The European Investment Bank and the International Solar Alliance published a new study outlining solutions to overcome key affordability and investment challenges holding back off-grid solar investment across Africa. Here is an excerpt from the Executive Summary:
“While the Off-Grid-Solar (OGS) industry has successfully scaled up activities in some market segments, providing Tier 1 modern electricity services commercially to millions of households globally, there are large segments below the “commercial frontier”. In Sub Saharan Africa (SSA), approximately 120 million households lack access to adequate electricity today. Estimates based on electrification rates and population growth indicate that 60 million households will continue to lack access by 2030, jeopardizing the achievement of SDG 7 – universal sustainable electricity access.
While off-grid solar solutions primarily include solar home systems and mini grids, this study focuses on enabling energy access via private solar home system (SHS) solutions. This reflects numerous studies within energy access literature, which show that SHS is the best, most cost-effective solution to provide full Tier 1 electricity access for most unserved segments in SSA. Moreover, the SHS private sector ecosystem is mature and robust in many SSA countries and well-suited for market-driven blended finance approach (as opposed to a more conventional grant funding approach). At the same time, we recognize that other solutions, such as mini grids, have an important role to play in the energy access landscape. However, the dearth of commercially viable business models and critical regulatory barriers (e.g., licenses, grid and mini-grid interactivity, tariff limits, land acquisition, etc.) in all but a few SSA countries means that SHSs remain a safer bet for Tier 1 electricity access in the short-medium term. Zooming out, there is a need to place these solutions in a continuum, so that Tier 1 access through SHS can pave the way for higher levels of access through mini grids over a longer time horizon. To that effect, we also believe that the study’s emerging lessons will be relevant for other solutions including mini-grids.
A set of five common, cross-cutting challenges current hinder SHS sector growth. These include:
(i) limited ability of customers to afford SHS products,
(ii) uncertainty in markets to effectively run businesses,
(iii) high costs to serving last-mile populations,
(iv) cash-flow constraints stemming from working capital, and
(v) instability in the political and economic environment.
Blended finance – which combines the powers of DFIs, bilateral and multilateral funders, governments – has a strong role to play in addressing these challenges and catalyzing SHS markets to reach unserved segments. The main idea of blended finance is to smartly deploy grant and other concessional capital including risk-sharing instruments such as guarantees to help anchor energy access projects and investments, which are often considered risky by standard commercial investors. Well-designed blended finance opportunities offer the ultimate win-win: reduces the average cost of capital for providers which ultimately leads to lower prices for consumers, without distorting markets. These vehicles and structure, in particular results-based financing, have seen success in expanding energy access (including to solar home systems) in countries like Kenya, Tanzania, and Nigeria, among others.”
Excerpt of Commercial & Economic Feasibility Study for Enhancing Off-Grid Solar Inclusion in Sub Saharan Africa | Final Report (EIB / Dalberg, 2021)