Powering a Connected Economy
In December, 2020, the United Nations Capital Development Fund (UNCDF) in partnership with the Singapore FinTech Festival organized a series of discussions entitled ‘Building Inclusive Economies in the Digital Era’.
One of the sessions – ‘Powering a Connected Economy – was moderated by UNCDF’s Inclusive Digital Financial Services Consultant – Ronald Rwakigumba, on 8th December.
This session comprised a panel of industry leaders comprised of Gillian-Alexandre Huart (CEO, Engie Energy Access); Martin Baart (CEO, Ecoligo); Vijay Modi (Professor of Mechanical Engineering, Columbia University), and Peter Mwesiga (Strategic Projects Manager, UMEME).
In this read, we document some of the insights discussed by the panel on quite a nuanced topic.
Not all Markets are Equal
Universal access to electricity is core to building a connected economy. However, more than a billion people are without electricity, and many more have only marginal and unreliable access. At the same time, the innovations borne out of connected economies are enablers for universal electrification, especially digital solutions that allow distributed systems in electricity production, distribution, and financing. Therefore, how are market players leveraging the symbiotic relationship between mobile connectivity, decentralized electricity, and financing technologies to build a robust, climate resilient, and inclusive connected economy? What more can be done?
The session was inspired to promote a connected economy that is inclusive; inclusivity meaning universal access for all. Discussions started with highlighting key trends and status toward achieving the goal of a more inclusive connected economy. As Vijay Modi noted, “the last decade has seen significant progress towards closing the energy access gap following various initiatives such as UN efforts like Sustainable Energy for All for continuous progress in reducing households without energy access.”
While it’s common to refer to markets and geographies across Africa, Asia and the Pacific in a homogeneous way when referring to energy access, Vijay cautions that it is important to be cognizant of the unique characteristics of various markets. For instance, sub-Saharan Africa is a large region with many diverse countries, with significant differences from country to country in terms of structure of economy, dependence on agriculture, domestic export led growth, settlement pattern, port access/landlocked, and cost structure associated with renewable energy assets.
Key Trends in Universal Access to Electricty
1. Growth of renewables. It is expected that renewables will continue to play a key role in the next decade including scale-up of solar as the cost of solar panels reduces further. What will be interesting to observe closely is the pattern of consumption. Learning from previous experiences in East Africa, consumption in a year or two was observed to be quite low despite the rapid progress in connecting the population to the grid. Therefore, in certain instances, despite being under the grid for customers under the distribution network or those that can be served by the grid, consumption can be low. In addition to unreliable or inconsistent grid power, this low consumption under the grid can be attributed to imbalance between access and demand, especially in new access areas that have limited consumption/demand and thus require demand stimulation initiatives. As Vijay highlights, it is important to understand the difference in both technology and market that can be leveraged to promote utilization. Similarly, Gillian-Alexandre Huart noted that it is estimated that by 2030, 60 percent of new access to electricity in the world will come from renewables, half of which will come from off-grid solutions.
2. Cost reduction and energy efficiency. The gap in cost of energy in sub-Saharan Africa is gradually closing with game changing renewables like solar. Take for instance in Ethiopia where a deal was recently signed for 2.56 cents kilowatt per hour for utility scale (a kilowatt hour is a unit of measurement that equals the amount of energy you would use if you kept a 1,000 watt appliance running for an hour) which is 1 cent more in markets like the middle east, where cost of capital, currency convertibility and supply chain was very good. As Vijay observes, “The gap is getting closed between what these differences used to be five years ago, that is, 5 – 10 cents at utility scale”. Gillian sees this decrease in the price of photovoltaic, and storage as being significant in such a way that ‘decrease in cost will be matched by more affordable solutions’. This is in addition to benefits from energy efficiency which, thanks to innovations, makes it possible to power multiple appliances, ranging from basic lighting to other use cases such as in agriculture for irrigation, small businesses like barber shops, and productive industrial usage, with limited amount of energy.
3. Ubiquitous Digital Technologies. GSMA projects that unique mobile subscriptions in sub-Saharan Africa will increase from 477 million (2019) to 614 million customers by 2025 with connected smartphones reaching 65 percent in 2025 from 44 percent in 2019. As mobile tele-density and smart phone access increases, mobile internet usage will also grow to 475 million users from 272 million in 2019. With this trend, energy access is bound to benefit as energy providers are able to access remote areas to provide both delivery and financing solutions using mobile technologies, like pay-as-you-go, making the technologies affordable. From an energy provider perspective, digital technology infrastructure comes with various opportunities which, as Gillian mentions, “facilitates innovation and new product penetration on the market with Internet of Things (IoT), Smart Meters making it possible to monitor and maintain equipment remotely providing better service to the end customer.”
In Uganda, the large utility provider – Umeme also identified opportunities emanating from digital technologies like providing better services while bolstering the profitability position of the company. “Digital solutions have enabled cashless payments such as use of mobile money which enables customers to make payments at their convenience. This has reduced cost of travel, for customers, and decongested offices”, notes Peter Mwesiga. This was ever more important with COVID-19 pandemic impacts. It was easier to facilitate remote revenue collection and service provision, complaints logging and resolution during lockdowns, initiatives that have improved efficiency and timely service delivery. Complaints have been managed remotely, with positive impact on revenue collection, compared to where the utility would have found itself without cashless and prepayment systems. The utility provider looks to deepen digital services to include online self-service solutions, and digital documentation, not only for efficiency, but also to reduce operational budget while improving quality of service with new points of service for the customers.
