The Challenge
In the African context, costs per connection for mini-grids have dropped by 20% over the past two years to well below what nearly every Sub-Saharan African utility charges. At the same time, mini-grids provide vastly superior quality and quantity of energy to rural communities than utilities in most of these countries. Mini-grid firms are truly rural utilities in these contexts, and have potential to drive transformational economic growth for an enormous proportion of rural people living just below or above the poverty line for the hundreds of millions for whom mini-grids have repeatedly been shown to be the least-cost option (Most recently in: IEA (2017). Energy Access Outlook 2017: From Poverty to Prosperity).
Despite this incredible potential, most private sector mini-grid developers in Africa are facing near-term existential threats due to a lack of affordable long-term capital. The same is the case for new players in the household solar market.
While the companies showcased in this publication have the potential to impact millions of lives, they all face two main categories of risks making finance a challenge:
- where they are doing business – countries with either unstable or inadequate political and regulatory environments that make capital either extremely expensive or unavailable; and
- who their customers are – poor people whose ability and willingness to pay makes revenue either unpredictable, or predictable but too low to be economically attractive.
Despite these perceived risks, experience has demonstrated customers’ ability and willingness to pay is high – provided services are reliable and predictable. This actually means investment in decentralised off-grid renewable energy a more reliable investment than national grid networks in areas where they cannot provide good service. Yet early stage firms – even if they have the potential to be genuinely catalytic and game-changing for local and national economies – find it very difficult to raise financing to move beyond grant or private equity-backed pilot stages.
Taken together, this means the finance needed to achieve the dozen SDGs reliant on energy simply is not available, and accordingly the businesses designed to deliver on the global community’s sustainable development objectives simply never get the opportunity to do so.
The Solution
Billions of euros are given to insolvent and bankrupt utilities every year (only three Sub-Saharan African utilities are currently solvent), but less than one billion euros of donor funds in total has been disbursed in the off-grid sector to date. To overcome the two overarching challenges noted above, we first need to re-balance this inequality. Development agencies are uniquely positioned to do this – and should be encouraged to do so – rebalancing energy support to better reflect 21st century technologies and approaches will ensure a better value for money given that mini-grid and off-grid energy companies working on rural electrification addresses multiple economic, environmental and social objectives.
Stepping up or meaningfully redirecting public investment to off-grid renewables would see radical cost reductions over a short period, as the introduction to this section illustrated. This is due the fact that the mini-grid sector in particular would finally be able to reach the economies of scale needed for any sector to reduce costs, as well as enable research and experimentation to further innovate and improve on today’s offerings. Concretely, we urgently need donor efforts and investment to flow into two broad categories matching the two problems noted above.
- Hearts and minds: Today it is unfortunately a reality that utilities, ministries, MDBs, and indeed – many donor national office staff – do not adequately understand the decentralised energy space and how far it has evolved in recent years. Members of the Alliance for Rural Electrification – despite being told by the global community that they are urgently needed – receive cold receptions by many key players at the national level, hence many policies and regulations (where they exist) are not developed with the true interests of the sector in mind. We urgently need the EU to support an evolution in this thinking. As all donors and MDBs work alongside national government priorities and plans – we need your support in building up local support for decentralised renewables.
- Good development is good for business: serving the world’s poor as customers without exploiting them means support is needed to either lower prices to an affordable level, and/or to raise incomes to a point where poor people can afford life-changing energy services. Hence there is an urgent need for donors to provide two categories of financial support in addition to the tools currently available:
- Large investments of long-term, low interest capital – as noted at the start of this section – these companies (mini-grids in particular) are providing better services than utilities, which receive infrastructure terms and finance. Mini-grids are indeed infrastructure and should be financed as such. Hence, we urgently need larger pots of patient debt and equity capital to allow such business to grow and deliver results (See Acumen (2018). Accelerating Energy Access: The Role of Patient Capital). We also need de-risking tools such as off-taker risk guarantees, and political and forex risk mitigation tools to help bring in semi-commercial and commercial lenders. This is the only way we will see companies with successful tracks records who are now are too big for seed funding but too small to access investment capital, really have a chance at succeeding on their – and our – goals for rural electrification.
- Business training and asset finance for communities – using energy for lighting will never repay a mini-grid. If this is all a household can afford, or the only energy technology they have easy access to, we will not see the change needed to achieve the SDGs. We must focus on building demand for energy by either raising local incomes through productive use training and micro-finance, or by finding ways to cross-subsidise energy costs not only within national utilities as it is done today – but across energy service providers – as will be needed to make energy affordable to the poorest.
The blog has been written by Rebecca Symington, Board Member, ARE and Executive Director, Mlinda Foundation and by Aaron Leopold, Vice President, ARE and CEO, Africa Minigrid Developers Association.
All the topics covered will be discussed with ETTG researchers and EU representatives at the InfoPoint Mobilising private-sector investment to mitigate climate change in Africa.
Image courtesy of Solar Trade Association via Flickr
