United Nations Climate Change
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Several new business models are helping off-grid energy projects get traction in sub-Saharan Africa.
The most prevalent models for such projects are stand-alone systems and micro-grids, where consumers can pay for energy in installments or as needed using their mobile phones or scratch cards.
More than $223 million in investments was committed to off-grid solar companies and projects this past year, particularly for pay-as-you-go models, which are leading new investments and are increasingly viewed as a new category of infrastructure investment. In comparison, $158 million was raised the previous year. These investments, consisting of commitments by private equity funds and individual equity rounds, are breaking the previous trend of relying on impact investors and donor capital.
US government agencies and international development finance institutions are also playing a large part by providing equity, debt, insurance, loan guarantees and other resources.
The need for off-grid projects in the region is clear: sub-Saharan Africa is the only region in the world where the number of people living without electricity is increasing, and more people in sub-Saharan Africa currently live without access to electricity than any other region in the world.
Nearly 80% of those lacking access to electricity are in rural areas. Off-grid projects are perfect for such an environment. Building out transmission would be too costly and time-consuming.
The International Energy Agency forecasts that off-grid development will increase dramatically in the coming decades. By 2040, 315 million people in rural areas are expected to gain access to electricity; approximately 80 million of these will do so through off-grid systems and 140 million through micro-grids.
Small photovoltaic systems currently are still too expensive for the broad mass of people in developing countries.
Several business models are helping to overcome this hurdle.
One is a fee-for-use model, not unlike the solar leases that have helped the sector get traction in the United States.
Under this model, the customer does not buy the stand-alone system, but only pays rent to use it. A solar company retains ownership, ensures that the system is operating properly and is responsible for maintenance. The customer makes a one-time installation payment as well as reoccurring fixed payments based on the size of the system.
The other model is a pay-go model that is an installment sale. The difference between the two models is the customer under the pay-go model ends up owning the system after a period of time, usually six months to three years. Some solar companies offer additional appliances that can be purchased in cash or financed over a few years’ time and can use the initial system as collateral once it is purchased. The solar company may provide maintenance services until the customer fully pays for the system or, in some scenarios, the customer is responsible for maintenance from the start.
Under both models, the system is blocked automatically if the reoccurring fee is not paid and cannot be used again until credit has been restored. The reoccurring fee is usually paid using mobile phone payment services. In some instances, scratch cards are used, where the cards are purchased locally and contain a code to unlock the system for a certain period of time.
In either model, the solar company can play all three roles of system owner, operator and maintenance provider and bill collector, or the roles can be split and a separate company brought in to handle customer collections.
In a variation on these models, at least one solar company rapidly getting traction in the region acts merely as an equipment vendor providing financing. It designs, manufactures, distributes and finances off-grid solar systems and has 36 retail locations in two African countries and expects to extend to 400 retail shops in the next two years.
The common theme in all the models is the use of automated cashless payment processes through agent networks and remote or cloud-based monitoring that together provide significant leverage over the customer.
As these models increase in popularity, the solar installers may amass large portfolios of loans that may need to be refinanced.
Most of the loans are denominated in local currency, while the capital that finances the solar company may be denominated in US dollars or euros. Therefore, the emerging business models carry currency exchange risks where, if the local currency is devalued, an additional cost will be imposed that is unrelated to business and operations.
Micro-grids are another emerging business model.
Micro-grids are small utilities. The solar company installs an array, perhaps as small as, or even smaller than, 100 kilowatts, and it is used to supply service to a small village in a remote area. As in the other models, the solar company can retain ownership and operate and maintain the equipment as well as collect fees for services from customers or the roles can be split among separate entities. In some instances, installation and maintenance are provided by rural energy cooperatives owned by local residents.
Any rural development requires collaboration with local governments and utilities, as well as a thorough understanding of local legal structures.
Recent projects involving micro-grids have included a solar array, batteries and often a diesel generator for back-up generation and sometimes have incorporated wind. Some models allow subscribers to prepay for power based on their needs, while others charge a set reoccurring fee .
Micro-grid solar farms may be deployed through turnkey implementation or various actors. In Tanzania, one company will send a shipping container that has in it a ready-to-assemble solar array of up to 100 kilowatts of installed capacity, including modules, cabling, inverters, foundations, and monitoring and installation tools. The arrays are assembled onsite and offer power to residents in remote regions on a rental basis. They can be installed in six days and deployed individually or in multiple arrays. The arrays are configured for low-voltage power so they can connect directly to existing networks and either hybridize with or displace diesel generators. A local business can rent one or more of the arrays from the company, paying an initial installation fee and then further fees based on energy used, as monitored by the company. The local business can effectively sell part of the electricity by renting individual solar panels to other businesses or residents.
Two 100-kilowatt arrays were built and rented to a local mini-utility using the capital from a convertible loan, and the mini-utility will construct a micro-grid and connect and bill customers. If this project is successful, then up to 30 additional ready-to-assemble grids may be installed across the country.
Solar companies using the fee-for-service and pay-go models receive support from various government and multilateral lending agency programs, such as the Electrify Africa Act, the Power Africa Initiative and World Bank Group and other development finance institution initiatives.
The Electrify Africa Act is a US statute under which the US government has put together an interagency working group to assist US government agencies to prioritize loans, grants and technical support to leverage private-sector capital for power generation and transmission projects in sub-Saharan African countries. The related Power Africa program is supported by 12 US government agencies and a myriad of private sector partners.
