How the Light Gets In: Five Way to Power Africa

Today, less than one billion of the world’s population remains without access to power. 48% of this one billion is in sub-Saharan Africa, though the region only represents 13% of the world’s population [1]. 

As we know, electricity is the building block of modern economies. The lack of reliable power hinders trade, commerce, health, and security. 

Recently, I talked to Andrew Smith-Maxwell of Fieldstone, an independent investment bank that focuses on renewable energy in Africa and other parts of the world. We discussed in depth the various phases of power development in Africa and the growing investment opportunities. 

Demand for energy and infrastructure continues to grow as electrification spreads throughout Africa.

How will the light get in?

1. Modular Solutions

Thanks to the falling cost of renewables, small scale wind and solar production (often combined with batteries) are emerging across Africa. In 2016, for example, 600,000 homes in Africa received power from off-grid solar. These off-grid solar deployments are growing at 60%-100% per annum [2].

Smaller and more modular power deployment will allow for a more affordable way to access power. A large fraction of Africa’s population have very low disposable income, so affordability, like accessibility, is important. 

“In many ways, Africa is leading in this thinking. Particularly in countries that don’t have a strong legacy of grid distribution and infrastructure (and very few do)... it creates models to bring power to individuals.” -Andrew Smith-Maxwell

The deployment of these off-grid or mini-grid consumption projects also takes a burden off of national grids. It also increases the rate of electrification by removing reliance on large, plodding monolithic intuitions.

2. Local pools of capital

As the economies of Africa continue to grow and mature, wealth accumulation means that projects will be able to source capital more locally. Local investors will assess projects in their region with greater focus, context, and understanding. The result is the superior execution of their investment.

Want more capital deployment in Africa? Look locally.

3. Entrepreneurial investors

Historically, project finance structures in Africa and the rest of the world have represented a barrier for development. Project finance return horizons stretch across decades. Thus, project revenues must be truly secure for investors to be willing to lock up their capital. Risk-tolerance thresholds have proven too high a bar, as evidenced by low capital deployment rates.

Investors who want to succeed in Africa must be willing to challenge the classic project finance mold. They need to experiment with other financial models. This process can be augmented and allow for more project deployments if the state allows structures such as direct private contracts and merchant sales.

4. Structural reforms

“If you start to treat [power] like a public service, a universal benefit, you very soon have the most expensive power of all, which is the power you don’t have.” -Andrew Smith-Maxwell

Many governments have treated electricity as a right. The creation of a truly competitive market will allow producers and consumers to connect directly, making the power producer the entrepreneur. As a result, behavior, and actions can have a much more direct link–if you don’t pay, you don’t get. Also, it shifts both risk and reward onto the power plant–and through them onto the capital providers. Properly assigning risk and reward in a marketplace removes decision distortions and allows for a more efficient deployment of capital.

5. A business model revolution

Though somewhat counterintuitive, creating additional demand on the continent offers a way to improve energy deployment in Africa. The investment decision for power comes down to one of two questions:

1. What is the quality of my power source (my cost input)?
2. Who will pay me for the power (my revenue input)?

Africa is a continent rich in power resources. However, the problem of who will pay has been a primary barrier to power deployments across Africa.

One solution is to create a “consumer of last resort.” By always having a way to convert electrons to dollars, power producers never have to worry about having stranded production in case they can’t collect from the utility.

Enter blockchain computing.

Bitcoin and other cryptocurrency networks are large and secured by a distributed network of computers. Anyone can join in securing this network. Just show up with a computer, plug-in, and get paid. Network security services can be quite rewarding, and it requires an awful lot of energy-intensive computing power.

Vertically integrating power production with computing can enhance returns for power producers. This offers a diversified revenue stream and is an alternative source of income from the utilities. Also, it means that power producers never have to curtail their excess production.

Lighting up the continent offers the opportunity to take billions of hours of human productivity out of darkness, representing unknown human potential. To date, electricity deployment has been hindered by structural and market issues and a low starting economic base. 

The light will enter Africa through a quilted patchwork of these, and many other solutions.

And, we at Soluna are thrilled to be part of it.

[1] Brighter Africa: The growth potential of the sub-Saharan electricity sector, McKinsey & Company

[2] Africa Unplugged, The Economist

If you enjoyed this, I encourage you to listen to my conversation with Andrew Smith-Maxwell on Soluna’s podcast, The Kingdom. Listen and subscribe here: pod.link/thekingdom.