Financing Mini-Grids in East Africa GIZ PDP Workshop Berlin, Germany 19 March 2014
Financing Mini-Grids... And I have to say, those who are involved in this process, they continually tell us the problem is not going to be private-sector financing. The problem is going to be getting the rules right, creating the framework whereby we can build to scale rapidly. Barack Obama, speaking on electricity access in Africa Dar es Salaam, Tanzania in 2013 1
Agenda Introduction to GVEP Mini-grids in East Africa Financing models and approaches Summary and path forward 2 Dec. 17, 2013
GVEP International Who we are Background: Launched in 2002 as a World Bank / UNDP initiative and registered as UK charity in 2006. Locations: HQ in London (UK), field offices in Barbados, Senegal and East Africa (Kenya, Tanzania, Uganda, Rwanda). Mission: Working with local businesses in developing countries to accelerate access to modern energy. Value Proposition: Sustainable businesses are longer lasting than the effects of direct donations. Impact: Provided 4 million people with access to clean energy, created 3000+ local jobs, saved 2.7 million tonnes of CO 2 and leveraged US$ 20 million for the development of energy products to date. 3
Business concept Performing business GVEP International Our role in supporting energy access Challenge GVEP Services Objective Electrification in SSA depends on SMEs: Small, infrastructure-light, distributed solutions by SMEs (including mini-grid developers) are a significant part of the solution in SSA Lacking enabling resources: Yet, resources required to enable SMEs to thrive are lacking in SSA TECHNOLOGY CAPITAL SKILLS DELIVERY NETWORK Help companies overcome gaps in enabling environment Address challenges in early stages of growth Support to achieve traction in customer market and amongst capital providers Enable to scale-up in order to become sustainable 4
Our Approach Three areas of intervention, focus on advisory Advisory Access to finance: Investment readiness analysis, introduction to investors and joint grant applications Consultancy: Revenue model development; technical, financial, and project development support Post-electrification support: Development and implementation of enterprise development plans to increase utilization of newly-installed generation capacity Analysis Understanding the market: Gathering of relevant reports; analysis of regulatory frameworks in KE, TZ, UG, RW Producing external documents: Mini-grid Policy Briefing; Proposal Mini-Grid Support Facility Engaging consultants: ESME small-hydropower study in KE Advocacy Donor Dialogue: Providing feedback to donor initiatives Conferences: Representation at major international conferences, roundtables, other forums hosted by WB, DfID, GIZ, IRENA, IsDB, AfDB, and others Events: EUEI PDF Mini-grid Workshops; DFID Green Mini Grids Seminars; WB Webinars Innovation for Rural Electrification GVEP s unique advantage is the access to the public and private sector on the ground. 5
Mini-Grid Portfolio Currently supporting 19 projects in 5 countries Country Project Type Size Haiti Biomass/hydro Solar/diesel Uganda Rwanda Kenya Tanzania Biomass gasification Multisite solar Hydro <50kW >500kW 50-100kW 0 2 4 6 8 10 Focus on East Africa: ~70% of supported projects are in Kenya and Tanzania. Hydro and solar dominate: Hydro and multsite solar account for ~80% of all projects. Few larger projects: ~80% of portfolio has an installed capacity below 500kW. Majority of supported projects are hydro/solar below 500kW in Kenya or Tanzania; advisory work has enabled GVEP to acquire sound knowledge of mini-grid market in East Africa.
Agenda Introduction to GVEP Mini-grids in East Africa Financing models and approaches Summary and path forward 7 Dec. 17, 2013
The Market for Mini-Grids Many factors supporting sector development 8 Tremendously large market; many resources, potential projects: solar and hydro in particular with many ideal sites throughout East Africa; 90+ projects in Tanzania REA pipeline. Established RE-technologies: Solar (PV technology deployed globally), small hydro (many previous applications in Asia) and biomass gasification (Husk Power, APL); payment/metering technologies (INENSUS, Access:Energy, Powerhive). Public funding available: Significant public sector funding available (local/national governments and international donors). Increasing depth of development and implementation experience: Developers such as INENSUS (solar/diesel in Senegal), Pamoja (biomass In Uganda), PowerGen (wind/solar in Kenya), Powerhive (solar in Kenya), Devergy (solar in Tanzania), RVE.SOL (solar/diesel in Kenya). An additional 5-10 companies developing mini-grid projects, some using ABC model.
