Speaker 1 0:09

Solar mini-grids have turned from small pilots to an electrification wave. We were there when mini-grid regulation was established, when financial transactions were closed. We saw new technology thrive and companies fail. This is where we tell the stories. This is where we discuss the future. The mini-grid business Powered by Enensis.

Speaker 2 0:35

Hello everyone, this is Nico. As a podcaster, you meet people and gain a good overview of what the sector looks like. Therefore, it sometimes is really enlightening to talk to fellow podcasters and get their view on the sector. That is exactly what Olumbunmi Olayide, from the podcast the Energy Talk, and I did during the Energy Access Investment Forum 2024 in Lagos. You are listening to part one of this recording where Olu interviews me for his podcast, the Energy Talk. As a listener of the mini-grid business, this may be more of a summary of what you already know. In part two, olu and I will enter into a discussion about innovations in the mini-grid sector. Part two of the recording is published as a separate episode.

Speaker 3 1:34

All right, nico, good morning. Thank you for joining me on the Energy Talk podcast. It's such a pleasure to finally be able to do this and, to make it better, to do it in person.

Speaker 2 1:39

Good morning Olu, yeah same here.

Speaker 3 1:41

So how have you been? It's your day two, I believe, in Nigeria, now day three and the conference has been going on for quite a while, the Energy Access Investment Forum. How has been your first few days and the engagement you've been having with different stakeholders?

Speaker 2 1:55

Well, this is the Energy Access Investment Forum. That, from my experience, is the largest one. There have been other events before which have been significantly smaller, I believe, and not that well visited. So there are many visitors here, a lot of high-ranked people, so I'm really happy to be here and to have many good talks.

Speaker 3 2:17

Yeah, and we'll get into this in the episode. But does this show the growth of the sector, Because you've been in this sector for, I believe, over 15 years now? But does this show the growth of the sector Because you've been in this sector for, I believe, over 15 years now and the increase of interest, especially from the policy side and the financier side? Are you seeing this as the sector gets into the place where it's maybe not reaching maturity, but gets into a level of prominence that we've been trying to reach for a certain level of years?

Speaker 2 2:40

Well, I would say the main effect that we're seeing here is the fact that this is happening in Nigeria now and Nigeria, as we all know, is the lead market at least for mini grids, but also for solar home systems to a certain extent. Yeah. And there are many Nigerian nationals here, policymakers, rhea, but yeah, also the investors and financiers are interested because this is the place this is where the money is supposed to be invested.

Speaker 3 3:10

Yeah, okay. So the way we like to start on the podcast is to understand what was your motivation to get into the energy sector. So I know for you. I've already heard this story. It's a pretty good one, but I want you to tell the audience what was your first introduction to the energy sector and how has it led you to your current role at an ensis well, I studied power systems engineering from there was 2000 to 2004 and then in 2004 we founded the company.

Speaker 2 3:38

And we founded the company because we had a professor who made us work on a student's project. That was around secondhand wind turbines from Denmark and Germany, northern Europe, and their application in Africa, and then we tried that theoretically for the first time and said, well, this may be a good business.

Speaker 2 4:02

And then this professor said, well, nice job, yeah, good project, good document. Present that at a conference. And that conference was in South Africa, in Cape Town, and then we presented it and people said, wow, what a great idea. That was before the repowering activity started, that was 2003, 2002, 2003. Yeah, activity started that was 2003, 2002, 2003, yeah, um, and turbine sizes were 500 kilowatts or so.

Navigating Mini-Grid Development Challenges

Speaker 2 4:33

Nowadays you have five megawatts and above right. Yeah, from today's perspective relatively small, but for the african market still much too large. We started off planning a project in Namibia, at the coast. Theoretically everything looked quite fine. And when we looked deeper into how we could implement, we found that the crane would have come from Johannesburg, some 2000 kilometers across the continent, and if we needed a second time then the profitability would be gone. And then we looked into the electricity network that we would connect to and we found okay, well, that has outages.

