HomeWorld RegionsAfrica'Mini-grids can electrify thousands of health centres in sub-Saharan Africa'

‘Mini-grids can electrify thousands of health centres in sub-Saharan Africa’

Exclusive interview with Aaron Leopold, CEO of the Africa Minigrid Developers Association (AMDA). He is also part of the speaker line-up and advisory board member of Future Energy East Africa in September in Nairobi.

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Let’s start with some background on AMDAࢀ¦
The idea for AMDA was created at a World Bank meeting in 2016 in Nairobi, where the World Bank energy team was basically talking to governments in East Africa about what their objectives were and how they were planning to complete those objectives. Of course, universal electrification is on everyone’s mind and the governments of East Africa, The World Bank and the mini-grid companies in attendance all wanted to invest more, to have more and to build more mini-grids. However, the governments and the World Bank, in particular, did not know how to make policy for mini-grids, how to regulate mini-grids. Also, the World Bank did not know how to lend at scale responsibly.

So, they can go and give the DRC government money for their Grand Inga Dam 3 because it is billions of dollars. But how do you give a billion dollars to a thousand small projects that are a hundred thousand dollars or a couple of hundred thousand dollars each maximum, across a few countries?

Because the World Bank only lends at scale. Furthermore, for the mini-grid sector to scale, we have to stop doing small projects and have to start doing larger projects. So how do we electrify 500 or a thousand communities in one round, instead of these isolated, five or ten communities here and there?

AMDA logo

So, AMDA’s job is essentially to help all of the key players understand how to bring the mini-grid market to scale. Scale is our number one emphasis and focus and really helping governments know and trust the sector is at the core of our mandate and helping investors know and trust the sector too.

Our two work streams are divided quite evenly amongst those two topics, policy and finance, but at the heart of our work is to build trust. Where does trust come from? At the heart of AMDA’s work is building the evidence base around mini-grids.

We are about to publish in the next four weeks our first ever annual report and it is going to be the Africa Minigrid Data Benchmarking Report. What we will be doing every year is building on that report, adding increases in revenue, trends on how long it takes regulators to approve things, trends on system reliability, customer growth.

AMDA is a member-based mini-grid association that has data sharing as a requirement. If you are not going to share data, you cannot be a member. That is how central this data evidence and transparency is to the sector.  

Can we talk about your members and the success stories that you can share with potential funders? 

To be an AMDA member you have to have a grid and you have to share data around that grid and they are also often doing experimental things on how to raise demand, lower costs etc. We have 30 members that are operating mini-grids across 15 countries. You might say, 30 members, that doesn’t sound like a heck of a lot? But it is truly surprising how few companies have owning and operating mini-grids at the heart of their business model. So we don’t have EPC companies as members because they don’t own the grid at the end of the day and they can’t share operation data. So the AMDA members are private sector operators. There are also a lot of government-owned and NGO mini-grids and those entities aren’t members either because the issue there is that ‘scale” word. We are a private-sector association because we don’t feel that governments and NGOs have the incentives to increase efficiencies and to provide the business motivation that will help drive scale.

If you look at Senegal, they have hundreds of mini-grids actually, all government-owned, and they are burdening the Senegalese taxpayer and all the different donors quite heavily. Our objective is really to show that this sector can grow, not as a burden on any taxpayer, but that it is creating economic efficiencies and so on.   

You mention success stories, let me be clear and say first of all, that none of the mini-grid companies are profitable today. You have to remember that Amazon wasn’t profitable for the first twenty years either. Tesla probably still is not profitable, I don’t think. So my point is, not being profitable does not mean you are not investable, because what these companies are doing, is figuring out a way to create 600-million new African customers.

If you look at all these big energy companies out there, such as ENGIE, Caterpillar and so on, they are making money doing stuff that people have known how to make profits for a 100 years, the kind of bread and butter energy work. The mini-grid companies, they are the Amazons, they are the Teslas, they are creating new customers. They are investible and creative and interesting that way, but they are not profitable right now. However, investors that come in early on, now, they are going to be part of that story and shaping the history of this continent.

So I wanted to point out that you are not going to get a case study of a company that has found the revolutionary magic sauce. But there are companies out there that are making it work and are moving steadily towards that.

Which companies are making good progress in your view? 

The largest company in AMDA’s portfolio is PowerGen which has mini-grids in four countries, Tanzania, Kenya, Nigeria and Sierra Leone and they will soon be in Benin. The interesting thing about PowerGen is they have a different business model to the other mini-grid companies. They have gotten the first-ever project finance investment in the mini-grid sector.

The trust point I made before, the biggest issue holding back investment and scale in the mini-grid sector is not that the business models don’t make sense. It’s that investors do not understand rural Africans as customers. They understand them as beneficiaries of grids. If you go to a rural village, you will see Coca Cola products, you will see Unilever products, you’ll see Red Bull, but you are not going to see big name brands in other areas right? And this is because those companies have understood the rural African customer for years. Infrastructure companies do not understand rural Africans as customers, they literally don’t have the data points to build financial models to price debt, risk etc.  

