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Innovative financing is crucial to the future of energy in Africa

May 17, 2016
Challenge: Extended. How do you scale access to power in Africa? Power Africa is taking an innovative approach, drawing on USAID's Development Credit Authority's risk sharing mechanism to bring commercial debt to the sector. Two out of three people in sub-Saharan Africa live without access to electricity. While some of these people will be connected to the electricity grid in the future, they may face a long wait as the infrastructure build-out across the region struggles to keep up with population growth. One of the greatest hurdles to providing reliable electricity access in Africa is the availability of financing, specifically debt. Power Africa uses an innovative transaction-focused model to galvanize collaboration, engage in critical actions to accelerate deals and projects, and drive systemic reforms to facilitate future investment. As part of the initiative, USAID's Development Credit Authority (DCA) works to bring commercial debt to the sector by providing guarantees for lenders. While typically used for grid-scale generation projects, this past year, Power Africa drew upon DCA to implement four new guarantees to help bridge the significant gap in access to financing. This work is expected to support new grid and off-grid connections, bringing energy access to hundreds of thousands of customers. The first area of focus is to unlock debt capital for off-grid and small-scale energy solutions on the African continent, especially for those customers that are far from the electric grid. Sustainable, private sector-led business models for off-grid and small-scale energy solutions from companies such as Off-Grid: Electric, Mobisol and M-KOPA are beginning to succeed in the marketplace and meet the demand of sub-Saharan Africa's underserved populations - bolstered by decreasing costs of technology and innovative "pay as you go" financing options. However, funding for this type of business is mostly provided through grants, angel investors or subsidized money from development finance institutions. While this approach has worked to pilot these solutions, there is a need for debt financing for companies that are ready to graduate from grants and concessional funding to more sustainable, longer-term commercial debt. To reach the 600 million people in sub-Saharan Africa without access to energy, these businesses must be able to scale-up across the continent. To achieve this goal, two of the four DCA guarantees will mobilize more than $80 million in financing to support companies providing small-scale renewable energy solutions to reach those who live beyond the grid. These companies, many of them Power Africa partners, most often provide solar home systems enabling customers to access services such as lighting, cell-phone charging, electric fans, and even television and refrigeration, at an affordable cost. These guarantees will support debt finance to the beyond the grid renewable energy sector, including the end users, to increase the uptake of these technologies and meet these companies' large working capital needs. The other two DCA guarantees, mobilizing more than $60 million, support a second area of focus: financing new connections to existing grids. While many people live within sight of the electric grid, extending or building additional lines is costly for the utilities, which can also make the connection fee too high for customers. These two guarantees will support the financing needed to make the connections as well as upgrade the existing grids to provide even more new connections in the future. These four Power Africa-DCA guarantees are a key tool for expanding energy access and demonstrate how USAID is responding to market demand. For the energy providers themselves, successful use of the financing provided through the guarantees will help them build up credit histories to continue to access commercial debt without the support of a guarantee.
Over time, the success of these guarantees will also be a signal to local banks and commercial lenders that this sector is ready for investment. Challenge: Accepted. Power Africa and DCA will continue to work together to share risk with financial institutions operating across the continent to sustainably mobilize debt financing to the energy sector. _________________________________________________________________ About the Author Claire Everhart is Presidential Management Fellow with USAID's Development Credit Authority (DCA). DCA is USAID's credit guarantee
program and
provides partial credit guarantees that unlock private sector lending in Africa. For the past fiscal year, USAID's DCA portfolio in Africa grew by 23%, marking the largest amount of financing that's ever been made available to African businesses through DCA.

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