Speaker 2 5:11

Yes, and these turbines were made for maybe a hundred emergency shutdowns in a lifetime, meaning that every outage is an emergency shutdown, and if you have two outages per day, which can very well happen, you can calculate how long your turbine will last. And that brought us to mini-grids, right? We? Said we need to somehow be in control of the stability of the network, and that is from 2004 onwards. We worked in our own company on solar and wind mini grids that we could then also operate.

Speaker 3 5:49

Yeah, and it seems like you discovered this segment of the problem kind of by accident and then by trying to track the different aspects of the value chain, you kind of recognize that, okay, these are the way. The pain points are Was that the correct way of your journey at that time?

Speaker 2 6:04

Yeah, definitely, definitely Right. As an entrepreneur, you always start somewhere, yeah, and you feel that you are on something and you feel that you have a solution, but then you run into problems and you have to revise, and you don't do that once. You do it five times, 10 times. I still keep revising the concepts and approaches in my company. Yeah, so that was the case right from the start. Yeah.

Speaker 3 6:32

But most people at that point let's say, they finished their project, they graduate, they'll move on, go to something else. Was there any particular moment that made you say that I want to look at this problem further, and at that point did you know that you would make it your career?

Speaker 2 6:47

Well, we started the company following the story that I just told you. There was one shift in what Inensos as a company does. We kicked off everything with electronics development. So we were electronics developers. We supported wind turbine manufacturers and developers In getting the turbines certified. We built and developed safety systems for them, especially in the small range, small segments five kilowatts to 100 kilowatts, small wind turbines. And then we also added solar photovoltaics.

Speaker 2 7:27

And then, in 2008, we established one of the first private sector solar mini grid companies on the African continent called Inersa, and we connected customers in our first mini grid and then wanted to expand.

Speaker 2 7:44

So we got some exemption license for this first project. And then we said, ok, if we want to expand, we need to put this on a more solid regulatory basis. And then we talked to the policymakers and we talked to the regulators and well, the feedback we got was, yeah, okay, well, you can scale and we have this program and the plan to do so. And then we asked them okay, can you set up the framework in this way or that way, because it enables us to attract finance? And then we asked them okay, can you set up the framework in this way or that way, because it enables us to attract finance. And then they looked us up and some weeks, months later, we detected, okay, they did exactly the opposite of what we recommended and our understanding is that, well, they saw us as private sector which kind of wants to exploit their people, their voters, yes, and therefore they had to protect their people and their voters from private sector. Yes.

Speaker 2 8:40

So they actually did the opposite, and that was the point in time when we decided that we need to sit on the other side of the table, while we need to somehow develop a trust relationship with the government.

Speaker 2 8:53

We need to develop a trust relationship with the regulator, and that is when we started entering into the consultancy for mini-grids. That was 2011, 2012. And this started off in India, where we supported then UP Neda, the electrification agency of Uttar Pradesh in India, where we supported then UP NEDA, the electrification agency of Uttar Pradesh in India, in setting up the very first mini-grid policy under an assignment with GIZ.

Speaker 1 9:20

Okay, yeah, so, and then?

Speaker 2 9:22

it went on in Nigeria, where we then supported the regulator here, nerc, in setting up the mini-grid regulations, again under an assignment with GIZ. The program was called NESP Nigerian Energy Support Program yeah, and it went on and on, like Ethiopia, mozambique, these kind of things, yeah.

Speaker 3 9:42

And that brings us very nicely now to Inensis, as it is as an organization that you're going to tell us how many countries you've operated in so far, because I know it's quite a lot, but the current iteration of Enensis what is the organization's mission? And, looking forward, what are the aims that you're trying to achieve with your team?

Speaker 2 10:02

Yeah, well, as said, we are a consulting company. The unique point in Enensis is that we don't sell anything that we have tried before. We are still mini-grid operators.

