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 0:36

Hello, this is Nico. Welcome to this special edition of the mini-grid business. With today's episode, we would like to draw your attention to the upcoming Energy Access Investment Forum 2024 in Lagos. If you are a mini-grid company looking for finance, if you are an investor or financier interested in the mini-grid space, if you are a government representative looking for private sector rural electrification of your country representative looking for private sector rural electrification of your country, this is the event to attend. The Alliance for Rural Electrification and the Minigrid Business Podcast team are looking forward to meeting you in Lagos from the 21st to the 23rd of May 2024. Remote online participation is also an option. Register for free under eaifenergy.

Speaker 2 1:25

Today we are talking about the mini-grid and solar home system multi-technology approach a way towards more finance for the sector. My guests are Lynn Wiesonga from Cross Boundary Access and Jillian Huert from NG Energy Access. Lynn is an Associate Director at Cross Boundary Access, an investment platform that deploys capital into energy access projects across sub-Saharan Africa, with a focus on electrifying rural communities. Lynn also sits on the board of the Alliance for Rural Electrification, which is our co-host today. Gillian is the CEO of Engie Energy Access, a leading solar home system and mini-grid solution provider in Africa. He is responsible for driving Engie's ambitious goal of maintaining market leadership and providing long-term impact on the lives of Africans. Engie Energy Access has over 1,800 employees, operations in Benin, côte, d'ivoire, kenya, mozambique, nigeria, rwanda, tanzania, uganda and Zambia, and more than 12 million lives impacted so far. And more than 12 million lives impacted so far. Lynn, what is keeping investors from injecting capital into the mini-grid space in?

Speaker 3 2:52

the large scale, hey, nico. So, first off, I don't know if I would say that investors are not currently injecting capital into the mini-grid space in the large scale, just simply because we might not have reached the scale that we're looking at. But we know multiple players within the space, including Cross Boundary Access, are constantly trying to find ways to put money into different pipelines all over the continent. Right, so you have multiple examples of Cross Boundary Access, hasc and many other financiers in the space looking to grow the space. But the reason why we might not have been able to attain the level of skill we're looking to have within the space by now is because one of the key factors that drive this is profitability. And if we're looking at profitability, that it brings to question some of the sites, some of the energy access rural communities that we have across the continent. And how can we actually trickle down the financing that we have in order to ensure?

Speaker 3 3:53

You always hear being discussed is, if we're looking to attain economic feasibility for mini-grid assets, then some of the governments do provide us with tenders in regions that are not as economically feasible.

Speaker 3 4:17

How do we then still electrify communities while still accounting for the fact that the purchasing power in such communities is low, so profitability is a key thing that we'll always have to consider.

Speaker 3 4:28

The other thing I would say is FX solutions.

Speaker 3 4:32

So we know, for example, casing point would be Nigeria there's a lot of volatility within the market with respect to FX, and so then, even as we are looking to achieve scale and put money at a large scale within the energy access space, how would we be able to bring back up returns?

Speaker 3 4:52

How would we be able to recognize a return on our investment, which is something that we constantly have to think about? And then the third thing is how innovative can the space be to allow us to integrate multiple or different technologies in such a way that you can achieve that profitability I mentioned a lot quicker. So if we're talking about maybe looking at a community where you can integrate a mini grid, you can integrate a mesh grid, you can integrate a battery swapping technology all in the same community in a bid to reduce, let's say, the cap expend and be able to bring in sort of the commercial viability, so these are some of the things that investors typically would look at. That would drive the conversation around how can we scale in terms of amount of money that we bring into the space.

Financing Challenges in Energy Access

Speaker 2 5:36

Yeah, lynn, thank you. You started off saying that you don't believe that the financing sector is not ready to scale yet. I think that we are actually talking about two different types of dimensions. I think we all know that there are several billions, probably several tens of billions of dollars needed to electrify the continent with mini-grids, or at least cover those villages that are electrifiable with mini-grids with mini-grids, or at least cover those villages that are electrifiable with mini-grids with mini-grids. At the moment, just World Bank dares is channeling 500 million and African Development Bank is channeling some hundred millions of dollars into the sector that will be dispersed as grants to mini-grid companies. After all, I believe that the private sector financing arm of the equation is still thinking about the tens of millions of dollars, and I think we should make the leap towards the hundreds of millions to not be late to go to the billions of dollars that will be required. Do you want to respond to that? I think we are too slow, way too slow on the private sector financing arm.

