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How Covid-19 is reversing energy access in the Global South

© david ouma on Unsplash

According to the World Bank, around 760 million people live without electricity, one billion more suffer from unreliable electricity for their homes and businesses, and 2.6 billion still have no access to clean cookstoves.

The UN’s seventh Sustainable Development Goal (SDG) aims to ensure ‘access to affordable, reliable, sustainable and modern energy for all’ by 2030. The Covid-19 pandemic, however, is causing potentially irreparable damage to that ambition. Intermittent lockdowns across the Global South have undercut incomes among the poorest communities, meaning demand for off-grid renewable electricity and clean cooking products has withered and people have regressed to candles and firewood. The companies selling those products have also been hit by supply chain disruptions, pushing up the prices of commodities and components, and forcing many out of business.

A solar mini-grid system in Zimbabwe. (Photo by Sebastian Noethlichs via Shutterstock)

 

“The goal of achieving universal energy access for all by 2030 took a big step back in 2020,” says Jem Porcaro, head of energy access for the UN-founded NGO Sustainable Energy for All (SEforAll). “Progress in this space, for both clean electricity and clean cooking, actually reversed in many Global South countries.”

A bleak reversal

People need access to affordable, reliable energy services for their health, hygiene, well-being, education, social inclusion and food preparation. These services typically include space heating or cooling, lighting, boiling water, cooking and refrigeration­, as well as access to technology for study, work, socialising, entertainment and receiving vital healthcare and information.

There are two ways of providing that energy. ‘On-grid’: adding communities to a country’s existing energy grid, and what is the bread and butter of the relatively nascent energy access industry, ‘off-grid’: solar lanterns, home solar panels, mini-grids and modern energy cooking equipment, among others.

In the past decade, the energy access industry has grown six-fold, providing 470 million people with energy access, creating more than 370,000 jobs and avoiding 74 million tonnes of greenhouse gas emissions. More than a billion people have gained access to electricity since 2010, and by 2019, 90% of the world’s population had electricity.

However, US-based philanthropy organisation The Rockefeller Foundation estimates that since the start of the Covid pandemic, 100 million people have actually lost access to electricity. According to the International Energy Agency (IEA), energy access rates decreased in sub-Saharan Africa for the first time since 2013. The same is true of clean cooking access: under today’s current and announced policies, 2.4 billion people will remain without access to clean cooking by 2030. Only a fraction of Covid stimulus packages contain energy access components, which risks sidelining finance for this SDG still further.

 

“For cooking in particular, we have seen a marked slowdown in the likes of Asia and sub-Saharan Africa,” says Porcaro. “On the electricity side, in 2020, we saw sales for off-grid small modular systems decline by about 20%, and it has stayed more or less the same since. Public resources have been restrained and there has clearly been an effect on the financial health of the utilities in regions like Africa, where all but a couple are basically insolvent because they have been forced to provide services almost free of charge as a lifeline for communities.”

Off-grid energy access companies have also suffered. “In 2015–16, we estimated that the off-grid solar market would be worth around $3bn–4bn by 2020, but the market reached only around $1.75bn by 2020 – only about 55–60% of what we had initially estimated,” says Arivazhagan G D, senior vice-president for South Asia at SIMA Funds, which has exposure to energy access companies across 17 Global South countries.

SIMA’s 2021 analysis of companies engaged in energy access eligible for Covid relief funding across 50 countries indicated that 77% of potential borrowers required emergency financial assistance just to stay afloat. Many companies were seeing reduced sales, increasing costs, limited cash reserves and tightening funding resources.

The Covid crisis unfurled in three phases, recalls G D. In the first phase, roughly March–June 2020, the first round of lockdowns actually saw increased demand for energy access products as customers upgraded homes they would be spending a lot more time in.

By about July, however, the sales started falling away as the incomes and savings of customers striving for energy access – who typically earn less than $5 a day – started to feel the strain of the lockdowns. Many of those customers were even forced to retreat to more traditional fuels because they could no longer afford the monthly instalments for the products, which are often bought on finance. This was compounded by falling global demand for agricultural commodities – farmers in the Global South comprise the largest customer demographic of the energy access industry.

Then, in late 2020-early 2021, the supply chain problems started, and the cost of solar panels, batteries and other components began rising, hitting both companies and consumers. At the same time, government support for the energy access industry was being reappropriated to deal with the healthcare crisis.

The third phase began in late 2021, as most countries started emerging from their intermittent lockdowns. Customer incomes are recovering, driving up demand for energy access products again. However, the supply chain disruptions are continuing, and have even got worse as a result of global events such as the Ukraine war, and companies’ margins are still under pressure.

Africa’s energy malaise

Sub-Saharan Africa – home to three-quarters of the people without electricity – has borne the brunt of the crisis. The number of those lacking electricity rose to more than 590 million in 2020, an increase of 13 million people, or 2%, from 2019, according to the IEA’s World Energy Outlook 2020. The worst effects are being felt in Nigeria, Ethiopia, Kenya, Tanzania and Cote d’Ivoire, which account for 70% of the population that is no longer able to afford electricity.

Local governments have rescinded support for energy access. In Kenya, the government removed its VAT relief for solar products for a year in 2020. In Uganda, public subsidies for an electricity access programme have been put on hold, while in South Africa, authorities have redirected funds to health and welfare programmes and facilities at the expense of expanding rural electrification. Rising borrowing costs have further limited governments from providing support. The IEA estimates that in the first half of 2020, African sovereign risks perceived by investors (the premium on top of the long-term cost of borrowing) rose by 2% compared with the end of 2019, reaching 7%.

