How to Structure a Blended Finance Deal for African Renewable Energy Projects

Introduction

Africa’s renewable energy sector presents one of the world’s most compelling infrastructure investment opportunities. The International Energy Agency reports that as of 2025, almost 600 million Africans lack reliable electricity access[1]. Africa requires significant investments to scale solar, wind, hydro, battery storage and mini-grid projects. Despite, the abundant renewable resources, many projects struggle to attract sufficient capital due to the perceived political, regulatory, and offtake risks associated with investments in developing countries. This is where blended finance becomes vital.

Blended Finance

Blended finance involves the combination of concessional or catalytic capital from development finance institutions (“DFIs”), governments, philanthropic organizations, or climate funds with commercial capital from banks, institutional investors and private equity sponsors. The objective is simple, derisk projects sufficiently to crowd in private investments into projects that would otherwise be considered unbankable.

A foundational economic rationale for adopting blended concessional finance in a project starts with a clear articulation of the contributions of the project to development. Additionally, in determining the potential impact of a project’s contributions to the community, this should be considered in two levels. Firstly, the direct impact of the project to the key stakeholders such as the government, employees, suppliers, customers and the overall community. Secondly, one should consider the impact on the market such as its effect on competitiveness, resilience of the market to external shocks and inclusiveness of employment and services.

For African renewable energy projects, successful blended finance structures often determine whether a project reached financial close or remains stuck at the feasibility stage. Thus, in structuring blended finance for a renewable energy project, there are key steps which must be adopted by the project stakeholders to achieve optimised results, this includes:

Step 1: Project Identification and Market Assessment

The foundation of every successful renewable energy transaction is the identification of a commercially viable project in a market with strong energy demand fundamentals. This would involve an assessment of national electrification gaps, government renewable energy targets, regulatory frameworks, grid infrastructure availability, currency convertibility, political stability and creditworthiness of the proposed off taker. By doing so, the project stakeholder should be able to determine what framework to develop its projects, whether Independent Power Producer (“IPP”), Public-Private Partnerships (“PPPs”) or mini-grid concession models.

Additionally, it is at this stage that project sponsors also determine whether the project has the proper features to attract concessional financing.  Research show that the common feature sought by DFIs and climate focused financiers are generally projects that deliver strong developmental impact, including increased electricity access, emissions reduction, local job creations, gender inclusion or rural electrifications.

Step 2: Early-Stage Project Preparation and Feasibility

One of the largest financing gaps in African infrastructure is the development stage itself. As a result, before commercial lenders commit to a project, the project stakeholders are required to conduct significant preparatory work. This includes activities such as technical feasibility studies, Environmental and Social Impact Assessments (“ESIAs”), Grid integration studies, land acquisition, resource assessments, financial modelling and legal and regulatory due diligence.

This phase is often funded through grants, technical assistance facilities, or project preparation funds provided by DFIs, climate funds, or donor agencies. Blended finance structures frequently begin here. Concessional funding absorbs early-stage development risk that private investors are unwilling to bear independently. This enables projects to mature to a stage where commercial capital becomes viable.

Step 3: Structuring the Capital Stack

The core of blended finance lies in the capital structure. A typical African renewable energy blended finance structure may include a blend of the following forms of capital:

• Sponsor Equity: Project developers and strategic investors provide initial equity capital. This demonstrates sponsor commitment and aligns incentives.
• Concessional capital: DFIs, climate funds, or philanthropic investors provide concessional financing through first-loss equity, junior debt, subordinated loans, grant funding, interest rate subsidies, or technical assistance. This layer absorbs higher project risk and improves the risk-return profile for senior investors.
• Senior Commercial Debt: Commercial banks, institutional lenders, export credit agencies, or infrastructure funds provide senior debt once project risks are sufficiently mitigated.
• Guarantees and Risk Mitigation Instruments: Political risk insurance, partial risk guarantees, liquidity support facilities, and foreign exchange hedging instruments are commonly introduced to further enhance bankability.

According to the IFC Blended Finance Framework[2], blended finance solutions may be structured as debt, equity, guarantees, or risk-sharing products depending on the risks being addressed.

Step 4: Risk Allocation and Bankability Enhancement

Commercial investors participate only when project risks are appropriately allocated. A key principle applied in most successful projects is that risks should be best allocated to the parties best capable to handle the risk. In African renewable energy transactions, the principal risks include off taker payment default, political and regulatory instability, currency volatility depreciation, construction delays, resource variability, transmission constraints and force majeure events[3]. Blended finance structures strategically allocate these risks among stakeholders. For example, governments may provide sovereign guarantees, multilateral agencies may provide political risk insurance, DFIs may offer subordinated debt, climate funds may provide concessional tranches and sponsors may absorb construction risk through EPC arrangements.

The objective is not to eliminate risk entirely, but to reduce risk to levels acceptable for commercial lenders.[4] Importantly, DFIs emphasize the principle of “minimum concessionality.” Concessional funding should only be used to the extent necessary to catalyse private capital without distorting markets.

