What’s Holding Back Pay-As-You-Go Market In African Off-Grid Solar?

What’s Holding Back Pay-As-You-Go Market In African Off-Grid Solar?

While the world electrification rate is roughly 84 percent, only 19 percent of the sub-Sahara Africa population is connected.

Failure to provide basic access to power is partly attributable to an underdeveloped and ill-maintained distribution infrastructure, as well as corruption.

Despite U.S. President Barack Obama’s Power Africa strategy falling short of its goal of 30,000 megawatts of new and clean power generation, African alternative energy initiatives are lighting up the continent.

From Global Risk Insights. Story by  by Constance Hubert.

Power Africa: Mixed results and an uncertain future

Aimed at enabling access to electricity by adding 60 million new electricity connections in sub-Saharan Africa, “Power Africa” was launched in 2013 by President Obama in partnership with both governmental and private sector African stakeholders. The $9.7 billion plan, however, fell short of its goal to double electricity access on a continent where two out of three people currently lack access.

Despite an inspirational launch speech in which President Obama promised the program would “bring light where currently there is darkness,” progress has stalled for a number of reasons including lack of infrastructure and corruption. As Power Africa has delivered less than 5 percent of new power generation in the past three years, the pace of institutional reforms is slowing down and President Obama’s ambitious pledge to ramp up electricity to 30,000 mw by 2030 is far from being met.

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The inauguration of Donald Trump as president of the U.S. is likely to add to the uncertain lingering on the future of Power Africa, as he predicted “every penny of the $7 billion going to Africa,” the original budget allocated to President Obama’s program, “will be stolen – corruption is rampant!” Despite Mr. Trump’s full-throated campaign rhetoric and stated hostility for trade agreements, it is too soon to worry about a dramatic turn in U.S. policy toward Africa, especially since it has benefited from bipartisan support from Congress throughout the past three administrations.

From mobile phones to sustainable energy

Demand for energy by households is growing fast, outpacing infrastructure change and public policies aimed at addressing the power challenge. If the grid is unlikely to expand fast enough to satisfy this demand, pioneering business models relying on pay-as-you-go (PAYG) payment models could push off-grid solar energy to reach 9 million households across Africa by 2020.

The pay-as-you-go business model has been attracting new investments and entrepreneurs for the past decade, especially since the cell phone ownership surge in Africa, a more than tenfold increase since 2002. Sub-Saharan Africa, the global epicenter for mobile money as a driver of financial inclusion, is a fertile ground for innovative solutions to the energy challenge, both in terms of distribution and sustainability. The “new and cleaner” power generation evoked by President Obama is currently being developed off the grid, by pioneering pay-as-you-go start-ups such as M-Kopa, linked to the Kenyan mobile money transfer service M-Pesa, and used by 250,000 households as of September 2015.

Relying on solar panels and a high mobile penetration, these companies can reach rural areas, in which distribution is one of the biggest challenges to serving off-grid markets according to Off-Grid Electric. Centers of small-scale solar power are blossoming all over Africa, overcoming some of the challenges faced by large centralized projects.

Challenges ahead for a new deal on energy

Despite the early success of off-grid solar energy access through pay-as-you-go payment models, challenges remain likely to slow the growth of the industry. In its 2016 report on off-grid solar market trends, Bloomberg New Energy Finance highlights four potential weaknesses of the pay-as-you-go industry.

First, long lead times are unlikely to be cut because of administrative inertia and the need to adapt to local preferences.

Second, geographical differences.  These pose a daunting question since the difficulties of M-Pesa to export its model outside of Kenya.

Third, the demand for debt financing to fund pay-as-you-go businesses is a factor likely to slow the development of the industry in new markets.

Finally, the possibility of a failure of a pay-as-you-go startup would increase the perceived risk of investment, a scenario that is unlikely as most pay-as-you-go businesses currently remain small-scaled, but remains as a necessary consideration.

While keeping those risks in mind, the off-grid solar industry is currently dynamic and fast-paced with a high potential impact for growth. This was foreseen by the African Development Bank when they organized an innovation workshop aimed at exploring innovative solutions to accelerate market growth of the pay-as-you-go model.