Conversations: Is Off-Grid Electrification the Key to Sustainable Energy for All?
Highlights of an expert discussion about the commercial viability and potential of off-grid technologies.
Highlights of an expert discussion about the commercial viability and potential of off-grid technologies.
Sustainable Development Goal (SDG) #7 commits the global development community to “ensur[ing] access to affordable, reliable, sustainable and modern energy for all.” Currently over one billion people - predominantly in rural areas - don't have access to electricity. In order to reach Goal 7, about 113 million connections per year are needed, making it one of the most ambitious and challenging of the SDGs.
According to a recent IEG evaluation, to achieve universal access by 2030 an increase of investments from US$3.6 billion per year to about US$37 billion per year are needed. This huge increase in connections, according to the report, is “unlikely to result solely or predominantly from grid expansion alone in the time frame set by global access goal.” The increasing commercial viability of off-grid technologies provides an effective and scalable complement to traditional electricity grid expansion, and the opportunity to rapidly improve the livelihoods of millions across the globe.
IEG invited a panel of experts to discuss the commercial viability and potential of off-grid technologies, including Dana Rysankova, Senior Energy Specialist, World Bank Energy & Extractives Global Practice, Sarah Ladislaw, Director and Senior Fellow of the Center for Strategic and International Studies’ Energy and National Security Program, Russell Sturm IFC Global Head, Energy Access Cross Cutting Advisory Services, and Ethan Zindler, Head of United States Research for Bloomberg New Energy Finance. The panel was moderated by Vivien Foster, Lead Economist for the World Bank’s Energy & Extractives Global Practice.
Below are highlights from the discussion, including reflections on a recent IEG study: Reliable and Affordable Off-Grid Electricity Services for the Poor: Lessons from World Bank Group Experience.
Editor’s note: Responses have been edited for brevity and clarity.
Question 1: Are policy makers taking off-grid access seriously enough? As most are used to the traditional approach of grid-based electrification, are they seeing off-grid as some sort of a side show or are they really taking it seriously now?
Sarah Ladislow: I would say one of the biggest things that always comes into play in the conversations that we're having with countries from various regions of the world, is trying to manage a couple core variables that seem out of their control, and one variable is volatile energy prices in more traditional markets, especially for oil and where it is applicable, natural gas.
I do think one of the interesting things over the last several years that gets to your question of whether or not they're taking off-grid electricity development seriously has been the level of interest that they are seeing from the private sector in providing those solutions. I think it's a new level of interest that they're seeing, and quite frankly, trying to figure out how do they capture it in the smartest way possible.
I do think that the access agenda is certainly an important one, but not the only one that they're grappling with. If it were only people coming in saying, "Hey, we'd like to do off-grid access as the quickest way to electrify at the Tier 1 level access in your community," that would be one thing, but it isn't the only thing that they're grappling with. Which is why I think this question of, and the issue of, geospatial planning and this concept of broader planning about how you can eventually marry those two issues - one, which is energy access for the purpose of driving economic growth and development, and two, energy access for the purpose of getting people the least connected in some way, shape, or form, is a really important element of the debate.
Question 2: Given the excitement around the technology revolution that we're experiencing in the off-grid space, are we scaling up as rapidly as the excitement suggests we should be? What's holding back the private sector from moving more rapidly on this? Is it realistic, when countries have spent decades subsidizing grid electrification, that now we're going to get off-grid with no public involvement at all?
"A billion and a half people who are off-grid is not just a massive humanitarian problem and crisis, it is also a massive commercial opportunity. Some of the largest corporations in the world are increasingly interested in this area."
-Ethan Zindler, Head of United States Research for Bloomberg New Energy Finance
Ethan Zindler: A billion and a half people who are off-grid is not just a massive humanitarian problem and crisis, it is also a massive commercial opportunity. Some of the largest corporations in the world are increasingly interested in this area.
We [recently] had an event in San Francisco and we had about 50 people there, representatives of some of the biggest power and oil and gas companies in the world, because they want to know more about this space. I take that all as a very good sign. Certainly we've seen more pure, private capital flow into this area in the form of private equity investments, over $200 million last year alone in investments in a variety of startup-type companies that are out there trying to do this.
