Circular Finance: The Missing Link in the Energy Transition

The global debate on energy transition is often framed in technological or environmental terms. For much of the developing world, however, the transition is fundamentally a development challenge. The central question is not merely how to decarbonise energy systems, but how to do so while expanding energy access, preserving fiscal sustainability and ensuring that the benefits of development are broadly shared. 

Approximately 666 million people worldwide still lack access to electricity, more than 2 billion rely on polluting fuels for cooking and developing Asia alone accounts for nearly 1.1 billion people without access to clean cooking solutions.

At the same time, millions of livelihoods across developing economies remain linked to fossil-fuel value chains. The challenge is therefore dual: expanding energy access for those who remain underserved while managing the social and economic consequences of transition for workers and communities dependent on existing energy systems.

The challenge becomes even more complex when viewed through the lens of financing.

According to the International Energy Agency, annual clean-energy investment in emerging and developing economies must increase from approximately $770 billion today to between $2.2 trillion and $2.8 trillion annually by the early 2030s. Excluding China, annual requirements rise from roughly $260 billion to between $1.4 trillion and $1.9 trillion.

Indonesia's own plans underscore the magnitude of the task. The Just Energy Transition Partnership and its Comprehensive Investment and Policy Plan estimate power-sector investment requirements of approximately $97 billion between 2023 and 2030. President Prabowo Subianto has also announced plans for roughly 100 GW of additional solar capacity. Including transmission, storage and grid upgrades, the investment requirement could easily exceed $120 billion.

These numbers reveal an uncomfortable reality. Even substantial international financing packages represent only a fraction of total requirements. The success of the transition will depend primarily on domestic financial systems, capital markets and financing architectures capable of supporting investment over several decades.

The conventional response has been to expand financing instruments, like social bonds and transition bonds, and lending platforms. While valuable, these efforts often rest on the assumption that the principal constraint is a shortage of capital.

Viewed globally, this assumption is difficult to sustain. Global retirement funds, sovereign wealth funds and major asset managers collectively control well over $200 trillion. The world is not suffering from a shortage of savings.

The real constraint is a shortage of risk-bearing capital.

Most institutional investors are willing to invest in mature assets with stable cash flows and predictable returns. They are considerably less willing to absorb construction risk, regulatory uncertainty, technology risk or demand risk. Yet these are precisely the risks associated with many of the investments required for energy transition, including transmission networks, storage systems, grid modernisation and investments in underserved regions.

At the same time, governments' ability to absorb these risks through their own balance sheets has become increasingly constrained. Many of the financing innovations currently in vogue remain fundamentally debt instruments. Whether borrowing occurs through sovereign balance sheets, public enterprises, development banks or project vehicles, leverage somewhere in the system generally increases. Global public debt now exceeds 90% of world GDP. Even countries with relatively strong fiscal positions, such as Indonesia, cannot realistically finance a multi-decade transition primarily through continuous debt accumulation. 

The challenge confronting developing countries is therefore not simply capital mobilisation. It is capital architecture.

Capital Recycling
This is the context in which the concept of Circular Finance becomes relevant.

Circular Finance is a framework for organising development finance around the changing risk profile of assets over time. It starts from the premise that public capital is often left locked in mature assets long after the original risks have dissipated.

Circular Finance proceeds from a different premise. As projects mature and risks decline, ownership and financing should progressively migrate to investors whose risk appetite matches the asset’s new risk profile. Public and concessional capital can then be released and redeployed into new projects where financing constraints remain greatest. In this manner, capital does not merely finance development once; it circulates through successive rounds of development.

India's experience provides useful illustrations.

Infrastructure Investment Trusts have enabled operational infrastructure assets to attract long-term institutional investors, allowing sponsors to recycle capital into new projects. The National Highways Authority of India has raised approximately $5.5 billion through such structures, while India's broader InvIT ecosystem now manages infrastructure assets worth around $80 billion. Infrastructure Debt Funds perform a similar function by refinancing operational projects and releasing capital for new investment.

Indonesia already possesses most of the institutional building blocks required, including PT SMI, the Indonesia Investment Authority, state-owned enterprises, MDBs, pension funds and capital markets. The challenge is to connect them into a coherent financing architecture.

Public and concessional resources should focus on areas where risks remain highest: transmission expansion, storage systems, grid modernisation, energy-access programmes and investments in underserved regions. As these assets mature, pension funds, insurers and infrastructure investors can refinance them. The released capital can then be recycled into the next generation of projects. An Energy Transition Recycling Facility could provide one mechanism for institutionalising this process.

The significance of Circular Finance extends beyond financing efficiency. Markets are generally willing to finance commercially-viable assets. They are less willing to finance workforce retraining, economic diversification in coal-dependent regions, rural electrification, affordability programmes and remote communities. By recycling public and concessional capital repeatedly, governments create greater fiscal space to support precisely these objectives.

For emerging economies, this may be the most important implication of all. The question is not whether sufficient capital exists. It does. The question is how to organise capital so that scarce public resources are used repeatedly rather than once.

The promise of Circular Finance is simple: development-generated assets become a continuing source of financing capacity. For countries such as Indonesia, this offers a way to align energy security, fiscal sustainability and social inclusion within a single financing architecture.