Opinion: Mini-grids in Africa scaling up slowly

From the newsletter

The African mini-grid sector has not grown as quickly as hoped. Despite over $9 billion in concessional funding committed in the past five years, only 14% has been disbursed, so writes Daniel Kitwa writes in today's article. However, the sector has also seen positive trends, such as a shift towards larger projects and a 20% decrease in capital costs since 2020.

• Daniel Kitwa is a senior renewable energy investment professional. In the course of his career, he has worked with international climate funds with over $1 billion in assets under management.

• Despite the hurdles, Mr Kitwa remains optimistic about the prospects of the mini-grid market in Africa. He points to technology cost reduction, enhanced competencies of mini-grid operators, and improved regulatory frameworks as some of the positive developments.

Opinion article

By Daniel Kitwa

The mini-grid sector in Africa is growing, but perhaps not as quickly as many would hope. 

The latest edition of the Benchmarking Africa’s Mini-grids (BAM) report, published by the African Mini-grid Developers Association (AMDA), offers a valuable "pulse check" on the sector's progress across various areas, including regulation, technology, business models, and financing. While some notable trends are emerging, the pace of financing disbursements suggests a familiar challenge.

Key insights from the BAM report

The report highlights a clear shift towards bigger projects. In 2022, only 8% of sites developed by AMDA members served over 500 connections. By 2024, that figure jumped to 30% of reporting AMDA members' mini-grids. This includes large-scale outliers, such as Renewvis's planned 2.4 MW solar mini-grid expansion in Kenya's Kalobeyei Settlement in Turkana County. This trend indicates that both utility-scale and smaller community mini-grids can coexist within Africa's energy mix and electrification strategies.

Encouragingly, capital expenditure (CAPEX) for mini-grids declined by approximately 20% between 2020 and 2024, dropping from $8,500 per kWp to a four-year average of $ 6,824 per kWp. However, this is still significantly higher than the estimated global CAPEX average of $3,000 per kWp, suggesting considerable room for efficiency gains, particularly in optimising generation, storage, and distribution costs as the sector matures.

Despite these positive developments, a significant hurdle remains: the slow deployment of funds. While more than $9 billion in concessional funding has been committed to the sector over the past five years, only 14% of these funds have been disbursed. This represents a mere 1% increase from the findings of the 2020 BAM report. This persistent challenge in fund disbursement is precisely why the adage "the more things change, the more they remain the same" resonates so strongly in the context of mini-grid financing in Africa. 

Reflections and recommendations

I've had extensive discussions with developers, fund managers, and industry peers about this slow pace of financing, and most agree that several factors contribute to the issue. 

The dearth of equity financing (both at the project level and even more so at the corporate sponsor level) means that the excess debt and concessional funds remain idle. There are market fundamentals that cannot be ignored like the lack of meaningful equity exits in the off-grid sector over the years. This makes the incentives for designing debt funds more appealing when pitching to Limited Partners (LPs) with regard to fundraising success, notwithstanding clear deployment risks down the road. Whilst funds like CEI Africa have offered one-stop shop models that include: RBFs, equity, debt, and upfront forgivable loans (that reduce the equity buffer) are examples of success, there is more ground to cover.

Still, we have to admit that the deployment challenges may also have been a function of poor fund design and investment thesis features from the onset. This makes it harder to adjust during the implementation phase. Some of the concessional funds have historically had rigid mechanisms, such as long procurement and due diligence processes that often get overtaken by events, given the dynamic nature of the mini-grid market.

For instance, some funder due diligence processes tend to be lengthy to the point that exclusivity rights and concession timelines for sites lapse. In this case, the developer may be at risk of losing the rights to the site or have to incur additional costs in negotiating extensions with the regulators. AMDA recommends that successful existing financing programs with experienced teams that have proven adept at the timely administration of funds should be expanded rather than more fragmentation and new starts. I tend to agree with this premise. This is especially important given the re-awakening that the sector has undergone as a result of the Mission 300 agenda.

Finally, recent cutbacks in international development funding may lead to a reduction in project preparation facilities. The winding down of programmes from USAID, the United States Trade Development Agency (USTDA), and the EU-funded Project Financing Advisory Network (PFAN) – all of which provided crucial project preparation grants and technical assistance – jeopardises future project pipelines. This underscores the need to rethink how project development is sustainably funded beyond the limited resources of project sponsors.

In conclusion, I remain optimistic about the prospects of the mini-grid market in Africa. We do have clear tailwinds in terms of technology cost reduction, enhanced competencies of mini-grid operators, and improved regulatory frameworks in some markets. Nonetheless, we should not take our foot off the pedal.

Disclaimer: The views expressed by the writer are solely his opinions. They do not necessarily reflect the views of his employer, clients, industry peers, and business partners (both past and present). This article is for informational purposes only and not for investment, tax or policy advice.