Blended Finance for Clean Energy Projects in Indonesia, the Philippines, and Vietnam

14 Nov 2023
Authors: John Cotton, Senior Program Manager
Authoring Organisation: Southeast Asia Energy Transition Partnership (ETP)
Posted At: 11-2023

This blog is written by John Cotton, Senior Program Manager, Southeast Asia Energy Transition Partnership (ETP), Nancy Nguyen, Director of Consulting Operations, Asia Clean Energy Partners, and Peter du Pont, Co-Founder and Co-CEO, Asia Clean Energy Partners. 

The Southeast Asia Energy Transition Program (ETP) recently commissioned an eye-opening report that delves into the world of blended finance and its potential impact on the energy transition in three key countries in Southeast Asia: Indonesia, the Philippines, and Vietnam. Let's explore the report's key findings and understand why it is crucial for the region's sustainable future.

Status and Potential for Blended Finance

Southeast Asia faces significant challenges in expanding its clean energy infrastructure. The report highlights that innovative finance products have the potential to attract additional private capital, addressing shortfalls in project funding. Currently, more than $200 trillion in private capital is invested in global financial markets, and innovative finance mechanisms can tap into this vast resource.

One notable approach is blended finance, which combines public and private resources. It proves effective in mitigating investment risks, mobilizing diverse funding sources for clean energy projects, and fostering positive, lasting impacts on local financial ecosystems.

Capital Demand for Clean Energy

Between 2016 and 2020, the average annual energy investment in Southeast Asia was approximately $70 billion,with roughly 40% directed toward clean energy technologies like solar photovoltaic (PV), wind energy, and grid infrastructure. During this period, Vietnam emerged as a major player in renewable energy, deploying substantial capital into the sector. However, recent investments in clean energy in Southeast Asia remain considerably below the necessary level to meet the region's goals. To align with the Paris Agreement and address energy access and air pollution issues, Southeast Asia must increase its investment in clean energy by more than five-fold, requiring an annual expenditure of over $150 billion by the late 2020s. This necessitates greater access to international capital. 

Cost of Capital and Challenges to Raise Financing for Clean Energy

While renewable energy technologies have become more cost-effective globally, the cost of capital (CoC) for wind and solar PV projects in Indonesia, the Philippines, and Vietnam remains relatively high. This makes private sector investments in renewables less attractive compared to more developed economies. In these countries, the anticipated internal return rates (IRR) range from 10% to 15% in local currencies and 9% to 14% in US dollars, while the CoC for renewables ranges from 8% to nearly 13% in local currencies and 6% to 10% in US dollars. In contrast, more advanced markets like China, North America, and Western Europe enjoy significantly lower CoC rates, ranging from 3% to 5%. This disparity is due to well-developed renewable energy markets and supportive policies in these advanced economies.

Lessons Learned in Indonesia, the Philippines, and Vietnam

1. Government Support: Government support, such as clear energy goals and incentives like feed-in tariffs and tax breaks, is crucial for boosting investor confidence and attracting private capital. Vietnam's commitment to energy accessibility and climate treaties, along with incentives, has attracted more private capital to the clean energy sector.

2. Complementarity: Effective collaboration between private sector investors and Development Finance Institutions (DFIs) can significantly drive the clean energy transition. DFIs can mitigate risks, offer guarantees and technical assistance, and advocate for favorable policies.

3. Monitoring and Evaluation: Establishing robust monitoring and evaluation frameworks is crucial to measure additionality in blended finance transactions. These frameworks should be flexible, transparent, and adaptable to evolving contexts.

4. Local Capacity: Investing in education and skill-building within local stakeholders is essential to strengthen the participation of local banks and investors in blended finance transactions.

5. Collaboration and Adaptability: Successful blended finance initiatives require partnerships and adaptability as circumstances evolve. 

Summary of Key Findings

The report highlights several critical findings:

1. Southeast Asia needs to significantly increase investments in clean energy to achieve the goals of the Paris Agreement, necessitating access to international capital.

2. Investment in clean energy in Indonesia, the Philippines, and Vietnam falls short of regional requirements, and private capital accounts for about 60% of clean energy investment.

3. The cost of capital remains relatively high in these countries, and this poses ongoing challenges to attracting private investment.

4. Blended finance can play a pivotal role in unlocking clean energy projects' potential by addressing financial barriers, reducing risks, and mobilizing diverse funding sources.

5. The scaling of blended finance transactions faces obstacles such as complexity in deal structuring, high transaction costs, challenges in measuring additionality, uncertainty in regulation and policy, capital market immaturity and limited project pipelines.

Recommendations for ETP in Blended Finance

The report suggests several recommendations for ETP to drive the region's clean energy transition:

1. Collaborate with DFIs to enhance risk-adjusted returns in blended-finance deals.

2. Facilitate direct engagement between project developers and investors, creating a project marketplace.

3. Assist philanthropic organizations in identifying projects aligning with their funding priorities.

4. Develop capacity-building programs for local banks.

5. Aid in policy development and knowledge exchange with local governments and regulators.

To summarize, this report sheds light on how blended finance can play a role in stimulating and accelerating clean energy investment in the region, and the challenges that need to be overcome. The report provides detailed recommendations for different stakeholders—namely DFIs, project developers, philanthropic organizations, local financial institutions, and local governments and regulators. The report also includes a number of global case studies of institutions and programs that provide blended finance and an annotated list of 24 blended finance projects in Indonesia, the Philppines, and Vietnam.



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