Speaker 2 10:17

as the Senegalese government basically changed their frameworks, they're more going into the direction of publicly owned assets, not that much privately owned assets, therefore, privately owned assets. Therefore, we kind of left Senegal, we shut down operations there, but we established, together with some partners, jumema in Tanzania, which has some 10,000 connected customers in 23 mini grids, and we established Volterra in Uganda. And whenever we have a new concept, a new idea of how to make mini-grids profitable, we kind of like to start with a blank paper, so to say, and that is why we then set up the Ugandan company, for example. So now, with that experience, boots on the ground, having gone through all the processes, the administrative, the development processes, all these things that regulators and governments expect from a mini-grid company, having worked with mini-grid customers, having gone through difficult times and through good times, we know pretty well how it feels like and what it requires to develop and operate a mini-grid.

Speaker 2 11:28

Yeah develop and operate a mini grid, yeah, so from that perspective, we believe we are well set to advise regulators, policymakers, but also funders, in how to structure frameworks, funding programs, grant funding programs, but also equity and debt investments and finances for the mini grid sector. Yeah.

Speaker 2 11:48

And that is also the mission Like we want to make the mini gridgrid sector and that is also the mission we want to make the mini-grid sector financially sustainable. And we know that we are not there yet. Most of the mini-grid companies are really struggling and we need new concepts and we believe that at Inensos we have some ideas that we are testing right now that can make a change and that can finally make many good companies break even.

Speaker 3 12:13

Yeah, that's a really good point, and there's something that you have very unique experience on. I know that a lot of private company owners probably dread the level of interaction they need to have with policymakers. As you described in the beginning of your story, it can be a difficult process because sometimes incentives are not necessarily aligned Sometimes for very good reasons. But you've been across a lot of countries. What is the key lesson you've learned when it comes to working directly with government and policymakers at international levels?

Challenges and Solutions in Mini-Grids

Speaker 2 12:41

Countries and governments differ from each other If you compare one country to the other. Of course there are similarities, but the differences prevail. And also the strategies under the African Union and also in kind of bilateral talks. Of course they talk to each other, but the structure within the respective country and the socioeconomics and the distribution of political power is so much different. Right, I've recently been to Somalia where the electricity sector is purely mini grids. Right. There is no national grid there.

Speaker 2 13:16

And there are small mini grids, the way we know them here, from Nigeria also, but there are also large mini grids, up to 300,000 customers. Are those all privately owned? All privately owned? Wow, okay, all privately owned and under conditions that are really really difficult. You know about the security issues in Zambia.

Speaker 2 13:35

Now, if you compare that to Nigeria, compare it to Tanzania, compare it to Mozambique, compare it to Zambia, wherever this is a completely different game. After all, it needs completely different types of regulations, kind of frameworks to attract finance right, compared to what we see here. Yeah, and as soon as policymakers see that you're taking their specific constraints and specific challenges seriously, you can, step by step, build trust. And trust is the main currency in the consultancy world, right? Without trust it doesn't work.

Speaker 2 14:13

So trust relationship, that is what we need to build and I think, with the expertise we have and with the ability and willingness to listen, we are usually a welcome partner to communicate and to advise. And another aspect is that we are building our African team very heavily. We're increasing the number of Africans in our team. We're training them for quite a long time before we then bring them into contact with policymakers, with regulators. But we believe that in some years from now probably, trust building will be easier because we will have people on the ground that have an African background and a better understanding of the conditions you find here. Yeah.

Speaker 3 14:53

And that's very interesting because I want to switch to the other side of that table conversation, because a lot of the work of governments is trying to make the policy frameworks and the environments they are operating in conducive. That the capital providers finances, whether it's concessional, if it's through DFIs, if it's private capital, whatever it is to be able to come into the country. So, on the financier side, how is the engagement and how does it differ from engagement with policymakers and governments and what are the expectations that they have, and does it align with the policymakers' expectation or is there some divergence there? Align with the policymakers' expectation or is there some divergence there?

