More private investment in mini-grids
The world has made undeniable progress toward universal energy access by 2030, a target laid out by the United Nations in its Sustainable Development Goal (SDG) 7. However, if the global energy landscape remains the same, 8% of the global population will still lack access to electricity by 2030, and a startling 90% of the un-electrified population will be living in sub-Saharan Africa.
Mini-grids are an attractive option for electrification in rural, hard-to-reach areas of Africa, as usual in most African countries. These off-grid systems not only accelerate economic development but also tend to offer important benefits in the way of resilience and carbon emission reductions.
After decades of consolidation and maturation of business models, access to finance and political support, mini-grids seem to be finally ready for a scale-up. There were over 2,000 mini-grids on the continent in 2018 and global capacity is expected to reach 1GW by 2019.
However, the available funding sources for mini-grids are mostly limited to donors and developmental finance institutions (DFIs) — notably, private financing is rare.
According to USAID, private lenders are partial to the lower apparent risk provided by on-grid rather than off-grid investments. The increased risk causes these private lenders to charge interest rates too high — 15-20%, as reported by the Rocky Mountain Institute — for most potential mini-grid projects to be economically viable.
Nonetheless, things are changing, and private investors are more willing to enter this market, making use of new instruments and funding made available, provided that they are backed up by Governments and donors.
Green Aggregation Tech Enterprise (GATE), is a risk-pooling initiative aimed at removing barriers to private investment in mini-grids conceived a few years ago. GATE aims to target specifically revenue risk by addressing the implicit demand risk, resulting from the lack of data on mini-grid-level energy demand in sub-Saharan Africa, and payment risk, resulting from the lack of credit history for most customers on the continent that would use mini-grids.
GATE promises to secure compensation for investors in mini-grids in sub-Saharaan Africa, opening up a pathway for commercial capital to safely enter this market. To mitigate demand risk, GATE would provide revenue guarantees for mini-grids. Mini-grid operators would pay GATE a prize, and if a mini-grid’s revenue fell below the guaranteed threshold, GATE would pay the developer the difference between the actual revenues and the guaranteed threshold. The concept and structure of the GATE instrument is still being validated, with other forms of protection for commercial lenders being considered.
GATE, too, would likely rely on donor and DFI capital in its initial stages to fund its operations. With diversification and risk pooling, however, the guarantor could obtain a credit rating. A rating would allow GATE to start leveraging its capital multiple times over to build further scale — this would increase returns, helping GATE to raise commercial finance itself.
Later this year in June, a group of investors with more than $ 2 billion under management voiced in a public position paper “Unlocking Private Capital for Mini-Grids in Africa” their confidence in mini-grids as a key solution to ending energy poverty in Africa, and urged multilateral and bilateral donors to create a well-designed, effective and preferably unified Results-Based Financing (RBF) mechanism to immediately mobilize private capital, both debt and equity.
The 12 initial investors - Acumen, Blue Haven Initiative, Ceniarth, CrossBoundary Energy Access, DOB Equity, ENGIE Powercorner, Hoegh Capital Partners, KawiSafi Ventures, Renewable Energy Performance Platform (REPP), responsAbility, SunFunder and Triodos Investment Management -- said they had the means to provide the matching private capital that donor-backed mini-grid subsidy programs needed in Africa.
Following closely on their heels, representatives from 10 African governments -- Côte d’Ivoire, Ghana, Kenya, Liberia, Nigeria, Zambia, Uganda, Zimbabwe, Tanzania, and Cameroon -- answered that call and issued an appeal to governments, international donors and the private sector “to commit the capital required to de-risk the mini-grids sector and to do so in collaboration with international and domestic financial institutions.”
Specifically, they recommended three actions: 1) greater high-level political engagement and country-to-country exchanges, training and technical collaboration, 2) gaining more access to international climate funds, and local finance mobilization and de-risking, 3) supporting innovative mini-grid programs and projects that can be replicated and deliver local socio-economic development benefits.
Clearly investors and governments are ready to scale, but the missing link remains greater donor support for an RBF, which is odd since RBF is proven to both leverage donor grant funding, while reducing fiscal burden on governments.
Some donors have experimented with mini-grid RBF, most notably DFID and SIDA, but no systematic, coordinated mechanism exists for all of Africa. Others, meanwhile, have shown an aversion to subsidies. The mini-grid trade body, the Africa Mini-Grid Developers Association (AMDA), has outlined guidelines for an effective RBF, saying it needs to be simple, measurable, Africa-wide, repeatable and timely (or SMART).
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