Alumn, Sebastian Petric and guest blogger, Merja Laakso, discuss the need to increase finance for clean energy markets on the African continent, and use the example of Beyond the Grid Fund for Zambia (BGFZ) as an initiative that addresses this gap.
Poverty reduction has been one of the key objectives for developing country governments, as well as international development institutions for decades. In this respect, there are some positive examples of success on the African continent but Africa remains among the poorest and slowest growing regions globally. Economic development has not led to improvement of life and opportunities for the local population at large to the extent that could have been possible. This is often attributed to geopolitics, weak institutions and corruption, conflicts, and low investment rates. International development organisations offer a wide range of support for local institutions to increase capacity for establishing an enabling environment and creating the conditions for growing economic activities.
Funds are increasingly directed towards supporting the private sector. The lack of investment in human development and infrastructure are holding back the economic development of African nations. That being said, the emergence of social entrepreneurship has led to the private sector bridging the gap on provision of services in sectors like agriculture, health, energy, and education, which are underfunded by local governments. International investments can play a vital role in this respect.
The private sector can efficiently offer targeted high-impact solutions to “final” beneficiaries. However, this comes with a higher risk of discontinued service provision imposed by the realities of the early stage markets on the African continent. If the private sector is to play a more significant role in addressing poverty, development finance is required to enable crucial investments for reaching scale that is significant in terms of impact objectives, as well as in terms of operational and financial efficiency. Long-term vision on functional markets needs measures to ensure a gradual transition from grant funding to debt and equity finance leading to a greater discipline of actors. In this respect, Africa is a prime target for an increasing number of impact investors that offer commercial finance for players demonstrating social and environmental impact.
Investment in energy is one means to support economic development, as well as achieve high social and environmental impact. It has the potential to contribute to the Sustainable Development Goal 7 which aims at providing ‘affordable and clean energy’. Over 600 million people in Sub-Saharan Africa are without access to modern energy. Based on the current levels of investments and rapid population growth, the energy access rate is expected to improve only marginally in the next decade. Continued use of fossil fuels is leading to drastic damages to the environment and hence, investments in the clean energy sector can have positive repercussions beyond providing economic opportunities.
There is a need for increasing finance of clean energy markets. Otherwise, a significant percentage of households will still not have access to electricity by 2030. Measuring the impact of current finance is essential in attracting future funding commitments. To demonstrate the most immediate and tangible results, impact is often assessed with KPIs such as number of electricity connections or C02 mitigation which are measurable and directly attributable to the funding provided. That being said, when financing the private sector, development and impact financiers should keep the vision of sustainability in mind.
One successful example of addressing the energy gap on the African continent is the Beyond the Grid Fund for Zambia (BGFZ), which was launched in 2016 and has had significant impact in terms of short- and long-term metrics. The vision for off-grid energy market development in Zambia is to provide at least 1 million Zambians in rural and peri-urban areas with access to clean energy services by 2021. Private sector service providers are key in this respect. In addition to the direct financial incentives provided to the target companies, crowding in private finance and facilitating the establishment of policies that support the further development of the market are key objectives of the programme. Before BGFZ, affordable clean energy services were unavailable to most Zambians; no company had sold connections at scale and few financiers were truly ready to take the risk of financing the energy service providers.
The companies supported by the BGFZ programme have provided more than 150,000 connections since 2017. This means more than 750,000 Zambians have gained energy access. The programme has also contributed to increased economic activity. Jobs were provided to more than 1,500 people and the USD 11 million of committed development finance has crowded in more than three times the funding from new financiers and investors. An impact assessment conducted in 2018 indicated that the new energy services resulted in savings of energy-related costs for 86% of the households and 25% of the customers were able to undertake new income generating activities.
The programme is coordinated in partnership with the Government of Zambia through the establishment and coordination of the Off-Grid Energy Taskforce which serves as a forum for clean energy market development in Zambia. BGFZ was recently awarded with the United Nations Global Climate Action Award and the Ashden Award for Innovative Finance. Receiving recognition provides for the opportunity to expand the scope of the initiative by adding more markets leading to significant social and environmental impact on the African continent.
Merja Laakso is Head of Programme, Southern Africa at Renewable Energy and Energy Efficiency Partnership (REEEP), where she and her team are in charge of programme management for the Beyond the Grid Fund in Zambia and Mozambique. Her work recently was awarded with the United Nations Global Climate Action Award and the Ashden Award for Innovative Finance. Merja is a graduate from the University of Stockholm.
Sebastian Petric is an EM Strategist with over 10 years of experience investing in emerging markets and developing economies. He was educated at the London School of Economics and Political Science, the University of Oxford and the Vienna University of Economics and Business. Sebastian recently published a book on fundamental, policy-induced and institutional vulnerabilities of emerging markets. He is currently working on an impact investment project at the University of Oxford.
The views expressed in this post are those of the author and in no way reflect those of the International Development LSE blog or the London School of Economics and Political Science.