Speaker 2 15:31

Well, if you ask investors and financiers, many of them would potentially say well, we could very well work without regulators Right.

Speaker 3 15:44

That is the capitalist dream.

Speaker 2 15:45

Well, I have a different opinion here. The problem in the mini-grid sector is that you cannot easily project electricity demand development. You cannot easily project the effect of macroeconomic changes. Yeah. For example, here in Nigeria you have seen the foreign exchange rate drop against the dollar. Many good companies here are really struggling to cover their ongoing costs right now because the regulator has not changed the tariff yet. In addition, we have the price elasticity effect, which means that if you increase tariffs, that doesn't automatically mean that the revenue of a many good company increases.

Speaker 2 16:29

It rather means that if you increase tariffs, that residential customers reduce their electricity consumption. Right, Because most of the really deep rural households they have more or less a fixed budget, that is at least our experience. Fixed budget per week or per month, per day, I don't know that. They want to spend on electricity and sometimes it's mixed like electricity and mobile phone and so on. But they wouldn't spend more if you increase the tariffs.

Speaker 2 16:55

So, therefore, the regulator has a very limited lever. What we're saying now is we need to empower the regulator to be the honest broker for the sector, honest broker between the mini-grid company and the government. On this broker between the mini-grid company and the government and the government including the REA, for example, or the Ministry of Power, ministry of Energy, depending on the country they also have other than the regulator. They have grant subsidies available, maybe not from their own tax money, but at least from loans they receive from AFDB or World Bank or similar, and we believe that the regulator is in a unique position to understand what the mini-grid operator needs and therefore the regulator needs to step in when a company is supposed to fail for reasons that the mini-grid company is not responsible for. So therefore, from an investor's perspective and that was your question investors should be, from my perspective, more open to regulators taking a stronger role rather than a weaker one.

Speaker 3 18:04

You probably can't go into details, but have you had conversations with investors or financiers about this and what is the response you receive?

Speaker 2 18:12

Yeah well, investors are not convinced very easily generally, but I believe it will take some time right. I believe after some years I guess it will become clearer what the role of the regulator should be, and I know that investors who are exposed to mini-grid related risks who have invested into mini-grid companies. Some of them are somehow not really happy with what they're seeing with the results.

Speaker 2 18:41

But well, I just presented one of the solutions. Right, they need to somehow let loose to succeed. So they need to somehow allow the regulator to take control for them to have a more stable financial projection also. Right, it's all about projections and equity Investors. Look into 15, 20 years of cash flows. But in mini-grids you cannot project that. Right, it's not possible. You don't know what will happen after 10 or 15 years, if a factory will be built or if a flood destroys the village. Right, you cannot say so. Therefore, yeah, the regulator needs to somehow be empowered to support the investors and they need to work together more.

Rural Industrialization and Due Diligence

Speaker 3 19:27

Yeah, and to get into something you touched on a bit already, the levers available to the policymakers and the developers especially. I know the productive use has been a big angle, a big level that developers especially are trying to get a lot more involved with as a way to kind of like spur demand within the community. Can you talk on other levels that you've seen and which ones you think are more feasible going forward in the market?

Speaker 2 19:51

Yeah, olu, there are two levels of productive use from our perspective. There is this regular productive use. If people talk about productive use, they think, okay, I have a mini grid, I electrify this community. Now how can I foster electricity demand increase? What can I do? Can I maybe electrify the Porsche mill? Can I maybe provide some popcorn makers? Can I maybe promote electric cooking, like these kind of things. And of course it makes a lot of sense. But from my experience in my own companies or in Enzo subsidiaries, and also when working with other mini-grid companies, these efforts do not pay off unless you get significant levels of subsidy for these interventions. From that perspective, the classic productive use channel will, from my perspective, never be self-standing. It will continue to require ongoing subsidies. Therefore, we came up with another angle onto the productive use quest, which we call rural industrialization or keymaker model. Under this angle, we're not looking at okay, I have a village, how can I foster my electricity demand increase? Yeah.

