Article written by Chris Ahlfeldt and Ipyana Mwasambili
The clean energy transition in many emerging markets faces another inflection point. The pullback of international aid funding creates both demand for and an opportunity to leverage local investment for future projects along with other sustainable investment sources. While renewable energy solutions are often the cheapest option for electricity access and provide well-documented economic benefits, financing remains a critical bottleneck especially for sub utility-scale installations. While utility-scale projects attract competitive finance from many global banks now, smaller installations with higher impact potential still struggle with affordable financing options and currency risk.
How Blended Finance Drives Clean Energy Investment
Blended finance, a powerful tool combining private capital with public investment, increased by 107% from $5.6 billion in 2022 to $11.6 billion for climate focused initiatives in 2023. Moreover, providing universal access to electricity in Africa by 2030 will require $200 billion per year, with about 67% going towards clean energy. Blended finance will be a key tool to help overcome perceived risks in future climate focused initiatives and can help bridge the funding gap to enhance resilience in communities most vulnerable to climate change.
Blended finance plays a key role in unlocking clean energy investment in emerging markets. By mitigating risk and enhancing creditworthiness, blended finance models like green bonds, catalytic grants, and concessional loans help developers secure capital for innovative projects. By attracting relatively small amounts of impact funding, blended finance can improve a project’s risk profile making it more attractive to private investors. This approach is particularly valuable for renewable energy initiatives because of the upfront costs with equipment and payback periods that can discourage some private investors who view it as too risky.
Organizations working to improve renewable energy access for off-grid communities or those with unreliable access to electricity are well positioned to benefit from blended finance. For example, by lowering the risk profile for projects, they can attract more funding to scale sustainable business models that reach underserved areas while increasing economic growth, job creation, and the capacity to both mitigate and adapt to climate change. By bridging public and private sector interests, blended finance plays a crucial role in tackling global challenges and scaling sustainable solutions.
Case Study: Aptech Africa’s Renewable Energy Growth Enabled by Blended Finance
A small renewable energy company’s experience in Uganda, highlights how blended finance can drive a transformative impact. Aptech Africa specializes in providing solar-powered solutions for water pumping, irrigation, and off-grid energy, for communities, schools, and hospitals in Africa. Originally founded in Uganda, the company faced significant funding barriers due to its lack of collateral and credit history. Aptech Africa leveraged a market opportunity to initially raise impact investment funding that would address two key challenges:
- “Over 60% of Uganda’s population lacked access to safe drinking water, with climate change impacting agriculture.”
- “Around 70% of Ugandans depend on agriculture for their livelihood, so droughts can lead to food shortages.”
The company received a $250,000 two-year loan in 2018 from the United Nations Capital Development Fund (UNCDF) helping the company overcome a financial barrier and expand operation. After just one year of making loan payments to UNCDF, Aptech Africa used this track record to obtain an additional $800,000 in private capital through a financing arrangement with Stanbic Bank. This operation made measurable improvements for local agriculture output, generating jobs, and increasing energy access in rural areas.
How to Overcome Challenges in Scaling Clean Energy with Blended Finance
While blended finance attracts more private capital to scale investment along with impact, local banks and financiers add another layer of complexity to the deals. Local private capital comes with its own bankability criteria, return expectations, and potential bias to the perceived risk profile of some projects. Key barriers include:
- Limited familiarity with clean energy technology and financial models
- Perceived risk with project bankability especially for distributed projects and for some customer demographics
- Regulatory uncertainty in emerging markets
For example, some local banks and financiers still have limited experience financing new technologies like solar PV systems with battery storage so may assign higher risk to these deals. Capacity building that’s deployed alongside blended finance tools is one solution that’s been used in recent years by development finance institutions (DFIs) to improve financial literacy with clean energy investing.
In addition, many small businesses and people still don’t understand or know how to access green finance that’s been committed by DFIs or international capital providers. Opportunity remains to mainstream these financing tools via local channels and fintech companies to reach more inclusive with the deployment of capital.
The Future of Climate Finance: Unlocking Private Capital for the Energy Transition
Blended finance has the potential for unlocking and scaling clean energy investments by mitigating risks and mobilizing private capital in high-impact sectors. The success of Aptech Africa in Uganda highlights the importance of strategic financing mechanisms to increase the potential for productive use of energy and bridge the finance gap. It’s up to investors, policymakers, and development finance institutions to make blended finance tools widely available to everyone including small-scale projects and individuals to unlock its transformative potential in achieving both sustainability and energy transition goals.
👉Are you looking to develop a pipeline of bankable clean energy projects or interested in learning more about other blended finance opportunities? 📩 Contact us today to explore investment opportunities and develop a strategic clean energy investment roadmap.
Co-authors
Ipyana Mwasambili co-authored this article as is currently working as an intern at Blue Horizon ECS. She has an interest in ESG analysis and advocacy for environmental and social issues. To reach Ipyana directly, you can contact her through LinkedIn.
Chris Ahlfeldt has over 15 years of in-depth work experience in the clean energy and sustainability industries primarily in the North American, Asian, and African markets. He’s also been involved in a number of interdisciplinary sustainable infrastructure and energy projects including climate finance strategy for an international bank, just energy transition grant deployment, renewable energy & off-grid policy, investor market entry strategy, economic development impact, and legislative/regulatory reforms in various countries in Africa (e.g. South Africa, Zambia, Thailand, Mozambique, Namibia, eSwatini, Liberia, Kenya, Botswana, Madagascar). He obtained an Energy Systems Engineering B.S. degree at Stanford University and has lectured at leading business schools on Environmental Finance, Renewable Energy, ESG, and Impact Investing. You can contact him here.