The low-hanging fruit of energy access: Unlocking the potential of energy efficiency solutions for African businesses
6 April 2022
By Adam Fitzwilliam, Camco's Regional Manager for East Africa
Over the years, you’ve likely heard plenty of discussion of the approximately 860 million people who lack basic access to electricity, including 600 million in Sub-Saharan Africa. This energy poverty has been a major barrier to economic development across the region, and continues to cause a significant drag on both social and health outcomes. Addressing the energy access challenge at the household level has therefore justifiably been a core focus of much of the climate finance flowing into Sub-Saharan Africa over the last decade. For a handful of countries in Sub-Saharan Africa (e.g. Ethiopia, Kenya, Ghana, Rwanda and Senegal), these efforts have led to material improvements in access to electricity, whereas progress elsewhere on the continent has remained frustratingly slow.
But it is not just individuals who are energy poor. Businesses across the region often suffer from expensive, unreliable and polluting power supplies – and particularly in rural areas, they may not have any energy access at all. The causes of this power inadequacy are structural and complex, and there is extensive discussion in academia and amongst energy sector professionals of how best to address it. But when viewing this issue from both a human development and climate change perspective, there are two imperatives that potential solutions should take into account: First, it’s important that significant, high-quality additional energy is made available to businesses as an enabler of industrialisation and economic growth. And second, it’s essential that these businesses’ emissions must fall, rather than rise, if we are to stand any chance of limiting average global temperature increases to 1.5 degrees Celsius, as called for in the Paris Agreement.
However, addressing the energy challenges of businesses in Sub-Saharan Africa is unfortunately not as simple as increasing power generation to meet their demand. There are several additional factors to consider, most notably how to get power from the source of generation to the source of demand, and how to optimise both the use of this electricity and of the power network that delivers it. The latter is particularly important, since it prevents unnecessary over-build – and therefore over-spend – on the region’s power generation and transmission infrastructure, thereby freeing up funds for national non-energy priorities such as healthcare and poverty reduction.
Taking into account that Sub-Saharan Africa’s commercial and industrial (C&I) sector represents almost 71% of overall power demand across the region, and that this demand is expected to double between 2020 and 2040, addressing the sector’s emissions growth is a climate imperative. Unfortunately, not nearly enough is currently being done to tackle the problem, and emissions continue to rise at an alarming rate.
Sustainable energy solutions for Sub-Saharan Africa's business sector
There are a number of approaches that could be leveraged to bring sustainable energy access to the region’s business sector. One such solution is distributed renewable energy (DRE), whose benefits are increasingly well understood, both from the cost and climate change mitigation and resilience perspectives. On the downside, the intermittent nature of most DRE generation sources is not conducive to uninterrupted power provision (which businesses typically need to optimise either production or service delivery). And this intermittency, if feeding into the national grid, can also reduce grid stability – especially since the energy usage of businesses is typically significantly larger than that of households. Furthermore, if renewable energy developers don’t first understand the existing energy usage of businesses, there is a risk that DRE systems will be oversized: This can result in unnecessarily high capital expenditure that will ultimately lead to higher power tariffs for consumers, since developers that sell oversized systems to businesses without a corresponding increase in power consumption will need to charge higher tariffs to recover these costs.
Fortunately, there’s another solution that also holds promise: Addressing energy efficiency, particularly with regard to heating, cooling, lighting and power quality, is “low-hanging fruit” among the energy interventions available to C&I power consumers. Avoiding or reducing businesses’ power consumption in the first place is one of the most cost-effective solutions with the shortest payback times on capital invested. Some estimates have found that reducing demand through energy efficiency measures costs less than US $0.05 per unit of electricity (kWh), with payback times – i.e., the time it takes a business or its partners to recoup, via cost savings, the money invested in more efficient equipment – as short as one year. This is significantly shorter than the payback time of most DRE projects, and it reduces a consumer’s demand over the full 24-hour cycle, rather than just when the sun is shining or the wind is blowing. As a result of this economic rationale, these demand-reduction investments should be made by C&I customers before they implement DRE solutions, which should be used to support reductions in the carbon intensity and cost of the business’ remaining demand.
We have seen these strategies to address C&I energy demand work elsewhere in the world, with the emergence of energy service companies, or “ESCOs,” that offer end-users fully funded energy efficiency solutions, which are in turn repaid through monthly service agreements priced below the customer’s existing power costs. So why haven’t they taken off yet in most markets in Sub-Saharan Africa?
Obstacles to energy efficiency efforts in Sub-Saharan Africa
In addition to regulatory bottlenecks, two of the main inhibitors have been a lack of access to finance and inability to unlock scale among energy efficiency developers – i.e., private companies that sell efficiency solutions to other businesses or government institutions. In many European markets, energy efficiency investments and initiatives scaled due to public sector buy-in, which enabled private developers to offer their solutions to large, government-led projects. This helped developers unlock the scale needed to drive down costs and become financially sustainable, and with these contracts underpinned by creditworthy sovereign (e.g., government buildings) or quasi-sovereign (e.g., public healthcare facilities) counterparties, investors eventually took interest.
The context in Sub-Saharan Africa is different. Due to concerns over creditworthiness and the enforceability of contracts with some public institutions, the nascent market is predominantly private sector-led. And due to the comparatively small average company size on the continent, average transaction sizes are also small, which means developers must carry out many projects to achieve scale. Add to this the currently limited market awareness of the benefits of energy efficiency, risk averse and illiquid funding markets in many countries, and limited public data on end-user creditworthiness, and it is not hard to see why the sector hasn’t yet taken off.
These challenges have persisted despite the existence of many capable energy efficiency installers and maintenance companies across Sub-Saharan Africa, with strong technical capacity and some track record of project execution on a small scale. These developers need access to streamlined funding to enable them to offer fully funded solutions to business clients. This funding needs to be flexible, so that these developers are not required to offer up increasing quantities of limited land and buildings as collateral to lenders, which inhibits their ability to scale up. They often also need training in credit management, finance and legal contracting as they move to provide fully funded solutions.
A solution to energy efficiency market bottlenecks
Last year, Camco founded our Spark finance platform to address these market bottlenecks and catalyse the growth of Sub-Saharan Africa’s energy efficiency and DRE sector. The platform offers developers access to up to 100% financing for energy efficiency initiatives and DRE projects (particularly solar) for C&I clients in Kenya, South Africa, Uganda, Ghana and Nigeria. Once a developer has become an approved partner, this funding is streamlined and quick to access, and it has no minimum ticket size (so it can accommodate small projects) and requires no land and buildings as collateral. Developers working with Spark also get access to proprietary credit assessment models, template legal contracts, environmental and social management tools, and training on the financial and risk aspects of running a finance portfolio, enabling them to assess the financial, legal and other risks of potential projects and to present completed contracts/assessments to Spark when applying for funding.
Putting the focus on energy efficiency in Sub-Saharan Africa’s C&I space – and providing the necessary financial innovations the sector needs to thrive – will yield both economic and climate-related benefits in a fast and cost-effective way. We believe that, through Spark, we have created a market-ready solution that does just that. But we recognise the need for further technological innovation, greater market awareness and more developers entering the market, in order to reap the full benefits of this often-overlooked area of energy access.
This article first appeared on NextBillion.