba Purkayastha, and Vikram Widge. Cost of Capital for Renewable Energy Investments in Developing Economies And the need for a Global Credit Guarantee Facility. Climate Policy Initiative, 2023. https://www.climatepolicyinitiative.org/wp-content/uploads/2023/06/Discussion-Paper-EM-Cost-of-Capital-for-RE-and-GCGF-FINAL-Jun-2023.pdf.

Wikipedia

{{cite report |last1=Gautam |first1=Kushagra |last2=Purkayastha |first2=Dhruba |last3=Widge |first3=Vikram |title=Cost of Capital for Renewable Energy Investments in Developing Economies And the need for a Global Credit Guarantee Facility |publisher=Climate Policy Initiative |date=June 2023 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2023/06/Discussion-Paper-EM-Cost-of-Capital-for-RE-and-GCGF-FINAL-Jun-2023.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{gautam2023cost, author = {Gautam, Kushagra and Purkayastha, Dhruba and Widge, Vikram}, title = {{Cost of Capital for Renewable Energy Investments in Developing Economies And the need for a Global Credit Guarantee Facility}}, institution = {Climate Policy Initiative}, year = {2023}, month = jun, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2023/06/Discussion-Paper-EM-Cost-of-Capital-for-RE-and-GCGF-FINAL-Jun-2023.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }