Earlier this autumn, energy access experts from EDF, Engie, BBOXX, Power Gen, The World Bank, and many others packed into a central London conference room for GreenTech Media’s (GTM) inaugural Off-grid Energy Access Forum.
A key concern and starting point for attendees was the ways in which African utilities, operating as vertically integrated natural monopolies, work more as obstacles than catalysts to the development of off-grid infrastructure. Increasing renewable energy access to avoid the worst effects of climate change demands innovation, risk appetite, and public: private collaboration. To this end, the inaugural GTM conference offered a meaningful discussion on the shape that new decentralized energy service companies should take, and the required market conditions that could accelerate their spread on the African continent and beyond.
The invaluable insights learned on the day were, of course, innumerable – but here are my 5 key takeaways from what felt like a landmark occasion:
- Customer Centricity is the Future:
‘Customer Centricity’ means focusing on how we deepen the customer experience to create value at the household level. On the day, ‘Utility 3.0’ was the term that rebounded from panel to panel to describe how a customer-centric utility operates. ‘Utility 2.0’ business models are found in more sophisticated energy economies, they’re formed on the basis of bi-directional energy flows between ‘prosumers’ and bulk energy suppliers. Perhaps ironically then, Utility 3.0 models apply more to underdeveloped energy markets – they focus on the long term potential for distribution companies to diversify their revenue streams by offering a variety of telecoms, credit measurement, and financial services.
What Utility 3.0 captures so well is the potential for ‘leapfrogging’ in the off-grid energy sector. The rural communities targeted by emerging Solar Home System (SHS) and Micro-Grid providers are populated by unbanked citizens, excluded from financial markets and underserved by many telecoms companies. Although there was much debate amongst the panelists about how close we are to the realization of Utility 3.0, few disputed that it represented the long term trajectory of the market. Indeed, the activity of Safaricom in Kenya and Orange in Cameroon prove there are heavyweights in the African telecoms industry who support this view.
2. Data collection is ‘nuts and bolts’ of the PAYG Solar industry
Given that many areas untouched by the grid are often completely without electricity, it’s not immediately apparent why the growth of off-grid infrastructure would be so heavily dependent on the collection of data via digital infrastructure -but it is! From the GTM forum, I discerned 3 key reasons why:
Firstly, it allows SHS providers to develop a loose credit profile around customers with a view to providing investors comfort. Attracting investment demands that SHS providers clearly demonstrate how their repayment scheme functions and that their customers pay for power in line with forecasted projections. Also, after coupling a customer’s payment profile data with their load profile data, companies create scope for revenue diversification opportunities through system upgrade offerings or energy-efficient appliance sales on a lease-to-own basis. BBOXX has made 40,000 system upgrades over the last year through efficient data collection.
Secondly, companies are better able to monitor system performance and reduce response times for faulty equipment. If a Smart Meter shows that a battery will soon need replacing, company supply chains are given a longer notice period to schedule a replacement. Remote monitoring also makes it easier for companies to see when customers have tampered with equipment while at the same time empowering customers to get access to spare parts under warranties.
Lastly, data collection allows developers to accurately identify geographic areas for expansion. For example, much of Nigeria’s massive rural population are served by diesel generators – the country represents the holy grail for off-grid distribution companies in their search for scalable business models. Simply deploying smart meters onto existing diesel generators can quickly illuminate the optimal sizings for a Solar- Diesel hybrid system targeted at maximizing the displacement of fuel consumption at a given site.
3. Strong Partnerships are Essential
Electrifying the last mile demands an appreciation of your limits as a distribution company but also of the particularities local market contexts. A well-formed partnership between international companies that have experience executing projects and an SHS or microgrid provider is an effective way of accelerating energy access. GTM presented the high profile collaboration between BBOXX and EDF is a good example of this.
Partnering with EDF made it easier for BBOXX to establish a strong working relationship with the government of Togo. The government was able to subsidize the project via a co-matching facility at the household level. Subsidising PAYG systems per kWh produced for each new connection requires coordination to ensure that legal frameworks can effectively regulate the new kinds of software being deployed. Consortiums of stakeholders that work closely with government do not only improve their credibility amongst rural communities, but are also in a unique position to shape the regulations in the new markets they’re involved in creating.
4. Results-Based Financing (RBF) has Great Potential
The financing constraints on the off-grid market are well discussed. Amongst other factors, low ticket sizes, seemingly un creditworthy off-takers, and local currency risk have all led to high transaction costs creating a ‘viability gap’ for smaller projects. Panelist on the day remarked that it is not out of the ordinary to see interest rates at +20% despite DFI security being in place.
RBF is positioned by The World Bank as a potential remedy to this market failure. RBF grants developers access to capital per connection made post commercial operations date. For example, in Nigeria, microgrid developers of systems for universities receive $350 per connection which comes straight into the project cash flows once the project is operational. Subsequently, RBF has created a new market for pre-financing loans to off-grid developers and is working to catalyze commercial debt and equity into the market.
Above all else, RBF is a means by which a continent-wide standardized process for off-grid electrification can emerge. Odyssey is at the forefront of efforts to reduce connection waiting times, they are working to codify a set of rules on what qualifies as a set connection. As has come to be expected in this space, RBF is an extremely data-driven financing instrument, companies like Odyssey are acquiring vast amounts of data to understand where RBF fits in within the web of tariffs, subsidies, and possible returns.
5. The future of off-grid financing is a mixed one
The challenge of financing small scale, decentralized power projects has stimulated great innovation in financing instruments. Sunfunder, now perhaps the most prominent lender to off-grid African renewable projects started off by effectively crowdsourcing capital from socially responsible pools of investors comfortable with riskier project profiles.
Sunnfunder’s early tactics enabled them to acquire track record and underwriting experience, they’re now at the forefront of an emerging off-grid banking industry keen to offer financial products that cater to the specific needs of off-grid developers through blended capital structures. Strategic investors want to see profitability in the short run which forces companies to weigh up EBITDA against the depth of customer value they can bring. The immediate task for the likes of Sunfunder is to facilitate more patient capital allocation that can ease the tension faced by new distribution companies between unit economics and traditional corporate finance considerations.
Looking to the future, issuing green bonds that can diversify the kinds of investors typically interested in energy access to include institutional capital is the next big step for the industry. Recently, BBOXX has looked into receivables securitization in Kenya, but much greater coordination between issuers, green bond regulators and distribution companies is needed to accelerate activity in this space.