Speaker 2 21:18

But we're looking at where are the value chains that would thrive if I provided electricity? Where are the products and the natural resources in Africa's rural areas that are not being harvested yet but which are there and which are excellent, right, and you have usually in the area you have people who know their resources and they know how to use them. They just don't have the finance, they don't have the management capacity, they don't have the legal capacity, they don't have basically the logistics knowledge to supply to a decent large scale offtaker which is not local but which is in the urban centers, or even an international offtaker. Yeah.

Speaker 2 22:09

And that is where I see big opportunities for the mini-grid companies. Yeah. And we are trying to showcase this in Uganda with the company Voltterra that I've been talking about. Yeah.

Speaker 2 22:22

This company is a joint venture with an agricultural company from Uganda and we selected a village with excellent potential for chili growing and vanilla growing, and vanilla needs very special environmental conditions humidity, soil like solar, radiation and these kinds of things. You won't find these conditions everywhere, but the village that we selected has these conditions and there are already some small vanilla farmers there. So therefore we said, okay, well, let's go together, let's electrify the community, let's set up a block farm, let's provide the blocks within the block farm to villagers, like to our electricity customers, which are also farmers. Yeah, and let's go vanilla and chili together, and this is an experiment which has started some two years ago, which is ongoing. Vanilla takes some time until you can harvest the first time. But, yeah, I think we are on a good track. We're expanding the system this year and we have also started collecting pineapple and mango, and we have electric dryers powered by solar, of course, by our solar mini grid on site and processing various agricultural products exporting to the international market.

Speaker 3 23:41

Yeah, that is such a good example of the level of engagement that's required, sometimes by necessity, for mini-grid companies to really spur demand. And something else that I'm really curious about that kind of plays into this intersection of policymakers, developers and financiers, and that is the place of due diligence. From the developer's perspective, they probably want due diligence to take less than half of how long it currently takes. The financiers will tell you that they want to take their time as long as it needs, but to make sure they're putting money in the right place, and policymakers probably only really care that it's getting done and it's getting done right. So I know that this is something that Inensos has also been looking very closely at right now. So I want you to talk about why due diligence, especially, has come up as a main issue for you and your team to focus on and where you are on that particular front.

Speaker 2 24:31

Yes, we have conducted a range of due diligences in.

Speaker 2 24:34

Africa, in Nigeria, but also in Haiti, for example, or in India, and gained some experience on the technical due diligence side, a little bit on the commercial due diligence side. But what we found is that in equity transactions it's usually the investor hiring the consultants and what they do is they hire consultants for the respective due diligence component and there are so many overlaps. Look at the demand projection Like you need that for the technical, you need that for the commercial. Look at the demand projection you need that for the technical, you need that for the commercial. You may even need that for the environmental part of the due diligence. And the individual parts of the due diligence are quite costly. After all, they make up for a significant percentage of the overall investment amount, because investments in mini-grids are not multi-millions, they are not $20, $50, $100 million.

Speaker 2 25:29

They are in the $1, $2, $5, $10 million range. Right, and if, after all, you pay some $300,000 or $500,000 just for due diligence, it doesn't make sense. Yeah, it absolutely doesn't make sense. So with that experience over the last five, six years or so, we said no, we cannot continue like that. We need to change something. We need to make investments more affordable and same in financing arrangements, like debt funding, then it's often the mini good company which selects the consultants, but anyway, they don't have an option to make it more efficient at the moment.

