African energy entrepreneurs are showing the way to bringing power to underserved populations, but face a number of challenges to closing the energy gap.
For Africa to realize its economic potential, it will need significant investment in power generation, transmission and distribution — as well as a sound regulatory framework to support the sector’s growth. Yet with nearly 600 million Africans living in regions not served by the grid, it’s not clear when new investments — such as those facilitated by Power Africa, President Obama’s whole-of-government initiative to lead the way on much-needed energy investment — will reach these remote areas, if ever.
Fortunately, a number of factors are coming together to allow off-grid energy solutions to meet the needs of rural communities. Advances in technology are bringing costs down, enabling local, renewable energy generation to become both commercially viable and attractive to customers.
What We Are Learning
These are early days for Africa’s off-grid renewable energy sector. As new projects are being launched, local entrepreneurs, village-based consumers, as well as industry experts are each facing a steep learning curve. A number of important trends are emerging:
Consumer Demand Up: Solar-powered lights and other household-level energy solutions are gaining traction. In just four years, sales of quality verified lighting solutions have grown by over 300 percent — topping 5.7 million in 2014 — yet this still represents less than 5 percent of the market. While rural populations initially questioned the advantage of moving away from kerosene, acceptance of cleaner and cheaper lighting technology appears to be catching on.
Fragile Market: At the same time, this new energy market is fragmented and fragile. Considerable market confusion remains around the reasonable cost for a home solar system. Local companies complain of an inflow of cheap, unreliable imports, prompting potential customers to question the reliability of solar power and the viability of different product offerings.
So while more customers are waking up to the potential of renewable energy, they need to distinguish offerings by quality and service. Service providers must find cost-effective ways to educate customers on the benefits of well-designed and serviced systems.
Widespread Abuse: In many countries, people are accustomed to a sort of “gray market” for power. It’s not uncommon for users to tap the grid through unconventional means, hoping to bypass the billing system.
While such tampering is illegal and ill-advised in any circumstance, this also creates real problems for private mini-grid operators or distributors of home solar systems — whose viability depends on paying customers. Some private operators report the same problem with slow-pays that plague public utilities. So changing public perception and practices presents an important challenge.
Finding the Sweet Spot: It’s broadly recognized that most off-grid providers will be unable to match the very low costs of on-grid energy generation. But is that a fair comparison for rural communities that don’t have access to the national grid?
Industry experts contend that off-grid energy should be compared instead to the cost of operating a diesel generator — or kerosene for lighting. Certain approaches may be more economically efficient, and we need to find the sweet spot for each business model.
Regulatory Conundrum: There are complex regulatory concerns as well.Some regulators believe the whole country should be served by the national grid — requiring mini-grid providers to use costly connections that conform to national grid standards. Others want to limit customer costs — making it virtually uneconomical for new solutions to be tested, developed and improved over time. Still others cling to a state-driven model, holding that only the state-controlled utility can sell power.
A more enlightened policy would require independent producers to register with the appropriate regulator — but giving companies that sell less than 1 MW the freedom to develop its system and charge what the market will bear.
Financing Challenges: Throughout Africa, small businesses have difficulty attracting financing, especially in areas involving new technology and unproven business models. Most companies lack sufficient collateral to meet commercial bank requirements, and there is a dearth of early-stage financing.
There are some early leaders with U.S. and venture capital connections — mKopa, D.Light — but many local energy entrepreneurs lack access. Most are left to bootstrap growth with retained earnings — slowing their growth and business potential.
Empowering Local Energy Entrepreneurs
But when entrepreneurs are able to access funds and scale, amazing things can happen. The Power Africa Off-Grid Energy Challenge (which my organization, the U.S. African Development Foundation, co-founded with GE and USAID) held open competitions to award $100,000 seed capital grants to local entrepreneurs who developed commercially viable ways to deliver power to underserved and rural populations.
The response was amazing; the Challenge has made nearly 30 awards to local African small and medium-size enterprises developing off-grid energy solutions. Most striking, though, is the broad array of solutions being developed by local African companies. New Energy, for example, is deploying solar-powered water pumping and purification technology to rural customers in Ghana; while the Organization for the Rehabilitation and Development in Amhara constructing biogas systems to supply gas for efficient cook stoves in Ethiopia.
When we launch the third round of the Off-Grid Challenge this summer, we will continue to expand the number of potentially profitable business models. But we recognize the importance of investing further in companies that are demonstrating real potential. And questions remain: How to foster cross-learning from one enterprise to the next? How to leverage financing — both debt and equity — appropriate to their needs? How to systematically address the challenges ahead?
One thing we know for sure is that USADF alone cannot generate the answers. Instead, there is great opportunity for sharing experiences among those of us who are tackling these challenges — the energy entrepreneurs themselves, as well as industry leaders from the private and public sector.
(Top image: Courtesy of Claudia Schwartz, USADF)
Shari Berenbach is President and CEO of the U.S. African Development Foundation. She previously directed the Office of Microenterprise & Private Enterprise Promotion at the United States Agency for International Development, and was President and CEO of the Calvert Foundation.