I think the interest is growing. I think it's not just those who are totally off the grid. It's also those, I don't know what the number is, a billion people who have some access to a grid but it's not a great grid and they want to improve it, and they want to have better energy experience generally. The opportunities are there. I would say we're seeing growing interest … the size of the challenge is so enormous that there doesn't have to be one answer to this.
There's nothing mutually exclusive about wanting to support grid scale projects and the distribution of pico scale lanterns, and everything in between - mini grids, micro grids, whatever it is. There's plenty of room for everyone. Similarly on the financing side, there's opportunities for pure private capital. Then clearly there needs to be capital from multilateral institutions as well that come along and play a role also.
I think we're beginning to get started. I think, like with everything, that investors are going to look for opportunities where they feel they're going to earn a decent rate of return on investment and that there's a certain amount of certainty around policies and policy structures, and tariffs, and things like that. Those are all works in progress, to be clear, but there's a lot of people who are kind of looking around and are interested in this area and want to make more investment.
Vivian Foster: Key issues are the prices, and we're actually getting quite a lot of questions on affordability, and sustainability, and tariffs, but also the regulatory environment. We [recently] launched a product called Rise that looks at the regulatory environment both for grid and off-grid access. We found that about half the countries in Africa had barely begun to develop a regulatory environment for off-grid. I think that really points to the need to make progress in this area.
Dana Rysankova: I think it's already changing. I think what's interesting, what has happened in the recent years … I definitely see more interest in governments taking the universal access to energy services goal as more serious than before, now that it’s an SDG goal. That opens a way for different thinking because I think in the past they all had some kind of universal access targets, but they were totally, mostly totally unrealistic, and mostly didn't consider off-grid solutions.
I think now seeing the pressure and increasing competition among themselves about reaching the goal, and also seeing what has happened in the recent years on the technology side and business model side, that the off-grid solutions actually are spreading out. They are beginning to consider them more seriously as a part of their official government programs. That's important for us as the World Bank, because we, being an institution that lends to the government, governmental clients, we cannot decide our strategy is to do more off-grid as much as many would like us to say that. Our strategy has to be related to the government strategies.
"There's definitely a trend towards increasing of our lending for off-grid solutions, and definitely an increasing demand from the government to borrow. That creates sort of new types of challenges, because there is an opportunity to integrate too in planning but it's really, really hard to do because on one hand you have this sort of top-down grid electricity planning."
-Dana Rysankova, Senior Energy Specialist, World Bank Energy & Extractives Global Practice
We see increasing demand from the governments to borrow for off-grid, and were, for example, in 2010, if you look at our access portfolio and access meeting here in this context, just then, we had about a quarter of our lending in off-grid. Now, about half of our portfolio is in off-grid. There's definitely a trend towards increasing of our lending for off-grid solutions, and definitely an increasing demand from the government to borrow. That creates sort of new types of challenges, because there is an opportunity to integrate too in planning but it's really, really hard to do because on one hand you have this sort of top-down grid electricity planning.
The other issue that we see is that the government often may be confusing a little bit the issue of equity and affordability. Concerned about affordability, they say, "Oh no, but off-grid users shouldn't pay more than the grid users," and that basically creates conditions where off-grid is no longer a possible solution because it just doesn't work. They say private sector should charge as much as the national utility, but that doesn't work if you don't have access to the same long-term subsidies, as well as the economies of scale of the utility.
As a result, people get fewer services rather than more services. I believe that our role, of the World Bank and other development partners, is really to help governments to help navigate in this new space, where on one hand they continue with the grid program but there is this opportunity for the off-grid, and integrated in a smarter way in some way that basically allows private sector to operate and to get to the universal access faster.
Question 3: When countries are borrowing for off-grid, what are they actually borrowing for? Is it subsidies for the systems? Is it more about putting a framework in place? What does that public money actually go to when companies borrow from us for off-grid?
