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As global energy systems evolve to be smarter, cleaner, and more consumer-centric, sub-Saharan Africa has a unique opportunity to build the power grid of the future, while also connecting more than 600 million people to electricity for the first time.
Achieving these objectives, according to the International Energy Agency (IEA), will depend largely on renewable, reliable, and modular community-based power plants and distribution systems called mini-grids.
It will also require commitment from both the private sector and the public sector. The private sector will need to bring innovation, efficiency, relentless emphasis on customer service, and private capital.
The public sector will need to provide regulatory space for private companies to operate, and appropriate incentives to support the sector and to ensure that lower-income rural consumers don’t pay more for power than their wealthier urban counterparts.
But what is an “appropriate incentive”? The Africa Mini-grid Developers Association (AMDA), a newly launched industry group working to build a modern African grid from the “outside in” through public-private collaboration, has concluded that the right structure requires keeping government support simple, and focused on results.
To achieve maximum impact, the public sector’s support for private utilities in Africa should come through a simple mechanism called Results Based Financing (RBF).
RBF makes a fixed amount of funding available to companies for every customer connected to high-quality power. The amount of funding per connection can be easily benchmarked against subsidies that the public utility in a given country receives through large-scale donor programs (like the Last Mile Connectivity Program in Kenya, for example, which provides a subsidy of several hundred dollars to the public utility per connection).
RBF programs for energy access have been tried in Africa, but so far they have failed to achieve their full potential due to excessive complexity and red tape.
Complex, high-touch approaches will not enable the private utility sector to quickly scale to address energy poverty - an unnecessary and solvable challenge.
For an RBF program to work, it must be truly “results based”. In other words, if companies deliver, they should receive funding commensurate with the impact they have delivered - full stop.
The private sector believes that all future RBF programs should have the following key differentiators:
Simple: fixed amount per connection; disbursement upon successful connection
Measurable: easy-to-verify completed connections
Africa-wide: as similar as possible across countries
Repeatable: not one-off, but structured to drive results long-term
Timely: simplicity will lead to rapidly achieving results
The private sector doesn’t need or want special treatment. The mini-grid companies working to solve energy access in Africa are merely asking for parity in funding with national utilities, which currently enjoy the benefits of significant public subsidy. The private sector is asking for a level playing field so that it can unleash its innovation and dynamism.
By breathing oxygen into the private utility sector, African governments and donors will maximize the chances for Africa to leapfrog today’s grid (which still largely relies on technology and business models from last century), and quickly develop the energy system of the 21st century instead.
Private utility companies will be a critical vector for that transition, as they bring innovation and technology into the market. At the same time, enabling private utilities to grow will reduce costs for all stakeholders, drive up the quality of service offered to consumers, and unlock significant additional debt financing for the sector.
The key to all of this progress will be a smart Results Based Financing approach from governments and donors. If business as usual continues, predictions are that the number of unelectrified in Africa will actually increase by 2030.
However, if RBF programs can be smartly deployed, the private sector stands ready to help build the grid of the future in Africa while delivering power for all.
Olusegun Odunaiya is CEO of Havenhill Synergy, and Sam Slaughter is CEO of PowerGen Renewable Energy, both private utilities building mini-grids in Africa. To learn more, visit www.africamda.org