In the past, there have been studies that have estimated the amount of investment that is needed to meet energy access goals across Sub-Saharan Africa, but none have attempted to systematically analyze what finances these countries are actually committing to energy access, what is known about the disbursement of development finance for energy access, or the challenges facing energy access enterprises in delivering modern energy services to more people more affordably. This new report, “Energizing Finance: Scaling and Refining Finance in Countries with Large Energy Access Gaps,” does exactly that. Energizing Finance explores these questions and offers insights and pathways to help governments, development finance institutions, and other decision-makers to accelerate progress on energy access.
The research is a series of reports done in partnership with the African Development Bank, Climate Policy Initiative, E3 Analytics, Practical Action Consulting, and the World Bank Group. It tracks and analyzes finance flows for electricity and clean cooking access in 20 countries predominantly in Sub-Saharan Africa and Asia that have significant energy access gaps. These countries account for 80% of the 1.06 billion people lacking electricity and 84% of the 3.04 billion living without clean cooking, identified in the Global Tracking Framework. Eleven of these countries additionally have explicit targets for electricity and/or clean cooking access in their nationally determined contribution under the Paris Agreement on climate change. These countries, dubbed ‘high-impact,’ cannot afford delays in making progress on energy access.
In Sustainable Development Goals set in September 2015, there is SDG 7, which calls for universal access to affordable, reliable, and sustainable modern energy. This includes access to electricity and clean cooking by 2030. The importance of SDG 7 is paramount. Lacking access to electricity means that food cannot be refrigerated and schoolchildren cannot do homework at night.
There are health risks, too. Indoor air pollution from burning charcoal and other fuels for cooking kills several million people every year. Development-wise, countries that fail to provide modern energy services stifle opportunities for inclusive economic development and overall security. This report provides a practical pathway for governments, financial players and other key decision-makers in allocating international and domestic finance so that energy access services can be delivered to more people more quickly and affordably.
Achieving energy access targets is costly. In 2013 and 2014, annual average financing in the 20 high-impact countries for electricity and clean cooking was $19.4 billion for electricity access and $32 million for residential clean cooking (SEforALL, CPI and the World Bank, 2017). Current flows remain a very small fraction of what is ultimately needed to achieve universal energy access, including in the five countries surveyed in the report. To reach the national targets, for tiers 1-3 energy access in the countries surveyed, annual finance needs are estimated at approximately $3.97 billion.
The cost of achieving government targets for electricity access is highly dependent on the targeted tier of access. Per the World Bank’s Access Investment Model (AIM), the per-household cost of providing Tier 1 electricity access is roughly 50 times less expensive than higher-service Tier 5 access (World Bank, 2017). And, although Tier 1-3 access does not provide electricity supply around the clock as fully or reliably as higher tiers, it can trigger significant development gains in terms of public health, education, gender equality, business opportunity, and overall human wellbeing.
In the clean cooking sector, the gap between needs and actual supply of finance for meeting national targets is even more substantial. Across the four countries for which cost estimates have been conducted (Bangladesh, Ethiopia, Kenya, Nigeria), the total estimated costs of meeting clean cooking targets, including both technology and fuels, stands at $18.44 billion per year through 2030.
Current annual spending for residential clean cooking across the 20 high-impact countries stood at a mere $32 million, indicating how large the financing gap in the clean cooking sector is (SEforALL, CPI, and the World Bank, 2017).
While unmet financing needs to achieve universal energy access are enormous, they do not seem enormous when compared with each country’s GDP.
So, what are the main finance barriers in energy access across the five countries? Lenders’ high collateral requirements remain a powerful barrier for small and medium enterprises (SMEs) in energy access enterprises trying to obtain finance. This factor was highlighted by respondents in all five countries surveyed.
Currency issues remain problematic in many countries. Fluctuations in exchange rates lead to unpredictability in the unit cost for imported equipment and associated costs that are incurred in US dollars. This volatility makes it all-but-impossible to offer stable, predictable pricing for customers and has significant negative impacts on customers’ own ability to pay.
In Ethiopia, the central banking restriction on access to foreign currency, specifically USD, further restricts companies from importing sufficient quantities of products, as these are usually priced in USD. Such delays have direct and sizeable impacts on enterprises’ ability to meet customers’ needs continuously throughout the year. In addition, it is notable that access to finance remains much harder for female than for male entrepreneurs across all surveyed countries, for both cooking and electricity access enterprises.
Although several important commonalities could be found, such as the need for working capital, better access to foreign exchange, as well as the crucial importance of mobile money for reducing customer acquisition and loan collection costs, each individual market differed markedly from the other. In Kenya, for example, private international equity from impact and venture capital investors plays a significant role, while this remains a comparatively small part of the market in the other countries surveyed.
