Tapping into the power of blended finance

The energy transition represents a transformative investment opportunity. And the world’s net-zero ambitions will either come to fruition or fail in the vast and dynamic Asia-Pacific region. Home to some 60% of the world’s population, it accounts for more than half of total global power demand. The fundamental challenge: according to the International Renewable Energy Agency (IRENA), about 85% of Asia-Pacific’s current consumption needs are supplied by fossil fuels.

Funds are flowing into the region to help bridge the gaps in generation, transmission and other vital components of infrastructure. The first half of 2023 saw a record US$358 billion global investment in renewables. About half of that total was invested in Asia-Pacific (the majority in China’s solar energy sector). But the funding gap remains substantial: US$1.2 trillion per annum of energy investment will be required between now and 2030 to get the region on the right track to meet net zero. Opportunities range from massively increasing new greenfield renewable energy projects such as solar and wind farms to pursuing less mature but equally appealing sectors such as green hydrogen and thermal energy. Other options include developing programmes to manage demand; building out transmission grids; and increasing the supply of nickel, cobalt, lithium and other critical minerals needed for batteries.

The transition is attracting investment interest and action from strategic investors, global infrastructure funds, sovereign wealth funds and venture capital. Take Singapore as one example. Keppel Corporation is working on the country’s first hydrogen-ready cogeneration power plant, Keppel Sakra Cogen Plant, in partnership with Mitsubishi Power Asia Pacific and Jurong Engineering. GIC, one of Singapore’s sovereign wealth funds, is focusing on investing in renewable energy and electricity utilities. And a new debt investment platform, Pentagreen, aims to accelerate the development of sustainable infrastructure in the marginal banking space.

But the private sector can’t fund the transition on its own, especially in emerging markets, where the risk associated with new investments and new business models is high. That’s where blended finance—the combination of public- and private-sector capital—can help bridge the risk gap, which threatens to hold up progress (see graphic below). As a recent PwC Strategy& report finds, by employing new types of financial instruments and engaging various stakeholders, such as multilateral institutions, blended finance can be a key tool in mitigating and allocating risk and in encouraging investors to engage with projects. The topic was front and centre at a roundtable convened by PwC in Singapore that brought together prominent leaders and voices in policymaking, investment and finance. ‘How can we raise and mobilise more blended finance in a more coordinated way?’ That’s the pressing question for the entire Asia-Pacific region as it seeks to decarbonise and ensure a just transition, according to Jackie B. Surtani, Regional Director of the Asian Development Bank (ADB). The bank is currently investing in projects, including working with the energy market authority in Singapore to import four gigawatts (GW) of renewable energy.

The energy trilemma—security, affordability and sustainability—is fundamentally unbalanced. Blended finance has a critical role to play in resolving the trilemma: making sure that energy is available to all at affordable prices, that those communities whose livelihoods are hit hardest by the move away from fossil fuels don’t get left behind and that the positive economic effects of the just transition can flow through the entire economy.

In Indonesia, an emerging economy with a fast-growing middle class, just 14% of final energy consumption comes from renewables. The country’s coal industry employs many thousands of people. Indonesia has created an Enhanced NDC (nationally determined contribution) target to reduce unconditional carbon emissions by 31.9% by 2030 and conditional ones by 43.2%. Five key investments are required to accelerate the energy transition in Indonesia:

• the development of transmission and distribution networks

• the early retirement and phase-down of coal-fired power plants starting in 2025 and ending in 2056

• dispatchable renewable energy acceleration

• variable renewable energy acceleration

• the development of renewable energy supply chains.

Indonesia has started two organisations to rally blended finance and meet these goals. Indonesia’s Just Energy Transition Partnership (I-JETP) was launched in 2022 in cooperation with the International Partners Group (made up of the governments of Canada, Denmark, France, Germany, Italy, Japan, Norway, the United Kingdom and the United States), with the ADB acting as a lead development partner. I-JETP intends to mobilise an initial US$20 billion in public and private financing over a three- to five-year period through grants, concessional loans, market rate loans, guarantees and private investments. US$10 billion will be provided by the members of the International Partners Group, and the other half is expected to be raised through private investment. I-JETP, which has a specific focus on the sustainability and resilience of local communities, has developed a working group with the United Nations Development Programme to assess the impacts of pursuing decarbonisation.

Although new, proven and scalable renewable-energy projects are attracting considerable investor interest, one critical part of achieving net zero continues to be neglected—namely, the accelerated phasing down of coal-fired power plants. Ninety percent of the world’s young coal-fired power plants—which have an average age of 13.5 years—are in Asia, and they need to be retired soon if climate goals are to be met. In India, coal-powered electricity accounts for more than 70% of generating capacity. Much of the global private investment community is pivoting away from coal-focused projects, preferring to invest directly into lower- or no-carbon sectors. “We are seeing investors focus a lot more on sustainable investments, not just in renewable energy but also in related sectors like storage,” explains Sharon Tay, chief executive officer of Keppel Asia Infrastructure Fund (KAIF). “Which is one of the reasons why the investment strategy for our follow-on value-add infrastructure fund, KAIF II, focuses on the sustainable urbanisation and decarbonisation agenda.”

