Increasing Energy Access and Powering Economies in West Africa

West Africa is home to nearly 500 million people, only half of whom have access to clean, affordable, and reliable energy. For nearly 36 million households, the prospects of connecting to convenient electricity services within the next five years are limited. In most West African countries, weak enabling environments, limited workforce with the skill sets needed, and large finance gaps?are blocking goals to achieve universal energy access by 2030. But there are innovative solutions on the market and opportunities to reform energy sectors across the region.

Tetra Tech ’s energy access experts support governments, investors and lenders, project developers, off-grid solutions providers, and international development agencies to increase energy and electricity access and energize economies. Based on their decades of experience and recent advisory services for initiatives like Power Africa , the Water and Energy for Food Grand Challenge , and the Africa Clean Energy Technical Assistance Facility , Tetra Tech's energy access experts discuss progress on energy access in West Africa: what works, what to avoid, and what’s on the horizon.

Beyond a Handshake: Providing Tailored Technical Assistance to Help Off-Grid Companies Thrive

In the last five years, Tetra Tech supported hundreds of leading, locally founded off-grid businesses and organizations in West, Central, and East Africa. We found that each company needs tailored technical assistance: earlier-stage companies need more support on their business models, partnerships, and sales and marketing, while more developed companies need support on digitalization and more efficient operations in addition to specific support on fundraising rounds.

In places where the nexus between energy and other sectors is nascent, or where productive use of energy (PUE) is still emerging, off-grid companies will need support over several years. Any grant programs from development partners should include technical assistance to help make PUE products successful and business models sustainable and suited to local conditions and existing value chains. Although PUE offers great employment and income generation potential in agriculture-dependent countries, it is a more difficult model to scale up than pay-as-you-go (PAYGO) solar home systems. Whereas the PAYGO business model is built on standardization and daily/steady payments, PUE products are more expensive, agricultural customer incomes are seasonal, and customer needs vary. ???

Even where the sector is more mature, off-grid companies need technical assistance to build partnerships with manufacturers, distributors, and investors; review and understand financial documents; and scale up marketing, sales, digitalization, and operations. Close relationships with government agencies and local banks are critical. As the sector consolidates and investors look for lean operations, off-grid companies will need support to reduce costs and extend their financial runways. For example, we helped ENGIE Energy Access (Africa) develop a leaner and more efficient company structure, aligning their operations in nine countries and making them more effective, which resulted in hundreds of thousands of new connections for homes and businesses.

Today, many of the more sophisticated energy access companies are using digital platforms to increase efficiency in all aspects of their operations, from generating leads to managing payments and performing maintenance in ways that reduce their costs. They’re also using geospatial data and financial indicators to determine the creditworthiness of often-unbanked populations to guide their expansion plans.

Our experience also proved the importance of dynamism: responding quickly and strategically to unforeseen challenges and opportunities. To succeed, especially during periods of external shock, companies need market data that factors in the changing environment. Data should support these companies to continue serving their customers, who are typically low income, vulnerable, and in rural areas far from support outlets. For example, during COVID-19, we quickly developed information sheets on topics that off-grid companies saw as the most important to them and their customer base in the midst of the pandemic. Business associations utilized these materials to successfully advocate that off-grid companies be declared essential service providers, allowing them to continue operations amid lockdowns and movement bans. In the future, off-grid companies in West Africa will continue to need a similar style of tailored market data to survive market shocks as the region is vulnerable to political instability (including coups d’état), high climate change risks in the Sahel, and other events that test the resiliency of the private sector in the energy access space.

Policy as a Partner: Creating a Regulatory Environment to Achieve Universal Energy Access

Energy sector investors want clear rules of the game. To attract investment, governments need to enact transparent policies and regulations that provide the right environment to scale energy access quickly and sustainably. In West Africa’s off-grid sector, regulations address topics like quality standards for solar equipment and products, mini-grid tariffs, fiscal incentives, licensing and permitting, and spatial organization. Regulation is also opening opportunities in the distributed renewable energy sector, making room for the private sector in energy infrastructure financing. But there’s more work to be done.

Strategically designed regulations?can create an environment where the private sector can operate in a secure, reliable market while contributing to local social and political objectives. For example, if we want to fast-track mini-grid deployment to electrify communities and critical services, two important regulations are transparent site allocation for mini-grids and simplified licensing for mini-grid operators.

In West Africa, continued sensitization and capacity building on the following issues would help policymakers adopt favorable financing mechanisms for private companies in the off-grid electrification sector:

• Regulations for stand-alone solar systems should avoid creating monopoly conditions. Operators should be free to serve all geographies and markets in a country to stimulate competition. Regulations should be balanced to serve all stakeholders simultaneously: balance makes a country more attractive to investors, allowing the sector to grow.
• Mini-grid regulations should allow for transparent technical interconnection terms and compensation rules in the case of national grid encroachment, which makes investors feel more secure.
• Rural electrification is not financially viable without government support, no matter the technology used, whether on or off the grid. Consequently, governments should avail innovative business and financing models to attract investment. Policymakers are still reluctant to channel funds to the off-grid private sector, though often find it acceptable to subsidize grid expansion for private micro-utilities. This needs to change.
• Transparent tariff guidelines are needed to ease the process from project preparation to tariff approval. Tariff policy should encourage cost-reflective tariffs for electricity, like in Kenya and Uganda, even if it means introducing a tariff compensation mechanism through cross-subsidies to maintain equity between on- and off-grid customers.
• To protect consumers, regulations on technical standards and quality must be coherent and comprehensive enough to fight counterfeit products with enhanced enforcement. Regulations outside the energy sector (e.g., overly broad financial regulations) can impact or threaten energy companies, especially those using the pay-as-you-go distribution model, which affects consumer data storage and protection, microfinance, microleasing, and VAT regulations, among others.
• Public-private partnerships should be encouraged … and transparent. Partnership between governments and the private sector?can only happen in a context of full transparency and reporting. Private companies should commit to information sharing about service level and customers reached with government agencies.

