Political and financial risks in developing countries: Implications for energy security and the transition to renewable energy
Aiman Javed, Junaid Ashraf, Yong Li
Abstract
This study investigates the impact of political and financial risks on energy security (ES) and renewable energy adoption (REA) in developing countries. Utilizing a dynamic panel data approach with the Generalized Method of Moments (GMM) estimator, we assess how these risks influence various indicators of energy security and renewable energy investment across 36 developing countries from 1990 to 2022. Our empirical findings reveal that reducing political and financial risks enhances energy security and facilitates the transition to renewable energy sources. Lower political risk creates a stable environment conducive to long-term investments in the energy sector, while reduced financial risk lowers the cost of capital, making large-scale energy projects more feasible. The interaction of these risks fosters investor confidence, attracts foreign direct investment, and promotes innovation and competition within the energy sector. Additionally, GDP growth and trade openness positively impact ES and REA by providing financial resources and enabling the exchange of advanced technologies. However, high human capital levels may increase energy consumption due to greater economic activity and higher living standards, posing challenges to energy security and the renewable transition. These insights offer valuable policy recommendations for enhancing energy security and promoting sustainable energy transitions in politically and financially volatile environments.