Private sector vital in Africa's renewable energy mini grids
Tuesday March 07 2023
The practice manager for the World Bank’s Energy Sector Management Assistance Programme (ESMAP) spoke to Vincent Owino on how Africa can leverage private finance and mini grids technology to bridge the power access gap.
The World Bank has warned that unless current policies and efforts change, at least 670 million people will be without access to electricity by 2030. How should policies and efforts change?
There are about 750 million people without access to electricity today, and more than 50 percent of them live in sub-Saharan Africa. The current pace of electrification on the continent is not fast enough.
On policies, I think that first, countries need to have clear national electrification plan with targets, so that the intentions of the governments can be tracked.
Second, regulation is important, because it is where the details are. The regulations should focus on ease of market entry and ensuring that retail tariffs are cost reflective.
They should also enforce service and technical standards so that they can track performance, including of other forms of electrification such as mini grids. So, I think countries need to look at these policy and regulation issues to deliver on the Sustainable Development Goal Seven (SDG7), commitment that seeks to ensure universal access to clean energy by 2030.
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Mini grids have been touted as crucial in accelerating access. However, they cost about $0.4/KWh, which is higher than the $0.16 average cost of electricity globally. How will they resolve the energy gap challenge if they are that expensive?
These figures, based on our Mini Grids for Half a Billion People Handbook, are actually the production costs and not necessarily the tariffs to the end consumers. But, indeed, the cost is a bit high, although we believe it is going to come down to about $0.2 by 2030.
However, what’s important is that if you compare it with the cost of the utility services, you realize that they’re actually not that different. That is because, although the utility services cost less than $0.2 per kilowatt-hour, mini grids have a better load factor, meaning that there will be more productive economic and productive activity where there are mini grids. They are also always reliable, whereas utility services, specifically in Africa, are not that reliable. So, the devil is in the details.
The cost seems high, but when it comes to performance and delivering reliable energy, it’s not that expensive. But we also know that through economies of scale and other factors, the cost of mini grid electricity will come down to in the next seven years.
These mini grids are mostly developed by private companies, which are profit-driven and will avoid unprofitable areas. Are there deliberate efforts by the World Bank to push for more government-driven projects?
I think both the public and private sectors have a role to play, in electrification in general, and particularly in mini grids. The investment needs are massive – we need about $91 billion to develop mini grids in Africa – and we can only get it if we have the private sector on board. But there are many ways of ensuring the private sector deliver the services appropriately.
For instance, we could rely on public-private partnerships and build-operate transfer kind of schemes.
And, of course, the only way of attracting the private sector and ensuring they behave well is through good policies and regulations. The private sector will be essential in delivering mini grids, not only because they bring finance, but also because they bring innovation, and since they are profit-driven, they are more concerned about efficiency in delivering their services. So, there’s an advantage of involving the private sector but not without public sector oversight.
The $91 billion needed for mini grids in Africa is about 72 percent of the total financing needed globally, yet Africa has so far gotten just three percent. How will these funds be mobilized?
It is an enormous challenge, but a lot of positive trends are converging. The private sector is very interested and engaged; costs are coming down; and many governments in sub-Saharan Africa are now ready to accelerate mini grids development. Countries, such as Kenya, have shown best practice in accelerating electrification rate, which is a good sign.
But to unlock private sector finance, you need to bring the appropriate financial products and models. For example, in addition to PPPs, you can introduce equity funds with good terms at the local level. There is also the need to address and mitigate risks for investors in mini grids. The World Bank will use a combination of measures to try and reduce those risks and unlock private sector finance, but it won’t be easy.
Another challenge keeping energy investors off Africa is the lack of the right skills and talent. How do you think this should be addressed?
I believe African countries are on a good track on talent and skills development; there are very strong universities and there are already new initiatives being deployed by international partners such as the World Bank and the African School of Regulation.
But talent in Africa is amazing and it’s only a matter of time before governments start to focus on tapping that talent to address the challenges facing the continent.
I think that emphasizing training in electrical engineering and financial education will continue be important for this cause, but then again, the continent is on the right track.
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Mini grids are not necessarily clean energy sources. However, should anyone still invest in fossil fuel-powered mini grids and does the World Bank finance such projects?
Mini grids relying on fossil fuels are of the past generations, and those that are currently being constructed or being planned will be solar- or renewable-energy-based. This is largely because Africa has a huge endowment of renewable energy resources and that the cost of solar, batteries, and wind generation is coming down.
At the same time, the cost of fossil fuels is increasing, after Russia’s invasion of Ukraine, and their use is becoming less cost-effective. So, the World Bank will be emphasizing on solar and battery mini grids rather than those based on fossil fuels. However, diesel generators are important for back-up generation as well, so in the new mini grids, we might have a few of them to ensure reliability.
How will the Bank ensure investments in mini grids and other energy projects do not infringe on human rights, as has been the case with some in the past?
The World Bank has very rigorous procurement policies. We provide concessional resources to our clients, which are governments, who in turn have to abide by the policies in procuring services. We do not and will not support projects in which human rights are abused, or there is child labour or anything like that. We also closely monitor our projects, so we don’t believe we’ll have this problem at all.
Ms Azuela spoke to The EastAfrican on the side-lines of the 7th Mini Grids Action Learning Event at Safari Park Hotel, Nairobi, on February 27, 2023.
The five-day event brought together 700 key stakeholders in the mini grids sector from 65 countries, including governments, mini grid developers, international and local financial institutions, productive use equipment suppliers, and associations.
Attendees included Africa Mini Grid Developers Association CEO Jessica Stephens, World Bank Kenya acting head of office Camille Nuamah, as well as Kenya’s Cabinet Secretary for Energy and Petroleum Davis Chirchir.