Mini-grids could provide energy access to the approximately 580 million people without power in Africa while fulfilling decarbonization and climate goals. However, financing these projects often proves challenging. In order to secure funding, project developers are increasingly looking to results-based models.
Africa offers tremendous potential for renewable energy systems with its vast solar and wind resources. The continent has ample solar capacity (10 TW), hydro (350 GW), wind (110 GW), and geothermal energy sources (15 GW) available, according to the African Development Bank Group. The International Renewable Energy Agency (IRENA) estimates that renewable energy capacity in Africa could reach 310 GW by 2030, placing the continent at the forefront of global renewable energy generation.
With its abundant natural resources and the support of specialized financing mechanisms, Africa appears well-positioned for future growth under a low-carbon, clean energy path. In fact, economic studies indicate that hybrid power systems such as renewables-based mini-grids could help Africa build a climate-resilient, low-carbon economy in a post-pandemic world, aligning economic recovery with sustainable development and climate goals. Placing renewables at the core of economic stimulus plans could help governments across Africa attract investments and strengthen national energy strategies.
Financing is the challenge
However, financing projects can be challenging due to a variety of factors. Mini-grid project development involves relatively high upfront costs and a significant amount of risk. In Africa, and especially in rural areas, that risk is elevated. Difficult geographical conditions, regulatory hurdles, and political uncertainty can impede project development, while economic issues can also delay payback to the developer from electricity sales.
These risks must be reduced in order for financiers to feel confident of the level of return on their investment.
“The lack of available finance is often cited as the main barrier to the sector’s growth,” explain the authors of Green Minigrids Africa Strategy, a report co-produced by the African Development Bank and Sustainable Energy for All, “but the reluctance of financiers is often due to one key constraint – the lack of public policies and regulations required to enable private sector investment.”
Analysts have identified results-based financing models as a path forward. Results-based financing (RBF) banks on development impact. The model links project funding to pre-agreed and verified results in order to increase accountability and incentivize program effectiveness and efficiency. As project developers reach development milestones and operational targets, they receive compensation.
Results-based financing is the path forward
“Results-based financing aligns the incentives of both the financier and the developer in the long-term success of the project. This is a big improvement over earlier grant programs that paid for the initial costs of a project but were not involved in its ongoing success,” explains Peter Lilienthal, Ph.D, Global Microgrid Lead, UL Renewables.
According to Bloomberg NEF’s State of the Global Mini-grids Market Report 2020, funding with RBF models has increased significantly in recent years and is often preferred by developers and private investors today because of their ability to improve returns, reduce risks of early-stage debt, and effectiveness in helping unlock private capital. The advantages are apparent. In pairing competition with subsidy, the financing mechanism rewards achievement while increasing investor confidence.
“A paradigm shift to results-based financing models can help put the world on track to achieve universal electrification and clean cooking access,” Damilola Ogunbiyi, CEO and Special Representative of the UN Secretary-General for Sustainable Energy for All and Co-Chair of UN-Energy told ESI Africa. The shift appears to have reached a tipping point with the emergence of several specialized funding resources.
Enhancing energy access throughout Africa
In 2020, a financing facility specializing in RBF opened to help fund mini-grid projects in Sierra Leone, Madagascar, and Benin. This lending institution called the Universal Energy Facility (UEF), is funded by Sustainable Energy for All in collaboration with a group of investors that includes The Rockefeller Foundation, Shell Foundation, Power Africa, Good Energies, UK aid, Carbon Trust and Africa Mini-grid Developers Association. It offers incentive payments in the form of grants to organizations that develop and operate energy systems and provide verified electricity connections and clean cooking solutions based upon pre-determined goals and standards.
In October of 2020, the UEF opened its first wave of funding focused on accelerating electricity connections through mini-grids for Sierra Leone and Madagascar. In this wave, the agency distributed $3 million dollars in grant payments to provide over 6,900 electricity connections based on a results-based incentive of $433 per electricity connection, according to ESI Africa.
Last week, the UEF opened a new window to facilitate mini-grid project financing in Benin. In its first lending round, the Benin facility plans to disburse grant payments to provide over 7,000 electricity connections based on a results-based incentive of $433 per connection. In subsequent rounds, it will include solar home systems and clean cooking solutions, with a goal of enabling 2.3 million energy connections by 2023.
Evidence shows this style of incentivized financing could provide a pathway toward a clean energy future and support the continent in achieving universal electrification. The International Energy Agency’s World Energy Outlook 2020 asserts that mini-grids are the cheapest, most effective technology to provide energy access to the 580 million people without power in Africa. With the help of finance mechanisms like RBF, that seems increasingly possible.
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