Speaker 3 6:49

So, while I agree, Nico, it is true, so for most of the private sector arm, we're still sitting around the realm of tens of millions of dollars and, like you rightly quoted, grants have already brought in over, well, billions of dollars. Right, and so then, as I'm sure your listeners already are aware, so if we're looking at grant financing, there's no return expectation on that right. It is a grant With private capital. You do have to gain comfort around the fact that you'll be able to make back a return on your investment, and so, in as much as we're looking to match the level of money that's been put into grants, it needs to come with some level of assessment that gives you comfort that you'll be able to either take out money, which ties to the FX point that I mentioned If I put in money but in a couple of years I'm not able to repatriate, then that becomes a key concern, right. It also means the sites that are chosen for investors to put money into becomes a key consideration, While we all understand this is the energy access space and therefore we're not here to make I don't know 20% IRR on these deals, but even then, if we're to scale, what you put money into has to give you back some level of return, and so then it becomes a bit more of a factor of looking at do communities have more commercial viability?

Speaker 3 8:09

Do they have productive users? Do they have commercial users that can uplift the consumption numbers to facilitate the kind of return we're looking at? So this is what would typically slow down us seeing, let's say, private sector matching in billions, especially at this stage, the grant money that we're already seeing in the sector.

Speaker 2 8:29

Okay. So what you're saying, Lynn, is it's not our turn, it's the project developers' turn. They are coming with the wrong projects. Right, that's what I hear from you. Like keeping the FX part out of the discussion for now. We can come back to that later. But in principle you're exactly saying that right, project developers are not developing the right projects because if they did, we would be ready to finance.

Speaker 3 8:51

Well, I love how you phrased it, nico, but hardly so.

Speaker 3 8:53

Project developers work hand in hand with a lot of financiers, for example.

Speaker 3 8:59

That's literally the business model. With cross-boundary access right, we are the asset core that will own the grids, and we have the local developers on the ground being the partners, as operating companies rather. And so then, even as they're choosing sites, we work alongside them to identify, or at least understand, the impact of the site chosen, whether or not it's commercially viable, the impact of the site chosen, whether or not it's commercially viable. The issue becomes is the community willing and able to actually spend at a level that makes sense? If we are going to assume that tariff can increase, let's say, I don't know in line with inflation over the next 10 years, how feasible is it for our model to pass that cost through to customers? Can they actually handle that level of tariff increment? And so then, even as developers are working hand in hand with investors to identify the most suitable site, it also is a matter of like currently, where's the continent at with respect to the capability of some of the communities we're trying to electrify?

Speaker 2 10:02

All right, jillian, I guess that is the point in time where you should come in and tell us a little bit about how you see the market and how you respond to these financials and investors' requirements for deliver the right projects to us, and then we are ready to finance.

Speaker 5 10:20

Yes, thanks, nico, I was about to scream, but I think it's okay now. Yes, thanks, nico, I was about to scream, but I think it's okay now. So, first of all, one aspect we are totally aligned with Lynn is that one technology does not fit all. We are here talking about off-grid, and off-grid is not only mini-grid. Off-grid is not only SHS. Off-grid is a combination of different approaches in order to meet our target in SDG 7, which, by the way, we are failing to meet if we continue at this speed by 2030. So now, if I look at the mini-grid in particular, it's definitely a very important element of the solution because at the moment, it is the solution that is driving economical growth in a specific sub-region in the middle of nowhere. It's not the only one, because more and more products are coming into the market that are AC oriented or enabled and that would be also managing different sources of energy. So, this being said, definitely very much aligned on the productive usages, on the income generating activities, and hence having an infrastructure with a concession which is from 15 years to 20 is definitely important.

Speaker 5 11:41

Now, looking at your question, are we developers bringing the wrong projects? Let's start by saying yes Honestly at some point. We are responding to tenders and the tenders are very much imposed to us. The mechanism of the tender is very much imposed to us. The technology selected for the tender is very much imposed to us. The technology selected for the tender is very much imposed to us. The economics of the tender and the risk allocation is very much imposed to us. So the optimization of the project, or the remaining space for optimization of the project, is very limited to the developer.

Speaker 5 12:20

Of course and this is something that I said all the time because I'm a long-lasting energy employee I've been dealing with IPPs in Southeast Asia, in the Middle East, a mini-grid is an IPP. The only difference is that you don't have PPE. You are a kind of merchant market IPP or a demand-exposed IPP. So if the sphere when we can, as developers, improve is the financing, how do we make the financing as cost-effective as possible? How do we build up a technical solution which is optimized in the framework that is imposed to us? Then, on the other side of the table, how do we manage and predict the demand? So for me, in order to be able to bring better projects, or to enable better projects, first of all, the private sector should be involved much earlier in the process. The pre-selection of the villages is already a very critical step. If the villages are for any reason picked upon criteria that do not allow to optimize, then you could say that the project is not good enough. So let's a little bit tuned on what I said earlier. But again, what does it mean when a tender is open? Most of the time is one single technology and the access to subsidies. So the grants that Lynn was talking about with no return is linked to connection. We have published last week our white paper on the multi technology approach to accelerate penetration and success of mini grids.

