Catalyzing Indonesia’s Just Energy Transition through Blended Finance

Indonesia is committed to reaching net-zero emissions by 2060 or before. To achieve this, the country launched the Just Energy Transition Partnership (JETP) in November 2022 with backing from the International Partners Group (IPG) countries (led by the United States and Japan) and the Glasgow Financial Alliance for Net Zero (GFANZ). This partnership aims to achieve key environmental goals, including peaking emissions of the power sector at 290 million tonnes of CO2 by 2030, attaining a 34% renewable energy mix by 2030, and achieving net-zero emissions of the power sector by 2050.

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To finance JETP targets, an initial fund of US$20 billion will be mobilized, comprising commercial loans provided by GFANZ-affiliated banks and various concessional loans, guarantees, and pledges.

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Unfortunately, Indonesia’s JETP still faces a shortfall in financial resources—echoing the challenge of the pioneer JETP in South Africa, where current funding covers less than 10% of the estimated capital expenditure (capex) investment required to successfully meet targets. The question for both countries is how do we close the 90% funding gap? One approach is to consider blended finance.

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How Does Blended Finance Solve Funding Challenges?

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More than 450 financial institutions managing over US$130 trillion have committed to the global net-zero emissions target by 2050. However, directing these funds towards decarbonization projects poses challenges. Many of these projects are in early development stages, carrying high investment risks. Furthermore, environmental benefits are frequently overlooked by the traditional credit models of private financial institutions.

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Blended finance is a promising solution to bridge this funding gap. It unites investors from diverse sectors, including philanthropy, government, and private, and brings together different risk and return profiles. Those with higher risk tolerance, such as development finance institutions (DFIs) and philanthropic funds, contribute capital to de-risk early project phases, acting as a cushion to attract further investments from those with lower risk tolerance.

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Blended finance also aligns differing investor objectives and leverages public and philanthropic funds to prevent the privatization of gains and socialization of losses. This approach is crucial for advanced economies to support the energy transition in developing nations.

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Several success stories already demonstrate blended finance’s effectiveness to mobilize funding for renewable energy projects:

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1. Sarulla Geothermal Power Plant (Indonesia): This project utilized public financing, guarantees, and feed-in tariffs to attract substantial private sector investments. It secured US$328 million in loans from commercial banks, and US$742 million from the Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC). A US$100 million concessional loan from the Climate Technology Fund (CTF) and Canadian Climate Fund (CCF) further optimized the project's cash flow.
2. Air Putih Mini Hydro Power Plant (Indonesia): PT Sarana Multi Infrastruktur (SMI) partnered with Agence Fran?aise de Développement (AFD) to implement a first-loss mechanism , which used a portion of the grant to cover initial losses. This de-risking tool subsequently attracted private capital.
3. Solar Power Company Group (SPCG) (Thailand): International Finance Corporation (IFC) and the Clean Technology Fund (CTF) provided a US$12 million loan to catalyze financing from three commercial banks in Thailand for SPCG's 12 MW utility-scale solar PV power plant. Within four years, SPCG has developed 250 MW of PV capacity and mobilized US$800 million in capital, transforming a sector that was non-existent in Thailand a decade ago.
4. La Jacinta PV Power Plant (Uruguay): Inter-American Development Bank (IDB) provided an A/B loan that was complemented by the Canadian Climate Fund (C2F). The longer loan tenor offered by the A/B loan increased investment attractiveness. The project was then refinanced through the issuance of A- and B-bonds.

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Tackling Challenges to Accelerate Blended Finance

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Despite the success stories and the clear advantages that blended finance offers, its widespread adoption is not without hurdles. The following key challenges must first be addressed to accelerate blended finance for a just energy transition:

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1. Establishing a viable project pipeline. The lack of bankable or investable climate projects often deter investors who, though interested, are dissuaded by risky return profiles. While blended finance can help distribute risks, more projects with viable returns are necessary. Facilitating access to carbon markets can also enhance the bankability of climate projects.
2. Developing finance mechanisms. Green financing products can minimize climate project costs and maximize impact. Selecting suitable financing mechanisms for each project’s unique needs and profiles is essential. Increased participation of international DFIs, particularly in the equity financing of projects, can help de-risk early exploration. Carbon pricing also play a pivotal role to accelerate energy transition through a monetization mechanism, especially to push for early decommission of coal-fired power plant (CFPP). Through blended financing, project owners can monetize the displacement of greenhouse gas emissions when retiring a CFPP earlier and replacing them with clean technology projects.
3. Creating an enabling environment. Suitable policies and regulations are needed to streamline business operations for financiers and project developers. This includes implementing mandates and incentives for renewable energy, and expertise to build and execute projects at the regional government level.
4. Enhancing data and monitoring. The absence of a standardized framework for climate finance measurement and reporting has resulted in significant data gaps and an incomplete understanding of financial flows and areas of critical need. In a recent study , BCG and The Rockefeller Foundation highlighted the shortfall in climate financing, with the current capital deployed meeting less than 20% of the total required. This deficit is more pronounced in some areas (adaptation & resilience) than others (electric vehicles).

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Stakeholders must address these challenges to unlock greater investment from financiers and accelerate the use of blended finance.

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Fostering Collaboration to Finance a Just Transition

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The path to financing a just transition is a collaborative endeavor that requires concerted effort from stakeholders.

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Governments and regulators must establish suitable policies and regulations to create a standardized framework and a conducive climate investing environment for investors. Simultaneously, project developers should invest in capability building to enhance project planning and implementation aspects that influence project bankability. Such efforts are realized through a commitment to good governance, underscored by data integrity and transparency.

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Financiers should also collaborate to create the right blended finance instrument to deploy catalytic capital as a means to optimize the achievement of each investor’s goals. Private investors are also encouraged to incorporate a sustainability lens into their investment portfolios and ensure proper tracking of their climate financial flows.

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By adopting these collaborative measures, it is possible to navigate the complex ecosystem of climate financing to drive forward a just energy transition.

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