Accelerating energy access with aggregation
Our ‘Insights’ series highlights links between business and sustainability. Our latest study looks at access to energy, and focuses on the potential for financial aggregation to channel funds to millions of off-grid energy projects.
Millions of people around the world are still waiting for access to electricity and clean cooking facilities. Huge investment will be needed if we are to achieve Sustainable Development Goal 7, ensuring “access to affordable, reliable and modern energy for all" by 2030.
Decentralised energy systems – off-grid electricity products ranging from single solar lanterns to mini-grids that supply many households – will be an essential complement to national grids in delivering electricity access. They already play a significant role across Africa and Asia.
Rolling out decentralised systems will need immense public and private investment: estimates suggest investment of more than US$20 billion per year will be needed to meet the ambition of SDG7.
IIED has identified aggregation as a promising way to accelerate access to energy – an approach that should interest impact investors, institutional financiers, foundations and others.
Insights for investors
- Decentralised energy is a huge investment opportunity. Billions must be funnelled into smaller energy service companies and programmes, including through more accessible and flexible financing, to achieve universal energy access by 2030.
- Aggregators can help target and guide more efficient public spending by focusing on blended finance instruments that attract more private money, grants to jumpstart markets and subsidies targeting people unlikely to be reached by other approaches.
- Investors should look for aggregators that offer support beyond financing – such as technical assistance, policy influencing and quality assurance which helps energy markets to grow sustainably and protects household and business customers, including those in poor or hard to reach communities.
- Better measurement of decentralised systems’ impact – determining who exactly is being reached, who is not, and how electricity assets are used – can better calibrate finance and policy instruments that are responsive to people not being reached and changing market conditions.
Aggregation – why now?
Aggregation involves bundling together projects or companies into portfolios that can reduce transaction costs and risks for investors. This approach can nurture sustainable energy markets, particularly when it includes wider support measures such as technical assistance and quality assurance. Importantly, it can focus resources on the people most at risk of being left behind by established approaches.
Estimates suggest about half the people gaining electricity access between 2016 and 2030 will be using decentralised systems.
The opportunity is huge, but we must finance millions more assets to reach everyone.
Private investors and governments have made big investments in energy access since 2010. But investment has been concentrated in a handful of companies: just ten energy companies soaked up 84% of investments for solar home systems; another ten secured 77% of all funding available for mini-grids.
We need to establish hundreds more companies. Estimates suggest that to deliver electricity throughout sub-Saharan Africa, some 298 first-, second- and third-generation solar home system energy companies will be needed – with a total of $26 billion in capital.
Building this pipeline will be decisive in delivering energy for all – and growing the pipeline will ensure competitive marketplaces.
Fledgling energy companies struggle to secure start-up grants and capital. They need access to different mixes of affordable and flexible equity and debt capital, as well as business support and market stimulation.
Aggregators – funds, financial intermediaries, public programmes and other structures – use different functions of aggregation along the value chain. Our research shows that different aggregation functions can nurture company growth by providing appropriate mixes of financing, together with support in the form of business development, links to policymakers and generating demand.
Energy access funds and financial intermediaries are attracting investors with structured funds. By offering different levels of return for comparable risk, structured funds can link investors with different risk appetites. The underlying assets for these funds are bundles of smaller decentralised systems and companies, which spreads risk, lowers transactions costs, hones expertise and standardises processes.
Financial aggregation has particular potential for building the pipeline by offering flexible and patient capital, as well as quicker deployments and tailored instruments.
Similarly, public aggregators have successfully pooled government and donor money to stimulate energy access in their respective markets. Bangladesh’s Infrastructure Development Company Limited (IDCOL) and Nepal’s Alternative Energy Promotion Centre (AEPC), both government initiatives, offer mixes of subsidies, grants and concessional finance tailored to the needs of different energy companies. This has been highly successful: their programmes have brought electricity to some of the poorest and most remote communities.
Non-financial support is vital for growth
Affordable flexible finance alone can't support the growth needed: business support is crucial. For-profit financial intermediaries can only offer limited support to clients; more significant technical and business support needs long-term donor or government funding.
Financial aggregators or government programmes are well placed to direct this kind of funding to qualified companies.
