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26 June, 2019

Blended finance – the key to financing clean energy in Asia?

Blended finance – the key to financing clean energy in Asia?

Convergence’s latest Data Brief considers how blended finance approaches have been deployed in Asia to date. According to the Convergence database, there have been 122 blended finance transactions targeting one or more Asian countries, which represent an aggregate volume of $23.3 billion invested in full or in part in the region. The Brief finds that the largest proportion of blended finance transactions targeting Asia has been in the energy sector, with more than 20% of transactions mobilizing financing for renewable energy.

In Asia, climate finance is a priority

Climate change poses a significant threat to sustainable development in the Asia and Pacific region, which is already one of the most disaster-prone areas and is considered by many the most important region in promoting clean energy, given the continued dominance of the fossil fuels industry there.

The region faces a massive financing gap to meet its clean energy targets – the Asian Development Bank (ADB) estimates that the region requires $1.7 trillion per year in infrastructure spending to maintain its growth momentum, including climate change mitigation and adaptation costs.

At the same time, renewable energy projects face multiple barriers to financing. Not only are these projects capital intensive, but many investors in the region (e.g., financial institutions) are reluctant to finance renewable projects because of (i) the perceived high risk and (ii) the low rate of return compared to comparable fossil fuel projects.

Bolstering climate finance with blended finance

Blended finance instruments – including concessional capital, guarantees and risk insurance, technical assistance funds, and design-stage grants – are all tools that can be used to adjust the risk-return ratio to make renewable energy projects more attractive to private investors. Our Brief finds that blended finance transactions targeting Asia have been significantly more likely to deploy guarantees or risk insurance than other blended tools: 40% of blended finance transactions targeting Asia compared to only 30% of all blended finance transactions.

Blended finance transactions targeting Asia by archetype

In Asia, public guarantees and risk insurance have been effectively deployed to mobilize additional private sector financing for renewable energy projects – both directly and indirectly. For example, the Sarulla Geothermal Power project in Indonesia is one of the largest geothermal projects in the world. The Sarulla project leveraged a political risk guarantee from the Japan Bank for International Cooperation (JBIC) as well as a 20-year Business Viability Guarantee Letter from the Government of Indonesia to crowd in commercial financing from six commercial banks. The project is estimated to save 1.3mt of CO2 annually, as well as positively impact the local economy and community through the creation of 1,800 additional jobs.

Beyond infrastructure projects, blended funds have also used guarantees to improve the investability of the renewable energy sector to mainstream investors. The Beyond the Grid Solar Fund provides financing to off-grid solar companies in India and the Pacific Islands (as well as to companies in Sub-Saharan Africa), and leveraged $10 million in political risk insurance from the Overseas Private Investment Corporation (OPIC) to attract investments from the private sector. The Fund has provided loans to 16 companies to date, supporting greater access to electricity for over 1.5 million people.

These are just some examples we’ve seen of how the Asia and Pacific region has been leveraging blended finance to draw more private investment into climate finance. We hope blended finance plays an increasingly important role as the region strives to achieve its clean energy targets.

Become a member to read the full brief.

About the Author
Ayesha Bery

Ayesha is an Associate supporting Convergence's data and research activities, including developing case studies on blended finance transactions and working with knowledge collaborators in the development finance community. Prior to joining Convergence, Ayesha completed her Masters at the University of Toronto’s Munk School of Global Affairs. While there, her interests focused on the intersection of development and innovative finance, and included an internship at the Centre for Financial Regulation and Inclusion in Cape Town. Previously, she worked as a project consultant for Grand Challenges Canada, where she developed an M&E tool to assess the impact of their innovations one year after completing their Transition to Scale program. Ayesha holds a B.A. from McGill University in International Development Studies and Psychology.

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