Blended finance can help unlock trillions needed for the clean energy transition
How developing countries meet their rising energy needs will be pivotal to the world’s energy and climate future, write Susan Lund, vice president, economics and private sector development, International Finance Corporation, and Tim Gould, chief economist at International Energy Agency.
Developing countries will account for the vast majority of global energy demand growth over the next decade. This reflects not only their growing populations, but rising income levels, urbanisation and industrialisation. They are also home to all of the 775m people that lack access to electricity globally and the 2.4bn that lack access to clean cooking fuels.
The risk remains that these countries will meet their growing energy demand using fossil fuels rather than clean energy. Meanwhile, technology is now available to create clean energy systems – green industry, e-mobility and buildings – and to create cleaner fuels for use in sectors where electrification is not feasible, such as shipping. However, putting developing countries on a sustainable pathway while enabling them to meet their growing needs and achieve universal access to energy will take scaling investment from billions to trillions.
Clean energy attracts roughly $770bn of investment each year in emerging and developing economies. A recent report by the International Energy Agency and International Finance Corporation estimates that this will need to more than triple to $2.2-2.8tn by the early 2030s, with one third going to power generation, another third toward greening industrial processes, buildings and transport and the remainder going to grid expansion, storage and cleaner fuels.
Not only do investments need to increase substantially, but capital flows must also diversify geographically. Investments in emerging and developing economies are already highly concentrated with China accounting for nearly two-thirds of the total. This is starkly illustrated in the volumes of clean energy deployment where China installed 100 gigawatts of new solar photovoltaic capacity in 2022, adding in a single year 10 times more than the 11 GW of operating solar PV capacity in the whole of Africa.
There are also clear opportunities for mature, cost-effective clean technologies, such as solar PV, to benefit the poorest in society. We estimate that a relatively modest investment of $45bn per year – less than 2% of the overall investment needed – could provide universal access to electricity and clean cooking fuels by 2030.
While the task for scaling and widening investments is daunting, it is not insurmountable. Blended finance can even catalyse the process. By strategically using funds from donor nations and philanthropies as well as working with governments to put in place robust policies, private investors can be given the confidence and visibility they need to enter markets that would otherwise be perceived as too risky or unprofitable.
At the country, sectoral and project levels, real and perceived risks mean that the cost of capital for a typical utility-scale solar PV project can be twice as high in key emerging economies than in advanced economies.
Instruments, such as first-loss guarantees or subordinated loans, can offset investor fears about instability or uncertain project returns. Performance-based incentives for project developers can compensate for the marginal cost of using greener technologies. On top of this, concessional loans can reduce the hurdle rate that project returns must surpass. By demonstrating the path to profitability, we can enable markets to take off.
In total, we estimate that $80-100bn of blended finance annually could unlock private investment at the scale required, with roughly 40% of the blended finance funds needed in Africa.
Governments in developing economies need to put in place a strategic vision of their place in the emerging clean energy economy. This will help catalyse improvements to the business environment and support regulatory and policy reforms, which allow for private sector participation in clean energy projects and emerging clean energy supply chains. In turn, blended finance can help to shift us from the billions to trillions needed in private capital. This combination not only serves to reduce emissions, but it will also assist with a host of other priorities, from air quality to employment and economic growth. Meeting the rising energy needs of developing economies in a sustainable way is pivotal for these countries’ own needs, and for global energy and climate goals.