International Finance
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Mini-grids: The future of African energy?

Mini Grids - Africa
Mini-grids have the benefit that they can at a later stage be linked to the national grid and become an integral part of it linked to the national grid and become an integral part of it

Reliable electricity supply has been a major problem in Africa for decades. Where the grid-based electricity supply is failing a fast-growing Sub Saharan Africa, renewable energy sources are stepping in to fill some of the energy gaps. According to a report by the International Energy Agency (IEA), renewable energy will make up almost half of sub-Saharan Africa’s power generation growth by 2040. That said, the IEA Africa Energy Outlook 2019 also points out that Africa will fall well short of universal electrification and will be home to 9 out of 10 people living without electricity in 2030, from almost 600 million people currently lacking electricity. This equates to 40 percent of the African population. Africa has an average electrification rate of 24 percent, compared to the global average of 40 percent.

However, in the last decade, we have seen an explosion of renewable energy-based solutions in the African continent. In the last couple of years, we also seen a number of off-grid renewable energy startups pop up throughout Africa. With an estimated combined economy of $1.5 trillion, the African continent presents huge opportunities for businesses and investors alike across the renewable energy sector. While it is certain that renewable energy will be part and parcel of Africa’s energy mix, what role will renewable energy startups play in fixing Africa’s reliable energy supply deficit? And will they co-exist or compete with the grid?

As Africa grows, so does its energy needs

Africa’s economy is growing and it is growing fast. Also, its population is among the fastest-growing and youngest in the world. The adaptation of rapid technological changes, changing business environment and changing demographics will hugely contribute to the growth of the African economy. As Africa grows over time, so does its electricity needs.

Seven African countries namely Nigeria, Ethiopia, the Democratic Republic of Congo, Egypt, Tanzania, Kenya, and South Africa will soon hold half of the continent’s population, and 43 percent of Africans across the continent will belong to the middle or upper classes. As the spending capacity of these socioeconomic groups increase, so will the demand for electricity. According to the IEA, electricity demand in Africa will increase to over 1 600 terawatt-hours (TWh) by 2040. The big question is ‘how can Africa meet its growing energy needs?’ The IEA report also indicates that by 2030, almost 530 million Africans could still lack access to electricity. The technology landscape in Africa is also booming and the operational prowess of the players in these sectors very much depends on the availability of reliable electricity.

For Africa to achieve inclusive and sustainable development, the continent would require tripling the average number of people gaining access to electricity every year from around 20 million today to over 60 million people.

So what can solve Africa’s electricity problem? Given Africa is plagued by grid failures throughout the continent, the grid cannot be expected to meet Africa’s energy needs on its own. African grids need a major overhaul and huge investment for modernisation. So can renewable energy come into play in such a scenario, given Africa possesses huge potential when it comes to renewable energy sources such as wind, water and solar?

Mikhail Nikomarov, an energy expert and the chief executive at Bushveld Energy, believes at the current GDP growth rates, the Sub Saharan African electricity needs is going to double. He told International Finance, “Most African countries are facing high growth potential, both because of massive population growth and on average improved political and regulatory regimes. Policy rather than technology is going to determine how much of that is filled by non-State Owned Enterprises (SOE). It would seem logical to outsource to the private sector whatever could be funded by non-government firms. I believe that more than half of the growth will come outside the SOE structure and it may be much more than that.”

So, to meet the growing demand of its economy, what Africa needs is to create a balanced and sustainable energy-mix that relies on its grids, biomass as well as on renewable energy. No doubt Africa needs to overhaul its power grids, which is a complex task, but economists and policy makers in Africa also need to understand the potential of renewable energy and consider it as a major source to meet its energy needs rather than an alternative.

Africa’s problem of grid failures

According to the IEA report, electricity demand in Africa in 2019 stood at 700 terawatt-hours (TWh), with the economies in North and South Africa accounting for over 70 percent of the total. According to the International Renewable Energy Agency (IRENA), Africa currently meets its energy needs from sources such as biomass and fossil fuels. While biomass meets around 50 percent of Africa’s primary energy needs, coal and natural gas account for 14 percent each and oil accounts for 22 percent.

To become sustainable, Africa needs to increase its power generation capacity by 6-7 percent gigawatts a year, which is 10 percent of its current total capacity. But electricity grids across Africa continue to perform poorly and provide poor coverage, which inversely impacts the economy. South Africa’s state-owned utility company Eskom is among one of the biggest in the world. The company accounts for almost 90 percent of South Africa’s power generating capacity from sources such as coal and nuclear. However, the company finds itself in the middle of a crisis as its debts continue to rise. Also, the operating cost of Eskom is too high. With debts of $30 billion, the company is on the verge of a total shutdown.

