Development of solar, wind and particularly hydro power fueled a boom in renewable energy investment over the past 20 years in emerging markets that, by 2015, surpassed that in developed markets. Yet climate change is eroding or shifting renewable energy sources, threatening economic stability and exposing the risks countries are taking by relying heavily on any single source of energy.
Ecuador, for example, despite its huge hydroelectric potential has recently endured up to 14-hour blackouts as droughts, worsened by El Niño, have depleted reservoirs. Its flagship $2.2 billion Coca Codo Sinclair dam operates at just 30% capacity due to sediment build-up and erosion. The crisis has been compounded by poor planning and underinvestment.
Ecuador is not alone. Latin America generates nearly 45% of its electricity from hydropower, but fluctuating rainfall and rising temperatures are constraining capacity across the region. Neighboring Colombia and Peru face similar drought-induced hydropower shortages.
Across the Atlantic, in sub-Saharan Africa, Zambia and Zimbabwe are facing power shortages as the Kariba Dam hydro plant is on the verge of shutting down due to record-low water levels. The power shortages are compounding economic woes in the two nations, highlighting how climate change can turn renewable-energy assets into unproductive liabilities . Zambia is now scrambling to grow its solar power capacity to bring diversity to its energy sector.
“This is not particularly good news for promoters of sustainability and matters of climate, but we are doubling down on coal…because we do have an abundance of coal.” —Jito Kayumba, a special adviser to Zambia’s president
The financial implications are severe. Ecuador’s blackouts have already cost the economy over $3 billion, halved industrial output and disrupted small businesses reliant on cheap electricity. The International Energy Agency warns that Latin America’s hydropower capacity could fall 10% by 2060, adding pressure to develop alternative renewable sources.
Zimbabwe’s economic growth is set to slow from 5.3% in 2023 to just 2% in 2024. Zambia’s growth forecast has been similarly slashed , with the IMF lowering growth expectations to 1.3% from 2.3% given electricity shortages’ impact on the key mining sector. The decline in power output is also hitting investor confidence, while multilateral lenders, once champions of hydropower, now stress the need for diversification.
That will require new capital and political will, both of which are in short supply. Solar and wind power are promising alternatives but they face logistical hurdles, including grid integration and land-use conflicts. Meanwhile, political instability in many cases hinders the ability of governments to pursue long-term energy reforms, leaving them vulnerable to future crises.
Climate-driven changes in energy production are also forcing governments to resort to less ecofriendly power sources. Ecuador, for example, has begun importing floating power plants fueled with natural gas and oil while incentivizing private-sector investments in energy projects, but these stopgap measures fall short of addressing the structural weaknesses in its energy mix.
Investors are taking note. The risks in hydropower-heavy economies are increasingly factored into sovereign credit ratings and borrowing costs. Ecuador, Zambia and Zimbabwe already face high debt burdens, and the additional costs of energy diversification will strain public finances further. Investors seeking stable returns will be tempted to look elsewhere, particularly to markets with more resilient energy portfolios or comprehensive climate adaptation plans.
The lesson for EMs is clear: climate change demands not just investment in green energy but also resilience. Hydropower remains integral to many economies, but governments must hedge against its vulnerabilities with a diversified energy mix. The cost of inaction will grow, not just in economic terms but also in the diminished attractiveness of these markets to investors seeking long-term growth in a warming world.
