Development finance institutions (DFIs) account for only around 1 percent of total financing for energy sector investment, but their importance goes well beyond this relatively small share. DFIs are specialised financial institutions set up to support a range of economic and social objectives by financing projects that may not otherwise get commercial funding. Beyond funding specific projects, DFIs play a crucial role in enabling investments by providing sector-specific policy support or technical assistance which lay the groundwork for long-term, transformative changes in emerging markets.
IEA analysis has highlighted the need for scaling up clean energy investments, particularly in emerging market and developing economies (EMDE). The recent World Energy Investment report (WEI) underscored the imbalances in capital flows, with 85 percent of today’s clean energy projects in advanced economies and China. DFIs can play a vital role in stimulating more of these projects in EMDE, helping to attract larger volumes of private capital.
This analysis follows a recent overview of the sources of finance for energy-related investments and explores in more detail the role of DFIs in financing secure, affordable and sustainable energy. It looks at three topics:
- the instruments that are used by DFIs to meet the energy investment needs of different regions and project types
- the impact of DFI interventions in mobilising additional capital for climate from private sector participants
- what more can be done by DFIs to accelerate clean energy transitions.
More:
Financial arrangements tailored for development impact
From 2019-2022, DFIs disbursed on average around USD 24 billion each year in finance for energy sector projects. Africa, Asia and Latin America were the largest beneficiaries. Around 80 percent of this was for clean energy projects, with remaining financing for fossil fuels mainly going to the midstream, for refineries.
While the overall capital structure in the global energy sector has a relatively equal balance of debt and equity financing, DFIs operate in a different way — debt instruments account for over 90 percent of DFI financing, followed by small amounts of grants and even less equity. Their high reliance on debt instruments is driven by the need to ensure financial sustainability, manage risk, and leverage limited capital for significant impact. This reflects both the strategic priorities and the operational constraints within which DFIs operate.
DFIs are fundamentally driven by a specific logic of development. While EMDEs other than China are faced with large shortfalls in clean energy investment, accounting for only 15 percent of the global total, Africa, Asia and Latin America are the largest beneficiaries of DFI financing, demonstrating that it is a primary means of investment support in EMDE.
The development mandates pursued by DFIs are also visible in the mix of different financial instruments for each region. Sub-Saharan Africa, for instance, not only receives the largest amount of DFI financing but also has the highest Official Development Assistance (ODA) to Other Official Flows (OOF) ratio, with a significantly large amount of grants and higher than average equity. India, on the other hand, has the second-highest ODA to OOF ratio but receives most of its ODA in the form of debt rather than grants, while China has a significantly lower ODA ratio. This pattern shows that regions that have limited repayment capacities and depend on concessional financing are recipients of the most forgiving forms of financing, whereas other borrowers with stronger infrastructure and more commercially viable projects receive less concessional forms of financing.
In the past decade, DFI financing for clean energy is more than four times that of fossil fuels, with over half of the clean energy investments provided in a more concessional form of financing.
Source: IEA