While customers may use digital technology, energy service providers too have various applications as well. Take for instance Engie that uses these technologies at different stages of project and interaction with customers, from GIS satellite imaging to informing preselection and design of the network of the minigrid, and technical action on assets remote monitoring to serve customers better. Gillian shares the example on “being able to remotely identify dirt on solar photovoltaic or less optimal charging fosters predictive maintenance to anticipate changing part of the equipment to have better customer experience”. Peter also observes that technology and data “give new opportunities and new areas for optimization and if we can optimize existing resources then we have more resource to extend access” and create win-wins for both providers and customers.
4. Innovative Financing Solutions. As the cost of technology continues to sink, there is increased learning about off-grid areas and how to connect them, hence clarity on this side of the market. Knowing this side of the market brings the question which many like Martin Baart ask; “how do we finance the energy deployments?” Traditional investors who provide either equity of debt to large scale projects are afraid to change their way of operation and focus on small decentralized renewable energy systems. If we are to achieve universal electrification while staying within the Paris Climate goals, “we have to find new ways on how to channel much more capital than we used to into these projects” suggests Martin. This is where innovative financing mechanisms play major roles on the dual goals of saving the planet while helping communities to get electrified.
Crowd Funding is one of the ways to channel unused capital into these projects. Take the example of Germany where over Euros 2.5 trillion are sitting on bank accounts without being used. “That’s a lot considering this is just Germany” observes Martin. He elaborates further on how “we have to find ways to convince private individuals to invest their capital into sustainable projects that give them a financial return and also serve a greater purpose of reducing effects of climate change, help developing/emerging markets to speed up electrification and let the communities, companies and private people in these markets enjoy benefits that come with having access to electricity.”
Elements for Scale-up
Various conditions or settings shape and could contribute to fast tracking closing of the energy access gaps.
I. Contrary to some misconceptions about last mile or rural customers at the bottom of the pyramid stealing electricity and not creditworthy, experience in last mile deployments, show that rural customers are creditworthy. A decade ago, when a Columbia University Shared Solar minigrid project in Mali and Uganda was deployed, Vijay informs us that using digital technologies entities, they were able to go directly to the customer and leverage the credit worthiness of the customer. He also notes that “If digital can leverage the credit worthiness for the customer, this can in turn create credit worthiness for the service provider.” Appropriate product -customer matching being important for Engie, Gillian posits on the importance of “being able to size the solution in such a way that customers get appropriate solutions dedicated and customized”
II. It is important to boost the financial position of energy providers to catalyze the whole chain of investments needed to ensure reliability of service, and sustainability of business models to allow more investments to come in with low cost of capital. It is also observed that in addition to rural customers being unable to pay high amounts, their income can be variable over time such as in seasonal agricultural activities, which could inform electrification models informed by digital solutions and data analysis. This is self-evident that it is important to understand the customer’s needs, income, growth drivers, and credit constraints at scale. Vijay recollects that the use of digital payment solutions enabled to “create transparent, accountable, small payments which was key not just for consumer but also for the operator”.
III. Identifying where customers are located and what their energy needs are, along with any other constraints is important to the success of providers. To better understand the customers and market context, UNCDF, Columbia University, Government of Uganda, and service providers are partnering to conduct a survey to map where the current Uganda energy market is and where the market is likely to grow for productive use. This is another example of how technology and big data facilitate energy access.
IV. Insights into successful financing campaign. As Martin explains “similar to how there are different types of energy access configurations like standalone home systems, utility grid, and minigrids, there are also different types of investors. We have large institutional banks, investors that traditionally invest in large scale projects, and investors that have different motivations that want to invest in smaller projects.” It is important therefore to try to understand which investors can invest in certain projects, and appreciate their motivation; “what drives them?” adds Martin. He further suggests ways to convince them, that is, trust building process; “They have to be trusting and trust comes through credibility”. To raise capital successfully, it is thus important to be the expert in the field and focus on that specific niche – this helps the project developer to be credible.
V. Diversified market implications. Just as Vijay noted, the markets are nuanced with intrinsic characteristics, so are the energy access interventions such as solar home systems, minigrids, and National Grid (main grid) – a strength of Engie that “looks at the market in an integrated way by addressing different market segments and needs” adds Gillian as he goes on to explore the various attributes for each market. Solar home systems, being at the lower end of consumption and aided by technology and innovation is, for instance, starting to have maturity and entering into small businesses like barber shops and restaurants. Gillian further expounds how minigrids, which focus on productive usages to create economic growth by delivering energy services, are long term with high Capex with regulatory implication and relationships. “While minigrids are relatively young market, they show promise” observes Gillian. Not least, the national grid helps with rural electrification by helping extend the national grid, support the grid, and grow under the grid services which fosters reliability and availability of the grid.
VI. Realizing that extending only by grid can not be expensive with high capex but also slow, national utility providers like Umeme are cognizant of new emerging technologies. In fact, as Peter notes “Umeme is exploring partnerships with various players including home appliance companies, and minigrid companies so as to find progressive innovative ways on how decentralized systems can collaborate with main grid (Utilities 2.0)”. This exploration of partnerships helps take advantage of strategic advantages that are typical of centralized systems such as established structure, standardized quality requirements, and expended research in metering technologies to manage commercial and distribution losses. It’s important that the partnerships are longsighted, and intentioned to fast track interoperability of systems and full utilization of off-grid built infrastructure. With national grid and minigrid collaboration in early stage planning, interconnection is made possible with existing minigrid investments put to use through integration when “main grid arrives to minimize dormant investments, avoiding wastage while allowing appliance financing and customers to grow from the beginning” explains Peter.