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While the number of Sub-Saharan Africans without access to energy has recently declined to just under 600 million people, high population growth rates are expected to reverse these gains. Even when taking into account grid expansion plans, the International Energy Agency (IEA) anticipates that approximately 602 million Sub-Saharan Africans will remain without access to energy by 2030.

Achieving universal energy access in Sub-Saharan Africa within the next decade will therefore require an innovative approach that combines grid expansion efforts with the rollout of off-grid solutions that provide consumers – particularly those residing in rural locales and with low spending power – with sustainable and affordable access to energy.

In light of the above, the Board of Directors of the African Development Bank (AfDB) approved the Distributed Energy Service Companies (DESCOs) Financing Programme in July this year, which is expected to contribute to the rollout of off-grid solar solutions to 900,000 households (comprising approximately 4.5 million people) by 2025. The programme, which will be implemented by the AfDB with the support of the European Union (EU) through the European Fund for Sustainable Development (EFSD), will crowd local banks and other financial intermediaries into financing energy service companies deploying primarily off-grid solar solutions.

Financing off-grid solar solutions

Off-grid solar solutions are individual systems solar home systems (SHS) of 10-300W and beyond that can power households and small enterprises. DESCOs deploying these products have had success in East Africa, particularly Kenya. High mobile penetration rates in the region – registering at over 100 percent in Kenya – and the widespread uptake of mobile banking and pay-as-you-go (PAYGO) solutions have allowed customers to effectively acquire off-grid solar systems on credit.

Customers pay an upfront fee upon acquisition of a system and then pay back the remaining cost of the system over a period of 6 months to 3 years, paying approximately US$ 5-25 per month depending on the size of the system they acquire. Customers who default on their monthly payments risk having their systems shut off remotely or reclaimed by their providers.

Like other companies, DESCOs need access to finance in order to scale up and deploy their products to their target communities (i.e. communities with no or limited grid access). Access to local currency debt is critical to ensuring the long-term financial sustainability of DESCOs given that their revenues – from which debt repayments are made – comprise local currency. Overexposure to debt denominated in hard currency can be particularly risky given the volatility of most local currencies in Sub-Saharan Africa and their historical tendency to depreciate against the U.S. dollar and Euro.

Local banks and other intermediaries are well-placed in certain markets to provide DESCOs with the local currency financing they need to sustainably expand their operations. However, given their inexperience with the sector and their capital limitations (given low savings rates in Sub-Saharan Africa and Basel III capital requirements, etc.), local financial institutions often propose tenors, interest rates, and collateral requirements that do not match the minimum requirements of DESCOs.

Credit enhancement for DESCOs

The AfDB and EU, operating under the auspices of the programme, seek to address the financing gap for DESCOs by working with local financial institutions to structure debt facilities for DESCOs that are collateralized by their receivables (i.e. the regular, often monthly, revenue they receive from customers paying off their system purchases). In order to improve tenor terms and pricing to match the financing requirements of DESCOs, the AfDB, with the support of the EU, will provide partial credit guarantees (PCG) covering a portion of the debt provided to qualifying DESCOs by their lenders. The level of credit enhancement envisaged by the programme will allow local financial institutions to provide longer-term and more adequately priced debt to DESCOs while adhering to mandated capital reserve requirements and best practice credit risk considerations.

While off-grid solar products are not an outright panacea to Sub-Saharan Africa’s energy access deficit, they nevertheless represent a short- to medium-term solution to providing rural and peri-urban communities with basic electricity access and reducing the usage of diesel and kerosene solutions that cause damage to humans and the environment. They also provide opportunities for economic development. For example, 56 percent of respondents of a 2018 survey by the Global Off-Grid Lighting Association (GOGLA) of off-grid households in East Africa reported that their respective households undertake more economic activities as a result of their solar home systems.

By: Fatma Ben Abda, Principal Distributed Energy Specialist and Nicolas Miyares, Consultant, both in the Power, Energy, Climate and Green Growth Complex of the African Development Bank.