A new report explores the issues and opportunities related to the financing of off-grid energy innovations, primarily focusing on the provision of small home systems for individual households or village microgrids in East and Southern Africa.
According to the Africa Progress Panel, based on current trends, it will take until 2080 for every African to have access to electricity.
In spite of this rather gloomy prediction, lights are switching on across the continent, thanks to the ingenuity of energy entrepreneurs and their funders. While more than 600 million people in Africa lack access to clean, safe and affordable energy, innovations in solar technology, mobile payments and distribution models are increasingly enabling greater levels of affordable access. In support of these innovations, the industry has seen committed capital of at least US $30 billion over the next five years from public and private funders – all focused on Africa for access to energy. However, access to finance remains the number one restriction to scale, according to energy access enterprises.
To grapple with this challenge, a new report by the Bertha Centre for Social Innovation and Entrepreneurship at the GSB and the Worldwide Fund for Nature South Africa, with support from the Wallace Global Fund, set out to explore innovative finance solutions for the industry. The research was based on workshops and consultations with more than 100 industry representatives across the continent.
MARKET OPPORTUNITY IN OFF-GRID ENERGY
Although the majority of mainstream efforts focus on large-scale infrastructure development, much of Africa’s potential lies in the off-grid space, which is currently being tapped by so-called energy access entrepreneurs. These entrepreneurs leverage the current momentum behind local, decentralised, renewable energy solutions, particularly solar technologies, such as microgrids, solar home systems (SHS), and intra-household or ‘picosolar’ systems. For solar home systems and picosolar products, Kenya, Tanzania and Ethiopia made up 66% of the sales in Africa in 2015, with Rwanda and Uganda generally regarded as the next emerging frontiers. Bloomberg estimates suggest that the market could be worth US$3.1 billion by 2020 – reaching almost 100 million households.
POWER-FULL BUSINESS MODEL INNOVATIONS
The market opportunity has spurred innovative business models, such as M-Kopa and Off-Grid Electric, that allow people to pay-as-you-go (PAYG) for their solar products. Over the last five years, the PAYG model has become the popular enduser financing model. PAYG customers pay a small deposit for a solar system to be installed in their homes. They then make smaller regular payments over time, usually through a mobile payment system, to pay for either the energy used or ownership of the system.
Beyond PAYG models, other companies are thinking equally creatively about the consumer financing component by tapping into either government resources or collaborating with corporates. The iShack project in South Africa builds their model to be in sync with existing national energy access strategies and integrates the mandated Free Basic Electricity subsidy into their end users’ payment model.
Solarus, an international renewable energy technology company, is currently testing another interesting business model in South Africa. To extend their off-grid energy solution to lower income customers who may not be able to afford the installation cost, Solarus is collaborating with a hotel in South Africa to roll out the Hotel Staff MPower Project. The hotel will finance the up-front installation costs of the systems to up to 600 employees’ homes. The employees repay the cost of the installation at an affordable monthly rate to the hotel.
COMMITTED CAPITAL – AND ITS LIMITS TO SCALE
The UN’s Sustainable Energy for All (SE4All) initiative, estimates that annual investments of US$48 billion are required to reach universal access. USAID’s Power Africa is one initiative driving these commitments, which has identified more than 43 private sector investors and practitioners who have committed US$1 billion to emerging energy access enterprises over the next five years through the Beyond the Grid initiative. But while momentum is building and large amounts of capital have been committed, energy access enterprises find that the types of capital and investment terms often do not match the enterprises’ needs and capabilities and that access to finance remains the n umber one restriction to scale.
Traditional financing through commercial banks or commercial lending institutions has not been a viable option for many of the energy access enterprises. The inability to predict future cash flow from sales, the actual return on investment per product sold, the lack of customers’ credit history and, often, the informal economy within which these businesses operate mean they struggle to access finance. Enterprises and entrepreneurs highlighted that: 1) there is an increasing need for local capital for (local) entrepreneurs; 2) that seed funding remains a challenge; 3) that working capital is one of the most significant financing gaps, particularly for enterprises offering PAYG solutions to their customers; and 4) that funding for logistics and distribution often goes ignored.
INNOVATIVE FINANCE SOLUTIONS
From Nairobi to Cape Town, interview respondents and roundtable participants urged the industry to come together to increase coordination and develop innovative finance solutions. Recommendations for different capital providers include:
Grant providers: In order to scale, the industry will need continued grant funding and concessionary capital along with better integration into the investment cycle. This concessionary capital will likely be necessary for proof of concept for early-stage ventures. Apart from directly seeding early-stage ventures, grant capital can be catalytic in opening up new, untested markets for the larger energy access companies, thereby enabling them to expand faster than otherwise possible. An impactful example is the use of result-based finance (RBF) in Tanzania, where companies are incentivised to go into harder to reach, high impact areas. “This incentive is exactly the kind of support we need to rapidly expand energy access to the customers who need it most,” says Xavier Helgesen, CEO of Off-grid Electric. “We believe it is an ideal model because it accelerates the market without distorting it …”
Local banks and other financial services providers: For companies that rely on cash sales and provision of devices to end-customers on a PAYG basis, working capital is a critical component to operating and scaling a business. Local banks potentially have a catalytic role to play in deploying much-needed debt financing to energy access enterprises. However, they remain relatively hesitant to lending based on cash flows, especially to early-stage companies in a sector most banks are not familiar with. One emerging alternative comes from digital finance, such as online lending marketplaces, which can be suppor ted by international impact investors, local institutional investors as well as retail investors. Through an online marketplace, the transaction cost of SME investing is reduced and automated. One such platform, which is blending institutional and retail investments, is Rainfin, launched in 2012 as South Africa’s first online lending marketplace. Models such as this have potential to fur ther leverage capital from institutional and retail investors.
Impact investors: Not surprisingly, investors generally did not second the notion that access to finance is the key challenge. For impact investors targeting market-rate return, the key challenge reported is a lack of investable deals. To mitigate this, impact investors are increasingly working with energy access enterprises to test new models such as securitising PAYG portfolios through bond structures. This is being explored by BBOXX, a London-based solar innovator, which aims to raise US$2 billion over the next five years to turn solar into an asset class and create contracts for thousands of solar rooftop arrays to sell as bonds to investors – ultimately demonstrating that it is possible to lend on the basis of future receivables from the solar home system contracts and the securitisation of the unbanked.
Thanks to the ingenuity of energy access entrepreneurs, such as M-Kopa, BBoXX, Solarus, and iShack, as well as the funders they partner with, the future is increasingly looking bright across the continent as millions of people are accessing off-grid energy.