Homegrown, African-Owned: A New Approach to Building Africa’s Off-Grid Energy Industry
Originally published on NextBillion
By: Dan Murphy, Andreas Zeller
Note: This post is one of NextBillion’s 12 most influential posts of 2018.
How can we achieve SDG 7’s ambitious goal of universal access to electricity in Africa by 2030? This question remains one of the hottest and—at times—most controversial topics in sustainable development. And one of the sources of this controversy involves the role of social business – and particularly impact investing – in meeting this target.
Investors have clambered to support the Pay-As-You-Go (PAYG) solar revolution over the past five years, channelling hundreds of millions of dollars into a small number of vertically-integrated companies staffed by dedicated, talented professionals. Most of these enterprises are heavily capitalized, yet they collectively serve less than two percent of the off-grid population on the continent, with most of their customers in East African markets. These businesses have faced enormous challenges as they’ve tried to expand out of their core markets and into underserved geographies. Some industry stakeholders have gone so far as to say that this concentration of capital around a select few is already “too much, too fast for a sector that has not fully solved core business issues” – an opinion that has sparked significant debate.
AVOIDING A 100 MILLION SHORTFALL
Nevertheless, there is little debate that off-grid solar must play an important role in the realization of SDG 7 in Africa. But though the industry has made tremendous progress – and learned innumerable lessons along the way – the scale of the challenge remains immense. Recent Shell Foundation/Catalyst Off-Grid Advisors research concluded that, at the current pace of financing, SDG 7 in Africa will be missed by more than 100 million households. Not surprisingly, the level of financing needed to avoid this shortfall and achieve the goal is enormous – over $30 billion, of which at least $1 billion needs to be in the form of catalytic grants. The scale of the execution challenge is even more worrying; hundreds of new PAYG solar enterprises need to be incubated and scaled across the continent over the next decade. All of this raises the question: Even if enough financing were available, where will the industry find enterprises capable of absorbing this capital and delivering electricity access to some 100 million off-grid households?
Finding and enabling these enterprises will require both investors and entrepreneurs to think outside the box and leverage best practices, experience and innovation. Off-grid solar has witnessed tremendous technological innovations – hardware is now largely commoditized, and third-party software solutions are rapidly headed in that direction as well. Financing is also increasingly available, particularly for later-stage enterprises that have navigated the “valley of death” and managed to secure a sufficient equity base. The latest wave of capital has focused on debt, with a growing number of specialized funds emerging that focus on the PAYG model. So, if technology and financing gaps can be fixed, what’s left?
THE MISSING LINK IN OFF-GRID ENERGY
In our view, the answer is the “ground game” – distribution. This is the critical missing link that has yet to be fully tested and proven by the off-grid industry. It’s the only way to reach 120 million households, most of whom are well beyond the industry’s core markets. What’s exciting is that there are thousands of African entrepreneurs who have already mastered last-mile distribution. These businesses may be small and unfamiliar compared to the incumbent industry, but they know their local communities better than anyone. And they successfully and sustainably transport goods to the underserved every day – and get paid for them.
The latent potential of these local enterprises is why our firms joined forces in early 2017 to create VentureBuilder, a development company that will partner with “best-in-class” locally-owned distributors to enable them to launch PAYG platforms, distributing solar products to their existing off-grid customers. Our local distributors already know their customers. What they need from us is expertise to develop and scale the PAYG business model and to help mature their businesses. This includes support in forming technology partnerships, and the right dose of early-stage capital investment – a form of capital that remains strikingly scarce. Our goal is to catalyze a new generation of homegrown, African owned and run PAYG companies that can make a meaningful and sustainable contribution toward SDG 7.
A NEW RESOURCE FOR ENERGY ACCESS
VentureBuilder has spent the past 12 months identifying partners in our first markets of Nigeria, Burkina Faso and Benin. We’re currently supporting them with a pre-investment package of enterprise development services. This is helping both sides lay the groundwork for a fully funded, two-year partnership that will deliver equity financing and a custom-designed suite of enterprise development services.
Now that we are on the verge of a full launch, we have published a white paper to make public as many of our early learnings as possible. We know that VentureBuilder and its local companies alone won’t be able to deliver electricity to 120 million households. That’s why we’re committed to sharing our lessons and experience as VentureBuilder evolves, in the hope that this will enable the broader energy access community to partner with us and innovate in related areas. We look forward to fostering partnerships with like-minded companies in the technology, finance and enterprise development spheres to deliver energy access across Africa.
Click here to read the white paper.
Dan Murphy is the Managing Director of Catalyst Off-Grid Advisors; Andreas Zeller is the Managing Partner of Open Capital Advisors.
Image courtesy of the authors.