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Elizabeth Littlefield

Off-Grid Energy for Rural Communities: Bright Promise and Caution Lights Ahead

At the global climate change conference in Marrakech this week, big issues about the political winds and worries about the progress of climate finance will be high on the agenda. But one of the good news stories is happening just below the radar of the climate talks and that is the revolution in distributed, small-scale, off-grid clean energy.

Off-grid renewable energy for rural areas is booming. It has captured the attention and investment agendas of aid and development finance organizations along with the imagination of socially responsible investors and techno-optimists.

The off-grid energy sector is now proving itself to be commercially viable and scalable. The business models range from a solar home kits that provide a single panel that can produce enough power to power a light and a cell phone charger and a fan to larger biogas digesters that provide a network of poorer villages with power by extracting gas from agricultural waste.

The Overseas Private Investment Corporation (OPIC) is the U.S. government’s development finance institution. Since 2009, our off-grid energy portfolio across the developing world has grown to more than $140 million, bringing light to families and villages located far from their nation’s electricity grids.

For example, Greenlight Planet, an OPIC investee, makes affordable solar lighting and phone charging devices and is now expanding its network in Africa and Asia.

Furthermore, in Nigeria, an OPIC loan to a small company called Txtlight Power Solutions, doing business as Nova Lumos, is helping to finance the expansion of their solar rooftop business. Lumos’ solar home kits consist of a solar panel, battery, LED lights and a mobile phone charger and are small enough to be carried by foot or bicycle, are simple to install, and allow customers to buy solar-powered electricity on a lease-to-own basis. To date, Txtlight has successfully deployed over 20,000 systems to customers in Nigeria. With OPIC support, Lumos will be able to provide access to reliable electricity to some of the nearly 90 million Nigerians who are not connected to the electricity grid.

Our team is proud of the agency’s pioneering role, and excited about the road ahead. However, several sources of uncertainty are evident.

A technological revolution has brought an exciting profusion of clean energy devices into the market within a very short period of time. Between 2010 and 2015, investors poured more than $500 million into off-grid energy businesses, and nearly 89 million people currently use at least one solar off-grid lighting product in their homes.

Some of these products will prove to be reliable, efficient, durable, scalable and capable of garnering loyalty among end users and confidence among investors. However, many will fail, and we should view those failures as drivers of advancement and competition. So managing expectations will be key, and developing international quality standards for these new technologies will be a powerful means of concentrating efforts on the most promising models.

The finance and economics of energy provision is likewise undergoing a revolution. Massive, fossil-fueled grids operated by regulated utilities have balance sheets, time horizons and regulatory challenges that are far different than off-grid renewable projects. In the off-grid sector, entrepreneurs and governments are only beginning to experiment with business models and regulatory systems to govern them. The sector is mostly made of young companies struggling to find necessary equity capital to fuel their growth.

Fine-tuning a business model that is attractive to both equity and debt providers is difficult. Some companies earn revenue from equipment sales, or long-term leases. Others, from usage fees. . Still others take a franchise approach, expanding village by village. Each of these models has had some accomplishments and some setbacks, which means that lenders and investors are steadily honing in on the ingredients for success. Ultimately, this will create a strong foundation for commercial financing in the medium term.

The local regulatory contexts in which these companies are seeking to thrive will be highly consequential, too.

Each developing nation has a unique profile of energy endowments, infrastructure and needs. The major fluctuations that the world has witnessed in demand, supply and prices of oil, coal and gas in recent years will undoubtedly affect the future of off-grid renewable energy supply. Rural populations in some nations, for example, are still heavily reliant on diesel generators for electricity. The market for diesel generators in Africa is estimated to be an astonishing 60gw installed per annum. Despite the current low fossil fuel prices, many governments continue to subsidize diesel (directly or indirectly) which will undermine the growth of their off-grid energy markets. Fossil fuel subsidies worldwide are estimated to be between $500 billion and $650 billion annually. Subsidies for renewable energy are estimated to be one quarter of that. Put simply, off-grid technology now has enough momentum to get one step ahead of the fossil-fuel world, but it is not free of its shadow.

Finally, it is worth recalling that the business of power (electricity) is deeply intertwined with the business of power (politics). The electrical grids of poorer nations are legacy assets that -- at least at the edge of the existing electrical grid where power supply can be unreliable -- may soon find their monopoly threatened by these new and sometimes more reliable off-grid alternatives. Established fossil fuel-based companies and government agencies may stand by idly in the face of gradual obsolescence. Backlashes will come.

OPIC will continue to support off-grid renewable energy companies in the developing world. With a conservative balance sheet, expert staff and mandate to take a long-term perspective, the agency is uniquely qualified to survive the ups and downs ahead. It is crucial that we do so. There are still 1.2 billion people across the globe who have no access to the power grid, and millions more with unreliable power. We can bring them clean, affordable, reliable power and light, and we will.

 

Elizabeth L. Littlefield is President and CEO of the Overseas Private Investment Corporation (OPIC), the development finance institution of the U.S. Government.

 

Source: https://blogs.state.gov/stories/2016/11/18/grid-energy-rural-communities-bright-promise-and-caution-lights-ahead