Speaker 5 13:59

One of the very simple example is the following a smart meter, which is critical in the mini grid business model because it does operate as a prepaid SIM card. You charge your smart meter with money, mobile money, and you consume it. When you come almost to an end, you receive an SMS saying please stop up, otherwise you will lose access to electricity. A smart meter is about $30 to $50, only the price of buying it, not shipping it to Africa, not connecting it to a house, not cabling it, not installing it. If you consider that a social tariff across a number of countries is $0.2 per kilowatt hour and you allocate that smart meter for a family that consumes two lamps and maybe charge a mobile phone, you will need 12.5 years to repay just the smart meter.

Speaker 5 14:49

This cannot fly just by definition, hence having this approach that Lynn was mentioning. That family would much better be served by energy as a service through an SHS which is not leased to own but just lease, and if the SHS is breaking then just replaced. If something happens to that family down the line that one of the kids is becoming adult and is increasing the overall wallet of the family and the needs are moving from lights to cooking or lights to fridge or lights to entertainment, then the connection to the mini-grid would make sense, which means that, from another perspective, I do believe that mini-grid would benefit of being built in stages. For instance, to have a better approach to mini-grids, we could have much more number of mini-grid with a smaller size in order to be able to adapt depending on which one would be successful fast. And first because there is an unpredictability on macroeconomics or even climate, elements that you can't predict. One mini-grid may find to be in a draft area and the other one is exploding in terms of usages because it attracts new villagers, etc. So that flexibility does not exist at the moment. And to come back to my first comment, if the private sector could be involved at different stages of the discussion, this could be offset.

Speaker 5 16:18

Again, there are a number of additional elements that would make a mini-grid more powerful and successful is when we look at the expected performance of a mini-grid. How can we make sure that we look at it from a holistic perspective, not only from a technology aspect, but from a commercial aspect? Why are we looking at financing the CapEx only and the initial one? Why we don't look at different funds at the inception of the project? And there are companies that are looking at appliance financing. This would make the business model more resilient because you would build up the demand progressively with the technology and the capacity of your mini-grid. From a funder preference as well, there are a number of funders that are very picky on the technology that they want to see developed. This may not be the best integrated model for the specific area in which the mini-grid would be. So that's a number of elements that, in my opinion, are making the project less interesting or, as you pushed, maybe not the right project.

Speaker 2 17:29

Okay, let me summarize that quickly.

Speaker 2 17:31

So Lynn started off saying private sector developers are not delivering the right projects, therefore we cannot finance.

Improving Energy Access Through Mini-Grids

Speaker 2 17:37

And then, jillian, you said, yeah, but we are not delivering the right projects because the government is running the tenders and prescribing a lot of things and, after all, we do not have much room to maneuver. Whereas we would like to integrate, like solar home systems with mini-GRIS, under one project, we would like to apply staged implementation and we would like to also be involved in the selection of the sites more and also bring in appliances, and that could all be part of one large grant funding program. But, gillian, most of the programs today are performance-based grants, right, and of course, stage implementation is, of course, still a little bit difficult, and those who had listened to our earlier episodes know that some funders are working on this, also with our support. Our earlier episodes know that some funders are working on this, also with our support. But after all, under PBGs, the degree of freedom that you have is relatively large, isn't it? And in some cases, I guess you can even decide on whether you want to go for a solar home system for a certain connection or for a mini-grid connection.

Speaker 5 18:39

I disagree. Okay, seriously disagree. Okay, seriously.

Speaker 5 18:45

Most of the mini-grid we have developed and we are constructing at the moment are, yes, result-based means. Please connect every single villager to have access to the subsidy. So, by definition, it goes against the very simple mathematics I have used earlier. So, yes, I can decide what type of battery and it's not always the case. I can decide what size of the mini grid I would construct. I can decide how the poles would be put in the village, and sometimes I cannot even decide what type of pole I can use. But overall, the result based is not on the demand, meaning what the customer has used as electricity. It's based on the connection, meaning how many new citizens have their house connected to a cable, which means that they are connected to generating capacity.

Speaker 5 19:34

So now, of course, I went into your direction to say that potentially, I can understand that we would say that mini-grid are not necessarily the right project, but let's look at the other side of the coin as well. We have been able and I think we are the first one, please correct me if I'm wrong we have been able to secure a project finance with Signum Capital for 60 mini-grids on an IRAP program in Zambia. When I mean a project finance, it's a full-fledged project finance. It means that we went through all the different steps that an IPP would go through, the big CCGTs or solar farm, wind farm, etc. With the due diligence, with the review of our financial model, with the review of our demand assumptions, and we secure this project finance. Which means that the way we interact with the financing institution, the way that we design the technology and commercial approach of those mini-grids has convinced that the proceed of the project would be enough to pay back the debt.

Speaker 2 20:38

Interesting. And, julien, there's no guarantee from Engie. As such, the SPV is the borrower, yeah.

