Why Is Blended Finance Important and What Does It Mean?

Blended finance seems like common sense in its elevator pitch. Utilize a variety of funding sources and specialized knowledge to reduce risk and increase returns. Regretfully, the truth is a little more nuanced. High specialization is needed to combine multiple funding sources and leverage the knowledge and resources of governments, non-profits, private commercial banks, and development banks. Fortunately, several Southeast Asian nations are utilizing these distinct funding sources to increase the viability of projects for investors that were previously unfeasible.

The lack of private funding for clean energy projects—which are necessary to reduce the use of coal, oil, and natural gas—is the main reason blended finance is so important, especially in Southeast Asia. In contrast to advanced economies where this percentage is 90%, only 60% of clean energy investment comes from private capital in the Philippines, Vietnam, and Indonesia. The high cost of capital for wind and photovoltaic projects relative to developed economies is, at least in part, the cause of this. Using a combination of risk reduction and enhanced investment expertise, blended finance can effectively tackle numerous uncertainties that impede the expansion of private investment.

Every distinct segment within the blended finance market fulfills a unique role. The Development Finance Institutions (DFIs), which include the World Bank and International Finance Corporation, are the first of these actors. They play a crucial role in the processes of financial technical assistance, risk adjustment, and capacity building. The existence of DFIs is encouraging to investors because they provide knowledge and dependability.

Local markets are served by the use of national development banks. National banks can develop effective financial strategies for clean energy projects by leveraging their local knowledge, as opposed to DFIs’ extensive reach. National development banks have an advantage because they are knowledgeable about local market dynamics, regulatory frameworks, and financial structures within a nation. These banks can co-finance projects, lowering risk and promoting private investment, using loans, equity, or other financial instruments. Commercial banks are the last significant source of funding; they offer the majority of the capital needed for energy projects. This covers risk management, due diligence, and the provision of credit lines and loans.

Of all the blended finance options used in Vietnam, the Philippines, and Singapore, catalyst funds account for 85% of the total amount used in recent times. This mix of public and private funding makes it possible to lower capital costs or mitigate risk. The development of the renewable sector is aided by additional blended finance sources such as grants, insurance and guarantees, and technical assistance. During an interview with Asia Clean Energy Partners’ co-founder and co-CEO, Peter du Pont, it became evident how important blended finance is for the region. Nonetheless, the intricacy of blended finance is a primary source of worry for prospective investors. Thus, the function of sector specialists like Asia Clean Energy Partners and others in facilitating the connection of possible partners and streamlining projects is essential.

All project developers need to do to get guidance on the complex world of blended finance is look at previous projects to see what has and has not worked in the past. Nearly 100 blended finance projects totaling about $20 billion were undertaken between 2018 and 2020. To replace coal and other fossil fuels with renewable energy in Southeast Asia, the Energy Transition Mechanism was introduced at Cop26 and has so far secured over $500 million in concessional funding.

The study from Asia Clean Energy Partners addresses the obstacles to blended finance, which should be taken into consideration. These include the perception of risk due to things like market volatility and regulatory changes. Furthermore, because blended finance is so complex, traditional investors might be turned off by the intricate transactions. High transaction costs, shifting laws and policies, and a lack of data accessibility are additional obstacles. Notwithstanding these obstacles, blended finance is expanding and will play a crucial part in the global drive toward renewable energy sources.