Rysankova: I think it varies, and it's also evolving. In the past, most of our off-grid portfolio were two types of projects. One was [similar to] Bangladesh, because this was a very large project, and it was a very unique model that was based on micro financing. Basically then our lending went into on lending to the microfinance institutions to finance the systems for the household, and the household would pay back to the microfinance institutions.
The other part was very much [similar to] Latin America, [such as in] Argentina and Peru, where really our focus has been on the last mile of grid electrification. These are countries that have reached 90% plus access typically and are looking for the last 5%, last 3%, and often have been using type of concessioning approaches. There, actually the bulk of our support would go into subsidies, because it's really to reach the most remote. Now, with the new type of projects, and increasingly we have an increasingly higher share of African countries borrowing for off-grid, it's a mix.
We have learned that when you talk more about pre-electrification or when you need to really reach masses, the subsidies on their own really is not the best way to support. I think it's two things. On one hand, we're looking at how to sort of help governments to set up frameworks that work, so it's more on the technical assistance part. Then it's financing, but financing not necessarily subsidies, and we are much more looking for ways to channel our funds through, for example, local financial intermediaries so that we cover the gap that often in the countries exists that the off-grid companies, often being startups or SMEs, have a very difficult time to get access to finance.
Basically covering the access to finance gap that often includes a combination of lending, sometimes even equity, and some grants, but grants mainly related to sort of development of sustainable private sector rather than grants to subsidize the users.
Watch a re-play of the live event Has Off-Grid Electrification Come of Age?
Question 4: How does the IFC complement what the World Bank is doing in the off-grid space?
Russel Sturm: I guess the insight that drives IFC's work in this area is recognizing that the kind of scale that we're talking about doesn't happen unless companies make money. That's the engine that drives commercial investment. It's the engine that drives innovation. It's the engine that create incentives to actually reach this target.
We view the vehicle for achieving energy access is the private sector, inevitably. Everyone uses that as poetry but what that really means is that the conditions have to be in place that create, not just return, but a distinct public sector to address risk, create certain conditions that enable investment.
It's often challenging, just a sidebar observation, that we treat energy access as a special needs child. We want to see that happen, but we're operating in environments where fundamental macro-economic issues are profound. Right now, there's a lot of interest in the access community around Nigeria. It's very difficult to address energy access in a context where you have depreciation of the currency by 50% in one year. That just puts the kabash on everything commercially that's happening, and sets that back. It's an observation.
The private sector is the key to achieving scale, but it's a dysfunctional functioning market where the poorest people on the planet are paying the equivalent of $100 a kilowatt hour for their lighting services by having kerosene from a can, but that's an existing market.
Where we came into this space was recognizing that just on the horizon, and now coming at us, were technological innovations that made the incumbent technology obsolete. Essentially what we did was we characterized this market and went to the companies that had the technology and said, "By the way, you have LEDs. LEDs are able to convert a small number of electrons to useful light. I'm going to show you an income industry, $30 billion a year being spent for kerosene that goes in this can with a wick in the top, and this is the level of services these people get."
When the people that had technology saw this market, they were all competing to sell to these guys and to these guys, and to automobile manufacturers, that was the LED industry, and saw that there was this incumbent industry that Exxon Mobil controlled that they had a superior technology for. Essentially what we did was we said, "What do you need to lower your first mover risk to come into this space?" That became Lighting Africa.
IFC can hire people to do advisory work. The Bank has certain metrics around volume versus people, because the business is to lend at its core. That's what we do. That's what we've tried to do, and we continue to look out on the horizon for where the emergent technology is.
Storage is the frontier where I think the conditions are here now that were here nine years ago with LED - solar, and storage, and to address a market where people have grid access. They say they have grid access but it may be for 10 hours a day.
You have a similar set of conditions where the price of storage fell 40% last year because of big volume manufacturing for automobiles. This drives a coincident opportunity to address the incumbent market where people are using diesel gen sets. Similar set of conditions and we're looking at it the same way.
Question 5: Are the current costs affordable to customers and can they at the same time provide enough of a profit margin to detonate this commercial wave?
