Report: Investment in Off-Grid Energy Access Totals $1.7B Through 2018

Off-grid energy, long the focus of nonprofits and governments,
is becoming the next massive investment opportunity for the
world’s biggest energy players, with hundreds of millions of
dollars going into solar home systems and other energy solutions
for the billions of people who lack access to reliable grid power,
or any at all. 

That’s the conclusion of a
new report
from Wood Mackenzie Power & Renewables and
Energy4Impact, detailing the spectacular rise in investment in the
off-grid energy access sector. From nearly nothing prior to 2010,
spending on the category — which includes businesses that sell
solar panels to power lights, cellphones and other household
devices, up to microgrids that power entire communities — rose
to a total of nearly $1.7 billion at the end of 2018.

More than $1.2 billion of that was invested since 2016. In 2018,
annual investment in the sector broke the $500 million mark.

The biggest investments in this sector have occurred over the
past two years, and the nature of these investment indicate that
the sector, while still in a nascent and uncertain phase of
development, is also entering a new stage of maturity, the report
noted. 

Year-on-year transaction volume grew 37 percent from 2016 to
2017, and total capital composition by volume shifted to over 50
percent debt, indicating a willingness on the part of investors to
scale up. In 2018, total transaction volumes grew another 22
percent, average equity investments doubled, and debt increased
more than fivefold compared to the previous year. 

What’s more, the share of strategic investment in the sector
is on the rise — from oil and gas majors like Shell and
Total, European utilities like Engie and
EDF, and energy technology providers like Schneider Electric, to
name some of the big names.

At the end of 2018, the report tallied $383 million spent on
more than 110 direct strategic investments in off-grid energy.
Investments range from outright acquisitions such as Engie’s
purchase of Fenix International
, to equity and debt financing
for solar home or microgrid developers. An additional $461 million
in strategic funding has reached the sector via indirect fund
investments. 

And while roughly 25 percent of this corporate funding has come
through corporate social responsibility (CSR) initiatives and other
sources not tied to the underlying business, the remaining 75
percent is commercial in nature, Ben Attia, Wood Mackenzie Power
& Renewables analyst and lead author of the report,
noted. 

“There are a billion customers that have no access to
electricity, and another billion that have access to unreliable
electricity,” he said, citing data from sources including the
World Bank and the International Monetary Fund. Companies that can
serve them “have the opportunity to own the next billion customer
relationships — and that includes all their evolving needs, and
all their data.”

While the term “off-grid energy access” covers a wide
variety of business models, more than 80 percent has gone
into off-grid
solar home systems
 providers, Attia noted. These companies may
be unfamiliar to observers of the U.S. or European solar landscape,
but they have raised significant sums to bring pay-as-you-go solar
offerings to hundreds of thousands of customers without
electricity. 

Overall, the solar home system (SHS) market has raised more than
$1.1 billion through 2018. Some of the biggest, in terms of capital
raised through the end of 2018, include Zola
Electric
 (formerly Off Grid Electric) with $261 million,
M-Kopa Solar with $194 million, D.Light with $188.5 million, Lumos
with $108 million, Greenlight Planet with $82 million and Mobisol
with $79 million.  

Of the companies in this sector, more than 90 percent are using
a pay-as-you-go model, built on the same
mobile device payment infrastructure
that’s enabling all
manner of e-commerce in countries where cellphone networks have far
outpaced traditional communications infrastructure. These
lease-to-own models offer far more affordable customer entry than
cash sales, and allow companies to make money on financing as well.
But they also require companies to carry that consumer debt on
their balance sheets, and seek regular injections of working
capital to cover the associated costs. 

But the long-term relationship of a pay-as-you-go model could
allow these companies to build “value stacking” on top of the
core solar proposition, Attia said. It’s a simple proposition:
once a household has electricity, it’s going to want all of the
products and services that come with it, and the companies doing
off-grid solar home systems see themselves as the natural provider
of them. 

“Households don’t demand kilowatt-hours — they demand the
ability to turn the lights on, or have a fan, or a radio, or a TV,
or Wi-Fi in their house,” he said. 

Attia also pointed out that the concentration of investment
among energy access companies, many of them competing in the same
markets, presents short-term risks for the parties involved.
Concentration is apparent in several ways. For instance, the report
finds that the top 10 deals represent $564 million, or one third of
total investment to date.

There’s also geographic concentration. Of the regions covered by
the report, Africa drew nearly 80 percent of the total capital
raised, compared to about 15 percent for India and Southeast Asia
and about 5 percent in Latin America. These low showings are
largely due to the presence of large-scale public programs that
limit the market for private off-grid solutions, compared to
Africa, where the ubiquity of “mobile money” payment systems
has allowed private-sector players to compete more
effectively. 

Wood Mackenzie’s report also tracks investment in the
so-called “mini-grid” sector — a category meant to
differentiate the smaller-scale projects involved from the broader
world of “microgrids,” which can include big industrial,
commercial and government facilities. The report tracked $190
million raised through the end of 2018 in the top 10 mini-grid
companies, including $45 million for PowerHive, $30 million for
Starsight, $29
million for Husk
, and $28 million for Yoma Micropower. 

In another sign of capital concentration, the top 10 pure-play
mini-grid providers have raised 77 percent of total mini-grid
funding through year-end 2018. 

“This represents an outsized risk to the sector as it may cause
heightened investor caution, particularly given the shortage of
successful exits to date,” he wrote in a recent
LinkedIn post
.

Source: FS – GreenTech Media
Report: Investment in Off-Grid Energy Access Totals .7B Through 2018