Why Developing Nations Need Different Energy Policies Than Rich Economies, World Bank Finds

A World Bank study finds that both renewable and fossil-fuel energy drive economic growth, but their impact depends on a country's stage of development, infrastructure and financial capacity rather than the energy source alone. The report urges governments and development partners to tailor energy investments by prioritising electricity access, grid modernisation, storage and technology transfer to maximise growth while supporting a sustainable energy transition.

The question of whether renewable energy or fossil fuels generate stronger economic growth has long shaped energy policy across the world. A new study by researchers from the World Bank Group's Development Economics Vice Presidency, Office of the Chief Economist and Senior Vice President suggests that governments may be asking the wrong question. Instead of choosing one over the other, the research finds that the economic value of different energy sources depends largely on a country's stage of development, the strength of its electricity system and its financial capacity. Based on 888 elasticity estimates from 110 empirical studies published between 2008 and 2025, the report concludes that there is no one-size-fits-all energy strategy. Countries need different energy policies at different stages of economic development.

Energy Choices Must Match Development Needs

The study finds that energy remains one of the strongest drivers of economic growth, supporting industries, agriculture, healthcare, education and household welfare. Across all the studies analysed, 59% of reported estimates showed a positive and statistically significant relationship between energy use and economic growth, confirming that expanding a reliable energy supply generally boosts economic performance.

However, the benefits differ across income levels. In low-income countries, increasing access to electricity, whether from renewable or fossil-fuel sources, produces the highest economic returns because millions of people and businesses still lack reliable power. Better electricity access immediately improves productivity, creates jobs and supports industrial development.

As countries move into the middle-income stage, the economic gains from renewable energy temporarily slow. This is largely because integrating solar and wind power into existing electricity grids requires major investments in transmission lines, storage systems and modern grid management. Without these supporting investments, renewable energy alone cannot deliver its full economic potential.

For high-income countries, the picture changes again. Advanced electricity infrastructure, stronger regulations and greater innovation allow renewable energy to contribute more effectively to economic growth. At the same time, fossil fuels, particularly natural gas, continue to play an important role by providing backup power when renewable generation fluctuates.

Different Energy Sources Deliver Different Economic Returns

The report shows that not all energy technologies contribute equally to growth. Among renewable sources, solar and wind energy consistently show stable positive links with economic growth, reflecting falling technology costs and wider deployment. Hydropower delivers mixed results because its performance depends heavily on rainfall and water availability, making it vulnerable to climate risks such as drought. Bioenergy records weaker economic performance because of sustainability concerns.

Among fossil fuels, natural gas performs significantly better than coal, with the study finding that its average growth elasticity is almost twice that of coal. The researchers say this reflects natural gas's growing role in supporting renewable energy by providing flexible electricity generation when solar and wind output falls.

Interestingly, fossil fuels still record higher median economic returns than renewable energy in many countries. However, renewable energy produces more consistent results with lower variation across different economies, suggesting that its long-term contribution becomes stronger once supporting infrastructure is fully developed.

The researchers also identify a U-shaped relationship between energy and economic growth. Economic returns are highest in low-income countries, decline during the transition to middle-income status as energy systems become more complex, and rise again in advanced economies once modern infrastructure and institutions are in place.

Strong Message for Governments and Development Partners

The findings carry important lessons for governments planning energy investments. The report argues that electricity access should remain the top priority for low-income countries, even as they pursue cleaner energy systems. Rather than focusing only on building renewable power plants, policymakers should also invest in electricity transmission, distribution networks, battery storage and grid modernisation.

For middle-income economies, strengthening infrastructure is essential to prevent renewable energy from becoming constrained by outdated electricity systems. Without complementary investments, countries may face higher electricity costs and reduced economic returns during the transition.

The study also offers guidance for international development partners, including multilateral development banks and bilateral donors. It suggests that climate finance should move beyond funding renewable generation alone and place greater emphasis on financing transmission infrastructure, regional electricity interconnections, storage technologies and institutional capacity building. Supporting technology transfer from advanced economies could also help developing countries adopt cleaner energy without slowing economic growth.

Private Sector Has Major Opportunities but Must Manage Risks

The report points to significant opportunities for private investors as countries accelerate their energy transition. Investment prospects extend beyond renewable generation into battery storage, smart grids, digital energy management, transmission infrastructure and grid-balancing technologies.

The research also highlights the importance of financial sector development. Countries with stronger financial systems are better able to mobilise investment, reduce project risks and support innovation in renewable energy technologies. This creates opportunities for banks, institutional investors and infrastructure funds to play a larger role in financing the transition.

At the same time, the authors caution against assuming that renewable energy projects alone will automatically generate strong economic returns. Successful investments increasingly depend on complementary infrastructure that allows renewable electricity to be integrated efficiently into national power systems.

The study also finds evidence of publication bias in existing research, particularly in studies examining fossil fuels, where statistically significant positive findings are more likely to be published. After correcting for this bias, however, the central conclusion remains unchanged: neither renewable energy nor fossil fuels consistently outperforms the other. Their contribution to economic growth depends on how well they fit a country's level of development, infrastructure and policy environment.

For policymakers, the message is clear. The most successful energy transition will not be defined by choosing between renewable and fossil fuels, but by investing in the right energy mix, modern infrastructure and supportive institutions at the right stage of economic development.