It has brought solar-powered lighting, phone charging, television and radio to many rural populations for the first time. But the Covid-19 pandemic has created challenges for service providers and their customers alike that threaten the long-term viability of this key sector.
Sales and technical staff at service providers have been unable to travel freely, supply chains have been disrupted, hard-up existing customers are struggling to balance the cost of pay-as-you-go solar payments with other outgoings.
At the same time, potential customers are deferring the purchase of solar panels and associated equipment packages until they are more confident about their future income.
“We're continuing to trade and we're continuing to grow our business, but whereas we were expanding at 40% or 50% a year, we're now growing at a much smaller number than that,” Simon Bransfield-Garth, chief executive of Azuri Technologies, told Impact Investor.
His company sells solar-powered home systems on a commercial basis to customers in 12 countries in sub-Saharan Africa, primarily Kenya and Zambia.
“We expect that growth to return, but it may take some time to do so. Are we going to be in the current situation in two years’ time? Nobody really knows,” he says.
AfDB steps in with blended finance initiative
A prolonged slowdown in the growth of energy access in developing countries would be a huge setback for efforts to meet the United Nations Sustainable Development Goal 7, which is to ensure universal access to affordable, reliable and modern energy services by 2030.
Significant progress was being made before the pandemic. Some 770mn people still lacked access to electricity in 2019, three quarters of them in sub-Saharan Africa. But that figure was down from around 860mn in 2018, according to the International Energy Agency.
To try to maintain the momentum, international development organisations have come up with a series of support packages for the sector, one of the most substantial of which has just taken another step forward.
The African Development Bank (AfDB) said on August 14 it had reached financial close on financing agreements for a $20mn concessional investment from the AfDB-managed Sustainable Energy Fund for Africa (SEFA) for its Covid-19 Off-Grid Recovery Platform (CRP).
This five-year, $50mn blended finance initiative is intended to provide relief and recovery capital to energy access businesses, supporting them through and beyond the pandemic. The concessional loan agreements were signed with fund managers Lion’s Head Global Partners, Triple Jump, and Social Investment Managers and Advisors.
Concessionary finance ‘makes sense’
Financial support through concessional financing packages such as these are regarded as crucial if the off-grid sector is to navigate the crisis in a form that will enable it to return to pre-pandemic growth levels in future years.
“The danger is that, if this were purely left to market forces over an extended period of time, the infrastructure that has been built up in the market would shrink. Then it would take perhaps another five years to build that capacity back up again.
So, some sort of concessionary finance to help maintain existing capacity to make sure it's ready to go when the markets pick up again certainly makes sense,” says Bransfield-Garth.
Kat Harrison, who leads energy and impact work at 60 Decibels, a development data analysis organisation, notes that lay-offs among on-the-ground sales and support agents employed by the services companies would also be a blow to rural economies where jobs are at a premium. Azuri, which is not cutting staff at the moment, indirectly employs around 2,000 commissioned agents.
Reduced cash flow
Bransfield-Garth says the pandemic has affected Azuri’s operations in terms of restrictions on movement of people, notably the sales agents, and interruptions to the supply chain.
But he says the biggest impact on the sector is the fallout from the economic travails experienced by developing countries as a result of the pandemic, which has led to rising unemployment and job insecurity, especially among the vulnerable communities most likely to be using off-grid products.
Kenya is a case in point, as the tourism industry on which the country relies for much of its foreign income and employment opportunities ground to a halt during the pandemic.
“We've definitely seen a tightening of available income within our customer base over the last 12 months,” Bransfield-Garth says. “There’s an increasing gap between the cash flow that we were expecting from customers and the cash flow we're actually getting in, while our outgoings have essentially remained the same.”
For many of Azuri’s household customers, their monthly payments for off-grid services may be among their largest items of expenditure.
Harrison at 60 Decibels says that while the pandemic has impacted the off-grid sector, this has yet to be as severe as some were predicting in mid-2020. She says this may be in part because poor households tend to value energy access over other items of expenditure, and may have cut other spending first if their incomes have been reduced.
However, she told Impact Investor the worst effects may be to come, as customers struggling to make payments on energy products finally run out of financial resources.
“A lot of people have been relying on savings, some were selling assets, or borrowing from friends and family, or taking out loans. But these are only short-term coping mechanisms, so there is some concern that people might be managing for now, but the longer-term impact remains to be seen,” she says.The service providers can help by agreeing to rescheduling customer payments, but only up to a point. “On the one hand, we’ve got to help our customers; on the other hand, we've got to continue to survive as a business and we have debt finance we must repay, so we need to balance the two sides. We're just trying to be as flexible as possible, in terms of their repayments,” says Azuri’s Bransfield-Garth.
A survey carried out in mid-2020 by 60 Decibels of more than 5,350 pay-as-you-go solar power users in six sub-Saharan African countries showed 44% of respondents had been offered some sort of support by their energy provider. Of that figure, 46% had used the support.
A similar picture exists for demand for off-grid energy products from potential new customers, who are thinking twice about signing up for long-term contracts, or may not be able to secure the credit needed to pay for these services.
On the other side of the equation, off-grid service providers are also wary of signing up new customers who may not be financially secure.
“In terms of new customers, we frankly have to be a little bit more cautious about who we provide systems to, because there's no point in giving a system to somebody who ultimately isn't going to be able to afford it,” says Bransfield-Garth.
He remains confident that the off-grid sector will bounce back to pre-pandemic growth rates given the huge market still to be tapped – around 570mn people are still without electricity in Africa alone – and the high rate of uptake prior to 2020.
Falling costs of supplies – panels and batteries typically get 15-20% cheaper every year – and improved equipment efficiency means that off-grid customers can expect “a more mains-like experience” in future.
“Our very first TV would run for five hours a night. Today, we’ve got a TV product that can run 24/7,” he says.