The mini-grid sector is taking a decentralised bottom-up approach the same as the telecoms sector has taken; however, mini-grid companies don’t have appealing advertising and amazing products like Samsung and Apple – and yet they are revolutionising communities throughout Africa.
In a one-on-one exclusive interview with Aaron Leopold, CEO of the Africa Mini-grid Developers Association (AMDA), he stated that mini-grid companies are providing the power and have the difficult task of fitting a square peg into a round hole.
Let’s start with some background on AMDA…
The idea for AMDA was created at a World Bank meeting in 2016 in Nairobi. Universal electrification is on everyone’s mind and the governments of East Africa, the World Bank, and the mini-grid companies in attendance all wanted to invest more, to have more and to build more mini-grids, but in particular the governments and the World Bank did not know how to make policy for and regulate mini-grids.
So, AMDA’s job is essentially to help all of the key players understand how to bring the mini-grid market to scale. Scale is our number one emphasis and focus. Helping governments know and trust the sector is the core of our mandate and helping investors know and trust the sector too. AMDA is a member based mini-grid association that has data sharing as a requirement.
Who are AMDA’s members?
We have 30 members that are operating mini-grids across 15 countries. You might say that doesn’t sound like a lot – it is truly surprising how few companies have owning and operating mini-grids at the heart of their business model. We are a private sector association because we don’t feel that governments and NGOs have the incentives to increase efficiencies and to provide the business motivation that will help drive scale.
Let me be clear, none of the mini-grid companies are profitable today. You have to remember that Amazon wasn’t profitable for the first 20 years either. Tesla is probably still not profitable. So my point is, not being profitable does not mean you are not investable, because what these companies are doing is figuring out a way to create 600 million new African customers.
The large energy companies such as ENGIE, Caterpillar and so on, are making money doing stuff that people have known how to make profitable for a 100 years, the kind of bread and butter energy work. The mini-grid companies, they are the Amazons, they are the Teslas, they are creating new customers.
These mini-grid companies are investible and creative and interesting that way, but they are not profitable right now. However, investors that come in early on, now, they are going to be part of that story and shaping the history of this continent.
Which companies are making good progress in your view?
The largest company in AMDA’s portfolio is PowerGen, which has mini-grids in four countries, Tanzania, Kenya, Nigeria and Sierra Leone and they will soon be in Benin. The interesting thing about the company is they have a different business model to the other mini-grid companies. They have gotten the first ever project finance investment in the mini-grid sector.
The trust point I made before, the biggest issue holding back investment and scale in the mini-grid sector is not that the business models don’t make sense, it’s that investors do not understand rural Africans as customers. They understand them as beneficiaries of grids. If you go to a rural village, you will see Coca-Cola products, you will see Unilever products, you’ll see Red Bull, but you are not going to see big name brands in other areas right? And this is because those companies have understood the rural African customer for years. Infrastructure companies do not understand rural Africans as customers, they literally don’t have the data points to build financial models to price debt, risk etc.
PowerGen’s project finance investor, CrossBoundary Energy Access, has worked with the firm over a number of years to basically show the reliability and build the trust in these customers through PowerGen’s payment records and, as investors, investigating these communities themselves. CrossBoundary has created SPDs (small power distributors) out of each one of these village sites, purchased these mini-grids and is paying PowerGen to operate them. This means that PowerGen does not have all of those liabilities on their books. They are building, operating and transferring, the so-called Build–operate–transfer (BOT) or build– own–operate–transfer (BOOT) models.
Can you expand on AMDA’s Data Benchmarking Report?
The Data Benchmarking Report is the result of a year and a half’s work with all of our members; with donors, research organisations, and investors to find out what information they need to make better investments, to scale up those investments; and also with governments, to help them make better policies. We have collected data across over 60 KPIs and that number will be expanding after this first round as we build trust through the data gathering experience. Next year we will be collecting much more data.
We’ve looked at data across some really fascinating areas. We’ve collected investment data around equity, debt and grant investment for each company. This is all anonymised and aggregated so you will not be able to see who has got what revenue per user etc. We also collected data on system reliability, connections, CAPEX per connection etc.
What result in this report has surprised or delighted you in particular?
That the average system reliability or the average up time of the mini-grids that we have surveyed is above 97%. These really remote, rural and poor communities have vastly better quality energy services that every single capital city across the continent. And that we are really proud of.
I would say the most frustrating result was the fact that although the time to get licences and approvals has reduced dramatically, the average time for a single mini-grid site to get its environmental impact assessment verified, its tariff approved, the construction licence approved, and then the operation generation licence approved – the average time across the continent is over 50 weeks per community.
The biggest message coming out of this is that for the decentralised mini-grid sector, the institutions are no longer fit for the realities of the sector and that every single government across Africa needs to have a robust mini-grid team within the regulatory regime.
Do you have a specific message at this year’s Virtual Future Energy East Africa?
Looking at the COVID-19 situation, mini-grids are the technology that will allow us to electrify thousands of un-electrified health centres across sub-Saharan Africa. There is a huge risk that every single city in Africa is being overrun because of the Coronavirus with people who need medical care, that should have received medical care in their rural communities, but there are not adequate facilities. My message for Future Energy East Africa is the decentralised nature of mini-grids is going to show its value this year. ESI
Due to the COVID-19 pandemic, this year’s edition of Future Energy East Africa, which was to have taken place in Nairobi, will now be a digital event from 1-3 September 2020. For more programme information visit www.future-energy-eastafrica.com