The Small Green Solution to Africa’s Big Electricity Problem

The now traditional early-January announcement of a new hottest year on record is a stark reminder — if one were needed — of the global need to transition from fossil fuels to renewable energy.

Last month’s pledge by world leaders at the COP28 summit in the UAE to triple global renewable energy capacity remains a daunting, but not impossible, prospect. Renewable energy capacity increased by 50% in 2023 — the fastest annual increase on record — thanks to rapid expansion in China, Europe, the US and Brazil.

Despite such progress, there is an urgent need to scale up deployments in emerging and developing economies in the coming years, according to the International Energy Agency’s (IEA’s) executive director Fatih Birol.

This article by Brickstone reviews The Banker’s publication on how to solve Africa’s Big Electricity Problem, highlighting key facts and insights. 

Africa’s Big Electricity Problem

As home to 60% of global solar resources, Africa is a key geography for such capacity expansion. Yet, despite the deployment of major solar projects such as Morocco’s Ouarzazate and Egypt’s Benban, the priorities for much of the continent remain far more mundane.

“For much of the continent, energy security is a more urgent concern than focusing on the transition to renewables,” says Rentia van Tonder, head of renewable energy, power and infrastructure at Standard Bank.

Responsible for less than 5% of global carbon emissions, the IEA estimates that 600 million people in sub-Saharan Africa do not have regular access to electricity (see chart), acting as a significant break on economic growth.

600 million people in sub-Saharan Africa have no access to electricity, more than anywhere else. Home and mini-grid solar systems have bloomed in recent years, thanks to falling costs and innovative funding methods. Government and development funding has underpinned the sector thus far.

Over the past five years, African utility providers have been running to stand still, incurring mounting debt levels to maintain energy prices at affordable levels, with the maintenance and extension of national grids suffering as a result, a trend only exacerbated by the recent rise in inflation across the continent.

“As a result, the number of people on the continent that gained electricity access via a grid connection or a mini-grid dropped by up to 50% in 2022,” the IEA noted in a recent report.

“Setbacks were observed in almost 80% of countries in sub-Saharan Africa, notably in the Democratic Republic of the Congo, Ethiopia, Sudan, Tanzania and Uganda.”

In the midst of such challenges, a new generation of smaller solar providers providing mini-grid and home solutions are stepping into the breach, offering more localised solutions that can not only provide a more reliable service than many national utilities, but that are often better suited to extending access in more remote areas.

“Having a large transnational power distribution network that’s rolled out across the African continent doesn’t seem like a technically or economically viable solution, given the geography and the distances involved,” says Sergio Pimenta, the International Finance Corporation’s (IFC’s) regional vice-president for Africa.

“Because of this, distributed systems are becoming really important methods for bringing access to electricity across much of the continent, especially in rural areas.”

While small-scale solar systems are not a new phenomenon, they have assumed an increasingly important role given the travails of utility providers. The installation of home solar systems accounted for more than half of access increases in sub-Saharan Africa during 2022, according to the IEA, following government programmes to reduce their cost in countries such as Nigeria, Kenya and Rwanda.

The spread of solar kits that serve not only individual homes but smaller communities has increased in recent years as equipment and installation costs fall, with innovative pay-as-you-go financing models offered by providers such as M-Kopa, Sun King, Engie Energy Access and Lumos. This approach enables homes and communities to access electricity and lessen their usage of kerosene, a widespread fuel used for lighting, cooking and charging mobile phones.

“The payments that users make [under the new solar schemes] are more or less the same as what they would have previously paid for kerosene fuel and recharging their phones,” says Tedd George, founder and chief narrative officer of Kleos Advisory.

While off-grid solar’s impact on national economies is increasing in key markets such as Kenya, Uganda and Nigeria, much of its growth has relied thus far on government and development finance institution (DFI) funding, with private sector funding only recently starting to ramp up.

Jérémie Bismuth, a counsel with French law firm Gide, told The Banker that his firm had seen a steady increase in recent years in the number of financings of smaller off-grid and renewable energy projects across a number of African markets, with private funding largely taking a back seat.

“The money for such projects tends to come from private investors that are already well-acquainted with African markets, many of which owe their funding to DFIs,” he told The Banker.

“DFIs understand that the financing of SMEs is a key part of economic development across Africa. They will therefore often specifically allocate funds to investment vehicles with the requirement that they are allocated to finance SME projects.”

In the main, mainstream banks and investors remain wary of such projects — which tend to cater to customers with low and irregular incomes — without the security of DFI involvement.

“Most of the companies operating in this segment [i.e. small scale solar projects] are still mainly funded via DFIs, who are to a certain extent more able to absorb some of the risks, mainly due to their development and social responsibility mandate and approach,” says Ms van Tonder.

“Commercial banks like Standard Bank work with DFIs through blended finance solutions, supporting local currency options which are much needed for these projects while also providing receivables financing.”

Results-based financing (RBF) programmes — government and DFI-led initiatives under which funding payments are released when pre-agreed results have been achieved — have proved a particularly effective model in key markets on the continent to crowd in the private sector.

“RBFs have been most dominant in east African markets, helping them become established markets for off-grid electrification, [while] they have more recently been employed in the rest of sub-Saharan Africa, notably in west Africa,” said the Global Off-Grid Lighting Association (Gogla) in a November report.

The report noted that the Nigeria Electrification Program — of which RBF funding was a key component — prompted a 75% compound annual growth rate in the number of solar home and multi-light systems sold between 2018 and 2022, leading to improved energy access for 7.4 million people. Similar results were achieved with RBF schemes in countries including Kenya, Mozambique and Malawi.

Yet, the development and consolidation of the solar sector into a series of larger companies may prompt a rise in non-DFI investment in the years to come. Gogla research found that just seven solar start-ups — Sun King, Zola Electric, M-Kopa, Bboxx, d.light, Engie Energy Access and Lumos — account for 70% of the funding for the sector.

Having grown in scale, such companies are well-positioned to offer additional services to their customers, including financial services.

“If you’re serving a network of 100,000 households or more, all of whom are already making regular payments, it’s a relatively straightforward proposition to offer them other services like insurance or other financial products,” says Kleos Advisory’s Mr George.

Last year M-Kopa, the original pioneer of the pa- as-you-go solar model, secured $250m in debt and equity financing, one of the largest fundraises by an African start-up. Funding came from the IFC and UK DFI British International Investment, but also from private sector bodies such as the Sumitomo Corporation and Standard Bank, the latter lending $100m.

Read the full publication here.