Buttressing finance with supporting services
Financing for commercial mini-grids has mostly lagged behind ‘pay-as-you-go’ systems. Recently investors have used special purpose entities to aggregate mini-grids into portfolios of assets in Tanzania and Sierra Leone. This proven infrastructure financing method presents a promising route to unlocking long-term project financing.
Such deals aim to align performance-based incentives with an equity share in the portfolio to ensure a good energy delivery service for end users.
Whether these incentives will inspire the meaningful community engagement needed to set up mini-grids in areas that have never had electricity remains to be seen. Financing is crucial, but if the mini-grid model is to be sustainable, community engagement, knowledge, skills, end-user financing and appliance supply chains must also be in place.
This supports the wider point: linking finance with technical assistance and community engagement is crucial – and this type of provision can be delivered by appropriately structured aggregators.
Better impact measurement for better outcomes
Current metrics generally use unit sales and multipliers to estimate the impact of decentralised systems. But multipliers vary between countries and within market segments, meaning these metrics struggle to accurately capture who is being reached and where, and how systems are used.
Energy companies can access usage analytics and/or collect data from customers – but there is little incentive to share this valuable information unless it unlocks finance.
The Beyond the Grid Fund for Zambia (BGFZ) requires companies to share usage statistics to qualify for funds; it then aggregates and publishes this data. This is an important move towards generating better information for the sector. A further step will be more detailed metrics that can be used to target subsidies to those who need them most.
IIED is seeking effective ways to measure the impact of energy finance and delivery models, to reveal who is – or isn't – being reached. This will support governments, donors, companies and practitioners to channel resources and to structure financial instruments to make energy access more equitable.
There may be an opportunity for impact investors to choose companies that reach disadvantaged communities, balancing financial returns with human impact returns. It is important investors recognise this different or deeper type of impact.
More public money, well targeted
Four of the top 10 corporate-level dedicated energy access funds are development finance institutes (DFIs): FMO, Norfund, CDC Group and OPIC.
DFIs have been investing concessional finance into aggregators through pooled funds and financial intermediaries. This has allowed crucial financing and in some cases wider support to reach smaller and earlier-stage companies.
DFIs have also been funnelling money directly into larger, later-stage companies, potentially speeding their profitability. But such financing may inadvertently compete with aggregators they already support. This needs further analysis.
Many investors believe that public money should be leveraged in blended instruments that de-risk and amplify private investment, especially where public budgets are tight or earmarked for grid extension. For example, SunFunder claims to have used grants in structured investment funds to attract 11 times the amount of private money.
As grids are heavily subsidised, applying or shifting subsidies into off-grid energy systems is a logical role for public funds. Bangladesh’s IDCOL has already made this shift.
The sector is continuing to explore financial instruments that can stimulate energy access:
- The Kenya Off-Grid Solar Access Project (KOSAP) is pairing debt and results-based financing (RBF) facilities in an effort to activate energy market expansion (see box 2).
- BGFZ releases funds to energy companies based on measuring and delivering on impacts rather than just selling systems. This demonstrates that an impact-focused approach is practical and could potentially be standardised across the sector.
- AEPC and IDCOL pool donor and government money and use a mix of grants and consumer price subsidies to reach some of the poorest people. An impact study convinced IDCOL to maintain subsidies on systems below 30 watts, to continue reaching the poorest, while removing subsidies for larger, more expensive systems.
Identifying the most effective financial instruments to reach different market segments will be crucial to catalysing energy access.
The Energising Development (EnDev) programme, KOSAP and the World Bank’s new Clean Cooking Fund are using results-based financing (RBF) to try to reach more people with clean cooking solutions.
RBF offers incentive payments for specified results. For example, if a company sells a stove in a target market (as verified by a third party), that company receives a payment. This approach could subsidise the investment costs of expanding to target markets without affecting prices for customers.
It remains to be seen whether RBF successfully stimulates delivery to target markets.
Download the full Insights publication: Accelerating energy access with aggregation, Kevin Johnstone, Ben Garside (2019), IIED briefing
Moving more money: can aggregation catalyse off-grid financing?, Ben Garside, Kevin Johnstone, Nipunika Perera (2019), IIED Issue Paper