Money and Machines Drive Renewable Energy Gains in Developing Economies, Study Finds

A sweeping analysis of 32 developing countries has found that renewable energy finance and technological readiness are the two forces most consistently linked to a faster shift toward clean electricity, while better governance scores alone, surprisingly, show no such boost. The study, covering the period from 2000 to 2023, measured the energy transition along two distinct dimensions: the share of renewable electricity in total electricity generation and the share of fossil fuels in total energy consumption. By tracking both sides of the ledger, the researchers captured something earlier work often missed — the fact that a country can expand its renewable capacity without immediately cutting its fossil fuel use.

The sample was deliberately broad and heterogeneous. It includes major fossil fuel producers and exporters such as Algeria, Azerbaijan, Kazakhstan, Venezuela and Turkmenistan, alongside countries with enormous solar, wind and hydro potential that have lagged in deployment, including Egypt, Argentina, Peru, Vietnam, India, Brazil and South Africa. What unites these economies is a shared predicament: rising energy demand, persistent energy poverty, constrained public budgets, fragile financial systems and uneven technological capacity. In Sub-Saharan Africa alone, more than 600 million people — over 53 percent of the region’s population — still lack access to electricity, and roughly one-third of its people cannot afford basic clean energy services.

The stakes are global. Although renewable electricity capacity additions grew by 22 percent according to the International Energy Agency, fossil fuels still account for nearly 80 percent of global energy supply. Around 730 million people live without electricity and nearly 2 billion rely on polluting cooking methods. The COP28 Global Renewables and Energy Efficiency Pledge aims to triple renewable capacity and double energy efficiency by 2030, and COP29 proposed raising climate funding from 100 billion to 300 billion US dollars annually by 2035. Yet the flow of money remains uneven: from 2007 to 2021, 62 percent of green bond funds went to renewable energy in some form, but only 15 percent were exclusively dedicated to renewable energy projects.

To measure technological capability, the study adopted a relatively novel indicator: the Frontier Technology Readiness Index developed by UNCTAD. Unlike conventional proxies such as research and development spending or patent counts, this composite index captures information and communication technology infrastructure, research capability, workforce skills, industrial capacity and access to finance — in short, a country’s preparedness to absorb, adapt and deploy advanced technologies. The authors paired this with an institutional quality index built from six governance indicators using principal component analysis, and controlled for gross domestic product and trade openness.

The theoretical framing combined two perspectives usually applied separately: the Energy Ladder Hypothesis, which describes a gradual replacement of traditional energy sources with modern ones as income, infrastructure and institutions improve, and Energy Stacking Theory, which holds that households and nations layer renewables on top of fossil sources rather than abandoning them. This dual lens reflects the empirical reality in many developing economies, where renewables are often supplemental rather than substitutive, particularly where fossil fuel infrastructure is locked in, subsidies keep conventional energy artificially cheap, and reliability concerns favor established supply.

Econometrically, the researchers faced the standard hazards of macro-panel data: cross-sectional dependence, slope heterogeneity, non-stationarity and potential endogeneity. Diagnostic tests confirmed significant cross-country spillovers and heterogeneous slopes, and second-generation unit root tests classified all variables as integrated of order one. The Westerlund co-integration test then confirmed a stable long-run relationship among the variables for both models. As the baseline estimator, the team used fixed effects with Driscoll-Kraay standard errors, which are robust to cross-sectional dependence, serial correlation and heteroskedasticity, supplementing it with feasible generalized least squares and, for endogeneity, a two-step system GMM with collapsed instruments to avoid instrument proliferation.

The headline results are strikingly asymmetric. Technological readiness was positively and significantly associated with the renewable electricity share, with coefficients of 0.3371 under Driscoll-Kraay and 0.3788 under FGLS, but its effect on fossil fuel consumption was negative yet statistically insignificant. In other words, technological advancement encourages renewable deployment without directly displacing fossil fuels — a coexistence the authors attribute to rising energy demand and entrenched traditional-energy infrastructure. Renewable energy finance, by contrast, worked on both fronts: a 1 percent increase raised the renewable electricity share by roughly 0.0475 percent and reduced fossil fuel consumption, with negative coefficients of −0.0113 and −0.0063 across the two estimators.

Energy intensity emerged as the most consistent brake on progress. It was strongly and negatively associated with renewable electricity (coefficients of −1.5589 and −1.4756) and positively and significantly associated with fossil fuel consumption, indicating that inefficient energy use and carbon-intensive production systems reinforce one another. The institutional quality index produced the study’s most counterintuitive finding: it showed no significant effect on renewable electricity and a positive, significant association with fossil fuel dependence. The authors caution against reading this as evidence that good governance hinders clean energy. Rather, they suggest that in several sampled countries, governance institutions remain aligned with established energy regimes — facilitating fossil fuel subsidies, state-owned enterprises and extractive industries — and that institutional reforms without environmental regulation and policy alignment may inadvertently entrench fossil-based systems.

The findings survived an unusually thorough battery of robustness checks. Re-estimating with energy efficiency as an alternative dependent variable kept technological readiness positive and significant, and gave institutional quality a positive and significant role there. Adding foreign direct investment and urbanization as controls left the core results intact, though both additional variables raised fossil fuel consumption in the short run by boosting energy demand. Excluding outlier countries identified by the interquartile range method — Algeria, Bangladesh, Belarus and South Africa in the renewable model; Algeria, Brazil, Pakistan, the Philippines and Sri Lanka in the fossil model — preserved the direction of the key coefficients. The system GMM estimates confirmed persistence in energy outcomes, with lagged dependent variables near 0.79, and diagnostic tests supported instrument validity.

For policymakers, the message is one of sequencing and coordination rather than any single lever. Investment without technological capability is unlikely to maximize renewable deployment, and capability without sustained finance may never reach scale. Improving energy efficiency — through industrial standards, cleaner production, efficient buildings, transport electrification and demand-side management — should be treated as the foundation of the transition, not an afterthought. And governance reform must prioritize implementation effectiveness: streamlined approvals, transparent execution and administrative capacity, so that better institutional scores translate into projects on the ground. Economic growth and trade openness helped renewable expansion in the panel, but the authors warn that macroeconomic expansion alone will not deliver a low-carbon energy system. For the 32 economies studied, and for the broader pursuit of Sustainable Development Goal 7, the transition appears constrained less by the availability of individual policy instruments than by the limited coordination among them.

Subject of Research: Determinants of energy transition in 32 developing countries, focusing on renewable energy finance, technology readiness and institutional quality

Article Title: Technology readiness and energy transitions: Evidence from renewable energy finance and institutional quality

Article References: Deepa, & Kumar, A. (2026). Technology readiness and energy transitions: Evidence from renewable energy finance and institutional quality. Environmental and Sustainability Indicators, 32, Article 101581. https://doi.org/10.1016/j.indic.2026.101581

Image Credits: AI Generated

DOI: 10.1016/j.indic.2026.101581

Keywords: energy transition, renewable energy finance, technology readiness, institutional quality, developing countries, energy intensity, fossil fuel consumption, green bonds, panel econometrics, SDG7, energy efficiency, UNCTAD Frontier Technology Readiness Index