Worldwide 1.1 billion people continue to live without access to electricity. More than 95% of those without access to electricity live in sub-Saharan Africa and developing Asia. While progress is being made, rapid population growth continues to challenge that progress. Perhaps needless to say but the most significant depravation is amongst rural communities.
The technological advancements in solar-based products and the extraordinary success of the “pay as you go” approach in providing widespread access to mobile telephones has placed Africa on the verge of being able to achieve breakthroughs in providing power and lighting for domestic users in a way that has not previously been possible. Ironically, the need to make the breakthrough has increased by the need for power to charge the mobile telephones.
Just considering lighting, it is estimated that consumers in Africa spend between US$12 – 17 billion annually on fuel-based lighting. According to a United Nations Environment Programme assessment, if Nigeria used modern off-grid lighting solutions, the country could save over US$1.4 billion annually. Replacing all of the kerosene, candles and batteries used annually for off-grid lighting would save Nigeria the equivalent of 17.3 million barrels of crude oil. Significant positive social and education impacts, health impacts – from the reduced use of kerosene lamps for example, environmental impacts as well as economic benefits could also be achieved.
Sustainability for all dependent on technical, legal and financial challenges
But many technical, financial, legal and other challenges need to be overcome to achieve “Sustainable energy for all”, notwithstanding major international initiatives supporting the objective, not least the United Nations declaring 2014-2024 the Decade of Sustainable Energy for All.
In “From the Bottom Up How Small power Producers and Mini-Grids can deliver Electrification and Renewable Energy in Africa” (The World Bank, 2014), the authors analyse in some detail the different possible approaches to regulation of the “decentralised track” of electricity production. Over-regulation through onerous and expensive licensing rules and required structures may be justified for large-scale production but with small scale or domestic production will hold back growth. Some reliable mechanisms are needed though to allow a commercial rate of return for investors but where consumers are not exploited where there is insufficient market competition to ensure this.
Where charged or chargeable appliances, such as batteries or solar panels, are sold, it is important from a legal perspective subject to amount of power they generate, that they are treated as consumer goods, rather than power generators or distributors, so not subject to a more onerous regulatory that would otherwise apply.
Output must be guaranteed reliable, available and suitable
Regulating product quality from a health and safety perspective and providing consumer confidence that power output is reliable, of a voltage, available when stated and suitable for stated uses is essential.
In an African context practical enforcement for non-compliance or injury will be an issue. So a national testing regime with a quality mark embossed on the equipment may be a way of consumers quickly recognising that a particular product range has satisfied certain advertised standards. Forging of quality marks would of course would need to severely punished as would intentional frauds concerning goods of a different standard being sent for testing for those supplied to the market.
Access to finance is bigger barrier than technology
Various business and financing structures have been emerging and others still need to emerge to support widespread distribution of small off-grid products. In many ways access to finance is seen by many as a bigger barrier to sustainable energy for all than the technology challenges. In relation to those models:
- Consumers are typically unable to pay a single amount up-front, certainly not sufficient to buy a single solar panel.
- It must be assumed that the consumers are not creditworthy and so cannot be relied on to keep up regular payments.
- For home solar systems for example, there are now businesses in existence based on single solar lanterns and multi-household solar panels, with pay as you go approaches ranging from “lease to own” structures; so-called continuous service models with payments via prepaid cards or via mobile money services; and pre-charged lanterns and power-boxes that need to be returned to the supplier to be recharged when the power runs out. They also require a down-payment. In this way there is no need for end-user financing.
- Another approach is to finance intermediate distributors of household systems who then supply them to consumers or others in the supply chain on a basis they decide is viable. Concern has been expressed about the efficiency of meeting the working capital needs of these distributors because of the high cost to them of the product as they are able to buy only small batch sizes and how quickly they need to turnover their stock to make a profit.
- Concern has also been expressed abut the possible market distortion of an otherwise profitable and financeable business by institutions deciding to give away small scale solar units in its area for free.
- Solar units left on roofs will also be susceptible to theft and so the replacement cost to the owner will need to be built in to their business model, unless the unit can effectively be shutdown if removed from an authorised user. In these communities insurance is not a realistic alternative.
- There is clearly scope for credit enhancements to make it easier for intermediaries to finance stock acquisition and develop their own distribution systems.
- The objective must be to create scalable business and financing structures based on standardised terms, at least covering rural populations in single countries and through this achieve economies of scale and stronger, big portfolio, based businesses.
The European Union is strongly committed to developing sustainable financing solutions through ElectriFi – the Electrification Finance initiative. This is part of the EU’s increased commitments made at the 2nd annual United Nations Sustainable Energy for All Forum in May 2015. As part of ElectriFi it will seek to bridge gaps between structuring and financing by launching a product of making grants to projects which are convertible into subordinated debt on milestones, such as completed feasibility studies, financial close, being achieved.
“The off-grid market has many business models, the most scalable ones still need to emerge. Nevertheless, it is difficult to see a future without off-grid ventures big time. ElectriFI will be at the heart of this emerging future.” (Marc Buiting, FMO)
Size of off-grid market beyond imagination
The size of the off-grid market is beyond any imagination. Mr. Buiting anticipates alternative finance routes such as crowdfunding being complementary to development banks, initially out of Europe and the US, but ultimately local currency crowdfunding.
“Sustainable energy for all” is one of the challenges of the decade. A worthy challenge and one which if we are able to meet it will have many positive, extraordinarily life-changing consequences for millions of Africans and others.
This article was partly inspired by a meeting with Marc Buiting of FMO, the Dutch development finance institution. FMO has a leading role in ElectriFi amongst the European Development Finance Institutions.
By Michelle T Davies and Howard Barrie. Source: Lexology