In late July PowerGen, a leading developer of on-grid and off-grid distributed solar energy, secured a $ 9mn long-term project construction financing connecting 55,000 people to electricity in rural Nigeria through a mini-grid.
PowerGen Renewable Energy is the leading developer in Africa of on-grid and off-grid distributed energy. Founded in 2011, the company has installed over 200 mini-grids or 16,000 connections across seven East African countries, providing electricity access to over 50,000 people.
Even though world leaders have committed to achieving universal energy access by 2030 under the UN Sustainable Development Goal 7, some 600 million Africans still don’t have electricity. In Nigeria, Africa’s largest economy, only one-quarter of people in rural areas have access to electricity.
Mini-grids, which are small power stations powering local low distribution grids, usually off-grid and serving rural settlements, have emerged as a powerful instrument to redress this imbalance. But investors have struggled on how to finance these networks.
Group of investors
The funding package from CrossBoundary Energy Access (CBEA), Africa’s first project financing facility for mini-grids, included construction financing provided by social impact investor Oikocredit and impact investor Triodos Investment Management (Triodos IM), both from the Netherlands, and the EU-funded Electrification Financing Initiative (EDFI ElectriFI).
For impact investors and financiers much of their recent focus has been about building viable funding mechanisms. The PowerGen deal in rural Nigeria provides a model of how such deals can get done in even the most difficult of circumstances.
“It’s really a shining example of how we can all operate remotely,” James Todd, Oikocredit’s Renewable Energy Investment Officer, told Impact Investor.
“Some people were in Nigeria, some in Kenya, others in London, the Netherlands, and the US. Through strong project management we were still able to orchestrate that process and have a clear oversight of what was needed to get the project done.”
Part of the financing structure is grant funding from the World Bank and the Nigeria Rural Electrification Agency’s Nigeria Electrification Project (NEP). They provide a fixed subsidy for each connected customer.
The electricity will be provided by 28 distributed renewable energy (DRE) systems, designed as solar power systems and battery-powered mini-grids.
The backers say this innovative financing structure, a first for mini-grids in Africa at this scale, is a model of how private capital can be brought into the sector.
Oikocredit, Triodos IM, and EDFI ElectriFI acted as the construction financiers for the transaction, providing $9mn of financing for the construction phase of the project.
Once operational CBEA will purchase the portfolio, becoming the long-term owner of the systems and providing the construction financiers with an exit.
Putting such an intricate and innovative deal structure together in the face of a pandemic was a challenge for Todd, who first started talking to PowerGen in April 2019.
“We were then really looking at ramping up the investment on a bilateral basis towards the end of that year,” he said. “However, Covid obviously moved a lot of the goalposts significantly.”
Time was of the essence. The World Bank PBG (performance-based grant) programme had just been announced and needed to be implemented.
PowerGen, having recognised the potential of the Nigerian market, were still determining how best to phase in their commitment, “and so we were initially looking to fund on a bilateral basis,” Todd said looking back.
Over the course of discussions over a couple of months the size of the project grew quite substantially, as PowerGen increased its appetite for Nigeria.
At that point Todd decided to bring in Triodos IM, which has built up in-depth knowledge throughout 25 years of impact investing in sectors such as energy, inclusive finance and sustainable food & agriculture.
“We had a positive experience of working with Triodos before on various infrastructure-related transactions and were confident of a continuation of this constructive collaboration given their cross-sector expertise,” Todd said.
Access to energy ‘basic human right’
What drove Todd forward was his realisation of how important this deal was, both to the Nigerian market and the communities involved.
“When I was in Nigeria at the beginning of 2020, just before Covid, driving nine or ten hours per day to rural settlements with little to no electricity access, it was clear that the infrastructure simply was not there to support access to clean and reliable electricity, which I regard as a basic human right,” he said.
The underlying economic activity in these villages in Nigeria is nonetheless vibrant. The pilot site, Rokota in Niger State in the middle of Nigeria, has around 450 to 500 dwellings and households.
“There was a dwelling there that had a hundred different types of phones being charged inside and then that was being run by a diesel generator. And people were cooking with traditional three-stone open fires which are very polluting,” Todd said.
A strong business case
As such, electricity provision via mini-grids for such communities has a clear business case as well as demonstrable environmental and social benefits.
Oikocredit and Triodos have a mandate to invest in mini-grids, with the latter proving a reputable name to bring in, able to attract the right type of attention and also follow-on financing possibilities.
“I was very pleased to have them on board, as the individuals that I'm working with have extensive experience both on the equity side, but also on the infrastructure and project finance side,” Todd said.
With the Covid-19 pandemic sweeping the planet, Oikocredit decided, however, to also bring on board ElectriFI, an EU-funded impact investment facility that invests in early-stage companies and projects in the access to the energy sector.
“ElectriFi is exactly the type of party that Oikocredit likes to work with,” said Todd. “The team that they have in charge of specific countries are diligent and incredibly knowledgeable of the respective operating environments as well as workable financial solutions from commercial, legal and regulatory perspectives.”
With experts dedicated to West Africa and Nigeria in particular, ElectriFI also knew the World Bank PBG programme very well. Having supported other local players, they were the ideal candidates to come in at relatively short notice and get up to speed quickly.
Presence on the ground
The ability to work remotely as investors doesn't negate the importance of on-the-ground presence. What really helped was that Triodos and Oikocredit were able to go on-site back in February 2020 and have a discussion with the World Bank in Nigeria, and conduct the due diligence.
The PowerGen deal could lay the basis for more innovative financing in the mini-grid sector. “We are now actively negotiating and closing deals in other countries across Sub-Saharan Africa with mini-grid developers,” Todd noted.
”We are targeting countries with a secure investing environment, stable macroeconomic outlook, and with a clear and transparent regulatory regime, and are optimistic of continuing to be a significant financier of the mini-grid space for years to come.”