Ethan Zindler: We've seen the PV costs come down 90% since 2010. They were about 40 cents per watt at the factory gate from China. Now, it used to be $3, $4, $5 a watt not that long ago. On storage, we're at about $275 per kilowatt hour down from a $1,000 just four or five years ago. There's major progress being achieved.
The good news, bad news about renewable strategies generally, and this really applies well beyond the off-grid space is that, the good news is that there's no marginal cost. Once you've put it in place, you don't have to buy fuel for them. They operate themselves. The bad news is that means that all the cost is up front. You have to put the system in, which means you need capital. Yeah, once you, if you've got a diesel generator you have to just keep buying the diesel. That sucks, and the price can go up and down, and all the negative effects that come with it, but your monthly fee is relatively small.
If you then want to convert to a PV system, that might require a bit more upfront capital, and that is really where finance is so critical to all of this because the cash has to basically come, generally speaking, up front when you want to make the switch over to clean energy. The good news is that the economics definitely do pencil out. For instance, one example is in India. I'm just looking here, our chart, looking at our rooftop level of electricity is about $110 per megawatt hour. The actual average commercial tariff in most cases in states there is well above that. You can beat with solar, but you need to finance the system first.
Russell Sturm: If I can draw a line from Ethan's point to what the bank's role can be now, so innovations in this space, it's happened so quickly. We were working with the notion of a solar light, and now a lighting global quality verified products go up to 350 watt systems. Just like LEDs allowed conversion of a few electrons to useful light, we now have 17-inch, eight watt TVs. No longer is a 60-watt system required to a do a little black and white TV. We're talking about computers, TVs with 15-watt peak capacity. It's profound and that affects affordability.
Question 6: Are there other innovations that make off-grid options more affordable?
Russel Sturm: The other innovation has been around business models for delivering. Recognizing that first cost is a barrier, but that it is profoundly competitive against the incumbent technologies, whether it's diesel or kerosene, or crappy grid. That businesses have come forth with a variety of models, often deploying partnerships with mobile telecom, riding that horse that's already penetrated to do pay as you go type of models. Essentially imagine a virtual pre-pay meter, using mobile money, to enable a solar system to operate that you are paying for use of on a daily, weekly, or monthly basis.
"All of the investment that's happening in the sector is in the pay go sector, where there's immense opportunities on the upside, and this is allowing affordability. The dotted line to the World Bank Group is new industry. Wall Street doesn't get it."
-Russell Sturm IFC Global Head, Energy Access Cross Cutting Advisory Services
All of the investment that's happening in the sector is in the pay go sector, where there's immense opportunities on the upside, and this is allowing affordability. The dotted line to the World Bank Group is new industry. Wall Street doesn't get it. Wall Street doesn't understand the risk profile of this, just like they didn't invest in mobile telecoms 15 years ago because they were analyzing mobile telecom companies just like they would AT&T, but it's a different business. This is a different business that's never existed on the planet before, so it requires an entity like the Bank Group or some other third party that has an eye on the development impact and recognizes there's this interim stage where some sort of risk-sharing has to take place to enable these companies to prove themselves and become commercially fundable.
About $270 million of commercial and quasi-commercial investment in these companies last year, and it's not a bad first start, but what could happen with additional investment if, alongside that, was some public money taking a first loss in these things? Not at a level that creates moral hazard or that crowds out the commercial investors, and we've seen that happen, but where this is a tricky role because we're intervening in markets, but it's a critical one to reach scale quickly.
Rysankova: Often, what we see, when the governments have these universal access roles, they say, "Oh, it has to be at least Tier 2, or it has to be Tier 1." As much as is happening with reduced cost, these sort of higher value systems are not affordable to everyone. I think there is affordability as long as it is acknowledged that some households will need to rely first on smaller systems, and that includes lanterns, and maybe grow to the bigger ones over time.
Vivian Foster: We have now this vast menu of things that really could potentially cover every pocket, in a sense. Not only that but we have parallel advances in energy efficiency that mean the appliances need less and less energy, and when you put the two things together that's really quite powerful.