Innovative business models for sustainable energy access in Africa
REACT – the Renewable Energy and Adaptation to Climate Change Technologies – calls for innovative business models to bring sustainable technologies to rural consumers in response to the following challenges:
- End user financing and affordability
- Traditional fuel alternatives
- Rural distribution chains
- Small IPPs and mini grids.
1. End user financing and affordability
The problem: While sustainable energy products offer affordable long-term solutions to off-grid energy needs, the upfront costs can be prohibitive for low-income consumers.
REACT grantee response: Pay-as-you-go Solutions
In Kenya, M-KOPA offers a pay-as-you-go solution through mobile money for purchase of small solar systems. This company was a winner in the first REACT round. In the second round, two more businesses won grant funding with similar pay-as-you-go business model proposals (Mobisol, catering to larger systems in Tanzania and Kenya through 36-month repayment terms, and Tanzania’s Off-Grid Electric).
Leasing models for rural consumers are made possible now because consumers can pay remotely via mobile money, and products can also be switched on and off remotely based on payments received. This convergence between renewable and mobile phone technologies offers a very promising future for the low-income market.
REACT grantee response: Micro-finance Institutions
Several REACT grantees are working to expand energy product lines offered by micro-finance institutions (MFIs), focusing on micro-loans for small solar and improved cookstoves. These loans are costly to administer, signalling the need for greater efficiency and specialisation in the market. REACT grantee, Micro-Energy Credits is partnering with multiple MFIs to build up their energy product line expertise, working now in Uganda with plans to expand regionally.
The company funds its efforts by aggregating carbon credits produced by the products bought through MFI loans. MFI agents monitor usage along with the loans. The resulting carbon credits are sold through offtake agreements, and carbon revenue is shared between MicroEnergy Credits and the MFI. Other similar business models look at how to efficiently combine energy product expertise with rural financing and distribution networks.
2. Creating a market for traditional fuel alternatives
The problem: Companies marketing products that would replace traditional fuels like firewood and charcoal are asking consumers to give up a widely available, free resource for an unfamiliar product that comes at a price and is subject to taxation and regulation – not such an easy sell.
REACT grantee response: La Terre
This company is manufacturing gasifiers and briquettes made from biomass as a charcoal alternative. Location is key: La Terre is using bio-waste from the many large rose farms in Naivasha, Kenya, a city near the capital of Nairobi where charcoal is very expensive due to increasing forest regulation and scarcity. The briquettes will be sold in local markets, incurring very low transport costs.
REACT grantee response: Scaling biomass fuels
Two companies from REACT Round Two, KGN Biofuels and Global Supply Solutions, will manufacture biomass fuel briquettes from large-scale agriculture waste to serve industrial clients in Kenya. Some large industrial operations in Kenya continue to use inefficient industrial diesel oil, heavy fuel oil, and even firewood to fuel their boilers. Serving industrial clients offers better potential for market entry, scale, and profit.
3. Rural distribution chains
The problem: Thus far, no company that we are aware of has been able to distribute small-scale renewable power generators (micro-LED lighting, phone charging products, small solar systems, etc.) into rural Africa in a commercially viable way. Many companies have entered the market, but continue to rely on support from aid agencies and development programs.
Reasons for this range from lack of financing at all levels of the value chain to the challenges posed by working with hundreds of suppliers and retailers spread across remote rural areas connected by poor infrastructure.
REACT grantee response: Nuru Energy
Nuru Energy is hoping to market a simple pedal charger for LED lights across East Africa. The business model only works if the company secures a lot of customers in multiple countries – the volume game. To cover that ground, Nuru is building a network of agent franchises. Customers pay agents and agents pay Nuru via mobile money, at which point Nuru unlocks the technology for use remotely, and the agent charges his customer’s light.
REACT grantee response: M-KOPA
This Kenyan company that offers innovative pay-as-you-go financing solutions for small solar systems to low-income consumers has also come up with a promising answer to the distribution challenge. M-KOPA offers financing through Safaricom’s M-Pesa mobile money system, and also uses Safaricom retail centres across Kenya to market the service. This model of piggybacking on an existing company’s distribution network is an effective way of penetrating the vast rural market – especially though telecoms networks, which have reached more rural Africans than almost any other business.
4. Small-scale Independent Power Projects and Mini-Grids
The problem: Arbitrary feed-in-tariffs, lack of available bank financing, and limited local supply chains and expertise have resulted in very few small (10 MW or less) independent renewable power projects in Africa. However, Africa harbours huge untapped potential for many small-scale projects to turn agricultural waste and renewable resources such as hydropower into electricity in rural areas.
These kinds of projects are well-placed to feed into isolated mini-grids for rural communities, while at the same time powering commercial agricultural estates or feeding the national grid.
REACT grantee response: Big business
REACT grantee, Teita Estate, is establishing a small power production project using biomass waste from its commercial agricultural estate in Kenya. Teita is a large, established company engaging in power production as a strategic complement to its business. They are therefore expecting to secure financing from their commercial bank, with whom they have an established relationship.
Another grantee has had similar success: EA-Power, a start-up clean energy company in Tanzania, is now in final negotiations to secure commercial financing and recently signed a power purchase agreement thanks to its strong financial and managerial capacity. In this case, REACT support was instrumental in bringing commercial finance on board. Backed by big business acumen, these grantees have also had some success negotiating more favourable feed-in-tariffs with the government, which may lead to a better market position for other small IPPs.
A few of these projects are feeding power into rural mini-grids. However, this element of the project is largely socially driven. It is not yet clear whether rural consumers will indeed pay for this power supply in order to make the mini-grid venture commercially viable in its own right. REACT grantees hope to answer this question.
What innovative business models have you come across that bring renewable energy access to rural consumers?
About Rachel KeelerRachel manages impact and innovation matters for the IDAS Africa team. This includes capturing the impact of IDAS programmes, as well as researching best practice, industry innovations and development trends to keep IDAS at the cutting edge of development practice in emerging markets. Rachel has extensive experience in research and analysis of business, finance, investment and private sector-led development in sub-Saharan Africa with a focus on East Africa. She has an academic research background at the graduate level in international political economy and African development. Her analytical and research background also includes international journalism and business analysis. Her skills include quantitative and qualitative research, writing, editing and online publishing. Work experience includes independent consulting for various clients including the International Finance Corporation (IFC), Africa Investor, and the MENA Private Equity Association, as well as stints with the Financial Times and the US State Department, among others.
agriculture, biomass, business models, carbon credits, carbon revenue, climate change, commercial financing, distribution chains, distribution network, financing, financing solutions, fuel alternatives, grant funding, industrial operations, innovative business models, Kenya, low-income market, M-KOPA, micro-finance institutions, mobile money, mobile phone technologies, Nairobi, pay-as-you-go, REACT, renewable energy, renewable resources, rural Africa, rural communities, rural consumers, rural market, supply chains, sustainable technologies, Tanzania, telecoms, Uganda, World Economic Forum