OHIO, United States, 8 February 2024: Institute for Energy Economics and Financial Analysis (IEEFA) announced that as the transition to a low-carbon economy gathers pace across emerging economies and new technologies and untapped demographic segments come to the fore, blended finance offers a solution that can help alleviate the technological and market risks allowing such projects to access affordable capital. Making the announcement through a Press release, IEEFA released the key takeaways of a new joint report by the IEEFA and auctusESG. 

IEEFA said the report highlights that in developing and emerging economies, commercial financiers are mostly backing utility-scale wind and solar projects at the expense of smaller-scale projects, such as mini-grid solar, which offer economic, social and environmental benefits for all, especially in those economies that still face energy poverty. 

Vibhuti Garg, Director, South Asia, IEEFA, and co-author of the report, said: “Blended finance is typically for projects with combined developmental objectives, which otherwise do not get funded via conventional financing channels, or for those sectors where the risk-return profile of a project is yet to be established but they need to scale. Moreover, its primary role is to bridge the gap between the level and direction of finance flows required from a social perspective and the flows determined by prevailing market conditions.”

IEEFA said the report points out that blended finance is a financing tool for the projects mentioned above by pooling public and private capital in a risk-adjusted return structure while adding an element of concessional capital to the pool.

Namita Vikas, Founder & Managing Director, auctusESG, and co-author of the report, said: “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 scales and emerging interventions in clean energy. Blended Finance’s bespoke structuring approach, involving public and private capital, addresses the perceived financial risks and thus provides comfort to raise commercial capital at scale. Using Blended Finance judiciously based on contextual factors would not only facilitate finance for energy transition at scale. However, it would create energy access for millions suffering from energy poverty while enabling a climate-smart planet. 

IEEFA said blended finance incorporates a wide range of stakeholders, such as a nodal implementation agency, commercial capital providers (microfinance institutions, banks and non-banking financial companies), catalytic capital providers (multilateral development banks, philanthropies), project developers, local communities, customers, auditors and consultants.

Shantanu Srivastava, Lead Analyst, Sustainable Finance & Climate Risk, IEEFA, and co-author of the report, said: “Blended finance can essentially help pay for positive social benefits by combining commercial borrowings with concessional instruments such as grants or subsidised loans from the government, philanthropic resources and multilateral development banks. At the same time, it is not a grant and demands reasonable financial returns, even if the desired returns may, at times, vary from market returns.”

IEEFA also said that blended finance has the potential to transform the lives of millions of people in emerging economies like India, especially those without regular access to grid power. 

Sourajit Aiyer, Vice President, auctusESG and co-author of the report, said: “This transformative pathway could allow those still living with a degree of energy poverty in emerging economies to leapfrog fossil fuel-generated power and tap into the opportunities provided by renewable energy applications. Moreover, it could also provide a blueprint for other developing economies to ensure no one is left behind in the energy transition.”

IEEFA said the report focuses on mini-grids as a renewable energy resource that aligns with a just transition in areas where the cost and reliability of central grid power is a bottleneck and added that solutions to this problem include:

· Mini-grids scaled up through the use of blended finance mechanisms that can derisk specific business models;

· Grant-funded technical assistance and a revenue shortfall guarantee blended with concessional and market rate debt, and developer equity contribution, and; 

· Asset aggregation to bring scale, community engagement to establish demand buy-in, demand estimation, and robust measurement, reporting and verification (MRV) to ensure the model can scale up and achieve commercial viability.  

This report, IEEFA said, provides a go-to market strategy for capital providers looking at energy transition as an opportunity, and added that it shows how blended finance’s bespoke structure can help aggregate smaller projects at commercially viable scale: a win-win for all and a shining example of trickle-down economics that actually works.