The reason why PowerGen is interesting, is they have been able to work with a project finance investor called CrossBoundary Energy Access to create the first-ever packaged debt deal in the sector. How did that do that?

Most mini-grid companies say: we want to own and operate these 200 mini-grids over here and 200 mini-grids over there. They, therefore, have a huge balance sheet, tons of assets and liabilities and they look very high risk because they have a couple of million dollars’ worth of equipment out in the middle of nowhere and a whole bunch of really poor customers who are one drought away from never paying. So what CrossBoundary has done is they have worked with PowerGen over a number of years to basically show the reliability and build the trust in these customers through PowerGen’s payment records and, as investors, investigating these communities themselves.

And CrossBoundary has created SPDs (small power distributors) out of each one of these village sites and has purchased these mini-grids and is paying PowerGen to operate them. What does this do for PowerGen? This means that PowerGen does not have all of those liabilities on their books. They are building, operating and transferring, the so-called Build”operate”transfer (BOT) or build”own”operate”transfer (BOOT) models. And they are finding success in that because when CrossBoundary purchases these assets from them, PowerGen then has money in the bank to go out and build more sites, which CrossBoundary then purchase if they want to.

So, I think this is a really good example of taking an old financial instrument and putting it into a new sector and really showing that it can work. They have done this in Tanzania where a lot of companies are having trouble right now and they have made it work there and they plan on duplicating this across the continent.

In the presentation I made during the recent Virtual African Utility Week webinar (Energy Access Matters, click here for recording), I mentioned that in the last two years alone, the number of connections of mini-grid companies around the continent has grown tenfold. So a 1000% increase in the last two years. The investors and donors are slowly accepting that these are the companies that they need to invest in.

You mentioned the big consumer brands that are able to penetrate rural communities, the same is true for telecoms. It is often said that power should take some lessons from telecom companies.

It is very much analogous. However, the proof is in the pudding and right now the revenues per user are quite low. The telecoms sector has the advantage of low-income costs per customer. So if you take a telecom tower and divide the cost of that by how many tens of thousands of people it serves, the telecoms industry has an advantage over the energy infrastructure sector which depends on poles and wires. The telecoms sector expanded on the back of them getting rid of poles and wires. The mini-grid sector offers kind of a Chinese middle way, because mini-grids, of course, require poles and wires, but only locally and not from village to village, which is that huge cost.  

So the mini-grid sector is very much taking that decentralised bottom-up approach that the telecoms sector has taken but the mini-grid companies do not have an app store. They don’t have Samsung and Apple making super sexy advertising and amazing products for the mini-grid sector. The mini-grid companies are providing power and then have to take off the shelf technologies from people who have never tried to build something for a poor consumer. They have to try and fit that square peg into a round hole.

What you are seeing now from the mini-grid companies is that they have a huge demand stimulation focus and this is what the app store does for all the telecoms companies for free. The Google Playstore and the Apple I-store perform free business development for MTN and Safaricom and they have not had to invest a single penny. The mini-grid companies do not have that.

Some of our AMDA members here in Kenya have agronomists and veterinarians on staff because they understand that the mini-grid companies’ income will only increase when the communities’ income increases as well. There is a lot of learning for utilities here as well.

The Last Mile Connectivity Programme in Kenya was funded by the World Bank and now it is being funded by a couple of other players. This programme has connected millions of Kenyans to electricity over the last couple of years and has reduced the shareholder value of Kenya Power by 92% because they have forced the Kenyan utility to connect millions of essentially non-paying customers. It costs a thousand dollars per connection and these people are purchasing about one dollar of electricity per month. So it is going to take a thousand months just to pay off the connection, not to operate or maintain etc.

The mini-grid companies do not have the luxury of sovereign-backed guarantees and political mandates. They have to make this business work on a commercial investment time horizon and are forced to go in on the demand side which, of course, in the end, is better for everybody.

Can you expand on the Benchmarking Report you mentioned earlier? 

The Benchmarking Report is the result of a year and a half’s work with all of our members, with donors, research organisations and investors to find out what is the information that they need to make better investments, to scale up those investments and also with governments, to help them make better policies. We have collected data across over 60 KPIs and that number will be expanding after this first round as we build trust through the data gathering experience. Next year we will be collecting much more data.AMDA slide2

We’ve looked at data across some really fascinating areas. We’ve collected investment data around equity, debt and grant investment for each company. This is all anonymised and aggregated so you will not be able to see who has got what revenue per user etc. We also collected data on system reliability, connections, CAPEX per connection etc. So we are going to have a really robust view of the price trends across the sector as well as the revenue trends. And I think this is going to be really fascinating because there is revenue data for customers for several utilities out there and we will be able to see how are the mini-grids performing vis-a-vis the grid, both on system reliability and efficiency but also on cost per connection and revenue per user.

What we are trying to do here is to help inform people how to make better decisions. On the one hand, it is going to be a quite academic data benchmarking report with a lot of charts, graphs and statistics. But we are also doing the ‘so what’ part of the report, how should governments and investors interpret this? And importantly, how should donors and people providing guidance also interpret this. So hopefully is going to gain a lot of attention.AMDA slide3
What have you been most surprised or delighted by coming out of this report? 