Speaker 5 20:46

Yes, it is Interesting Good, which I think is a very important first step. Indeed Now, of course, the construction is ongoing, so the future will prove us true and I'm convinced that we can deliver. That would be also a way to accelerate construction of many more mini-grids. Let me go to Mozambique, for instance. At COP28, there was a closed-door discussion with Funai on the Mozambique mini-grid. Let's say ambitions. I do believe that things are changing. Mozambique is looking at mini-grid from a multi-technology approach, which means that from day one, they will give the flexibility as long as a number of criteria are met. Meaning, can you demonstrate and then we go back to your comment on result-based financing that someone somewhere in a village is having access to electricity? Would it be SHS? Would it be solar business systems or a system which is in AC and in kilowatt instead of watt? Would it be connected to the mini grid? Would it be mesh grid? It's not very relevant. What is relevant is is electricity accessible, affordable and used? And I think it. Gillian, you have both technologies integrated into your management platform.

Speaker 2 22:13

We on the micropower manager we are also working on this. I guess that is a very important step to have both technologies and business lines under one management, to have the ability and opportunity to send out local staff to mini-grid metered customers as well as to solar home system customers. Is that actually generating a lot of synergies? And what do you think is the effect if you put it into quantities, if that?

Speaker 5 22:43

is possible. You almost took my word out of my mouth. So, yes, that's our philosophy. So energy access, as you mentioned, is active on nine markets. Our goal is to be present with the two technologies in each and single market, except if the regulation or, let's say, business environment does not help one of those two technologies or solutions. So it does provide upside or synergies, at the very minimum in the quality of data we collect.

Speaker 5 23:12

When you survey a mini-grid with a third party, it's in any case a contractor to you. When we use our own workforce and commercial network, we are already aligned on our mission. We know what we want to achieve. We want to have a positive impact on life. We want to provide services that are affordable and reliable. We want to optimize sustainability. We want to be excellent in customer experience. So when the village is surveyed, the answers are challenged Does everyone would like to have a fridge? Yes, how many of them could afford a fridge at first? Less, how many of them will purchase a fridge Even less.

Speaker 5 23:56

All of those data are very important in the first and early stage of the project, by sizing the solution, our capacity and capability to identify entrepreneurs, to engage with communities, in order to before the project has started, be able to engage in a switch between a diesel generator for a compressor and an electrical one, between having a generator and using electricity for tools for carpenter, a welder, etc.

Innovative Energy Access Funding Structures

Speaker 5 24:29

Which are usually the first thing that we identified in a village. But we go even further. We try to industrialize processes that have been very much man-hours usage in oil. Pine production is still very much driven by women and them stepping on the I don't know if you call it seeds in order to create the oil. We are engaging on seeing how we could improve the performance of this process and giving them access to more time but also more money. All of this is something that we first of all encourage and also promote because it's part of our DNA. So, in terms of figures, it's a little bit too early to be able to tell you if we gain 10% of efficiency or we are able to decrease the cost by 15% on initial capex, etc. But definitely we see that the early mini-grid we constructed in Tanzania in the 15 or 17 are totally different than the one that we have started constructing in Nigeria, in Benin.

Speaker 3 25:33

And Nico, I just want to jump in here and give the perspective of what Gillian is describing. You very much see that that is modifying the sort of funding structures and funding mechanisms that private sector is putting in place. I want to contextualize that a bit more the integration of different technologies in order to provide energy access to communities. You see that even in, let's say, how we chose to look at also battery swapping technology.

Speaker 3 26:02

Yet our initial investment mandate was, say, mini-grids, right, and so then the conversation is always around all financiers and mini-grid developers, as if we're pulling in different directions.

Speaker 3 26:14

But the two actually move in tandem because, alongside our mini-grid developers or the local operators that we work with, you're able to assess and see there's need for an integrated technology approach if you're going to electrify a community or if the project is actually going to result in profitability that will allow scale. There's need for that and that is informed by all the collaborative effort from a financier and developer perspective. Then, as a result, you see our investment mandates and our funding structures morph in order to accommodate the fact that we might have come in with the idea of mini-grids being the solution to the energy access issue. But really, how can we then allow for, let's say, funding of a solar home system or a mesh grid or a battery swapping technology, because, as Gillian said, regardless of how someone is electrified, it does not matter that it's through I don't know a battery. The point is, do they actually have access to the electrification?

Speaker 2 27:13

Yeah, lynn, you're coming from an investor, financial, which is very innovative and very open to new approaches. If I approach a bank with that idea of mixing mini grids with solar home systems, they would immediately tell me what? These are two different asset classes and you want to mix them? No, this is not possible. You better finance them in two different strings.

Speaker 5 27:38

That may be true, but I think the world is evolving.