The US agencies are starting to put serious money into the program.
For example, the Millennium Challenge Corporation now has five ongoing power-focused compacts or threshold programs in sub-Saharan Africa through which $680 million has been spent in just the past year. Of that amount, $46 million was for off-grid electrification in Benin, MCC’s largest off-grid electrification effort to date.
The Overseas Private Investment Corporation made a $15 million loan to Lumos Inc. to sell home solar kits in Nigeria, a $5 million loan to Greenlight Planet Inc. to expand its distribution of solar energy products to underserved populations in sub-Saharan Africa and a $15 million loan to a new investment vehicle managed by SunFunder Inc. that will provide financing to companies operating in developing countries that manufacture, distribute and install solar lighting and energy systems.
The US Agency for International Development has provided risk coverage for approximately $143 million in loans to power projects, including a $75 million pan-African facility for loans to off-grid producers, manufacturers and distributors across sub-Saharan Africa.
The US Trade and Development Agency partnered with Renewable World East Africa to develop micro-grid solar and battery storage systems in Kenya this past year and, more recently, launched a tender for clean energy projects in sub-Saharan Africa with proposals to be submitted in February 2017.
The US African Development Foundation, which supports an effort called the “Off-Grid Energy Challenge” in partnership with USAID and General Electric Africa, has made 50 grants of $100,000 each to entrepreneurs and private organizations developing innovative off-grid technologies and an additional 21 grants are in the works.
USAID has also developed a “Power Africa tracking tool,” an online and mobile application that allows users to track power sector development, transactions and projects -- a useful resource for developers and lenders interested in the off-grid sector. Users can view transaction status by project in each country, statistics on generating capacity, energy mix and available technology, and active projects, and also read the latest news on the African energy sector. The tracking tool also tracks the environmental, social and other impacts of these projects.
Development finance institutions have been involved in about 25% of the investment rounds of off-grid solar ventures. This involvement has been in the form of grants, equity, debt and loan guarantees.
The World Bank launched a “Scaling Solar program” recently in Zambia. The program was a utility-scale solar PV competitive procurement process designed to make it easier for Zambia to procure solar power quickly and at low cost through competitive tendering and pre-set financing, insurance products and risk products. Two provisional winning bids were selected at US6.02¢ and US7.84¢ per kWh, which represent some of the lowest solar PV costs to date in Africa and among the lowest in the world. Because the US6¢ Zambian tariff is fixed for 25 years and will not rise with inflation, it represents about US4.7¢ per kWh over the life of the project, which is on par with recent auctions in Peru and Mexico.
Neoen/First Solar and Enel are the winning bidders, and they are expected to reach financial close on the projects within three months and complete construction on the two sites (up to 50 megawatts each) a year later.
The Scaling Solar program plans to develop 1,000 megawatts of solar power in the next three years. Zambia has committed to a second round of tendering, and Senegal and Madagascar have also enrolled in the Scaling Solar program.
In addition to the Scaling Solar program, the International Finance Corporation, a member of the World Bank Group, has developed a “Lighting Global program” as a platform to support growth of the off-grid solar market. Participants in the program receive IFC’s advice on how to verify the quality of products, market them and expand their reach on the basis of sales trends. IFC and FMO, the Dutch development bank, invested approximately €14.6 million in equity in Mobisol GmbH, a Berlin-based company and an associate of the Lighting Global program. Mobisol uses a pay-go business model for modular solar systems.
The IFC also recently launched an “Off-Grid Market Opportunity Tool,” an online tool that draws on a database to help users assess the potential market for off-grid energy solutions. The database platform builds on open geospatial data to let users see where there is a need for off-grid electrification. The open-source software also allows users to improve its functions by building on the code. Users can also export analyses generated by the platform and combine them with other data. Unlike the US government data tool, this tool does not show current projects; rather, it tracks population, solar power potential and electrification paths.
More than 100 private companies have pledged to develop nearly 16,000 megawatts of electric generating capacity as part of the Power Africa initiative. This represents more than $40 billion in commitments. More than 40 of the companies are focused primarily on micro-grid and distributed generation in sub-Saharan Africa.
There have also been notable recent investments from Africa-focused private equity funds in pay-go solar home system companies.
In South Africa, Enel Green Power is now offering Tesla home power kits to customers. While no funding options are available to purchasers of the home power kits, Enel’s view is that the forecasted increases in South Africa’s electricity prices are enough to induce customers to pay the large initial upfront costs. Tesla anticipates significant growth on the continent and plans to use South Africa as its springboard to the market.
Private-sector lending is also on the rise. Off Grid Electric, a private company, recently announced that it raised a record $45 million in financing in a single debt round for solar power and battery storage, bringing its total capital raised to $70 million over the past year, including a $25 million series C investment led by various private sector lenders.
Some companies are packaging customer contracts from off-grid solar installations in Africa and securitizing the payment streams. BBOXX recently held a $20 million series C funding round led by Engie (formerly GDF Suez). BBOXX previously led the first-ever securitization of off-grid assets about one year ago for $15 million. BBOXX’s asset-backed notes, called distributed energy asset receivables, represent a bundle of customer contracts based on monthly installments. BBOXX aims to raise up to $5 billion over the next five years.
Our aim is to help our clients understand the potential opportunities and challenges that COP25 may have on their business.
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