The European Commission (EC) has announced draft plans to fund the provision of sustainable energy services to 500 million people by 2030, including details of its new Electrification Financing Initiative, or ElectriFI. From early 2015, this will provide early stage development risk capital in the form of convertible grants, which will later turn into subordinated debt. This fund will have an initial allocation of EUR 75 million, part of a wider plan to allocate more than EUR 3 billion worth of grants over 7 years. These funds will be allocated to projects in 30 countries around the world, which have chosen energy as a key focus for their national development goals.

“This is just the start,” Roberto Ridolfi of the EC’s EuropeAid directorate said at a stakeholder event in late September, adding that the EC hopes to help leverage investments between EUR 15-30 billion in loans and equity. ElectriFI is largely aimed at Sub–Saharan Africa, but not exclusively. Ridolfi said that it is not as difficult for developers to find finance for big projects such as large hydropower projects as it is for relatively smaller projects in rural areas where there is no grid connection. 1.3 billion people around the world lack any access to electricity, which is why the United Nations (UN) and many other institutions have been busy supporting “energy access” initiatives to bring modern energy services to those who don’t have any.

IRENA supports “transformative idea”

Adnan Amin, Director General at the International Renewable Energy Agency (IRENA), welcomed the proposals. “75 million won’t change the world overnight but it could create a transformative idea of how to use financing to reduce risks,” he said. The EC already assists larger projects through blending facilities in conjunction with the European Investment Bank (EIB) and other lending institutions, but the blending system does not work as well for energy access projects.

The traditional way the EC has dealt with smaller scale energy access projects is through “call for proposals”. This has worked for non profit organisation– led projects which have benefited from grants to promote clean energy access and poverty reduction. However, in order to meet both climate change and energy access goals, observers say far more needs to be done, and on a larger scale. EC officials hope ElectriFI will bring together the non profit community with the private sector and the finance world to scale up projects that so far have been in a pilot phase, turning them into something that can reach millions of people.

Large banks prefer IPP model

There are already a number of entrepreneurs and small companies currently working on offgrid or minigrid electricity solutions, which are often the best option for bringing electricity to rural areas far from the grid. According to Marc Buiting of Dutch development bank FMO, not all of these entrepreneurs have business models suitable for reaching a larger scale of investment, or they may simply not be adaptable to the needs of large international banks.

Large banks are used to one basic model, according to Buiting: the independent power producer (IPP) model originating from the US and exported globally, with 40 % equity, 60 % debt. They like to see one borrower, one off-taker, one guarantor, and a syndicate. “Every banker has this model in mind…and the solutions we are looking for should be as similar to this as possible,” he said.

In Africa fewer than 30 projects of this kind of IPP model have been developed, and most concentrated in a handful of countries. Yet, according to Buiting, there is currently a strong momentum for private sector investment in African renewables, with the lower cost of clean energy technologies being one factor. In addition, another factor is that more long term funding is becoming available for clean energy in developing countries, as development finance institutions are mandated by their governments to “green” their investments.

Successful efforts in South Africa have also helped attract interest in African renewable energy potentials. The country has embarked on a large scale renewable electricity program, aiming to reach 3,725MW by 2016. This has attracted developers from richer countries seeking new markets while government support was being reduced back home.

ARE welcomes ElectriFI

The Alliance for Rural Electrification, an international business association representing the decentralized energy sector in developing and emerging countries, welcomed the EC proposal for a new funding mechanism. “ElectriFI will strengthen the strong engagement of the private sector to make universal access to clean energy a reality by facilitating and thus multiplying small and medium scale private investments and operations in sustainable energy projects,” said Marcus Wiemann, ARE Secretary General. Yet one academic study commissioned by ARE questioned whether risks for investors are still too high and profits too low because of expectations by end use customers over the level of tariffs.

Other observers are worried that ElectriFI proposals – as outlined so far – may be workable for large European businesses wanting to invest in Africa, but not as realistic for Small and Medium–sized Enterprises (SMEs) from Europe and the developing world. The EC has suggested that SMEs in target countries could team up either with European companies or other local entrepreneurs, in order to bundle smaller projects together.