Speaker 5 27:41

But even if we take that as a statement that we can't change today, then let's create a pool of funds and in the same process of tendering, you know that you have a backup of two types of funders Ones that love infrastructure and would definitely put their money into the part of the mini grid that serves the village, and others that are thinking that what counts is also speed, the village and others that are thinking that what counts is also speed.

Speaker 5 28:08

And SHS is a product which has been proven with standards in terms of quality, and we sign contracts and warranty with our customer, and that's enough for them to provide the same proportion of subsidies, for instance, or grants, in order to make the overall project even more viable. Because then, if we manage to pull those different profiles of financing institutions, then the overall project to come back to your first statement is becoming much more attractive. The probability of success is extremely high and hence it will attract even more industrials. Then, if you attract more industrial, then you increase the, let's say, share of best practices, the ability to continuously seek for operational excellence, for a better operation and maintenance, for capacity building in the country of talents and new jobs, etc, etc. And then you have initiative, this positive and virtuous circle that would attract even more financing. It's not that complex.

Speaker 2 29:18

Yeah, Julian, I'm a big fan of economies, of scope effects in the rural electrification space. As you may know, we are looking not just in the combining of solar home systems and mini grids, but we are looking rather into the direction of combining mini grids with agricultural value chains, and that is what we call rural industrialization. But in principle, the idea behind is not that different. But what people then tell me is how do you combine those two expertise that you need for, in this case for the solar home system? It's a kind of different expertise DC systems, probably other technology compared to mini-grids. How do you actually make sure that this one personnel has both?

Speaker 5 30:01

I have a very simple answer to your question Just call me. Just call me. We do it because we are doing it on a daily basis. We are a company that has the two solutions. We have built up the capacity of our teams to be able to do both. We are entering into a new segment, which we call Solar Business System, which is also bridging the gap between DC and low consumption and specific, let's say, range of appliances and productive usages for isolated consumer.

Speaker 5 30:35

Shs has been a one-to-one relationship. You sell one SHS for one consumer. Mini-grid is a one-to-many, sbs would be a one-to-one or one-to-few, but at a different scale, promoting productive usages. So then, if you come back to the first statement of Lynn, sky is the limit, because we could easily having a mini-grid which is a combination of small mini-grid in the same village, because you would have your big consumer anchored to your larger SVS and less cable and then move to the next cluster in the village or you would serve differently. I do believe that it's the way forward. Although the products or the solutions are different, the end goal is the same and if companies are alone in one of those two or three verticals, partnership is still feasible.

Speaker 2 31:30

Yeah, gillian, you're basically coming from both ends. You started off with mini-grids on the one side and solar home systems on the other, and then more or less merged those two to form one more efficient and more easily implementable approach. But do you think solar home system companies, which are already pretty large, will identify the mini grid sector as their next goal? Will they turn into a mixed kind of electricity supply company including mini grids and solar home systems?

Speaker 5 32:01

I would say most probably not. If you look at our competitors like Sunken, they are not moving in mini-grid and Delight either, and Copa is moving in smartphones. So I tend to agree with what you said. They may not, but for us it's in the DNA and hence we strongly advocate for it.

Speaker 3 32:20

Nico, I do have a view on this a bit, and maybe this is looking at it from a financier perspective. Looking at it from a financier perspective, if I, as a financier, have put money into, let's say, a mini-grid developer, or rather I have partnered with a mini-grid developer and so have investment in mini-grid technologies, but also at the same time, let's say, have investment in mesh grid technology and battery swapping technology, what would be the limitation of me leveraging my access to the different portfolios to, let's say, utilize the capability of the mini-grid developer and the battery swapping developer and the mesh grid developer within a particular site? Right, because ultimately, like I said, we're all moving in tandem and the goal here is to be able to achieve scale, and scale is dependent on profitability. I currently have within my portfolio a scale of mini grids batteries, mesh grids, maybe even solar home systems, so I don't need them to exist within a single developer. I just need to be able to leverage them to be used within a single community.

Speaker 2 33:23

But if you bring in several companies into the same community, you have twice the travel cost. You have twice the staff cost. If you let both technology be managed by one company, you can basically reduce travel costs. You can reduce staff costs because the same person traveling to site can do two things Serve the mini-grid customers and also the solar home system customers. Why would you do that with two different companies?

Speaker 3 33:48

I would argue that becomes a contracting issue. We can contract around this such that we allow for the local operator or for the different capabilities to be leveraged in different ways. I don't think. I see it as it is an impossible task and you need both of them on ground at the same time. I do believe there can be contracting workarounds for something like that, to allow for who, at any given point in time, is responsible for the functioning of the integrated community, because what we're looking at at this point in time is an integrated community and not I brought this and I brought that, and so then I need to always be the one traveling for this versus that.

Speaker 2 34:32

Julian, do you think that will work, given the training requirements and coordination requirements and everything?

