Grants, patient capital unlock value for firms offering clean energy

When Lilian Chabuka started the Women Initiative for Delivering Clean Energy (WidEnergy) enterprise in 2016, more than 96 percent of Zambia’s rural population had no access to clean energy. And that was the foundation of her business.

Chabuka began selling small solar lanterns with the goal of helping rural populations shift to more sustainable and less health-hazardous forms of lighting.

But the Lusaka-based business wasn’t growing fast enough, making it hard to reach millions without access to sustainable energy. And no one was willing to give her additional capital to scale up.

Green Scene Energy, an Ethiopian company that provides household solar systems, faced similar challenges when it started in 2016. Their business developer, Amen Aniley, told The EastAfrican that not a single investor wanted to come on board as the “business didn’t seem as profitable”.

Many off-grid renewable energy projects on the continent struggle to scale or stay afloat as investors shy away due to the “high risk” associated with these kinds of enterprises.

Read: Energy sector seeks financing solutions tailored to Africa’s needs

But both WidEnergy and Green Scene are beneficiaries of a grant from the African Entreprise Challenge Fund (AECF), under the Renewable Energy and Adaptation to Climate Technologies – Household Solar (React) programme, which enabled them to expand and provide more people with clean energy sources.

Chabuka told The EastAfrican that the business was able to move from just selling solar lanterns on a cash basis to providing home solar systems – comprising three bulbs, a phone charging battery and a radio – to Zambians on credit.

“We were able to expand our staff from four to more than 600 and now we have reached a stage where investors are able to listen to us and we have been able to gain access to crowd funding,” she said.

However, many African startups in the renewable energy sector are not as lucky to win grants.

Removing the risk

Ricardo Pereira, head of the React programme, told The EastAfrican that many companies find it hard to get enough early-stage investments because their target populations are the poorest rural Africans who may not be able to pay for those services fast enough, making it risky to invest in those markets.

Read: Is it time for energy transition in Africa? That’s the question

“From a private sector perspective, no one wants to go where people live below $1 a day because they might not be able to pay. But these people need energy access as well, and that’s where we come in,” Pereira said.

The programme, executed in partnership with the UK’s Foreign, Commonwealth and Development Office (FCDO), disbursed £7.35 million ($9.4 million) to 17 companies across seven countries, to provide such off-grid solar solutions.

Of this 40 percent was a grant and 60 percent as interest-free loans.

About 167,220 households with around 836,000 people benefited from the investment, but these are a tiny fraction compared to the over 600 million people on the continent without access to clean energy. According to Pereira, by giving grants and patient capital or interest-free loans with a flexible repayment period to these companies, they prove to investors that the enterprises are sustainable and can be commercially viable.

“The grants are important because they give them the capital to try untested innovations and business models, after which a commercial investor can invest if once proven to work,” said Angela Muraguri, investment manager at Nairobi-based Kawi Safi Ventures, a venture capital firm for renewable energy companies.

“When you deploy patient capital to the private sector start-ups, you are also unlocking private sector capital to fund social development projects,” argued Victoria Sabula, AECF’s chief executive officer.

But while such grants prove that off-grid renewable energy sector projects on the continent are sustainable, foreign investors across the globe continue to invest everywhere but Africa.

Read: Leaders push for new global financing model that fits Africa

The United Nations Conference on Trade and Development (UNCTAD) has warned that prospects of realising the seventh sustainable development goal of universal access to clean and affordable energy may not be achieved in Africa by 2030.

In its latest World Investment Report, the agency decried low investments in the continent’s clean energy projects and other SDG sectors, leaving a gap of about $4 trillion every year, despite growing investments in similar sectors in other parts of the world.

“The growth of cross-border investment in the [renewable energy] sector has been strongest in the economies that are least dependent on it. In developing regions, it has barely outpaced overall FDI and GDP growth,” said Rebeca Grynspan, UNCTAD’s secretary-general.

“The task is now to channel those funds to where they are most needed to support the transition and to provide affordable access to electricity for all.”

Grynspan acknowledges that the main challenge with getting the necessary investments into the continent’s renewable energy projects is the high-risk level associated with the emerging markets.

“The cost of capital for investors is a major disincentive, which calls for more international de-risking support at the country level,” Grynspan said.