Others stressed that rural electrification in Europe and US have been historically driven by the public sector. “We believe there needs to be a strong [role for the]public sector in Africa too,” said Christian de Gromard, energy expert at the Agence Française pour le Développement (AFD). Gromard highlighted how Morocco has recently achieved impressive growth in electrification rates, moving from 20 % to 95 % in 12 years. For this effort, AFD provided soft loans, and other loans were provided by Germany’s development bank KfW and others, and a large part of the effort was public sector led, he said.

Yet most observers recognize that this type of public sector–led project won’t be feasible in all countries, so new and innovative financing mechanisms are urgently needed to achieve a boost in clean energy investment and rural electrification. Kandeh Yumkella, CEO of the UN’s Sustainable Energy for All initiative, praised the content and timing of the EC proposal. But he also stressed importance of capacity building for African energy entrepreneurs.

According to Ridolfi, the European Union and the US – thanks to financial commitments they have made so far – can reduce energy poverty by 50 % by 2030. He added that a major event is planned in Gujarat in January to accelerate investment in renewables and storage to ensure energy access is also provided to 300 million people in India. In parallel, the EC is also putting some efforts into exploring feasibility of European–wide crowdfunding platforms – aimed at the general public – which it hopes may play a part in supporting ElectriFI and related initiatives.

IEA projects huge growth in African renewables

Power generation capacity in Africa is projected to quadruple to 385 GW by 2040, with half of this growth in the form of renewable sources, the International Energy Agency (IEA) said in mid October, as it launched its Africa Energy Outlook special report in London. The projected share of power from renewables in the electricity sector could increase from today’s 23 % (mostly large hydro) to 40 % by 2040. Solar power, wind and geothermal could account for a third of the growth.

The IEA said this is the most comprehensive analytical study it has carried out to date on African energy and added this is “one of the most poorly understood part of the global energy system”. The report highlights renewable energy resources of Africa as key to meeting demand growth, including hydro in many countries, wind energy mainly in coastal areas and geothermal in the east African Rift. “Almost all this potential is currently untapped,” said chief economist Fatih Birol.

Growth in electricity generation is seen as crucial for the continent’s economic growth and also to tackle the lack of electricity for some 620 million people in Sub–Saharan Africa. For those that do have electricity access there, average residential electricity consumption per capita is currently around half the average level of China and a fifth of that in Europe.

Solar technologies have so far played a limited role in Africa. With most of the continent enjoying an average of more than 320 days of bright sunlight per year and irradiance levels of almost 2000 kWh per square meter annually (for comparison: twice that of Germany) – the potential is obviously high. However, the average cost of generating electricity from photovoltaics in sub–Saharan Africa currently exceeds $175 per MWh, above the cost of other grid technologies. In some cases these costs can be lower, as demonstrated in recent bids in South Africa’s IPP procurement programme, according to the IEA. In addition, photovoltaics become far much more competitive in offgrid or mini grid applications, where the main alternative are diesel generators, according to the report. For rural electrification – reaching populations too far away from the grid – key technologies would be photovoltaics, geothermal, mini hydro and microgrids, Birol said.

Geothermal in the east African Rift Valley is what the IEA dubbed “one of the most exciting prospects in the world”. This sector is currently competitive with fossil fuels, and with total potential between 10–15 GW, which could provide large amounts of base-load power to the continent. Wind power has so far been very limited compared to hydropower, with only 190 MW in the whole of Sub–Saharan Africa, whereas its potential is estimated at around 1,300 GW which would produce several times the current level of total African electricity consumption.

The IEA report recommends that a “sound policy and regulatory environment” is essential for the large scale development of renewable energy sources, particularly in the electricity sector.

As for smaller, offgrid projects, the IEA says they have the “potential to sidestep institutional weaknesses” but the hurdles there are the poor access to finance and to replacement and maintenance services.

Germana Canzi