In January 2020, the Nigerian national grid too collapsed leaving the whole country in a blackout. Even though only 40 percent of the Nigerian population is connected to the national grid, a collapse is still a matter of grave concern as it cripples the industrial sector. Grid failure across emerging economies in Africa is a common occurrence. Economies such as Kenya and Uganda too have been plagued by grid failures. In Uganda, its power grid reaches just 23 percent of the country’s 40 million people, according to power distributor UMEME.

Mikhail Nikomarov said, “The grid is an issue, as in some markets there is more than enough generation, but evacuating that power and delivering it to distributors has proven a challenge. Part of that is technical capacity and part is financial. It will mean that some customers and communities may be better off never connecting to a ‘central, main grid’. Before, this was really not a cost effective-option.”

Off-grid renewable energy penetrates grid untouched areas

Amid all the energy crisis, grid failure and blackouts in Africa, off-grid solar technology has come as a sign of relief for many Africans. In many parts of Africa, off-grid solar has reached people that reside in areas where the grid has not arrived yet. It helps many poor Africans in rural areas access electricity at a very reasonable rate. The global off-grid solar market has grown considerably over the years to be worth $1.75 billion serving 420 million users. In the last few years, many startups have raised funds in Africa in a bid to bring off-grid solar solutions to the non-electrified areas of their countries. While most of the startups were based in East Africa, it’s only recently that startups have started tapping into the potential in the Western side of the continent.

According to the World Bank, more than 700,000 solar systems have been installed in Sub-Saharan Africa. The market is growing exponentially in Africa with over 5 million pay-as-you-go home solar systems sold in the continent in the last four years with over one million systems sold over the first six months of 2019, according to business consultancy Kleos Advisory. The report further reveals that the commercial opportunity for off-grid solar power in Africa is $24 billion per year.

Liliane Munezero Ndabaneze, chief executive at Women’s Initiative for Delivering clean Energy to Africa (WidEnergy Africa) told, “The Pay-go model has tremendous potential especially if you look at how well it has performed in other parts on the continent, especially Eastern Africa where millions of households have now access to clean energy. For markets with vast territories such as Zambia, the grid access will simply not reach some of the areas we are targeting and this represents great opportunities for WidEnergy Africa and other players in the market.”

In Africa, renewable energy possesses the potential to change the very energy landscape of Africa. However, much depends on how this potential is tapped into and also the value of investments made into the sector. Opio David, who co-founded Ugandan pay-as-you-go (PAYG) solar startup gnuGrid Africa told International Finance, “The efficiency of renewable technologies, the speed and cost with which they can be deployed and the continuous rise in investments in renewable energy make it a scalable solution to this problem.”

According to Jan Albert, co-founder and chief executive at Solarise Africa, “The costs of solar have come down dramatically. Solar can now be offered as a cheaper supplement to the grid, under the condition that there are finance solutions available. The availability of adapted finance, as well as the availability of good quality Energy Performance Contracting (EPCs) are the elements that are crucial to make it truly scalable.”

How do the offgrid renewable startups fill energy gaps?

WidEnergy Africa, is a Zambia-based women-led initiative focused on providing clean, reliable and affordable energy solutions. According to Liliane Munezero Ndabaneze, WidEnergy’s vision is to become a regional strong women-led brand in household clean energy distribution. The Women in Energy hub (WeHub) project launched by WidEnergy is a multipurpose woman operated solar-powered store, serving as distribution hubs for its products while serving as a community microgrid where it’s located. WeHub unique value proposition is ‘Empowering women entrepreneur, with Energy’. In the next five years, the startup plans to reach between 70,000 to 100,000 households, thus impacting more than 400,000 lives, Liliane Munezero Ndabaneze added.

Another Uganda-based off-grid solar startup gnuGrid is disrupting the market by integrating technology to increase power efficiency. Launched by David Opio and James Dailey, gnuGrid has developed Solar Sentra, which is an amalgam of a PayGo platform and IoT enabled hardware. With the PayGo platform, transactions are swift and effortless through digital payments thus enabling instant access to power post payment by the end-user.

Opio David, who serves as the chief executive said, “The PayGo platform also allows for installation mapping that facilitates seamless tracking and extension of maintenance and after sales services by the solar companies’ technical team to troubleshoot any faults in the solar systems.” In short, Solar Sentra bridges the gap between solar companies and their clients and perpetuates timely service delivery.

