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28 Jan 20

It’s time to scale-up blended finance for energy access

It’s time to scale-up blended finance for energy access

Our latest Data Brief outlines key trends in the use of blended finance approaches for the energy sector in developing countries. Energy has been one of the most common focus sectors for blended finance transactions, second only to financial services. In our database of historical blended finance transactions, we have identified 128 blended finance transactions focused on the energy sector, representing an aggregate $67.7 billion in total financing. Most transactions have focused exclusively on the energy sector, but a few have broader mandates (e.g., green growth, clean technology).

Achieving universal access

Universal access to energy is crucial to achieving many of the Sustainable Development Goals (SDGs) and embodied in Goal 7 (Affordable & Clean Energy). Yet, more than one billion people still live without electricity, including 65% of the population in Sub-Saharan Africa. The persistent challenge is to promote universal access while reducing the environmental footprint of the energy sector. To achieve this, a broad range of energy technologies are needed, including new sources of energy (e.g., solar, hydropower) and improved carbon capture and energy efficiency.

The majority of blended finance transactions have focused on power generation, including the financing of greenfield and brownfield energy infrastructure projects. These energy projects have most commonly leveraged solar technology, with about one-third of solar projects being off-grid solutions. Beyond solar, transactions have focused on hydro and wind technologies, and then oil and gas. Of the transactions focused on oil and gas, approximately 60% have focused on developing new production capacity, with the remaining 40% focused on transportation, storage, and other logistical infrastructure to increase access and affordability.

Three reasons it’s time to scale-up blended finance for energy access

Regardless of the technology, achieving universal energy access will require significant capital investment in power generation, transportation, storage, transmission, and other logistical infrastructure, as well as operations and maintenance. Our recent Research Note identifies at least four SDGs that are “ready to scale”, including Goal 7 (Affordable & Clean Energy). Blended finance is well established in the energy sector – and now it is time to scale proven solutions that achieve development impact (i.e., greater energy access and affordability) and mobilize additional private sector investment.

1) The pipeline is ripe for scale: The median blended finance transaction in the energy sector has been $123 million in total size, which is approximately double the median transaction size across all sectors. The majority (55%) of blended finance transactions in the energy sector have been larger than $50 million, with 23% of transactions between $100-250 million in total size and another 15% of transactions between $500 million and $1 billion. The energy sector represents a real opportunity for development organizations to allocate catalytic / concessional capital funds to blended finance vehicles that have the capacity to achieve development impact (e.g., greater energy access and affordability) at scale.

energy transactions by total size

2) There is room for more portfolio solutions: Energy is one of the few sectors where blended finance solutions have been most commonly structured at the project level. Nearly half of transactions targeting the energy sector have been individual projects, double the proportion of projects seen across all blended finance transactions. Companies that have benefitted from blended capital are also common in the energy sector, such as off-grid solutions like d.light and M-KOPA. While there are many stand-alone projects large enough to attract investors, diversification across projects could reduce risk and mobilize greater total volumes of private sector investment.

Transactions by blended vehicle type

3) Specialized blending facilities are facilitating coordination: Public concessional funds – both bilateral and multilateral – have played an important role in blended finance transactions in the energy sector, accounting for about 70% of concessional commitments. Specialized multilateral instruments, like the Green Climate Fund (GCF) and Climate Investment Funds (CIF) (e.g., Clean Technology Fund (CTF)), are among the most active public concessional capital providers in the space – and these facilities hold great potential to increase coordination and cooperation. This supports the shift away from creating redundant solutions and towards scaling up or refining existing models that achieve development impact and mobilize private sector capital at scale.

Become a member and read the full brief.

About the Author
Justice Johnston

As a Manager, Justice is responsible for Convergence’s data and research activities, including building out Convergence’s database of historical blended finance transactions, documenting blended finance case studies, developing blended finance trends analysis and benchmarks, and coordinating webinars and workshops. Prior to joining Convergence, she worked at the MasterCard Foundation as Program Coordinator for the Financial Inclusion team. While there, Justice was responsible for contributing to new project development, managing current projects, updating project records and preparing strategic reports, as well as managing team organization and coordination. Prior to joining the Foundation, Justice was at the University of Toronto’s Munk School of Global Affairs completing her master’s thesis on Financial Inclusion and the Role of Government. She also has a variety of research and policy experience through her work at Scotiabank’s Government Communications, Policy and Research department, the G20 Research Group, and the World Wildlife Fund.

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