Blended Finance and Clean Energy

Topic: How can blended finance deliver low carbon transition in energy sector?

Modern world which is totally depend on technology and energy devices, from our domestic LPG to mobile phones and laptop, where energy plays a great role to run this modern world. It is very important to understand, from where this energy comes? Energy as a electricity comes either from fossils or from non-fossils fuels due to lack of technology, viability and efficiency in renewable or non-fossils energy in past, resulted tremendous growth of fossils energy sector but now it is possible with modern technology and behavioural approach towards climate to increase the proportion of renewable source of energy and helps to low carbon transition in energy sector, which further plays vital role to decrease carbon emission and save environment in long run.

What are the causes that hinders the path to deliver low carbon transition in energy sector?

·         Unpredictability of weather: role of changing environment and weather is crucial. for example, solar panel only works in day, in presence of Sun which means during Night we have to relies on other source of alternate energy system, so again this cause hinderance in low carbon transition in energy sector.

·         Finance and Investment: First and foremost cause is the requirement of huge capital investment in initial infrastructure of renewable energy project, to solve the problem of finance and investment in clean energy blended finance could be one solution. 

What is blended finance?

Blended finance can be defined as the developmental investment which is blended by private and public authority to complete the goals of development such as sustainable development goals (SDGs).

Under SDGs-7, affordable and Clean Energy is mentioned where affordability is very much concern and challenge to make clean energy viable. Blended finance helps to achieve this goal in energy sector.

SO, How Blended finance Helps?

·         Involvement of Private players in development finance with good return attracts the investors and helps to generate capital investment in clean energy which further change the path towards low carbon transition in energy sector.

 

·         CSR (corporate social responsibility) and Philanthropy could be one way to invest in climate and environment and solve the problem of carbon emission.

 

·         Risk reduction due to blended mode of risk-reward transfer can helps or Nudge the corporate sector to work and invest in clean energy sector.

Let’s take an example to understand the risk reward ratio of blended financing in clean energy infrastructure:

PPP (public private partnership) model is very common to enhance and complete the target or to invest in viable project which gives best return but in development financing infrastructure such as energy projects which require huge capital investment at starting and the return is in small proportion in long run, then PPP model with Blended frame will helps. which means government uses multiple instruments to increase the investment (like incentivization, tax rate cut etc.).

Instruments which nudge the blended finance:

1.      Economical instruments: PLI (production linked incentives), Tax Rate cut and registration fee exemption in green technology such as EV Vehicles will help EV (Electric vehicles) corporates and helps to transit carbon emission.

2.      Environmental instruments: Environmental rating, indexing and certification helps to nudge the customers to switch towards them. promoting green energy, 5 star rated electronic products and special certificates to best environmentally friendly appliances will help to investor and consumers to move towards those products. Which create large finance to those company and nudge them to improve their ranking and further reduce carbon emission.

3.      Regulatory Instruments: PPA (power purchase agreement), rooftop solar panel, Different clean energy regulations (such as PM KUSUM, Solar parks, RE market, etc) these are helpful to create friendly environment for the investors to finance in clean energy sectors to increase the demand and make market viable.

Multiplier effect of blended financing in Energy sector: once the private company get profited from risk transfer, it will again invest in same, which attract to those developmental financing.

Way Ahead:

·         Separate market for Developmental financing (like capital market regulated by SEBI in India) needed for better performance and return.

·         Multilateral developmental banks and Developmental financial institutions are key pillar for blended financing in developmental projects but Decentralized MDB (Multilateral developmental banks) and Developmental financial institutions will help more in this case at grassroot levels.

·         Nudge the behaviour of consumers to create more demand and attract better rewards.

·         Circular economy helps to create sustainable and more environmentally friendly product and nudge the customer towards it, blended financing with circular economy concept create revolution in future. 

On the above mentioned points the importance of blended finance and future of blended finance is very vital in energy sector to reduce the carbon emission and increase the tendency to protect or nudge the behaviour of each individual towards the mother earth.