Blended Finance: Key to Bridging Energy Transition Gap in Developing Countries, Says New Report

Mini-grids and Tailored Capital Unlock Renewable Energy Access for Millions

As emerging economies move towards a low-carbon future, new technologies and untapped demographics are emerging. A joint report by the Institute for Energy Economics and Financial Analysis (IEEFA) and auctusESG highlights Blended Finance as a key solution to overcome challenges and unlock affordable capital for these projects.

The report finds that commercial financiers in developing economies primarily focus on large-scale wind and solar projects, neglecting smaller-scale initiatives like mini-grid solar. These smaller projects offer significant economic, social, and environmental benefits, particularly in regions struggling with energy poverty.

“Blended Finance typically targets projects with combined developmental goals that wouldn’t attract conventional financing or those in sectors with unestablished risk-return profiles,” explains Vibhuti Garg, IEEFA’s South Asia Director and co-author of the report. “It acts as a bridge between the social need for finance and the market’s current offerings.”

The report outlines how Blended Finance achieves this by merging public and private capital in a risk-adjusted structure, incorporating concessional capital to enhance its appeal.

“Commercial entities prioritize risk and return, evaluating factors like proven models, cash flow visibility, and borrower credentials, which are often weak in many small-scale clean energy interventions,” says Namita Vikas, auctusESG founder and co-author. “Blended Finance’s tailored approach mitigates perceived financial risks, attracting commercial capital at scale.”

This approach involves a diverse stakeholder group, including nodal agencies, commercial capital providers, catalytic capital providers, project developers, communities, customers, and consultants.

“Blended Finance essentially uses commercial loans alongside concessional instruments like grants or subsidized loans to achieve positive social impact,” explains Shantanu Srivastava, IEEFA’s Lead Analyst for Sustainable Finance & Climate Risk and co-author. “While not a pure grant, it still demands reasonable financial returns, even if they differ from market rates.”

The report emphasizes the potential of Blended Finance to improve lives in emerging economies, particularly those lacking access to grid power.

“This approach allows those facing energy poverty to leapfrog fossil fuels and embrace renewable energy opportunities,” says Sourajit Aiyer, auctusESG vice president and co-author. “It can also serve as a model for other developing nations to ensure an inclusive energy transition.”

The report identifies mini-grids as a promising renewable energy solution aligned with a just transition, particularly in areas with unreliable or expensive central grid power. Proposed solutions include:

  • Scaling up mini-grids through Blended Finance mechanisms that mitigate specific business model risks.
  • Combining grant-funded technical assistance, revenue shortfall guarantees, concessional and market-rate debt, developer equity, and asset aggregation.
  • Fostering community engagement to build demand buy-in, conduct accurate demand estimation, and implement robust measurement, reporting, and verification (MRV) for scalability and commercial viability.

This report offers a valuable roadmap for capital providers seeking to invest in the energy transition. It demonstrates how Blended Finance’s tailored structure can aggregate smaller projects into commercially viable ventures, creating a win-win for all and showcasing a successful model of trickle-down economics.

Read the full report: Blended Finance: Key to Bridging the Energy Transition Gap in Developing Countries