At the heart of improving the energy access sector’s “investability,” is the creation of strong enabling environments, particularly in the energy, investment and banking sectors, through the establishment of effective and transparent rules. Given the levels of debt, equity and grants estimated across the five countries for electricity and clean cooking access, it is imperative that governments, donors, investors, development finance institutions, the private sector, and civil society organizations collaborate. Actions across the national policy and regulatory system in the energy, banking, investment, and trade arenas must be looked at holistically to accelerate needed finance flows. Clear policy and consistent government planning about grid extension and mini-grid development remain critical to provide more certainty for enterprises, as well as donors and NGOs.
There is an established solar lantern product market which is highly competitive and quickly achieving global standards in the countries surveyed. It remains the most widely used and affordable solution available for Tier 1 electricity access, undercutting kerosene, torches and candles for basic household lighting needs. Solar lantern enterprises face challenges, however, in accessing working capital and consumer finance. The working capital need is frequently exacerbated by issues surrounding foreign exchange markets, currency volatility, import duties and VAT regimes. Significant energy access gains could be achieved by simplifying import procedures and tariffs, reducing or eliminating value-added taxes and introducing dedicated working capital facilities for enterprises working in this field, as well as by improving their access to foreign currency.
The rise of pay-as-you-go (PAYGO) companies in the markets signals a major shift from prior business models. PAYGO companies can provide reliable, affordable electricity access at a fraction of the upfront cost of traditional grid extension and often in a fraction of the time. In Kenya, the combination of sophisticated real-time analytics, large networks of on-the-ground sales representatives, customized consumer finance solutions and the spread of mobile money has proved to be a powerful combination that is helping make significant gains in electricity access.
While the other four countries surveyed show varying levels of adaptation and replication of the PAYGO business model, none is nearly as advanced in this regard as Kenya, which remains a market leader. The latter’s success was contingent on a range of factors, including policy clarity, a well-developed financial sector, an active mobile money market, ready access to foreign exchange, a relatively stable currency and simplified import procedures.
A small number of surveyed companies providing clean cooking solutions, mainly in Kenya and Nigeria, were making considerable profits. A critical factor to this success was ensuring customers had easy access to finance, since the price of most improved cookstoves on the market sits just above what consumers are willing (or able) to pay in cash.
There is a huge potential to support the emergence of diversified cooking sector enterprises that can provide partially or fully, vertically integrated solutions to the challenges facing the sector. Much of the clean cooking discourse focuses on the supply of advanced cook stoves, whereas the overwhelming majority of revenues in the sector rests with the supply of fuel (e.g., charcoal, kerosene, lignite, liquefied petroleum gas (LPG)). Supporting clean cooking enterprises could involve the expansion of enterprise and consumer finance, as well as larger investments in the infrastructure required for expanded supply of cleaner fuels such as LPG, ethanol, and natural gas.
Kenya’s energy access market is one of the most advanced in the developing world. This is due to several factors, including supportive business regulation, a flourishing mobile money market, a dynamic financial sector and a strong entrepreneurial drive. Nevertheless, there are still approximately 29.5 million Kenyans without reliable access to electricity and 43.2 million (93.8% of the population) without access to clean cooking. Kenya has made considerable progress in delivering off-grid energy services at Tiers 1-2 through the solar lantern and solar home system (SHS) markets. Sales in both market segments have increased steadily and made Kenya the largest market in Sub-Saharan Africa, with over 650,000 unit sales in the second half of 2016. In parallel, the national grid is being extended.
Kenya is also one of the most dynamic markets in the world for the growth of the pay-as-you-go (PAYGO) SHS market as highlighted above.
The relative stability of the Kenyan Shilling against the US Dollar over the past 3-5 years has subdued investor concerns over foreign exchange risk, a factor that has contributed to the large influx of venture and impact capital in the last 2-3 years. Several enterprises, nevertheless, expressed a greater desire for local currency financing, particularly local currency debt.
The energy access market in Kenya remains heavily reliant on owner equity. In 2015-2016, roughly two-thirds of surveyed enterprises financed their business from equity. Of those, all used corporate equity or own funds (as opposed to project equity or mezzanine finance). Over a third were also relying on equity from friends and relatives. This represents a markedly higher share than in other markets, including neighboring Ethiopia.
Kenya’s clean cooking market has lagged significantly behind the electricity market. Per the SEforALL Action Agenda, nearly 90% of Kenyans living in rural communities rely on either wood or charcoal to meet their cooking needs, rather than improved cookstoves and cleaner fuels.
The early stage of the market may explain why there were a greater number of not-for-profit market actors when compared to the solar products and SHS market segments. It also meant that they sourced a higher proportion of their finance from grants.
