More than one billion people do not have access to electricity. What will it take to get them connected?

This article is brought to you thanks to the strategic cooperation of The European Sting with the World Economic Forum.

Author: Peter LyonsCommunity Lead, Technology, Media, and Digital Industries, World Economic Forum & Frank RayalPartner, Xona Partners

The United Nations’ Sustainable Development Goal 7 centres around achieving access to affordable, reliable and sustainable modern energy for all by 2030. Currently, 1.2 billion people worldwide – one in every six people on the planet – do not have access to electricity. Based on a business-as-usual scenario, some 780 million people are projected to remain without it by 2030. A radical new approach is needed if this trajectory is to be remedied.

Milagros Rivas Saiz, Global Head of Cross Industry Advisory at International Finance Corporation, discusses what it will take to achieve SDG7, including some of the challenges companies are facing, and the one issue that must be solved quickly to increase off-grid energy access.

1) SDG 7 aims to ensure access to affordable, reliable, sustainable and modern energy for all. Do you believe that this can be achieved?

Absolutely. While I would be naïve to underestimate the challenge, let us not forget that universal electrification has been achieved in the vast majority of the world. While 1.1 billion people currently do not have access to modern energy services, it’s worth remembering that more than seven billion people do.

A significant portion of those connections were made in the past half a century. In fact, industrialized countries such as the US and UK were not fully electrified until the mid-1900s. China, Vietnam and Thailand have achieved astonishing rates of electrification in just the past few decades. So clearly, it’s possible.

2) We know that the countries with the biggest electrification gap are not delivering connections at the rates needed to be fully electrified by 2030. What will it take to move the needle faster?

In one word: decentralization. We simply cannot continue to push national grids in remote areas where the demand for electricity does not justify the investment, nor can the grid infrastructure itself, in many such places, handle the electrons that are supposed to pass through it. Last mile grid instability is a serious issue in many parts of the developing world.

As indicated by the International Energy Agency, probably as much as half of electrification will need to come from off-grid solutions. We have seen tremendous growth in access using rooftop solar home systems (SHS), which can be deployed in one day and can provide sufficient power for everything from a few lights and phone chargers to milling, grinding and refrigeration using highly efficient appliances.

Mini-grids will also need to be an important part of the end-game. They typically require significantly less capital to set up, compared to centralized power plants and associated distribution networks. Yet they can support productive loads critical for economic development, from pumping water to small-scale manufacturing. Although extension of current grids, particularly ‘densification’ in more populous areas that may lie just under the current grid, will still be key, it is unrealistic to suggest that the grid will get us to universal access by 2030.

3) With both the capabilities and finances of most utilities, notably in Africa, under pressure, how can private operators and investors be crowded in?

It’s all about risk – namely, identifying and addressing key issues along the value chain that hamper the private sector’s ability to enter and operate in markets. SHS players are already active across the continent. In Kenya, Tanzania and Uganda, most notably, rates of penetration are impressive. While it is true that many companies are picking lower-hanging fruits – i.e. customers in peri-urban areas – there is a huge amount of innovation in terms of developing distribution networks, payment solutions and credit rating technologies, that are enabling these businesses to thrive. But in less obvious markets, such as those with sparse populations or less advanced legal and regulatory frameworks, the private sector needs more help.

There are a few companies that are venturing further afield, capturing SHS opportunities in countries such as Ethiopia, Togo and Zambia. But in these cases, mechanisms have been put in place to reduce barriers to entry, be these reasonable financial incentives or connections with local players who can support the development of networks in deep rural areas to facilitate system installation and maintenance. And in the mini-grid space, it is clear that a more structured public-private partnership (PPP) approach is needed, as is the case with most infrastructure with natural monopolistic characteristics.

From the perspective of a development finance institution, such as IFC, PPPs can help extend services to populations that otherwise could not access them, either because they are too poor to purchase even the lowest amount of electricity services offered, or because they live in areas where the cost of doing business is so high that it is unviable for the private sector to serve them on a purely commercial basis. Well-designed PPPs can use smart public subsidies to close the “viability gap”, which is the difference between the return expectations of private sector developers and investors, and the revenues that can reasonably be expected from end-users, which in turn leverages commercial capital.

4) Which types of companies are you seeing as interested in the energy access space? Given the complexities of serving the market, what challenges do they face in doing so?

Broadly speaking, there are three types of distributed energy services company (DESCO): smaller local enterprises, “international start-ups”, and larger corporates.

Local enterprises tend to have deep market knowledge and can typically serve customers in rural areas well. Often, they’re active in other related business areas, such as LPG distribution or even agri-processing. But they often struggle to access sufficient financing. Many also lack the strong back-office and customer management skills necessary to reach meaningful scale.

International start-ups have generally dominated the headlines. Many have brought fresh thinking around business models, particularly in East Africa, where the market for SHS is on a pay-as-you-go basis, because of the prevalence of mobile money. But we’re seeing that market expansion is not always straightforward. This is because Rwanda or Nigeria can be vastly different from, say, Kenya or Tanzania, in terms of customer expectations, willingness and ability to pay, as well as in their broader ecosystem conditions, including critical requirements such as mobile coverage and mobile payment systems.

Larger corporates, both domestic conglomerates and multinationals, have deep pockets (or can access financing), strong R&D skills and broad operational competencies to support the roll-out of large, complex projects. Increasingly interested in energy access, several players have launched ventures in both the SHS and mini-grid sub-sectors. Many are waiting on the margins for PPP tenders to be launched, as these could be a good way for them to enter the market with sizeable numbers of connection opportunities.

5) If you could identify one issue that must be solved quickly in order to achieve a significant increase in off-grid energy access, what would that be?

We must absolutely close the data gap, as discussed in the recent World Economic Forum paper Finding Middle Ground: How public-private partnerships could change the off-grid electrification game. Seemingly simple questions that have often not even been asked in the past must now be answered.

In which areas are off-grid energy service schemes deemed to be the lowest cost electrification option, given the expected level of energy service appropriate to meet existing demand and reasonable growth projections? Where is the main grid not expected to reach within the next “X” number of years? In the case of mini-grids, where is there sufficient population density, as well as a need for higher energy services to allow for economic and business activities, and social service provision?

Beyond this, a deep understanding of the specifics of any given off-grid market is also imperative. This includes pre-feasibility work for sites preliminarily identified as potentially ring-fenced for off-grid. This would include energy service demand estimates, willingness to pay assessments, customer segmentation, and availability and use of mobile money systems, all of which would influence a company’s assessment of whether or not to enter a market.