Catalyzing Financing for Off-Grid Energy Companies in Africa
By: Molly Doyle, Senior Advisor at Scaling Off-Grid Energy
By 2030, it is predicted that 104 million households—35 percent of the sub-Saharan total—will remain in the dark. So, what will it take to electrify all the households in Africa?
As captured in a report released last month by our partners at the Shell Foundation, pay-as-you-go (PAYGO) household solar companies must be able to provide energy access to an estimated 40% of households that cannot be reached by the grid or mini-grids. In order to reach that market share, an estimated additional $24-26 billion in commercial financing is required as well as the launch and scale of over 250 new household solar companies. Given this, there needs to be a significant shift from business as usual.
Recent investments in a number of PAYGO companies over the past few months signal increasing interest in the industry’s attractive bottom-line returns—both market and impact. Most recently in October, French utility giant ENGIE acquired Fenix International, a Scaling Off-Grid Energy (SOGE) grantee and Power Africa Beyond the Grid partner.
While it is encouraging to see large capital raises and the first-ever acquisition in the industry, investments still tend to focus on a few mature firms, foregoing the early- and growth-stage companies that are piloting new products or expanding into new markets, often seen as “too small, too risky.” Efforts by Acumen and others aim to address this ‘pioneer’ financing gap between early-stage and late-stage commercial capital, which bottlenecks the growth of the sector. Still, there is a need for more innovative financing structures and patient capital to further unlock the necessary commercial investment.
Through the newest round of SOGE awards, we are testing a new approach and taking a step towards the $1 billion in catalytic grant/blended capital that Shell Foundation’s report called for. In October 2017, USAID provided $3 million of its grant capital to support three commercial funds that will in turn invest in PAYGO solar companies. We invested in SIMA Funds' new $75 million debt facility to increase their capacity to lend to higher risk, early-stage companies. We are supporting the structuring and launch of Solar Frontier Capital's $100 million working capital facility for companies seeking local currency debt. We are helping scale Persistent Energy Capital's existing portfolio of startup and early-stage companies. These commercial funds will not only be able to reach more companies at a faster rate, but be able to better match companies with the private capital they need.
With these awards, USAID is using our development dollars to de-risk investments and catalyze the pipeline of new and innovative PAYGO solar companies climbing the valuation ladder, as they strive to extend their service to those at the bottom of the pyramid and expand off-grid solar coverage across the continent.
While financing is a significant challenge to the growth of the off-grid energy market, we recognize that there are many factors in play, and there is still a need to make deliberate efforts to reach latent markets as well as experiment with market-based solutions to drive growth. Insights on our strategy behind our other three awards to Baobab+, Sunna Design, and Mobisol are forthcoming.