Speaker 5 34:39

I will just make the comparison with an IPP again. At some point you have two options Either you do an EPC or you do an EPCM. At some point you have two options Either you do an EPC or you do an EPCM. An EPC is that one single company is aggregating any other and is fronting it, so you have one single interlocutor, which reduce the risk of misalignment, etc. If you do an EPCM, it means that as the developer of the project, you would manage several different contracts. It depends on the situation. Sometimes it will give you a heads up or tailwind and help you reduce costs and, by definition, help you to win the tender. From a complexity perspective, most of the time it's much more complex indeed.

Speaker 2 35:25

Okay, we've been looking at Engie. Engie is a large company, very powerful of course, active in quite a wide range of geographies already, but you can probably not cover the full market everything everywhere all across the continent. We will probably need other companies, and so far, governments have always been designing their tenders to also encourage local companies to be competitive and to encourage them to also participate in tenders and learn and become actually successful. Now, jillian, I think this is a question to you what do you think? Do these smaller companies have a role to play? Because the more complex this business becomes and we just said that, well, we need to integrate solar home systems with mini grids under one management structure this increases complexity. After all, will those small companies be able to follow, or will they sooner or later be just replaced or absorbed by the larger companies?

Speaker 5 36:31

I don't have a crystal ball, but I do believe that local companies have their strengths. As an international industrial company, I am very much exposed to local currency, which is not the case of a local company, depending if the equipment is available in the country or not. So I would start from a different angle. Look at the size of Africa and the size of the market to be served. That promoting assembly line, promoting manufactured in the continent, would be a very strong enabler of our sector because it would unlock a higher resilience of the business model.

Speaker 5 37:15

The partnership between local company and international company like ours has been there for decades and centuries. Again, it's a question of allocation of risk or allocation of knowledge. A local company is normally better armed to understand the regulation of a local country, to understand how is the ads evolved, what is the end goal or what would be the next change. So I'm very much into win-win partnership and hence I do believe that there is a space for both. I think that the overall sector would benefit from having a little bit more than Engie and ADF or other companies big one. Promoting development of mini-grid and partnering with local companies for me is part of the full solution. Would they be able to go alone first Not immediately, and if we all want to scale fast and to reach that SDG 7 sooner than later maybe not the right way forward, but if we want to lift and shift and work quick and efficiently, yes, partnering and nurturing these entrepreneurs in countries is also very much needed.

Speaker 2 38:29

Lynn, what is your view on local companies? What role do these have to play in the mini-grid space or the rural electrification space in general in the future?

Speaker 3 38:39

I do think, because one of the key considerations again is how can we scale, and not just scale, but scale quickly.

Financial Strategies for African Mini-Grids

Speaker 3 38:46

I don't see a world in which and I could be wrong but I don't see a world in which we scale without the local developers, because if I have an investment mandate to be able to deploy capital into the energy access space across the whole of sub-Saharan Africa, while it is beneficial and helpful to partner with all the big players, you also still need, as Gillian said, the input of the local developers, because one they do have a very good understanding of the market, and so if I'm entering, let's say, a new market as an investor, when it comes to upskilling and my understanding of the requirements of what is needed to operate in that market, they help you get up to speed with that, not to mention the grid codes and everything that is tied into developing a national grid standard. You would find that the local developers have that knowledge. So I do see them as a very crucial part of scaling within the mini grid space, especially if we're to do it at a large scale across the entire continent.

Speaker 2 39:46

Yeah, in an earlier episode, lynn, your colleague, humphrey Virico, said that involving smaller domestic African companies into the financing stream is still a task that has to be resolved or that financiers have to work on. It's not too long ago, like I would say half a year back or so, that he made the statement. Has anything changed in the meantime? Is anything happening in helping local companies scale from a financial perspective? Because, after all, I think we've all learned that mini-grid financing is infrastructure financing and cross-boundry access is really pushing a lot on that end to really convince also other investors and financiers also that it's all about infrastructure, it's about long-term investment.

Speaker 2 40:41

It's about also that it's all about infrastructure. It's about long-term investment. It's about really not looking into five years or seven years or 10 years, but looking into 10 years or 20 years or even more, and that return does not need to come immediately but can be earned in the long term. So now this is all related to scale, right? This whole infrastructure management only works if you have a large number of mini-grids under management. As Jillian just said, in Zambia you had 60 mini-grids and that of course makes it easier to find finance and then suddenly also doors open up for project finance. So now, lynn, how do you see this? Is there any chance for smaller African companies to take the same route?

