In 2014, Kenya completed the financing of a project that promised to deliver both 20% of the country’s electricity via renewable energy and a new 428km transmission line bringing reliable, clean and affordable power to the underserved northern part of the country.
The Lake Turkana wind farm was the largest private investment in Kenya’s history, with Google agreeing to acquire a stake in the project. Construction of the transmission line suffered multiple delays, however, due to land disputes, and Spanish contractor Isolux Corsan filing for bankruptcy. Once the wind farm had been connected to the grid, almost three years late in 2018, Google had backed out of the deal.
The number of Kenyans without electricity access fell sharply to just 8.45 million by 2019, but it had little to do with eye-catching infrastructure investment such as Lake Turkana. Instead, a long-promised revolution in energy access had finally begun to deliver some results.
The promise of off-grid power
While off-grid power systems may differ in scale, technology or power source, they all attempt to address a common problem: providing power to people without national grid access through small-scale power generation, storage and distribution.
While these systems can be run on diesel generators or other forms of carbon-emitting power fuels, the sharp cost reductions in solar power and advances in battery technology offer the hope of widespread off-grid power across sub-Saharan Africa that is also renewable.
[Better access to electricity in Africa] should have happened. The reason it didn’t is because the World Bank and others butted in too early and placed regulatory straightjackets on the market. Tara Lindstedt, Dream EP Global Energy
Off-grid solar power systems for the home and mini-grids serving wider communities have proliferated across African in recent years, reducing electricity access deficits. Kenya, Tanzania and Ethiopia accounted for half of the five million people benefiting from solar home systems in Africa by 2018.
Yet some argue that this growth in off-grid access has not been quick enough, and with populations continuing to rise in many African countries and Covid-19 slowing development, the trend for improving power access is now reversing.
The introduction of mobile handsets and networks across Africa 20 years ago meant those with phone access went from the minority to the majority of Africans within a few years. This was done without the need for large, state-managed infrastructure development.
Mobile technology had leapfrogged the usual development challenges.
When commercial solar and electric battery storage systems were still in their infancy, many institutions talked up the potential of a similar revolution in electricity access. Distributed power offered the opportunity to bypass the bureaucracy and inefficiencies of governments and state utilities, with small communities able to generate, store and distribute their own power.
Many of the areas of Africa with the lowest access to electricity rates now have the highest consumption levels of renewable energy, which should make them ideal for greater levels of distributed energy.
The revolution that is yet to come
A sudden revolution in electricity access did not materialise though. The World Bank says that despite progress, 8% of the global population, some 650 million people, will still not have access to electricity by 2030, with nine out of ten of them living in sub-Saharan Africa.
“I think we were all wrong”, says Yann Tanvez, upstream lead for mini-grids in Africa for the International Finance Corporation (IFC), part of the World Bank. “There are fundamental differences between phones and electricity.”
He adds that electricity is far more of an essential service than phones, which means its provision needs strict regulation to ensure safety and that users are provided a service at an affordable price.
Some blame that regulation for slowing progress, however. “It should have happened,” says Tara Lindstedt, who as the managing director of Dream EP Global Energy developed a mini-grid on Remba Island in Kenya’s Lake Victoria. “The reason it didn’t is because the World Bank and others butted in too early and placed regulatory straightjackets on the market.
“If you look back on the history of the evolution of the mobile phone sector, it grew rapidly because it was not regulated. The governments did not understand it and so they left it alone.”
Rolling out of mini-grids
The World Bank says that if universal access to electricity is to be achieved by 2030, the number of mini-grids installed worldwide will need to rise from less than 20,000 in 2018 to more than 212,000.
The World Bank estimates that 1,465 mini-grids have been installed in Africa to date, but those systems are providing just 783MW of total capacity and the capital cost per kilowatt to develop them is higher in Africa than any other continent, at $6,668.
The cost per kilowatt hour (kWh) of those off-grid solutions, unfortunately, is expensive. Let’s say its $1/kWh, many people just can’t pay that. Yann Tanvez, IFC
“The cost per kilowatt hour (kWh) of those off-grid solutions, unfortunately, is expensive,” says Tanvez. “Let’s say its $1/kWh, many people just can’t pay that. In rural areas some are living off less than $1 a day. They can barely afford food, so how can they afford your expensive power systems?”
Tanvez is working on a new IFC programme for rolling out mini-grids in selected African countries that would be similar to its Scaling Solar initiative. Under the solar programme, the IFC provides standardised documentation, institutional support and (if needed) financing to government-tendered projects.