Goldilocks or the Valley of Death? Making Access to Finance “Just Right” for Off-Grid Companies in West Africa

Some of the leading off-grid companies operating in sub-Saharan Africa raised significant capital in the past two years. In East Africa and Nigeria, we saw high-profile deals in the commercial and industrial (C&I), micro-grid, solar home system, and PUE subsectors.

However, most off-grid and distributed renewable energy companies in West Africa (excluding Nigeria) are still in the so-called “valley of death”: too big for grant funding, venture capital, or impact investing, yet without the profits that would attract larger commercial investors or direct development finance institution (DFI) funding for scalability. This applies to nearly all second-generation pay-as-you-go solar home system companies in West Africa as well as mini-grid companies. Most PUE companies are even less advanced, still navigating the concept stages or pilot phases.

Interest in mini-grid development is high, but tenders throughout West Africa typically have small ticket sizes that prevent the winners from advancing to the next stage of development. Meanwhile, the C&I sector turned frigid following a series of political changes, policy reversals, and regulatory uncertainty that chilled off-takers’ investment decisions. Only two C&I companies with headquarters in West Africa managed to close equity raises above $2 million.

Debt and equity remain challenging for locally owned and locally focused companies, especially for companies active in the inland Sahelian region or in Liberia, Sierra Leone, and Guinea where local currency is critical. Whereas debt abounds for companies with pan-West African operations and regional offices in capital cities, many of these companies prioritize controlled growth to ensure higher repayment rates, particularly when facing upward-trending prices. An even bigger issue lies in the absence of dedicated equity funds with tickets up to $5 million. Few companies in West Africa today are willing to risk their own balance sheet to scale faster than 15,000 units per country without any subsidy scheme to back up faster sales performance.

Some donors and DFIs set up a strong set of incentives such as results-based financing and large grant programs designed to crowd-in large investments, even in complex geographies like Liberia, Burkina Faso, and Chad. During the recapitalization of CIZO in Togo, large players such as Sun King acquired the local group Soleva, allowing the company to enter the country at large scale making use of the government incentive. Multi-country models of results-based financing have been tested successfully, though the actual subsidy rate must be fine-tuned.

Donor-supported and private capital funds will play important roles in West Africa in the next few years. Already, the mini-grid sector has moved from utility investors to infrastructure fund investors. For the first time in years, we are seeing genuine interest from local banks in financing certain segments of distributed renewable energy, notably C&I and PUE. Foundations are laying the groundwork for key programs in Ghana, Sierra Leone, and Senegal.

However, national results-based funds quickly exhaust their endowments, and disbursements have not always been targeted based on regional or beneficiary capacity to pay. Today, this is the biggest challenge.

It Takes a Village: Engaging DFIs and Development Agencies to Connect the Dots on Energy Access

An innovative partnership approach to engaging both the private sector and DFIs is key for many West African countries to meet their political and social commitments. Through a structured engagement process and a clear vision, the private sector can gain the information it needs and use its strengths efficiently and effectively to invest in local and regional energy access programs.

The West African off-grid market is growing faster than expected and DFIs are taking note. In the past 10 years, Power Africa interventions (including Tetra Tech’s support under the Power Africa Transactions and Reforms Program and the Power Africa Off-grid Project) have raised the interest of other donors. In C?te d’Ivoire, the IFC - International Finance Corporation invested in the development of a renewable energy roadmap with the intention of providing an environment that supports private sector engagement. The African Development Bank Group (AfDB) Africa Energy Market Place initiative included the development of country Action Plans with an off-grid framework. These two programs benefited from our advisors’ support at both content development and private sector engagement levels.

Central coordination can connect the dots between governments, the private sector, and DFIs. Through our engagements with Power Africa and other clients in the region, Tetra Tech developed and maintained constant coordination with donors such as 世界银行 , AfDB, European agencies, and the Millennium Challenge Corporation , as well as with investors like the U.S. International Development Finance Corporation , the Export-Import Bank of the United States , Gaia Impact , Social Investment Managers & Advisors (SIMA Funds) , and Shell Foundation . For example, Tetra Tech provided insights on quick wins for the implementation of the UK Foreign, Commonwealth and Development Office ’s ACE TAF program in West Africa and encouraged the program to focus on improving the lobbying capacity of national renewable energy associations.?

Donors, DFIs, and investors prefer savvy companies with proven potential. To help off-grid and energy access companies catch the eye of donors and investors, Tetra Tech has delivered on-the-job training to improve business performance, refined marketing tools, strengthened business models, and coached CEOs. We provided market intelligence for Francophone countries to more than 250 companies, and helped close more than 75 transactions, some of which involved DFI and donor support.

DFIs can support a market-led transformation in West Africa’s energy access sector. Where access to capital and/or business consulting is difficult, “energy access incubators” can help propel small and medium-sized companies owned by local entrepreneurs, including women led-companies. National industry associations will play a more critical role in digesting new business models, deploying new technologies, and mainstreaming circular economy and e-waste management into their businesses. These associations can benefit from the type of financial backing and capacity building that development agencies may be best positioned to provide. Of equal importance will be the promotion of women entrepreneurs in the energy sector through innovative programs supported by donors and DFIs.

Learn more about Tetra Tech’s work to increase energy access and accelerate a clean and just energy transition in West Africa and around the globe.