Speaker 3 41:27

Yes. So one thing I do want to point out is you're right in that there has been a change between when we first started working in this space and now, in that we have been a huge proponent of looking at mini-grids as infrastructure and you actually see even some of the pipeline that we receive right now, especially from local developers trying to adopt to that. So if they're coming to cross-boundary access, looking for financing, you see a couple of developers already putting in place building blocks to represent their projects or to represent their sites or their mini-grids as infrastructure. They've carved them out of the day-to-day operations, They've put them in separate SPVs and they're giving you to assess mini-grid projects that are separate from maybe any other SHS business or CNI or whatever others that developers engage with. So that shift, even though it's not at the scale that we'd be looking for at this stage, but that shift already makes it easier when it comes to working with local developers Because from the onset, when it comes to them presenting potential projects for screening and for investment, you already see them adopting it into infrastructure-led projects.

Speaker 3 42:38

That's what I would say is the first thing. The second thing is you do have to work with a lot of local developers and we're happy to work with a lot of local developers, just also given the knowledge that they bring. And so, internally, the same way we are able to shift funding mechanism to allow for sort of an integrated technology approach is the same way we then shift and see how can we support some of the smaller developers that we do have in our pipeline to, let's say, be able to operate at, let's say, an energy scale or at a scale of a bigger developer. And what that would typically look like is even in some of our funding allocation, even in some of the conversations we have with investors, we try and understand if we facilitate, let's say, the appliance financing, if we facilitate all of these things, it helps them build the mini-grid projects in a certain way. So there's an active element on our side as well, because we recognize the importance of just having the local developers within the space as well.

Speaker 2 43:36

Lynn Jillian, you both talked about the FX risk, so the fluctuations in local currency against hard currency, and in an infrastructure business like the mini-grid business, this is, of course, an extreme risk, where you inject most of your cash flows in hard currencies and you receive your revenues and local currencies and then you are exposed to this foreign exchange risk over the full period of project operation. Lynn Julian, does any one of you want to talk about this briefly and tell our audience how you handle this from an investor's perspective and, on the other hand, from a operator's perspective?

Speaker 3 44:26

You're right, nico, in that FX remains a concern.

Speaker 3 44:30

We are constantly trying to find ways in which we can reduce FX exposure, and there's a couple of things we do put in place, but of course we're always trying to adopt any new options out there.

Speaker 3 44:43

One of the things, of course, that you would have as an investor is you'd like to diversify your portfolio, so have it across multiple geographies, because then the hope is, if the currency is devalued in one particular country, it's not spread across your entire portfolio. The other thing is we also look at bringing in some level of senior debts in local currency. The use of proceeds for this particular facility can go towards the purchase of capital expenditure, such that you're not always exposed to the USD injection. Some of the things we do as well is just trying to make sure some of our operating costs are maintained in local currency. But the main thing would be the senior debt facility in local currency which we currently are seeing in Nigeria with InfraCredit. But you don't find in a lot of markets. But if we did have this solution in a lot of markets, it would provide a bit of cover to the kind of exposure we see in effects.

Attracting Financiers to Energy Access

Speaker 2 45:43

Thank you, lynn. Considering the lack of private funding, especially equity and debt, and considering the upcoming Energy Access Investment Forum, what could attract more financiers into the mini-grid space? Because, well, we have already discussed, there's not really a very big margin to be made, but it's still a business that's worthwhile investing in, lynn, otherwise you wouldn't do it.

Speaker 3 46:11

That's true, nico. I agree with that in that we do have to still bring in additional pools of capital. So the traditional impact capital remains very crucial to the space and that's the typical capital you'd find from the likes of IFC and FDB and other DFIs, and so that remains very crucial. You're able to attract pure play commercial capital using this type of capital. But I do believe that there's other pools of capital the mini-grid space can dip into, and that could include climate financing. So there's money allocated specifically towards climate financing and I'm sure we'd agree that mini-grids do play a role within the climate financing space. And so then, for example, with Cross Boundary Access, we have microsoft climate innovation fund as one of our investors, and that was a specifically allocated climate financing pool of capital.

Speaker 3 47:09

So, in a bid to attract, say, other non-traditional pools of capital would look at, let's say, climate financing, would look at some of the carbon credit financing that's currently within the market, although this remains fairly opaque, like people are figuring out. What can we possibly look at, what are the angles with which we can use to attract this kind of financing? And, lastly, it's just like the pure commercial equity. But for this to come in, of course, we need to be looking at how can impact capital blend with the pure equity capital in order to make this attractive for the pure equity players. So I do think the space can still attract a lot of financiers. I think there's quite a bit of cash within the space right now to look at different pools of like climate related or energy related which can still be attracted into the energy access space all right, thank you both.

Speaker 2 48:08

Um, okay, let's, uh, slowly come to an end. I basically have two questions for each of you, jillian. Let's start with you from your perspective what is the way forward to addressing the key challenges towards universal access to energy?

Speaker 5 48:24

Okay, my first say would be the multi-technology approach. There is not one single technology fits all, and there are some actors on the market that are promoting one of the two, and when I say one of the two is mass market versus infrastructure, and I think it's misplaced. We should look at the two in order to go faster into universal access to energy.

