Blended finance has recently gained attention as a potent tool for effectively directing development finance towards addressing challenges such as inadequate infrastructure and significant initial costs. This capability makes it possible for energy transition projects to become financially feasible and attractive to private investors, thereby playing a crucial role in ensuring the availability of funding for an equitable energy transition.
It is evident that blended finance is still in its nascent stages concerning climate initiatives, but the potential it holds for securing financing for a fair energy transition is substantial. However, to fully harness this potential, concerted efforts are required to overcome barriers with robust policy support, clearly delineate the roles of each stakeholder, draw from successful past experiences, and address capacity development requirements.
The accomplishment of global energy transition objectives largely depends on the climate pathway chosen by emerging markets and developing economies (EMDEs). Without significant investments in advancing energy transition within their jurisdictions, the global battle against climate change will encounter a major obstacle. For these countries to achieve their energy and climate targets, investments in clean energy must increase from US$770 billion in 2022 to US$2.2-2.8 trillion annually by the early 2030s, with about 60% of this amount expected to come from the private sector.[1]
Blended finance has emerged as a potent mechanism for strategically utilizing development finance to overcome challenges such as inadequate infrastructure and substantial initial costs, thus making energy transition projects financially viable and attractive to private investors. This makes blended finance a tool for nurturing markets that can, in turn, attract commercial finance.
To date, only a modest US$109 billion of global blended finance deals aimed at addressing climate change have been concluded, as indicated by Convergence, which falls short of the capital requirements for the global energy transition.[2] While the majority of these deals have been implemented in EMDEs, the focus has been primarily on Sub-Saharan Africa (SSA), which accounted for 48% of the transactions between 2020-2022, followed by Latin America and the Caribbean at 24%. Thus, there is an urgent need to significantly expand the scope and diversify the mechanisms of blended finance across the economies of the Global South.
The clean energy transition presents significant opportunities but also poses numerous challenges. On one hand, it holds immense economic potential for communities worldwide. However, if not executed fairly, it could unfairly burden vulnerable populations with high costs and unequal benefits, ultimately affecting the livelihoods of at-risk communities and millions of individuals employed in carbon-intensive industries. Consequently, any energy transition must be fair and take into account the adverse social and environmental impacts it may have on people.
In this context, the importance of raising blended finance for funding a just energy transition in emerging economies cannot be overstated.
Footnotes:
[1] International Energy Agency. IEA-IFC Joint Report Calls for Ramping Up Clean Energy Investments in Emerging and Developing Economies. 21 June 2023.
[2] Convergence. State of Blended Finance 2023. 25 October 2023.
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