IEEFA Cites Jharkhand Solar Policy To Support Blended Finance For DRE

A recent report by Institute for Energy Economics and Finance (IEEFA) has put the spotlight on the role of blended finance as a medium to support transition to renewable energy in developing countries.

The report defines blended finance as a medium to support scaling up financing for assets such as mini grids that have the potential to scale up but lack viable business models. By allowing investors with varying risk tolerances, it is an effective way to combine public-private partnerships and deliver finance to hard to fund projects at times. 

It further explained, “As India’s transition to a low carbon economy gathers pace, commercial financiers are mostly favoring sectors with utility scale potential, such as wind and solar. Meanwhile, other segments, such as mini-grid solar, struggle to obtain conventional finance. Blended Finance provides a coordinated, structured and tailored solution that can bridge the gap between private and public sector finance to combine in a risk adjusted return model and help aggregate smaller-scale projects with potential economic, social and environmental benefits for many millions, including those without any access to power. Blended Finance could also provide a blueprint for other developing economies to ensure no one is left behind in the energy transition.”

The IEEFA report found, “The gap between commercial imperatives and environmental objectives to be one of the big obstacles to the transition to renewable energy in developing countries, especially for smaller projects that target energy poor populations or nascent solutions.” It stated, “Blended Finance can be structured in a bespoke way to bring private sector and public finance together to aggregate smaller projects at commercially viable scale: a win-win for all.”

It elaborated, “The overall structure of Blended Finance includes several stakeholders, such as a nodal implementation agency, commercial capital providers (microfinance institutions, banks and nonbanking financial companies), catalytic capital providers (MDBs, philanthropies), project developers, local communities, customers, auditors and consultants.”

Citing the lack of scale in India, it says “For instance, the lack of sufficient scale to cover overheads, limited demand, cash-flow variability and access to low-cost financing have prevented a viable business model for India’s mini-grid industry. Appropriate Blended Finance mechanisms can help resolve this.”

“In India, connectivity to the national grid has been the predominant form of electrification. However, decentralised options hold significant potential in regions and demography where the grid network is yet to expand. Even where there is electricity access, grid reliability is poor, with frequent cuts and low voltage, creating a high dependence on diesel.”

According to the report, Blended Finance fits in as a financing tool for the aforementioned types of projects by pooling public and private capital in a risk-adjusted return structure, while adding an element of concessional capital to the pool.

“Commercial entities focus on risks and returns, and gauge risk based on factors such as proven business models, visibility of cash flows, and credentials of borrowers, which often are not strong in the case of several small scale and emerging interventions in clean energy,” says the report’s co-author, Namita Vikas, Founder and Managing Director, auctusESG.

Blended finance as a solution to distributed renewable energy (DRE), such as solar mini grids, emerging in several states:

• Mini-grids are a community-based power source wherein the location of the energy generation plant is close to the end client, resulting in a reliable, uninterrupted and low-cost energy system.
• It overcomes the challenges related to extending the national grid, such as costs, technology and losses due to transmission.
• While frontrunning Indian states such as Jharkhand have included mini-grids in the state solar policy (targeting 110MW through mini/micro-grids by 2027), India still has far fewer solar mini-grids than that required to create energy access across its hinterlands.
• Lack of finance has been a key inhibitor to scaling this segment.

Challenges to Scaling Up Mini-Grids

It highlighted some of the ongoing challenges faced by India. As per Smart Power India, about 4,000 solar mini-grids have been installed in India, of which 3,300 are government-financed and owned. The private mini-grid industry in India is still looking for a viable business model that would create scale while generating profitability.

To leverage Blended Finance and to scale up this segment requires:

• Challenges for private developers include aggregating small mini-grid projects in an asset pool, visibility of demand, estimating cash-flow variabilities, meeting variable costs, and incentives for upfront capital expenditure (capex) costs.
• Another risk private mini-grid operators face is the expansion of the central grid in their areas of operation. Rates of private providers vary and are often higher than tariffs of a state DISCOM, which may be subsidised.
• Financiers may lack or have limited understanding of the risks and returns of mini-grid solutions. Further, with rapidly developing technologies, the inability to appropriately structure financing or risk-mitigation mechanisms may also be a limiting factor.
• Given that these projects are often in the hinterland, they may involve communities with low income, high climate vulnerability, scarcity of credit track records, including low levels of energy consumption. Beyond these, high transaction costs in financing smaller volumes and an over-dependence on local banks with short maturity horizons also deter investors.