Synergizing Energy Finance, Financial Development, Government Effectiveness, and Economic Complexity in Balancing Energy Trilemma in Developing Countries

Abstract

The energy system in the developing world is undergoing a critical phase, with rising energy demand, lack of adequate energy access, heightened geopolitical risk, and natural disasters. To this note, balancing energy trilemma is an emerging concept that addresses three often conflicting challenges: “energy security, energy equity, and environmental sustainability.” In the context of developing countries, the over-dependence on fossil fuels, limited access to modern energy, unequal access and unaffordability of energy, inadequate infrastructure, limited investment, and climate change pose a serious threat to the development and transitions of energy systems. Thus, using Driscoll-Kraay standard errors, IV-GMM, and quantile regression, this study examines the impact of energy finance, i.e., total public investment in renewable (TPIR) and non-renewable energy (TPIN) sector development, financial development (FD), government effectiveness (GEF), and economic complexity (ECI) on energy trilemma in 49 developing countries from 2000 to 2023. The empirical analysis discloses the imperative role of aggregated and disaggregated energy financing in balancing the energy trilemma in developing countries. This study also examines the mediating role of financial development and economic complexity on the energy trilemma and documented that both FD and ECI mediate more than double the direct impacts of aggregated and disaggregated energy finance in balancing energy trilemma. Based on the above findings, the study provides implications for policymakers to focus on increasing the financial flow into the energy sector, strengthening FD, and enhancing ECI to balance the energy trilemma and making substantial progress towards Sustainable Development Goals 7 and 13 of the developing countries.