 

Local energy access companies felt the pain, with the total number of solar products sold in Africa dropping by more than 10% in the first half of 2020. In large countries like Ethiopia, lockdown measures affected energy access distribution chains and reduced sales by 20% in the first half of 2020, according to the Global Off-Grid Lighting Association. In other markets, such as Zambia and Uganda, disruptions in upstream supply chains hampered imports.

Opening up the taps

As with most of the world’s socio-economic problems, the lion’s share of the solution comes down to funding. Reaching universal electricity access in Africa alone by 2030 would require approximately $20bn in annual investments, according to the IEA’s Sustainable Development Scenario. These investments would need to go to decentralised electricity systems as well as centralised power generation, distribution and transmission.

According to a recent SEforALL report, to address the persistent underinvestment in electricity access, public actors including national governments, bilateral donors, philanthropists and development finance institutions must increase their own funding and accelerate efforts to mobilise commercial capital to the Global South. “Energy access companies need to be supported by more affordable capital, both debt and equity,” says G D. “We estimate 77% of these companies require debt or a grant, or both, just to stay afloat; and over 90% really need equity capital.”

Policy reform and the adoption of sustainable and innovative business models and financial instruments will be important to accelerate the deployment of finance to the mini-grid and off-grid solar sector. “This industry has been around for 10–15 years and we don’t see many successful or profitable businesses,” says G D. “The companies need to collaborate to find a profitable and scalable business model.”

Efforts towards increasing electricity access should be paired with clean cooking investments, says SEforALL. Clean cooking should be integrated across cross-sectoral planning and awareness campaigns to leverage electrification and climate action. Governments must make clean cooking a national priority, and the current piecemeal, project-by-project approach to investments by international public financiers requires a strategic rethink across the value chain.

Increased innovation in financial instruments as well as a drastic increase in local currency finance and blended (public-private) finance are needed to deploy the scale of capital necessary to reach universal clean cooking access, says SEforALL.

“Most investors only provide dollar funding and don’t do any local currency funding,” says G D. “Especially for companies in Zambia, Zimbabwe, and so on, this is becoming a major challenge because they have very high inflation and a lot of currency volatility. We need local currency funding for small institutions at affordable rates.”

Across the board, more targeted public finance is needed to leverage and de-risk private capital. “If you look at the flows of finance for energy access, it is woefully insignificant, particularly in sub-Saharan Africa,” says Porcaro. “The international community needs to double down and work hand-in-hand with local governments to create the enabling environment that attracts private capital.”

In September 2021, SIMA launched the Energy Access Relief Fund, which raised $68m in a first call for funds and is targeting more than $80m. It aims to protect energy access for at least 20 million people in sub-Saharan Africa and Asia. The fund – a first-of-its-kind collaboration between 16 governments, foundations and investors – is providing relief capital in the form of short-term, unsecured, low-cost and subsidised loans to around 100 African and Asian energy access companies that are struggling with disruptions caused by the pandemic.

At COP26 in November, a ground-breaking financing coalition led by The Rockefeller Foundation, the Global Energy Alliance for People and Planet (GEAPP), pledged to address the issue by mobilising $100bn for green energy and renewable power in developing countries over the next decade.

“What makes the Alliance unique is its work with developing and emerging economies, who face outsized challenges to achieving an equitable energy transition,” explains Joseph Nganga, executive director, Power & Climate Africa and GEAPP at The Rockefeller Foundation. “The Alliance’s work will be led by our partner countries, as they seek to transition [away] from coal and other fossil fuels, create jobs and expand energy access to those without it.”

Making up lost ground

According to current projections, the world is forecast to fall far short of its universal energy access SDG 7. Under current and planned policies, approximately 660 million people would still lack access to power in 2030, stated a recent report from the IEA, the International Renewable Energy Agency, the UN Department of Economic and Social Affairs, the World Bank and the World Health Organization.

Tackling this issue is not just a development conundrum but a climate one too. While energy-poor countries are currently responsible for 25% of global CO2 emissions, their share of global emissions could grow to 75% by 2050, estimates The Rockefeller Foundation. Yet, despite representing nearly half of the world’s population, these countries currently only receive 20% of clean energy financing. There are also 243GW of coal plants planned, permitted or under construction across the developing world. If built, these would emit 38 billion tonnes of CO2 over the coming decades, nearly equal to total global emissions last year.

Access to energy is essential to economic development in the Global South, but off-grid renewables will be key to getting the vast amounts of it that are needed without increasing emissions in the process.

The energy access industry is still getting back on its feet. Covid has disrupted its supply chains and there is no quick fix for that. “At least for the next six months, the supply issues will continue,” predicts G D. “Commodity prices are still going up, inflation is increasing and the macro situation isn’t favourable. We are living in an interconnected world and most of these companies have to borrow in US dollars, so that is obviously going to get more expensive.”

However, looking ahead, there is huge potential for the industry – namely 760 million unreached customers. G D draws comparisons with the development of the microfinance sector. When microfinance came about, it encountered numerous challenges and went through many cycles, but it eventually overcame those, and now, in most countries, microfinance institutions are profitable and sustainable. G D estimates it will take two to three years for the energy access sector to turn into a healthy, self-sustaining industry.

“Global efforts to combat climate change must be a pathway for progress for the 3.5 billion people around the world who [still] lack access to reliable, affordable, sustainable energy,” concludes Nganga. “There has never been a moment of greater urgency for the world to unite to ensure a just, clean energy transition.”

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