Speaker 2 48:48

Okay, Lynn, do you want to contribute here?

Speaker 3 48:51

Yes. So I would say a couple of things. So access to additional pools of capital outside of the traditional impact capital, which, I will reiterate, remains quite core to the energy access space, but then access to, especially, climate financing, because there's so many angles that mini-grids touch on from an impact and development outcomes perspective that should be able to attract this type of financing. The other thing I would say is collaborative effort with the private capital, the government, to find sort of effects solutions that can help hedge, because effects remains a very key determinant of how and how quickly private capital can scale.

Speaker 3 49:31

So we do have, like I mentioned already, the infracredit example, but then we need this at a mass scale. So then, if on a collaborative level, from the government, financial institutions, locally, other private capital, like, let's say, cba, collaborative effort to identify how can we put in place local currency effects solutions that make this space scale even faster and even more attractive. And then the last thing I would say is and we haven't touched on this in the discussion, but there's a lot of political risk that is taken with respect to this space and, at the moment at least, on a mass scale, there's not a lot of solutions trying to address this. So I would feel like this is definitely sort of an area that is yet to be fully explored.

Speaker 2 50:16

Yeah, and as you said, that we have to advocate more for financiers to provide impact capital to the sector. I guess that is also a call for the Alliance for Rural Electrification, which is our co-host today, and Engie the Cross Boundary Access. Andy Nenzus, we are all members of the Alliance for Rural Electrification. I think we can all join hands and contribute to this advocating process. Now there will be this wonderful event, the Energy Access Investment Forum, in a few months from now. What message would you like to send to investors and financiers at the EAIF 2024 in Lagos?

Speaker 5 51:00

A very positive and constructive one, as explained during this podcast. At Engie Energy Access, we have proven that our business is a sustainable one. We have scalable operations, we have a pipeline of promising opportunities and hence we are ready to boost the growth and the impact in this challenging energy landscape. We are open to partners, we are open to more funds in order to accelerate providing access to energy to millions of people in sub-Saharan Africa, and hence I strongly believe that together we can make a real difference in the lives of millions.

Speaker 2 51:38

All right, lynn.

Speaker 3 51:40

Yeah. So the messaging remains. Well, we know that mini grids are a challenging space, and not just mini grids, but energy access in general remains a challenging space. We remain committed to finding innovative ways to finance this space and that's why we even advocate for the thesis that mini grids are infrastructure and therefore should be financed as infrastructure, should be looked at as infrastructure. There's a lot of innovation going into this. We continue working with the developer partners that we have on the ground to inform the modification of our business model into, let's say, looking at an integrated approach.

Speaker 2 52:17

But one thing is at the core we remain believing that mini-grids are infrastructure and should therefore attract very patient capital, which is infrastructure financing investors and financiers will be happy to join the EAIF 2024 and discuss about their remaining doubts and hopefully resolve them and finally open the streams of cash into the sector. Thanks a lot, lynn. Thanks a lot, jillian. That was very insightful and very exciting and interesting. I hope to talk to you soon and meet you at the eaif 2024, of course yeah, sure, thanks lean, thank you yes, yeah, thank you, jillian

Unlocking Capital for Rural Electrification

Speaker 5 53:13

bye-bye hello.

Speaker 4 53:15

This is inez from the alliance for rural electrification. There is significant new capital from climate financing and larger scale impact financiers like IFC and AFDB waiting to be tapped. However, mini-grid project developers, investors and financiers alike depend on the profitability of projects. Rural electrification approaches integrating mini-grids and solar home systems under one management seem to be an opportunity to harvest synergies, reduce costs, improve profitability and therefore increase the flow of private capital into the sector. If you had asked a financier some years back if he wanted to fund mini-grids and solar home systems within one project, they would have advised to reduce the complexity and increase focus. Now it seems that synergies and economies of scope are being acknowledged more. This is a very much welcome switch in mindsets.

Speaker 4 54:16

To allow for this integrated rural electrification approach to become a reality, policy frameworks and especially tender designs must be adapted. This is what needs to be considered by governments and grant providers in the next evolutionary steps of grant fund structures. Coordination and collaboration between all sector participants is required to unleash the urgently demanded additional equity and funding. As the Alliance for Rural Electrification, we believe in the power of collaboration and investment to drive change. We are therefore thrilled to invite you to the forefront of clean energy investment at the ARE Energy Access Investment Forum, eif, in Lagos, nigeria, from the 21st to the 23rd of May 2024. Eif is a Catholic platform where more than 1,000 in-person and virtual delegates, including private and public investors, industry and invited government officials, convene to forge partnerships, spark innovation, mobilize capital and accelerate access to clean energy for undeserved communities. Join us at EIF 2024 to get the latest insights on the market and network with international investors and funding partners.

Speaker 1 55:38

This episode of the mini-grid business has been brought to you by Enensis, your one 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 Inensys.