About half of the companies interviewed who were active in the cooking sector had an international presence, a factor that also influenced where they sourced their capital. All cooking-sector interviewees pointed out their inability to obtain traditional bank loans, because of either onerous collateral requirements or the perceived immaturity and the lack of a sector track record. Not one company had successfully raised debt finance from a local provider.
In contrast to the other countries examined, Kenya’s national electricity access targets include a greater emphasis on decentralized solutions, with 75% of new connections targeted by the government to be met by decentralized energy access.
Ethiopia’s energy access market is characterized by a large access gap in rural regions. Of the 85% of the population that lives in rural areas, an estimated 2% had reliable access to electricity. By contrast, in urban areas, access is estimated at or near 100%. Most of the rural population has basic (Tier 0) lighting needs characterized by using expensive and high-emission fuels, such as kerosene. However, a growing number of rural households have access to solar lanterns, with estimates ranging as high as 2.4 million units sold (World Bank, 2017).
Regarding cooking, an estimated 19.1 million households, representing approximately 97.4 million people, lack access to modern clean cooking. A large majority is concentrated in rural areas. Such households still depend on solid biomass fuels and inefficient open-fire cooking methods with an estimated energy efficiency of 10% or less. As of 2013, 4-5 million improved cookstoves were estimated to be in use. That has increased since, but at a gradual, rather than exponential pace.
While debt financing is available in the market, it can be very difficult to access. The most significant barrier for enterprises is lender’s’ collateral requirements: Banks have a blanket requirement for collateral worth 100% of the value of the commercial loan, applying across all sectors, including energy access. Most enterprises interviewed lacked the capacity to provide such collateral. Additionally, public-sector banks, such as the Development Bank of Ethiopia (DBE), value enterprises’ assets at a third or lower than their market value. For the few enterprises that have the assets to back their loans, such an approach limits their ability to raise debt to a few rounds of financing for larger growth phases of their business. For almost all, accessing debt for working capital is nearly impossible and was cited as a major barrier to scaling-up.
Equity is the single-largest source of financing, forming 45% of enterprises’ capital structure. None of the enterprises interviewed reported relying on equity from friends and relatives. Equity came almost exclusively in the form of corporate equity (or companies’ own funds), while debt came primarily in the form of corporate debt. Indeed, over 40% of respondents relied upon corporate debt in 2015-2016, with a further 15-20% deriving part of their financing from project debt. Most of the debt came either as a loan from a local commercial bank or development finance institution.
Although enterprises are stepping up to provide energy access in a commercially viable and scalable manner in Ethiopia, they face significant barriers to growth. The design and enforcement of quality standards appears to be more of a market bottleneck than a support for better energy access.
Nigeria is Africa’s largest economy and most populous nation. Its energy situation is one of the most challenging on the continent, with a huge deficit in production and demand, a rapidly-growing population and significant disparities in energy access between urban, rural and remote areas. Nigeria has the largest absolute energy access gap in electricity (35 million households after population growth) and clean cooking (57 million households after population growth) of the countries surveyed.
In 2013, Nigeria privatized its electricity market and divided the country’s electricity system into 37 territories, each with its own Distributed Energy Services Company (DESCO). These DESCOs are facing financial problems, which is resulting in a worsening of the electricity supply they offer, meaning longer and more frequent power outages. One DESCO has recently declared bankruptcy and there are said to be at least three others facing severe financial problems.
This picture is underpinned by the poor performance of the Nigerian economy over the past two years, where the recession has been hard and all sectors of the economy have been suffering.
A key reason for this recession has been the falling prices of oil and the subsequent crash of the Naira, particularly against the US dollar.
Raising finance was considered a major challenge for virtually all Nigerian companies interviewed. The enterprises had very little success in sourcing finance from local financial institutions or local investors. With few exceptions, such as the emerging PAYGO players, many respondents found that raising finance internationally was not an option either, due to the highly volatile nature of the country’s foreign exchange rate. Most enterprises were relying on corporate equity (mainly in the form of operating profits being plowed back into the company) as the main source of finance.
Debt financing for Nigerian companies is almost nonexistent. And yet, despite being unable to obtain debt, over half of respondents planned to increase their reliance on debt. Like Kenya, most enterprises are heavily equity-financed; but in contrast to Kenya, they appear to have fewer avenues available to securing financing: crowd-funding does not seem to be playing a major role in the energy access sector; local banks are focusing elsewhere; and international investors are largely taking a wait-and-see approach until currency, economic and political risks dissipate further.
The Nigerian market for energy access needs greater attention nationally. In the absence of this, the private sector has focused on the middle- to higher-income households looking for an affordable and reliable back-up to the grid. To make deeper inroads into rural and remote regions, particularly in the cooking sector, more grant investment and targeted policy support is required.