Solar Sentra can be integrated into a wide array of solar products which allows for a faster penetration into the solar power market. gnuGrid sees a growing PayGo solar home system market as well as new prepaid microgrid models and leasing or subscription models.

Opio David believes gnuGrid Africa will be among the main drivers of energy inclusion to millions of households in and outside Uganda expanding into markets such as Kenya, Tanzania, Rwanda and Northwest Africa in the next five years. gnuGrid also signed a partnership with MTN and SolarWorx in Liberia in a project to provide solar energy to 500,000 Liberians in a period of five years.

Solarise Africa, a pan African energy leasing company, too is helping to bring clean, reliable, high quality and low-cost energy to Africa’s commercial and industrial sectors. The Kenya-based startup provides smart financing solutions through its partners to commercial and industrial (C&I) clients. Solarise aims to solve the financial hurdles for captive rooftop and ground-mounted solar projects ranging from 100kW to 3MW. According to Jan Albert, C&I projects are either too small for big financers or too complex for local banks or leasing companies. Also, this is where Solarise is coming in and solving the financial problem faced by such projects. He told International Finance, “We offer finance products that are adapted to the needs of the end user. Our finance offering is integrated in the offering of the developers and EPCs. We jointly target the clients and come up with an integrated proposal and create a one stop shop for the end user.”

African renewable energy startups face funding squeeze

Funding is a challenge for off-grid solar startups in Africa. Renewable energy startups are only able to raise 20 percent of the funding they need per year. Existing funding is insufficient and concentrated in other fields for instance only 11 percent of World Bank’s total energy access funding for Africa between 2011-2014 went to off-grid renewables. Mikhail Nikomarov said, “The successful ones get capital from overseas, so if you are an African entrepreneur without access to Silicon Valley, getting high risk capital is not easy. Another is creating a business that is scalable and one that can be carried across national borders. All too often, companies have business cases based on specific regulatory rules and in Africa, there are at least 54 sets of such rules.”

Liliane Munezero Ndabaneze believes it is very difficult for off-grid solar startups to raise funds in Africa. She said, “One thing to remember is that more than $500 million have been raised by the industry in the last five years. What is the percentage of that went to the startups, founded and managed by the locals, especially women? The figure will tell you how ‘easy’ it is for African owned startups to raise funds. Yes, there is a need for more investment, but more investment by African investors is still equally challenging.”

Manfred Hafner, professor of international energy studies who teaches at the Johns Hopkins University School of Advanced International Studies and Giacomo Falchetta from the Catholic University of Milan believe that in order to be successful and sustainable, renewable energy startups must take a set of actions aimed at tackling some of the greatest challenges of doing business in the sector in the context of developing countries of Africa. The first action is coordination and continuous interlocution with the government. Secondly, investments must be tailored to the specific setting such as potential supply variability and demand change is necessary. Finally, startups must ensure that their business model is encouraging a regular payment of customer bills or government agreements and subsidies that enable firms to repay costs and scale-up their infrastructure.

Mini-grids linked to national grids; the future

The outlook for renewable energy as well as renewable energy startups is positive. In the next five years, Africa is expected to better understand its renewable energy potential and its resources and make good use of them. While Sub-Saharan regions have good potential for solar energy, the coastal regions hold potential for wind energy. Opio David said, “As technology costs are slowly reducing, with an increasing trend of investments in technology research and development plus attraction of renewable systems over diesel generators grows, there is bound to be exponential growth for off-grid renewable energy startups over the years.”

Liliane Munezero Ndabaneze said, “If we look at last years’ Pay-go systems, the southern African region is last on the chart, with less than 1 percent contribution. So increasing this to 5 or 10 percent is definitely achievable in the short term and should be an industry effort. Once again, factors such as mobile money penetration will determine how fast we can scale up.”

According to Jan Albert, the outlook for off-grid solar startups is still positive. However, the only successful off-grid renewable energy startups will be the ones that are well managed and have sufficient capital to see them through. In the end, it is all about implementation.

Mikhail Nikomarov, on the other hand, believes the future of renewable energy is the mini-grid. He said, “These small grids will likely feature multiple technologies, including solar PV, possible another generation source if it exists locally (mini-hydro, wind, and gas) significant amount of energy storage (large batteries) and, in wealthier areas, some back-up power support in the form of diesel and HFO generators.”

Manfred Hafner and Giacomo Falchetta believe if properly planned, mini-grids have the benefit that they can at a later stage be linked to the national grid and become an integral part of it. In this scenario, the local renewable generation capacity can still continue on providing the baseload power needed locally, while the electricity from the central grid can step in to fill the demand-supply gaps.

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