Step 5: Securing Revenue Certainty

Revenue certainty is central to achieving financial close. Most utility-scale projects rely on long-term power purchase agreements (“PPAs”) with governments, utilities, or corporate off takers. Investors scrutinize tariff stability, currency denomination, termination compensation, payment security mechanisms, and indexation provisions.

Where utilities have weak balance sheets, blended finance structures often incorporate payment guarantees or liquidity facilities backed by DFIs or multilateral institutions. For mini-grids and distributed renewable projects, blended finance may support viability gap funding, results-based financing, or consumer subsidy mechanisms to improve affordability and investor returns.

Step 6: Environmental, Social and Governance Compliance (“ESG”)

DFI’s require strict compliance with international ESG standards. Projects seeking blended finance typically must comply with IFC Performance Standards, equator principles, climate disclosure frameworks, anti-corruption requirements and community engagement obligations. Strong ESG compliance materially improves investor confidence and broadens the pool of available financiers.

Increasingly, institutional investors view robust ESG governance as essential for long-term infrastructure investments across emerging markets.

Step 7: Financial Close and Syndication

Once the financing structure, risk allocation, project agreements, and due diligence processes are finalized, the transaction moves toward financial close. This phase includes finalization of financing documents, satisfaction of conditions precedent, execution of security packages, perfection of collateral, completion of insurance arrangements and drawdown mechanics.

DFIs frequently play a catalytic role by anchoring the financing round, which signals confidence to commercial investors and enables broader syndication. According to the IFC Blended Finance Overview[5], IFC-supported blended finance projects have mobilized billions in additional financing by using concessional capital strategically to crowd in private investment.

Case Study

Case Study: IFC and SIMA Solar Green Bond Initiative (Africa, 2024)

In 2024, the International Finance Corporation (“IFC”), alongside Symbiotics Investments (“SIMA”), the Government of Finland, and the Global Energy Alliance for People and Planet (“GEAPP”), launched a US$150 million Solar Green Bond initiative aimed at financing distributed renewable energy developers across Africa. The transaction represents a modern example of blended finance being used to mobilise private capital into underserved renewable energy markets.

The financing structure combined concessional and commercial capital layers to improve investment viability. IFC acted as the anchor investor while concessional funding support was provided by Finland and GEAPP. The blended structure was specifically designed to reduce investment risks associated with financing small and medium-sized solar energy developers operating in frontier African markets. By absorbing part of the investment risk through concessional mechanisms, the initiative sought to attract additional institutional and private sector participation.

The initiative demonstrates several of the blended finance principles discussed in this paper. First, concessional capital was strategically deployed to address market barriers that commercial investors would ordinarily consider too risky, particularly credit risk, foreign exchange exposure, and limited access to long-term financing for distributed energy companies. Secondly, IFC’s participation provided market confidence and enhanced the credibility of the financing structure, thereby crowding in additional investors. Thirdly, the programme targeted projects with strong developmental impacts, including improved electricity access, emissions reduction, and support for energy transition objectives across underserved communities in Africa.

The structure also illustrates the principle of minimum concessionality often emphasized in blended finance transactions. Rather than replacing commercial financing, concessional capital was used selectively to improve the overall risk-return profile sufficiently for private investors to participate. This enabled the initiative to mobilise substantially larger pools of private capital than would otherwise have been available for distributed renewable energy investments in African markets.

Importantly, the Solar Green Bond initiative highlights the growing role of capital market instruments in African renewable energy finance. Instead of relying solely on traditional project finance structures, the transaction used a green bond platform to aggregate financing for multiple renewable energy projects. This model improves scalability, diversifies risk exposure, and creates opportunities for institutional investors to participate in Africa’s clean energy transition.

The initiative therefore serves as a strong illustration of how blended finance can be used not only to finance individual renewable energy projects, but also to develop broader financing ecosystems capable of accelerating renewable energy deployment across Africa.

Conclusion

The success of blended finance in African renewable energy projects depends on designing a financial architecture that aligns development impact with commercial viability. The most effective structures typically combine Concessional capital for risk absorption, commercial capital for scale, strong contractual protections, government support mechanisms, ESG compliance and transparent governance frameworks.

As Africa accelerates its energy transition, blended finance will remain indispensable in bridging the gap between infrastructure demand and available private capital. The continent’s renewable energy opportunity is enormous but unlocking it requires financial structures capable of reconciling developmental priorities with investor expectations. Done correctly, blended finance does more than fund projects. It creates markets, reduces investment barriers, and establishes a pathway for long-term commercial participation in Africa’s clean energy future.

References 

[1] International Energy Agency. (2025). Financing electricity access in Africa. IEA

[2] Using Blended Concessional Finance to Invest in Challenging Markets

[3] Organisation for Economic Co-operation and Development. (2020). Blended finance principles guidance. OECD Publishing. https://www.oecd.org/dac/financing-sustainable-development/blended-finance-principles/

[4] Convergence. (2024). The state of blended finance 2024. https://www.convergence.finance/resource/the-state-of-blended-finance-2024/view

[5] International Finance Corporation. (2021). IFC blended finance: Mobilizing the private sector for development impact. International Finance Corporation. IFC PDF Report