The Market for Mini-Grids Despite positive signs, challenges persist Still defining scalable business models: Mini-grid sizes tested by our clients range from 1-2kW to >500kW with different pricing strategies; some use ABC model, others do not Relatively little private sector involvement: Most significant dev. driven by gov t (e.g. KPLC/REA in Ke), donors (GIZ in Ke/Ug), NGOs (Renewable World in Ke) and local communities Vague regulation: Regulatory frameworks for mini-grids are underdeveloped and gridextension is priority over off-grid solutions; regulatory frameworks differ quite dramatically depending on country Lack of financing Similar returns to grid-connected generation, but higher perceived risks (no offtake insurance, etc.). Therefore: Lack of project development funding Few local lenders offer longtenor debt financing at feasible rates Few active international lenders, equity isn t well matched (SME investors want developers/tech co s, project investors want gridconnected) grants introduce delays and uncertainties 9
Supporting Mini-Grid Development However, increasing interest from many parties Facilitators DFIs & Grant Providers Donors & Investors Private Sector Investors Donors and facilitators are supporting market-entry for a number of businesses; yet the market remains early-stage and high-risk for investors. 10
Focus Areas of Donor Interventions Most initiatives tackle financing and regulatory Key Obstacle Details Intervention Level* 1 Business Model High electricity cost due to high upfront cost, yet low ability to pay in remote areas High cashflow risk without single offtaker Few interventions; some providing market analyses and grants for pilots including GSMA MECS Innovation Grant 2 Access to Finance Premature market and few investors with sufficient risk appetite Grant dependency to demonstrate a model Several grant programs: ACP-EU Energy Facility EEP Africa DfID Mini-Grids Facility WB ESME Programme 3 4 Regulatory Framework Technical Capacity Absence of sufficient financial incentives (RE- FiT, credit lines/grants, adapted retail tariffs) Vague licensing regulations Local technical skills required for construction, management and O&M often insufficient Various donor initiatives: WB TEDAP (REA in TZ) EU SE4All TA Facility GIZ program with REA in KE EUEI PDF Mini-grid toolkit IRENA Few donor initiatives: GIZ program in KE (capacity training for solar engineers) * High level of intervention Low Level of intervention 11
Agenda Introduction to GVEP Mini-grids in East Africa Financing models and approaches Summary and path forward 12 Dec. 17, 2013
Financing Models Overview Fully-subsidized Partially-subsidized For profit Costs are fully subsidized by governments/donors In-kind contributions from the community are common Cost recovery tariffs nominally cover some O&M and admin expenses, but often do not end up being collected over time Large subsidies for capital costs O&M cost recovery occurs from tariff No subsidies O&M costs covered by tariff collection Tariffs provide a return on the nonsubsidized portion of the capital cost 13
Mini-Grid Financing The economics of for-profit schemes Obstacles Isolated mini-grids not viable if: required to charge national tariff no grant funding/public subsidy provided This leads to: Inability to cover loan payments under tenors and interest rates in EA Inability to deliver required equity returns Use of diesel in hybrid-system to reduce payback period Demand Management to reduce peak/av. demand ratio and coverage optimization Potential solutions Higher tariff schemes than national uniform tariff Higher tariff for B - Measures to increase commercial viability Grants to lower capital costs consumers to crosssubsidize C Enterprise development activities to increase productive use by small industry For-profit schemes require significant interventions including an enabling regulatory framework; without them, based on current economics, for-profit models are unlikely to scale. 14
Commercial Lending in East Africa Bank requirements result in equity gap In East Africa, commercial banks require contribution of 30-40% of project costs in order to qualify for a loan; this is often not possible resulting in an equity gap: Long-term debt from local banks enabled by the World Bank line of credit 10% Equity gap 2 potential mechanisms: allow REA/donor grants as equity and securitize future carbon revenues through a CER program 70% Debt 30% Equity 5% Conn. grant 10% Cash 5% In-kind Advance payment of a portion of the $500 per new connection Typical amount based on various projects Value of developer s sweat equity: water rights, land, other dev. activities Under current conditions, local commercial banks unlikely to play a significant role in mini-grid financing. 15
Case Study I: Project Financing Hydro mini-grid in Tanzania Project background Installed Capacity: 2.5MW Connections: 2,800 HH CAPEX: $6.7M Revenue Model: Mini-grid / excess sold to Tz state utility TANESCO (so not isolated mini-grid project) Capital requirements: $200k of dev costs (WB/Russian gov t grants through GVEP) $2.6M of equity (in advanced discussions with equity investor/developer with local presence) $2.6M of debt financing (Tz commerical banks using WB TEDAP credit line) $1.3M of connection subsidy (WB TEDAP through Tz REA) Challenges Complex funding: facilities still relatively untested (few complete projects). Lack of sponsor capacity and private dev. capital: project would not have achieved current status without donors funding feasibility and early stage development. Insignificant carbon funding: Carbon prepayment mechanism results in minimal contribution to financing due to current carbon prices. Financing of projects extremely difficult without grant funding, in particular early stage development costs. 16
