Recovering the Missing Millions Owed to Africa’s Minigrids

Only a tiny percentage of international donor cash is going to projects, and it’s especially bad in Africa.

Minigrid developers have called for changes to international financing programs after research found that only a fraction of the cash pledged was getting through to projects.

The minigrid funding commitment from international donor organizations is “in the billions,” says Daniel Kitwa, energy access finance advisor at the Africa Minigrid Developers Association (AMDA). But “as much as these entities are well intentioned, there’s no standardization around how to make this commitment a reality,” Kitwa said in an interview.

In July, a consortium called the Mini-Grids Partnership published a report showing that development finance institutions had pledged more than $2 billion to support the build-out of minigrids worldwide since 2012, with close to $1.6 billion allocated to sub-Saharan Africa.  

However, only 13 percent of the cash committed globally was making it through to projects on the ground, the research found. The main roadblock seems to be Africa; so far, 60 percent of all minigrids have been installed in Asia, said the report.

Africa, which is supposed to get 80 percent of the cash, only has 39 percent of the projects. And in further research published in August, AMDA members reported receiving just $40 million of public and private grants and $10 million in concessional debt since 2013. That’s roughly 3 percent of what has been pledged to the region.

Despite the large sums promised, “the energy access minigrid sector is chronically underfunded,” observed Benjamin Attia, senior research analyst in Wood Mackenzie’s energy transition practice, in an email.

The analyst firm’s own figures confirm that donor capital is having trouble getting through to the sector. More than 70 percent of the $500 million in disclosed corporate-level investment that Wood Mackenzie says the minigrid sector has raised worldwide is from private investors.

The problem, according to insiders, is that donor finance disbursements are being held up because projects can’t get through national regulations that were never designed with minigrids in mind.

“Many donor-funded energy access minigrid support programs see disbursements triggered once milestones are achieved by regulators, rural electrification agencies or developers for individual projects,” Attia explained. “Because the sector is still maturing, many of these milestones have yet to be achieved. Others are simply behind schedule.”

Regulations are a big problem for minigrid developers

Despite a decade of progress, building minigrids in Africa remains “a big challenge,” said Brian Somers, founder and CEO of minigrid developer Standard Microgrid, in an interview. “It is a heavily regulated space,” he said. “We’re working in frontier markets with customers that have never had electricity before.”

It’s not just the customers that have to be educated about minigrids, Somers said. African regulators only have one rulebook, and it’s designed for monolithic state utilities. As a result, getting a minigrid off the ground can require almost as much paperwork as building a coal-fired plant.

To navigate these regulatory minefields, a large chunk of donor cash is going to consultants. They’re tasked with understanding in-country legislation and trying to adapt it to minigrid funding programs. On that second point, success appears to have been limited at best.

Foreign advisers often fail to grasp the nuances of African markets, said Somers. He cited the example of consultants suggesting that the regulatory framework for minigrids in Zambia should include net metering as an option for customers.

“If you’re in California, that makes sense because you have a customer who could buy solar and get compensated,” he said. “In rural Africa, where the customer can barely pay $5 a month for energy, there’s not a chance in the world that they’re going to buy a $3,000 inverter and solar system.”

A further challenge to the current funding model is that donor cash rarely covers the full cost of a minigrid. Hence, developers have to go out and seek matching finance from private sources, adding years to the project development cycle in some cases.

African minigrid developers aren’t set up to carry the costs of developing projects over multiple years, said Somers. “It’s a miracle some of these projects can get across the line because you have to have so much resiliency built in."

“A program will be announced, but it will be two to three years of waiting until any money comes through," Somers said. "During that time period, you’ve got overhead.”

This can be significant. Minigrid staff members have to tackle jobs such as financial modeling and raising co-funding. This requires skills that would command a premium anywhere, and even more so in Africa.

Market growing in spite of challenges

All said, it’s amazing the African minigrid market has been able to grow. In fact, it has done surprisingly well. According to AMDA’s research, developers managed to cut the capital cost of minigrid projects by 57 percent between 2014 and 2018.

The average price per connection has fallen from $1,555 to $733, and the number of connections has gone up from 2,000 in 2016 to 41,000 in 2019. Minigrids now provide high-quality energy supplies to 250,000 people across sub-Saharan Africa, AMDA says.

This is good, but not good enough. The World Bank estimates that 140,000 minigrids are needed across the continent. And as things stand, it is simply impossible to achieve this scale. 

“Even if regulators could process 1,000 applications a year, which is 3.5 times the total amount of AMDA member minigrids existing today, it would take 140 years to process all the required licenses using current practices,” states AMDA’s report.

The findings are a blow for African minigrid donor organizations, which include development finance institutions such as the United Nations Development Programme, the African Development Bank and the European Investment Bank, among others.

The good news is there are plenty of ideas for how things could improve. An obvious proposal is to link funding to simplified regulation for minigrid projects. “One of the things that would be really easy to do would be to say any system that’s under 100 kilowatts is unregulated,” said Somers.

“In Zambia, I struggle to find communities that need more than 100 kW,” he said. “The vast majority need far less.”

Another option is to switch minigrid funding packages to a results-based financing model. This could reward developers with a fixed amount — say $500 per connection — on project completion. Such funding models are increasingly being embraced for other forms of donor support. And last year a dozen investors, with more than $2 billion under management, espoused the approach for African minigrids.

“Currently the economics of investing in the vast majority of rural minigrids are not ​viable without subsidization through results-based financing,” said the group in a position paper.

A third recommendation from the minigrid sector is to provide donor programs that are regional rather than national in scope. This might prevent programs from being bogged down by national regulations since countries with nimbler regulatory frameworks would stand to benefit, encouraging less-nimble neighbors to review their rules.

Why minigrid development might help Africa's utilities

There’s no reason why donor organizations could not implement all of these recommendations. As things stand, any change in the amount of cash getting through would be a vast improvement. “We might not get to 100 percent, but even 50 percent gives us traction,” said Kitwa at AMDA.

Unlocking hundreds of millions rather than tens of millions of dollars would help drive down prices and scale up supply chains, as well as supporting the creation of a minigrid industry ecosystem and attracting larger pools of private capital, Kitwa said.

And there’s a bigger reason for taking the subject seriously, he said. African governments are pouring money into state utilities that are stretched when it comes to rural grid expansion.

Minigrids could handle rural electrification more cost-effectively, freeing up funds to bolster utility finances. “That gets [utilities] in a much healthier position, in 10 or 20 years’ time, to expand and reach a more empowered community that can actually pay for power,” Kitwa said.

“Current minigrid expansion increases the potential of future public utility solvency,” he said. But right now, “that’s a conversation that no one is having.”

It’s now up to the development finance institution community to work on a plan for change. "Donors' 'not made here' mentality needs to be replaced by radical collaboration if we're going to end energy poverty by 2030,” said William Brent, chief campaign officer at advocacy group Power for All, in a statement.

There's no shortage of good intentions, Brent added. “But there continues to be resistance among donors to consolidating, streamlining and standardizing efforts across Africa while exploring other mechanisms that don't rely on country-level partners who may lack capacity or interest in carrying forward capital deployment on time."