Speaker 2 26:07

And we said, no, we must make it more efficient. How can we do that? And we linked up with detailed solicitors here from Lagos who have also a lot of experience in legal due diligence for mini-grids, and we linked up with Steinbeiss Impact, which is an international consulting firm. More on the commercial side, and we, well, we know technology very well. We also build a little more on the commercial side, and we, well, we know technology very well, we also build a little bit on the commercial side. We can also do a little bit of environmental and so on. Together we can cover the whole range and we can make sure that the overlaps are being reduced and we can make sure that findings from one component of the due diligence are used in the other, because they are all interlinked. This way we want to maximize efficiency and we believe that we can not only increase efficiency but also reduce costs that way.

Speaker 3 26:54

Yeah, and also one major factor as well is time, because a lot of time at least with the deals that I've worked on it takes a significant amount of time and usually the way the medical sector is. Unfortunately, if you have a subsidy program that's approved and you have to arrange financing for that project, usually you do not get the subsidy until the financing is arranged and the equipment is on site. And you can get the equipment until you've paid the OEMs, most likely in full. Or if you can get better payment terms, that's fine, but that's very unlikely, especially right now. So it kind of puts projects in a place where the policymakers might think they've already done their jobs. They've approved the subsidies, they've given the sites, they've done community engagements. But there's so many other steps and it all comes back to how quickly can due diligence be completed for investments to be made and then for the procurement and the development of the site to begin. So the time aspect, I'm sure, is also like a really big factor in this.

Speaker 2 27:53

True, and due diligence should not be a bottleneck Right, and we believe that we can definitely. By being more efficient, we can also be faster.

Speaker 3 27:57

Yeah, yeah and going forward. Now. Is this product in the pilot phase and how are you looking to roll it out?

Speaker 2 28:04

We have just launched it, basically yesterday, and how are you looking to roll it out? We have just launched it, basically yesterday. We had prepared it over the last three months or so and in my podcasts, in the mini-grid business, we have already recorded and published an episode on this, so whoever is interested in learning more about that can listen to that episode or visit our website. And yeah, so now we are ready to go. The team has been set up, we are coordinated amongst each other, we have organized who will take the lead, like Inenzos will be the contact point, we will subcontract the other partners and then we will coordinate and make sure that everything is smooth.

Speaker 3 28:41

Yeah, and that's something else that connects us both being podcast hosts. Just this time, the difference is that you are the interviewee, so you get to be the one answering the questions. So something we like to end the podcast with, especially with our guests, is to find out from your perspective and from the work you're doing because you're working with different stakeholders, you're seeing different viewpoints and you're also trying to advance the industry forward how do you define failure in your work going forward?

Speaker 2 29:11

some years back, say three, five years back I saw that the mini grid sector was developing very slowly. I kept saying, like telling amda, the alliance for electrification, and also my own colleagues in my own sector, if we don't succeed making the mini-grid sector profitable and bringing it on a growth path within the coming five years, well that was five years from now.

Speaker 2 29:39

So to say so now most likely, some of the donors and financiers will move out and unfortunately, that's what we're seeing right now. So, while World Bank is moving in with billions of dollars literally billions of dollars like large time. Yeah.

Speaker 2 29:59

Others, like, for example, the German government or the European Union, are thinking about maybe shifting more to main grid extension, which is a loss, a big loss, because the German government and the EU have been two of the biggest supporters and had really contributed to developing the sector to where it is right now. And exactly those people stepping out, it hurts a little bit. Right. And failure would be if now others look at the example of the EU and Germany and see oh yeah, maybe they're right, let's take a different direction. That would be the largest failure I could imagine and then the whole thing would stop. Yeah, yeah.

Speaker 3 30:42

Nico, this has been a really good recording. Hopefully we never reach that point, but we have people like you working on this, so I'm very optimistic on that. So, nico, thank you for making time for the podcast. Thanks, olo, yeah, it's been fun.

Speaker 1 30:55

Yeah, okay, this episode of the mini grid business has been brought to you by Enensis, your one-stop shop for sustainable mini grids. For more information on how to make mini-grids work, visit our website, enensiscom, or contact us through the links in the show notes. The mini-grid business Powered by Enensis.