When it comes to encouraging the transition away from fossil fuels, a blended finance model can add real value—reducing the return-on-capital investment risk for private finance (as well as the prospect of being saddled with stranded assets) by partnering with major public finance players including the World Bank and regional institutions such as ADB. Indonesia’s Energy Transition Mechanism focuses on using concessional and commercial capital to accelerate the retirement or repurposing of fossil fuel power plants and replace them with clean energy alternatives.

For example, ADB is currently working on the early retirement of a 660-megawatt coal-fired power plant in Indonesia. ‘By providing cheaper concessional finance combined with commercial money, blended together, we can ensure that the cost of financing is more attractive than the current financing,’ explains Surtani of the ADB. ‘By discounting future cash flows under a power purchase agreement, a new blended financing structure allows the retirement of the coal-fired plant earlier while keeping the existing shareholders whole. Otherwise, you are not going to convince private-sector investors to close down a plant that they have invested hundreds of millions of dollars in.’

Blending finance from public and private sources could help accelerate the shift away from coal by reducing the cost of capital, thereby shortening the payback period of a power station and hence inducing investors to accept the early retirement of their asset.

Blended finance also has a role to play in stimulating supply in Asia, where policies are mandating sharply higher levels of investment. Indonesia has created a green RUPTL (electricity supply business plan) and intends to increase the proportion of electricity produced through renewable energy from 15% in 2021 to 56% by 2030. The green RUPTL calls for more than 18 GW of renewable power plants to be developed through the country’s Comprehensive Investment and Policy Plan. Recent deals have involved solar farms, wind power plants and geothermal power generation. Here, blended finance mechanisms can reduce the risk exposure for private investors while also helping project developers access domestic and international debt finance.

India plans to meet its projected rise in peak demand, which is growing at a projected 6% CAGR through the end of the decade, largely by increasing non-fossil energy capacity to 500 GW by 2030—50% of which will come from renewable sources such as hydro, wind and solar. Electricity transmission continues to need support as India’s demand for energy grows, and the sector will require more than US$25 billion of additional investments over the next seven years. The good news is that the investment landscape remains vibrant—nearly US$2.5 billion has poured into the renewables sector so far. But it will need substantial foreign direct investment. GIC is just one private financier that has adopted a platform investing approach to blended finance. Recently, the sovereign fund partnered with Greenko, a renewable energy company in India that develops and manages assets on a long-term basis.

In Australia, where the Federal Government has targeted a goal of having 82% of electricity generation come from renewable sources by 2030, a huge amount of capital investment is required. The country will require a fivefold increase in utility-scale distributed solar, a sixfold increase in utility wind capacity, and a 24-fold increase in utility-scale storage, along with 10,000km of new transmission lines. Federal and state governments are looking to facilitate investment in the energy transition; announcing emissions targets to support renewables, storage and transmission; and shaping policy to support and accelerate renewables investment. One of the strategies has been to set up renewable energy zones (REZs). These REZs will be home to major transmission projects (government procured) that will facilitate the connection of much-needed generation and storage to help transition the grid.

Momentum for offshore wind is underpinned by the Federal Government’s Offshore Electricity Infrastructure Act, which provides a licencing regime. Australia already boasts 100-plus publicly announced hydrogen projects (most under development or under construction), representing more than US$250 billion in green hydrogen investment. This growing market is attracting both domestic and international companies, and is supported by a government subsidy and production credit scheme.

Focus on demand

Decarbonising energy supplies has long been the central focus of net-zero investment and activity. Increasingly, though, global investors and policymakers are expanding that focus to managing energy demand. After all, the cheapest and most efficient molecule of energy is the one you don’t have to use. ‘How we use our energy is a real emerging space,’ says Jon Chadwick, Partner, PwC Australia. ‘Companies globally spent US$10 trillion last year on energy, but they also spent US$600 billion on energy efficiency or electrification initiatives.’

India, for example, plans to convert all of its 250 million domestic electricity metres to smart metres. This creates an investment market opportunity of between US$11 billion and US$13 billion and needs to be achieved quickly.

Managing energy demand will take effort on the part of both public-sector entities and private companies. Despite the significant potential for change, some chunk of the investments in demand management are unlikely to deliver immediately obvious returns for private finance. Some may even involve creative new funding structures and approaches. Blended finance, therefore, will be essential in de-risking the capital investments needed and thus providing the incentive required for the private sector.

Throughout the Asia-Pacific region, the drive to decarbonise is accelerating even while governments must protect the security of energy supplies and ensure they are affordable for a population whose demand for energy is also increasing. But the size and cost of decarbonising are more than the public sector can handle on its own. The private sector, meanwhile, needs reassurance regarding the many risks involved in this comprehensive energy transition.

As our colleagues at Strategy& have noted, scaling up blended finance in Asia, and throughout the world, will require all key stakeholders to work collaboratively to forge a new future:

• The public sector should consult with the private sector at the design stage of projects—focusing on which risks the private sector is willing to take and for what level of return.

• Multilateral development banks must address internal issues concerning incentives, which typically focus on how much capital they deploy rather than how much capital they successfully mobilise. They must focus on recycling capital and standardise blended finance structures.

• Regulators need to think more systematically about how financial regulation and supervision can hinder or encourage the growth of blended finance.

• The private sector must continue to innovate on infrastructure financing solutions, especially with respect to using their skills and balance sheets to support projects during the riskier early phases.