In Short : Cost of capital expectations for 2025 are diverging as global uncertainty grows. While some sectors anticipate rising financing costs due to inflation and tight monetary policy, others expect easing as rate cuts loom. In India, infrastructure and renewables may see stable capital access, but startups and leveraged firms could face funding challenges amid shifting investor sentiment and economic volatility.
In Detail : Whilst interest rates are beginning to fall, the cost of capital remains high
Global energy-related investment grew to over USD 3 trillion in 2024, but only around 25% of this was directed towards emerging markets and developing economies other than China, a fall in real terms over the last decade. One of the principal factors holding back investment is the high cost of capital, driven by on a range of perceived and real risks facing investors in EMDEs. For clean energy investments, which are typically characterised by high upfront costs with minimal ongoing expenditures, project viability is highly sensitive to the cost of capital, but data on the actual terms facing project developers is scarce, out of date and geographically limited. In 2022, in recognition of the importance of accessing empirical data on the cost of capital for energy projects in EMDEs, the IEA launched its Cost of Capital Observatory.
This year marks the third update to the Observatory. Once again, the scope of the Observatory was extended both in terms of technology and geographic scope, with data derived from firms that have collectively financed or developed over 1700 projects. For the first time, we gathered insights on the cost of capital for hydroelectric power projects (the largest source of renewable electricity globally) and expanded coverage of Southeast Asia, a region expected to account for 25% of global energy demand growth over the next decade. We also gathered perspectives from financiers, project developers and institutional investors on how they expect the cost of capital to change over the coming year, alongside results for 2023 and 2024.
Our findings confirm that the cost of capital for renewable power projects and batteries in EMDEs is at least double the amounts seen in advanced economies, with substantial variations across the surveyed countries. The survey results show that the cost of capital has generally increased in all major markets compared to the previous update in 2023, with some divergence at a country and technology-level due to changes in local market interest rates and regulatory environments.
In addition, in many markets, the weighted average cost of capital for utility-scale battery projects is similar to standalone solar power projects, with batteries typically co-located with wind or solar generation. This finding was based on taking the median of responses from institutions that answered this year’s survey and covers projects reaching final investment decisions (FIDs) over four years: 2021, 2022, 2023 and 2024. Battery prices have declined more than two-thirds over the last decade, driven by R&D and economies of scale in manufacturing, and now represent one of the fastest growing clean energy technologies. Deploying batteries on site with renewables can provide dispatchable clean power, reducing variability in renewable output and allowing projects to provide grid balancing and ancillary services. Our engagement with developers and financiers through interviews has shown that it is becoming increasingly common to pair solar with batteries, enabling low-cost solar electricity to meet evening demand peaks where storage capacity is sufficient.
Regulatory, transmission and off-taker risks need to be addressed to reduce the cost of capital
Investments in EMDEs face a range of both perceived and real risks. These risks drive the cost of capital for energy projects to be at least two to three times higher than in advanced economies or China. According to our latest survey, investors and financiers have identified three main sector-specific risk factors: regulatory risks, political risks, and bankability concerns. Regulatory risks in particular was highlighted as the number one risk in the majority of markets covered by the survey, showing the importance of reforming the regulatory environment to boost investor confidence and thereby lowering the cost of capital. In addition to these sector risks, respondents also pointed to political and currency risks, which affect projects well beyond the energy sector.
Other risks mentioned by respondents to our survey related to permitting, transmission, and the risk of public off-takers defaulting on agreed payment schedules. Key risks also varied substantially across EMDE markets, with political risks the largest driver in Southeast Asian markets but not considered a principal risk in India and Brazil. Strong and sustained policy support have enabled the latter two to take advantage of low-cost renewable power, with rising investment trends over recent years standing out amongst other EMDE.
Currency risks are also a substantial barrier to energy investment in EMDEs, which were not among the most commonly cited top risks. For countries with underdeveloped financial systems, there is a reliance on international lenders, who typically offer loans denominated in “hard” currencies (e.g., US dollars). This introduces a currency risk for the developer, as electricity revenues will be denominated in local currency, introducing potential default risks if depreciation occurs. Currency risk-management tools such as forwards, swaps and options are available, but often come with high costs and are limited in availability and duration. Our survey results indicate that nearly three-quarters of financing was denominated in local currencies.
Macroeconomic and political tensions cloud 2025 cost of capital projections
After a period of high interest rates following the Covid-19 pandemic and global energy crisis, borrowing costs have finally begun to decline in many countries. While this easing should help reduce financing costs, the cost of capital for energy projects in emerging and developing economies (EMDE) still remains persistently high.
Although global interest rates are generally trending downward, there is no clear consensus on how borrowing costs will evolve in EMDEs in 2025—expectations vary much more than usual. Around 25% of respondents anticipated a decrease in the markets where they operate , citing improved conditions in electricity markets and the growing maturity of wind and solar projects. Over half reported that they expected costs of capital to rise, highlighting global economic uncertainty and still-elevated U.S. interests rates. In contrast, our 2023 update to the Cost of Capital Observatory showed 90% of respondents expected near-term increases.
Reducing the cost of capital in EMDEs will be essential to deliver much-needed investment in low-emissions power. Local governments can leverage various policy and regulatory tools to de-risk investments, such as guarantees, market reform, and public procurement, while also pursuing broader reforms to address key regulatory challenges. Support and assistance from international partners will also be key to de-risking investments, particularly from development finance institutions. Assistance to date has included concessional loans, guarantee programmes and technical assistance, but the increasingly constrained development finance environment – marked by recent cuts from major donors – brings the feasibility of scaling up these programs into question.
Early last year, the IEA developed recommendations to reduce the cost of capital for clean energy projects in EMDE, which was published and presented at the IEA’s Ministerial Meeting in 2024. The IEA was then mandated by the G20 Brazil Presidency ahead of COP29 to develop a roadmap for scaling up energy investments in EMDE. This roadmap explored in greater depth de-risking solutions and innovative approaches to unlocking private capital at affordable rates for EMDE. The IEA remains committed to providing valuable insights through the Cost of Capital Observatory and related work.
