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Blended Finance: Key to bridging energy transition gap in developing countries

February 08, 2024
Namita Vikas and Vibhuti Garg and Sourajit Aiyer and Shantanu Srivastava
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Key Findings

The gap between commercial imperatives and environmental objectives is a big obstacle to the transition to renewable energy in developing countries, especially for smaller projects that target energy poor populations or nascent solutions. Blended Finance can be structured in a bespoke way to bring private sector and public finance together to aggregate smaller projects at commercially viable scale: a win-win for all.

Blended Finance provides a roadmap for scaling up financing for assets such as mini-grids that have the potential to scale up but lack viable business models.

A valuable resource for industry and policymakers alike to facilitate India’s energy transition, Blended Finance could also serve as a blueprint for other emerging economies facing similar issues scaling up private capital for renewable energy.

For the millions living without access to power in developing countries, Blended Finance offers an unprecedented opportunity for this demography to leapfrog fossil fuel-based energy entirely and transition to the abundant, untapped renewable energy resources around them.

Executive Summary

Economies are increasingly decoupling economic growth and intensity of carbon emissions to address the challenges faced due to climate change. Recognising the consequences of delayed action, a transition phase towards low carbon is already underway in many developing economies. This requires a structured approach towards a transformative and system-wide change, particularly within the energy sector, which is the largest global emitter of carbon. This also necessitates significant changes across multiple dimensions, encompassing technology, capacity building and various enabling factors.

Such a transition pathway in the energy sector demands substantial financial flows. While technology, capacity, and other enablers are vital, securing finance, particularly from commercial sources, requires a clear demonstration of acceptable risk-adjusted returns models beyond utility-scale renewable energy. Commercial entities focus on risks and returns and gauge risk based on factors such as proven business models, visibility of cash flows, and credentials of borrowers, which often are not strong in the case of several small-scale and emerging interventions in clean energy.

In emerging economies such as India, utility-scale solar or onshore wind have evinced significant access to capital. However, numerous clean energy applications, often those most critical for vulnerable communities in socio-economic and climate terms, may fall outside the purview of conventional finance.

This report aims to identify and suggest options to bridge this gap in finance by exploring the potential of Blended Finance structures. By demystifying the concepts around Blended Finance and offering insights into enhancing its applicability, this report provides a roadmap for interventions in segments that struggle to secure conventional finance.

This report delves into the structure of Blended Finance solutions, illustrating how bespoke frameworks can mitigate financial risks associated with projects, products, target communities, markets, or technologies. A specific emphasis is placed on the role of blended finance in scaling up the solar mini-grid segment.

This report serves as a comprehensive guide for financial institutions seeking to navigate Blended Finance structures in the pursuit of energy transition. Development and commercial financiers often approach opportunities with nuanced objectives. Blended Finance emerges as a mechanism that harnesses the respective strengths of both these segments. Additionally, this document serves as a pathway for enterprises operating within the energy ecosystem, offering insights to enhance their preparedness and align with the specific criteria that financiers may seek. Furthermore, it may act as a valuable resource for policymakers, advocating the adoption of more facilitative policies to promote the integration of Blended Finance into India’s low-carbon energy transition opportunity. Lastly, it may also serve as a blueprint for other emerging economies that face issues similar to India’s, to devise financing mechanisms for energy transition.

Namita Vikas

Namita Vikas is an award-winning senior business leader with 32 years’ experience and an influential voice in sustainable finance and climate transition globally. Her diverse experience in sectors across banking, finance and technology led to the launch of several first-to-market green and sustainable, wholesale and retail banking products, including the issuance of India’s maiden green bond in 2015.

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Vibhuti Garg

Vibhuti Garg is Director, South Asia with the Institute for Energy Economics and Financial Analysis. Vibhuti’s focus is on promoting sustainable development through influencing policy intervention on energy pricing, adoption of new technologies, subsidy reforms, enhancing clean energy access, access to capital and private participation in various areas of the energy sector. 

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Sourajit Aiyer

Sourajit is Vice President at auctusESG. He is a finance and sustainability professional with 17 years’ experience. Previously, Sourajit worked with Motilal Oswal Financial Services, UBS Investment Bank London, Evalueserve, Grameen Capital and UNEP’s Sustainable India Finance Facility. He has authored three books on regional economies and published some 170 articles on sustainability, business and finance.

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Shantanu Srivastava

Shantanu Srivastava is responsible for leading the sustainable finance and climate risk initiatives at IEEFA South Asia. He specializes in the financing, policy, and technology aspects of the Indian electricity market.

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