Delighted? The average system reliability or the average up time of the mini-grids that we have surveyed is above 97%. These really remote, rural and poor communities have vastly better quality energy services that every single capital city across the continent. And that we are really proud of.

In Nairobi, I live just around the corner from the State House, the Presidential House, and we lose our power every two weeks. Every single mini-grid in Kenya has better power than that. I think that is really fascinating.
AMDA slide

What was also very positive was that there were no big surprises and getting confirmation. There is anecdotal information about costs and reliability etc. but to see it all aggregated is really powerful. You know, certain things we had assumed but now we can act upon it, and that is tremendously powerful.

I would say the most frustrating thing that came out of it was the fact that although the time to get licences and approvals has reduced dramatically, the average time for a single mini-grid site to get its environmental impact assessment verified, its tariff approved, the construction licence approved, and then the operation generation licence approved ” the average time across the continent is over 50 weeks per community.   

So if you have a regulator, who next year or in 2022, needs to approve 500 or 1000 mini-grid sites ” because that is the trend we’re seeing, the sector has got scale ” that is a combined aggregated 500-1000 years of wait time. It’s just not possible. We are reaching a point where the floodwaters are coming and the governments are completely unprepared. So, the biggest message coming out of this is that every single government across Africa needs to have a robust mini-grid team within the regulatory regime.

They need to have a digital approval process that reduces the amount of work per application by like 99%, and this is the most important thing, they need to have a portfolio or bulk approval process. It is our view that it should really be either a cluster of villages that is approved all at once or it should be a company that gets an approval for a year or two by the regulator. So then PowerGen can go and electrify all the villages they want and the government can go and spot check them. If they then find them to be violating anything there should be highly punitive measures to really disadvantage anyone that is trying to cheat or play games. That is what we are saying.

And it is because the regulators have only dealt with huge projects before. For example the Medupi coal plant in South Africa, you don’t need a whole team at the regulator to work on that, you only need a few people.  But for the decentralised mini-grid sector, the institutions are no longer fit for the realities of the sector.

You are a regular speaker at Future Energy East Africa and advisory board member. How important is it for the region to gather at this event over the years? 

From a mini-grid perspective, it’s been extremely important because really the progress started in Tanzania and it spilt over into Kenya. Now we are starting to see Rwanda, Ethiopia, Uganda, Burundi, even Somalia, take up interest and activity.

The conference has really helped to share those experiences and to show government officials in particular that we’re giving this a try, and it’s working, you should give it a try as well. I think these regional events really shows that the sharing of experiences is really valuable. I know there is also an expo element to Future Energy East Africa but I think it is really that knowledge and experience networking that has been so beneficial. As soon as you see these spill-overs in other countries you know that it is working.

The quality of the sessions and speakers has always been very high.

Do you have a specific message at the event this year?

Looking at the COVID-19 situation, mini-grids are the technology that will allow us to electrify the hundreds of thousands of un-electrified health centres across sub-Saharan Africa. There is a huge risk that every single city in Africa right now is being overrun because of the Coronavirus with people who need medical care, that should have received medical care in their rural communities, but there are no adequate facilities. The decentralised nature of mini-grids is going to show its value this year. My message really for Future Energy East Africa is really that mini-grids are not something that I am biased towards, what I am biased towards is finding the best solution to address the problem.

Right now, we have two problems. We need to empower rural Africa and we need to not only give them adequate energy services but adequate services period. I think that Future Energy East Africa has a great opportunity right now to showcase the diversity of different approaches and the diversity of companies that are working together to really solve those problems. If we can illustrate that at Future Energy East Africa, I think that utilities and governments will wake up to these benefits.  

The other thing is the high service quality of mini-grids, this should not be seen as some sort of negative for the utilities. I see it as a huge opportunity for the utilities to say: ‘great, then you guys finally take these unprofitable communities off our hands and we can focus on service quality for the urban communities that we have been forced to not serve well enough because of political pressure to go out into the middle of nowhere. So in my view, the utilities should be able to see this as a great opportunity to consolidate and improve their services and profitability rather than see it as a threat.

More about Aaron Leopold, CEO AMDA
Aaron Leopold is responsible for building out the organization’s ability to deliver on its objectives of radically growing both financing and political support of decentralized utilities across the continent. Leopold also serves on the Board of Directors of the Alliance for Rural Electrification (ARE), a global industry association representing the entire rural energy value chain.

He previously was a member of the Private Sector Advisory Group of the Green Climate Fund (GCF), and for nearly five years was Practical Action’s Global Energy Representative, where he acted as a thought leader on energy access, and was co-lead author of their annual flagship Poor People’s Energy Outlook report. Leopold was also a co-founder and deputy director of the Power for All partnership and campaign. Before his focus turned specifically to energy for development, he was the Director of Environment & Sustainable Development at the Global Governance Institute, a Brussels-based think tank he co-founded. He has published on renewable energy in a variety of contexts and has a Master’s degree in Global Political Economy from the University of Kassel, Germany.

Pamela Largue
Pamela is a senior content creator and editor and has been a part of the Clarion content team for over seven years. She specializes in international power and energy-related content.