Three years ago, a World Bank meeting in Nairobi brought together regional government officials, companies from the energy space and a host of prospective investors to discuss the development of green energy and the electrification of rural Africa.
The unanimous solution proved to be the role that mini-grids in the off-grid space would play in the years to come.
This conclusion was met upon the realisation that Africa doesn’t necessarily have a generation problem; rather a transmission and distribution problem across and in-between vast areas of land.
Despite reaching this potential epiphany, however, governments at the time lacked templates, frameworks, and even – in some cases – an understanding of how to develop, finance and regulate the off-grid sector. More than ever before there was a need for advanced industry data and a more coherent and unified industry voice to drive forward a seemingly pivotal solution.
Enter, the Africa Mini-grid Developers Association, more commonly referred to as ‘AMDA’.
“AMDA was created out of this need to create an industry data benchmark – to collect data from across the continent in the mini-grid space and present it in a way that is helpful to financiers when they’re going through due diligence,” explains the association’s CEO, Aaron Leopold. “The data centre we proposed when initiating year ago would also be an indicator for governments of how the sector is performing, which would in turn inform how it should be policed and regulated.”
AMDA was subsequently borne with an initial vision to bring onboard not just anyone, but an accumulation of companies already with existing grids who would be able to scale the sector quickly; to serve more as a tangible showcase of what could be achieved if such infrastructures were developed on a broader basis across the continent’s rural areas.
“What we’re doing now is working on policy and finance, from a growing number of offices around the continent,” Leopold continues. “We need people on the ground in a regulated sector to work personally with the respective governments and companies involved, and to guide them through a largely unfamiliar sector.
“Half the countries in Africa don’t even have regulation around mini-grids at present, which lends to a bit of a ‘Wild West’ scenario. So, we’re active in trying to prepare countries for the incoming off-grid revolution, while also working with more prepared countries in regard to regulation and implementation.”
The winds of change have arrived
Across Africa’s 54 countries, the level of preparedness of off-grid solution is inevitably varied. However, one thing that Leopold is happy to have witnessed is the consistent willingness across the board to engage with the trend and its potential.
“This has led to many governments actually requesting that mini-grid companies come in to build pilot grids for them, even in the absence of policies and regulation, to get a flavour of the sector,” Leopold says. “It’s a positive sign of intent borne not just out of a vision to electrify their countrysides, but also in anticipation of this being the future of energy and therefore the future direction of potential investment and donors.”
In Kenya, Nigeria and an increasing number of other countries, investments are beginning to respond to this intent as well.
“The winds of change seem to have arrived,” Leopold states, acknowledging that previous reticence seems to be waning.
“In the past 18 months especially, there’s been a resurgence in interest in mini-grids, and much more forthright conversations are now taking place about how to fund something that is quite different to the traditional infrastructure they’re used to,” he elaborates. “However, that doesn’t mean that just because more conversations are being had, but also that the conversations are increasingly more constructive and conclusive.”
Leopold refers to a challenging of the status quo, and an inherent difficulty that lies within this. By stating that for rural and remote areas, mini-grids are a faster, more reliable, cost-effective and high performing solution than traditional utilities, the potential exists for these often state-owned utilities to understand this as a direct – and political - challenge to their work. “Our approach however, is a collaborative one. Our message to utilities is that we’ll take the expensive to serve, underperforming rural areas off your hands. We want utilities to focus on what they are good at rather stretch themselves so thinly that service quality suffers. We tell them to focus on more profitable centres and we’ll take the tough ones, work to grow the loads, and when the grid eventually arrives in ten or 15 years, they’ll be energy consuming and reliably paying communities instead of the money pits they would be if utilities connected them today.”
A chicken and egg investment conundrum
It’s a balancing act that is perhaps understandable given that both the sector and the countries themselves are trying to find their feet with off-grid. However, this slow and complex transition isn’t always comforting to prospective investors who would love to see the continent grab the bull by the horns and inject some pace into the evolution of mini-grid adoption.
“It’s one of those chicken and egg conundrums, right,” Leopold muses. “Investors and potential donors are worried about the cost and speed of project mobilisation, but the companies in the space who would love to get things moving, need larger investments to reach economies of scale on cost, and to hire and train the larger teams needed to move at speed.”
However since they are small and costly, funding rounds have remained small as well. The positive news, at least, is that in the same way that a vicious cycle has engulfed the continent until now, a similarly virtuous cycle is bubbling as larger investment rounds are indeed beginning to emerge, bringing with them the potential for the sector to truly take off.
“What we’re pushing for and have a good feeling about is building an international community that allows funding rounds to actually pack a punch,” Leopold says. “In the next year, I’m 100 percent sure that we’ll begin to see $50 million-plus investment rounds of funding instead of just $9 million.
“Once these companies show that they can build 20 grids in a year with small teams, rather than 20 grids over the course of three years as is the traditional rate, interest and investment will snowball from there; leading to a much faster rate of overall infrastructural development.”
This acceleration has been aided in recent months off the back of not just any investment, but high-profile equity investments. Household names such as Toyota, Mitsubishi and a host of French players such as Engie in particular have come into the offgrid market with a combination of motives and agendas.
Firstly, of course, they see Africa as a viable business proposition, and being on the verge of taking off. But, similarly, they’re able to tap into a CSR-resonating, public support that comes inherently with the notion of electrifying rural, underserved communities.
“At AMDA, we have a strong message around public support,” Leopold affirms. “We tried taking a solely commercial, profit-driven approach to test mini-grid models, but we have found that rural electrification in Africa is the same as in other geographies – all of which have required public support due to the comparably small economies and demand levels in rural versus urban areas. Universal access is the goal – and commercially driven companies will only go where demand for their services exist, hence minigrids will need subsidies to get to the last mile, and that should not be a surprise to anyone. We are working with the World Bank, African Development Bank and a range of other development financiers to develop tools to accomplish this equitably across the continent. And investments are already beginning to flow.
Electricity is a gateway
Once again, the waterfall effect that can occur from watching Toyota, Engie and others take a strategic chance on a rural area of Africa, to great effect, is clear for all to see.
What Leopold is most excited to see as a consequence of all this spiralling progression however, relates very little to the energy concern that kickstarted the whole process – and AMDA’s involvement – to begin with.
“I do believe that in five years’ time we are going to see rural electrification of Africa really take off, and that’s great,” he concludes. “However, there is a bigger knock-on effect to be seen from this, in unlocking the mystery of the rural consumer in Africa.
“What all these mini-grid companies are doing is setting up an infrastructure of economy and commerce. They can’t operate if the only power on offer there charges a lightbulb or their phone. They need engineers, carpenters, welders, consumer goods – they’re encouraging the development of communities en route to setting up an infrastructure that will help these areas establish their own economies of scale in the future.
“It’s not about transforming the energy space. It is about creating a gateway to open up the hundreds of millions of rural Africans who are simply not included in the modern economies because they are not connected to energy and financial ecosystems – both of which unlock dozens of possibilities to grow economically – and both of which minigrids bring with them to every community they go to.”