Blending financing for transmission infrastructure
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In this edition of Smart Energy’s Power Playbook column, Yusuf Latief speaks to Kevin Anderson of Climate Fund Managers (CFM) on their use of a blended model for transmission financing, which uses public capital to balance risk and enable private capital to enter.
In early March, at Smart Energy International I covered a major initiative to interconnect Southern African transmission, the Regional Transmission Infrastructure Financing Facility (RTIFF), a $1.3 billion target facility focused on improving strategic interconnection.
Managed by Southern Africa’s Power Pool (SAPP) and Development Community (SADC), Netherlands-based CFM were appointed managers.
What strikes a chord when looking at this specific project is how it battles the high-risk and high-capital nature of energy transmission projects.
It’s now almost four months into 2024 and financing transmission has already repeatedly been highlighted as a major theme that utilities, as well as the private sector, need to overcome to usher in net zero.
In that context, CFM’s facility, making use of blended financing, is of interest.
More from Smart Energy’s Power Playbook:
Europe’s grid is receiving record levels of investment. But is it enough?
The US power market: Bridging the transmission gap
A two-pronged approach
Blended finance involves the systemic and strategic use of development finance and funds to mobilise and engage private capital at scale through concessional financing and risk coverage.
The model has been recognised for its ability to unlock funds for investment in areas that are not well funded, particularly in developing economies.
Sitting down with Kevin Anderson, who heads strategic initiatives for CFM, he explained their model, which consists of a development and construction fund.
The first, development funding, is raised from the donor community, namely governments and development financial institutions (DFIs). This bout of funds, which is hoped to reach between $100 and $150 million, is purely meant to “unpack the complexities of developing new transmission lines.”
After this stage, should projects be found commercially viable, they are fast-tracked through a process to reach financial close. Then, they move on to the construction funding required to build the projects.”
And according to Anderson, an element propping up the finance model is that it is globally applicable.
“A country that seems to get it right is Brazil. There are quite a few business cases about how Brazil has gotten its transmission line business well established. In saying that, we don’t think you can just copy and paste.”
Anderson here refers to the case of Africa, which of course “has its own challenges, its own nuances and for that reason, we need to make sure that we understand the local market best.”
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Strategic $1.3bn fund to interconnect Southern African transmission
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Risk management
Ideally, a blended financing model involves the allocation of certain risks to public or private parties, balancing it out by evaluating who is best placed to manage and mitigate them.
Added Anderson: “It’s the role of the fund manager to try and address risks upfront.
“If, for example, you build a new transmission line in a country, just to find out that the utility is planning something similar in an adjacent area, you run the risk that your line might not have enough electrons to be transported,” says Anderson.
And this is but one risk. Anderson also referenced the problem of supply and demand, especially in the face of potential power outages.
“If you have a heavy user shutdown, near where your transmission line is, it might have a big impact on how the utility decides to move electrons due to a change in supply and demand.
“Ultimately, those are all inherent risks that we need to get our heads around.”
For investors looking to enter the transmission space, Anderson adds that it will be important to see the track record of the given fund manager, whether in the power sector or ancillary sectors.
“Because transmission lines have historically not been available to the private sector – it’s always been dominated by public utilities – the closest infrastructure sector match would be that of toll roads, and how private sector has stepped in to build and finance such assets.”
The skill set of the fund manager will also be critical. Anderson specifically draws a distinction between developing and building a project versus managing a 20-, 30- or 50-year-old assets.
Anderson of course speaks on behalf of CFM and the RTIFF, which he says has been generating a significant amount of interest from European governments and private sector to get on board.
“We will be in talks with the likes of the Dutch and Brits governments as a start and a few of the Scandinavian DFIs as well.”
Of interest here is that this paints a rare picture of government initiatives leading the way, generating interest for the private sector to follow.
Said Anderson: “Once you see governments get comfortable – they like the story, they like the initiative and they like the mandate – it should immediately then start unlocking the private sector. If the government’s getting into it first, we can marry the two and bring them together.”
What has been your experience investing in the transmission space and what are some emerging finance models on your radar?
Let us know.
Yusuf Latief
Content Producer
Smart Energy International
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