According to Tanvez, developers often target the poorest areas to build mini-grids in order to maximise the social impact, yet this leads to a requirement for substantial subsidies that are not sustainable long-term. Instead, he says, focus should be on proving the model in more urban areas where it is more commercially viable before expanding to rural communities.
Lindstedt argues that concerns over ability to pay are overstated, however. “In the early days of mobile, prices were sky high, but people would find the money to buy,” she says. “Haiti, the world’s poorest nation, has similar numbers of mobiles per capita when compared to rich nations.”
She adds that there was a boom in off-grid and mini-grid solutions, with developers such as Access Energy and PowerGen investing heavily up until around 2013 when regulation started to stifle development.
Lindstedt says that the Remba mini-grid demonstrates there is an ability to pay in even the poorest communities if the service is good. Remba supports a fishing community of about 10,000 people, and she claims it is thriving despite having a tariff eight times higher than the Kenya national electricity tariff. “We have a long waiting list,” she adds.
Investor appetite rises as electricity costs fall
The World Bank estimated in 2019 that almost $4bn had been invested in African mini-grids, with Kenya-based PowerGen the leading developer, having installed more than 100 systems across seven African countries. It also estimates that a further 4,000 mini-grids are in planning stages in the continent, with most heading for Senegal (1,217) and Nigeria (879).
Solar panels have of course come down in price and will continue to do so, but I also think the business models of companies are getting smarter. Ash Sharma, Beyond the Grid Fund for Africa
Tanvez of the IFC says Nigeria is a good example of a market that has quickly introduced new planning rules and regulation in order to implement mini-grid tenders in just a few years, but there are signs of investor interest outside of the major markets too.
Ash Sharma is head of Beyond the Grid Fund for Africa, managed by the Nordic Environment Finance Corporation, which aims to build markets for off-grid energy in Burkina Faso, Liberia, Mozambique, Uganda and Zambia, specifically targeting rural areas.
He says that the oversubscription of its early funding rounds proves investor demand is significant, although he acknowledges the challenge of scaling development to bring down costs. “The affordability issue is always going to be there, and companies do need an incentive to go up-country and address the very base of the pyramid,” says Sharma.
“But costs are coming down, whether for hardware or through the optimisation of load and digitisation. Solar panels have of course come down in price and will continue to do so, but I also think the business models of companies are getting smarter.”
Sharma says decarbonisation, decentralisation and digitisation are the mega-trends in the African power market and Lindstedt talks up the possibility of emerging digital payment systems making it easier for people in rural communities to access distributed power.
Role of state utilities
However, do state-owned utilities, which have failed to deliver universal power access across Africa, risk stifling innovation by demanding involvement in the roll-out of off-grid power systems?
Lindstedt says that one of the motivating factors in selecting Kenya to invest in mini-grids was the country’s decentralisation agenda, but after initial success working with local county governments the interference of national institutions and development banks led to a “complete stalemate”.
She says efforts to increase electricity access across the region “will not work if the World Bank continues to prop up monopolies and corrupt institutions while the IFC insists on competitive market reforms and significant internal rates of return”.
“By nature [utilities are] groups of engineers with money and power, and they want to build things themselves,” says Tanvez. “Even if it is a solar plant or a battery unit, they don’t want anyone else to do it besides themselves.”
He adds that “mini-grids will become mini-utilities in time, and you need to make sure they do not face the same structural issues as the national utilities”. Tanvez believes that a model where the ownership of mini-grids transfers to state utilities at the end of concessional periods could be advantageous for all, as long as the assets are grid-compatible and the tariffs used are regulated on a national basis to allow smooth integration.
“I think most people accept that government bodies shouldn’t have a monopoly on electricity provision, but state utilities have a role to play by focusing their capital investment programmes on new generation and replacing ageing transmission infrastructure,” says Sharma. “The two models can coexist.”
A window of opportunity
While the potential scale of development and interest from investors seems significant, Tanvez cautions that “there is probably a window of maybe two to four years to make this happen.
“If the next wave of investment is structured well, with commercial investors coming into the space as a result of proper contracts, things could really take off,” he adds. “If in four years from today it is still just the same group of development banks dominating the market, the large industrial players are likely to retract because there has been no money to be made.”
Given how economically damaging low electricity access rates are, particularly in an increasingly digitised world, the success of distributed power efforts could have a huge impact on the future prosperity of sub-Saharan Africa.
Jon Whiteaker is a senior editor at Investment Monitor focusing on FDI in the energy sector.