Case Study II: Portfolio Financing ABC-model using telecom towers Another company is taking a portfolio approach to raising financing for a 5-year, 1,000 telecom tower-based mini-grid deployment. To develop these projects, it is seeking funding of $13m, with $5m structured as a grant and $8m as a subordinated loan facility. The project would benefit approximately 2 million people and 40,000 micro enterprises would be created or expanded. Investors targeted include DFIs/donor programs, infrastructure investors, and others. Despite attractiveness of portfolio approach, investors are likely to fund multisite projects through developer rather than through structured project financing. Required subsidies and feasibility work implies uncertain development process and long lead times. 17
Current Deals in Mini-Grids in EA Limited appetite for project investments Company Country Investor(s) Kenya Tanzania Undisclosed single investor Persistent Energy Partners Few investors: Few investors in the sector, and those that are do not have commercial, risk-adjusted return expectations; offset by potential for social/environmental impact Uganda Kenya Acumen, Shell Foundation, DFJ, IFC, LGT VP, Bamboo Finance, others TomorrowVentures, others Differing strategies: Investors investing in technology companies, not individual projects/portfolios; those we are working with in East Africa are in discussions but few examples of closed investm. Current investor landscape underlines the conclusions from Case study I and II that equity financing limited to a few investors with high-risk appetite. 18
Investments in Mini-Grids Key risks from an investor s perspective Development risk: few developers with track records; complexities and timing associated with securing all elements for financial close (insurance, FX, etc.). Financing risk: loans difficult to secure on a non-recourse basis (particularly if off-take risk); available debt is often short tenor, expensive; dev. banks, but can be slow, bureaucratic. Construction risk: potential cost overruns/sometimes difficult logistics, lack of track-record in the region for EPCs. Offtake risk: for isolated mini-grid (no grid offtake for excess power) demand risk; and even if grid connection, some national utilities are questionable credit risk/late payments. Operating risk: distributed nature of mini-grids increases complexity and potential for issues around operations, long-term maintenance, security, etc. Exit risk: uncertain monetization alternatives available as compared to grid-connected renewables. 19
Agenda Introduction to GVEP Mini-grids in East Africa Financing models and approaches In summary 20 Dec. 17, 2013
Debt Financing Project level-financing unlikely in the mid-term Mini-grids require debt financing to be financially viable. The ABC model a PPA with an anchor customer is at this point critical to bankability and still very much in its infancy in East Africa few case studies available. While local banks are beginning to recognize the bankability of well-executed projects (most of which include offtake of excess power to grid), and guarantee support from donors is encouraging them (e.g. TEDAP credit line through Tz commercial banks), we believe financing in the near/mid-term will be at topco not project level, and more similar to long-tenor corporate finance than loans based on the contractual and risk-mitigated principles of project finance. However, we believe that over time, more sources including larger, international banks and institutions will become available, providing lower cost debt at lower rates, once there is more certainty/understanding about revenue flows. 21
Equity Financing Growing interest, yet challenges persist In addition to traditional equity investors who are mostly unable/unwilling to invest in small-scale renewable energy in developing countries, impact investors for whom social and environmental impact is also a priority are attempting to fill the missing middle SME financing gap; energy is a key focus sector, however they are more focused on VC rather than than infrastructure finance approach Growing interest by donors (private and gov t) to support the entry of equity investors (and lenders) by providing piloting grants, capital subsidies, and development cost contributions. In addition to investing directly, donors are providing loan guarantees and management advice to help develop businesses (GVEP is an example of this), however a number of challenges remain for them: - High transaction costs to generate deal flow, conduct DD, and provide business support - Large capital requirements to scale up a single project to multiple in a region or country 22
Path Forward Bundling as a potential solution Considering that projects are too small in one sense, and require too much capital in another, many facilities are in development to aggregate. An increasing number of developers are bundling individual mini-grids into a single investment opportunity to decrease risks and attract larger investors, including Inensus, Africa Power, Synchronicity, African Solar Designs. DFIs are exploring facilities where large public and private investors invest in a portfolio of projects (e.g. AfDB, Islamic Development Bank, DfID); prevailing wisdom is to intervene at various points of the capital structure/financing needs (development equity, grants/subsidies, concessional project debt, etc.). Despite these efforts, early-stage business and project development support will remain critical to make mini-grids a success-story in Africa. 23
Thank you. We would be pleased to engage with German companies interested in the mini-grid sector, and recognize opportunities for mutually beneficial cooperation. Please contact: Peter J. George +44 77 1705 8589 Peter.George@gvepinternational.org 24