Covid-19 has proved to be a game-changer for East African businesses. Among the hardest hit is the region’s alternative energy sector. The sector, responsible for providing many remote communities with off-grid energy services, started the year on a high. However, the pandemic, and the recession it motivated, quickly reversed fortunes. FORBES AFRICA examines how the sector is responding, and coping, to some of these shocks.
Over the last decade, East Africa’s off-grid energy companies have been the unsung heroes of the region’s wider energy industry. According to GOGLA, the global association for the off-grid solar energy sector, these businesses have collectively provided at least 470 million people, many of them in remote communities, and cut off from the national grid, with alternative energy access.
The industry, working to reduce energy poverty across East Africa, was arguably on a high at the start of 2020 but the onset of Covid-19, and the reactionary public policies that followed, have worked to reverse a lot of growth that the sector was previously experiencing.
Looking at the off-grid solar sector, GOGLA’s East Africa representative, Patrick Tonui, says that while the impact of the pandemic has been grave for the industry, Covid-19 remains a universal shock for the region and sector businesses had to react with that in mind.
“Coming into the beginning of this year, this industry was really on a solid growth path and the outlook was looking good. [In] January, we began to hear about Covid-19 and what was happening [especially after] China shut down for the month. We [anticipated] there were going to be impacts on the supply chain and on the manufacturers who were producing these products. As we went into March, when Covid-19 reached Africa, and we saw various government responses to it, one thing was abundantly clear was that we [were] going through a global health crisis and it wasn’t necessarily about us [as an industry],” he says.
Ensuing public health measures to contain the virus including lockdowns, curfews, and travel bans hampered the industry and severely impacted trading for many of these businesses. In fact, according to a survey by EnDev, an international energy access partnership working in a number of developing countries, East Africa’s off-grid energy firms were among the hardest hit, globally, with 35% of these businesses going into hibernation as a direct result of the pandemic. To an extent, says Tonui, this couldn’t be helped.
“We asked ourselves [as GOGLA], we asked our partners, and our members if it would have been responsible for us, as an industry, to go to [our] government and say ‘you are hurting my business by shutting my stores down or by shutting the ability of customers to come to us’. This is a global health crisis and [right now], it’s a question of how we [as an industry] are going to protect our communities and our workforce.”
While the direct impact of Covid-19 policies have played a major role in declining sales for sector businesses, investment in the industry has also been strained in the fallout.
“Coming into the beginning of this year, this industry was really on a solid growth path and the outlook was looking good.”– Patrick Tonui of GOGLA
This is already apparent on the ground. A number of relief funds have been set up to help East African off-grid energy businesses through this crisis including the Energy Access Relief Fund pioneered by Acumen, the multinational not-for-profit impact investment fund, which provides bridge loans as an avenue for emergency funding to eligible businesses.
The realities of this moment are all too real for entrepreneurs like Aaron Cheng, President of renewable energy firm, PowerGen, operating in five countries across the region including Kenya and Ethiopia.
“In general, Covid-19 has impacted some investors from what we’ve seen. Some investors have completely pulled out or put [a] pause on new investments and that’s really damaged projects in the sector. We’ve certainly been affected by that, we’ve been lucky enough to have some investors step in who have been supportive through this time,” says Cheng.
Nevertheless, Cheng notes that his company has had to minimize all possible costs while waiting on emergency funds to get through the crisis.
“We have done our best to preserve our team and keep that together. In terms of relief funding, we have been in discussion with some of these programs but they have been a lot slower than intended… and so there hasn’t actually been any final stage notices around any of the funding [that we’re seeking]. For the most part, we have done our best to reduce non-personnel costs to be able to retain our team… that’s been really important to us to keep the business going,” he says.
Delayed financing has had an impact not only on operations but on new projects as well.
“We’ve actually seen a greater demand for large-scale solar battery solutions and I think that’s because grid reliability has been hit by Covid-19 and, generally, corporate ‘greenness’ is a sentiment that’s increasing around the world and [the pandemic] has helped accelerate that discussion and dialogue [globally] so we’re seeing a lot of commercial-scale interest but projects themselves are taking a while to close because financing has been slow.”
The pandemic is also affecting one of the off-grid sector’s innovative service provisions; mini-grids. Independent from the national grid, these installations provide reliable and consistent off-grid electricity for small-scale electricity generation projects usually for communities or businesses.
According to Aaron Leopold, CEO of the Africa Mini-grid Developers Association (AMDA), an industry association initiated by mini-grid companies across the continent, based in Nairobi, even before Covid-19, the sub-sector faced constraints due to its idiosyncrasies.
“The issue with mini-grids is that energy policy, around public sector support, subsidies and also regulation has traditionally been built around approving and monitoring a very small number of very large projects whereas mini-grids are a huge number of very small projects. The burden, the complexity, and the detail of the regulatory requirements are overly burdensome on these small projects. It will be physically impossible to achieve universal energy access on any reasonable time scale without significant improvement in the regulatory environment,” explains Leopold.
As a result, these shortfalls in policy have restricted the region’s mini-grid sub-sector’s access to investment, posits Leopold.
“[It’s] that very same regulatory environment hampers investment. We have investors saying, ‘What? It takes you one year to get approval to electrify a village of 1,000 people? I’d rather put my money somewhere else’! We are really looking to help governments [through our work] think creatively about keeping their citizens safe, because that’s what regulations are for, and also enabling the progress that they are trying to see in technology and rural service provision.”
“Corporate ‘greenness’ is a sentiment that’s increasing around the world and [the pandemic] has helped accelerate that discussion…”– Aaron Cheng, President, PowerGen
However, despite the policy blindspots, Leopold does note that there is a crucial part this kind of off-grid technology can play during the present pandemic, particularly for the remote communities the sub-sector serves.
“This year, looking at the Covid-19 situation, mini-grids are the technology that will allow us to electrify thousands of un-electrified health centers across sub-Saharan Africa. There is a huge risk [that] every single city in Africa [may be] overrun because [of the pandemic] with people who need medical care, [who] should have received medical care [within] their rural communities, but there are not adequate facilities. The decentralized nature of mini-grids is going to show its value this year,” he noted at an interview at Future Energy East Africa, in June, considered the largest conference and trade exhibition for the region’s energy sector.
Taking a broader view, Lighting Africa, an initiative of the International Finance Corporation (IFC), has been working on market development for off-grid technologies including solar products and mini-grids in the region for the last 12 years. Program lead, Itotia Njagi, from Kenya, believes that major African alternative energy markets have been severely affected by Covid-19, comparing market performance between 2019 and 2020.
“Across Africa, we’re seeing almost a 30% drop in sales if we compare the first half of this year to the first half of last year. It varies; some [regional] markets have been hit harder than others, but that’s the general pattern we’re seeing. In fact, this is the lowest half year sales we’ve seen since 2014,” he says.
Despite the startling statistics, Njagi is of the mind that government responses have a lot to do with how their corresponding off-grid energy markets fared, particularly in terms of sales volumes.
“Covid-19 has impacted [regional] markets very differently. As an example, the numbers in Kenya were not down so much, maybe at about 15%-20%. Tanzania, much less, because they never really had a lockdown [period]. However, if you look at countries like Uganda that had proper lockdown [measures] then you start seeing those 30% numbers and, I think, with Ethiopia, it’s significantly more than 30%. So, it varies from country to country.”
As in the mini-grid sub-sector, the wider industry has been hindered by reactionary policy measures, across the region, during the pandemic and beyond.
“Two things have happened in the last six months from the policy-side that have affected the industry. One is that VAT was re-introduced on solar products. On top of that, [excise] duty was introduced. I can relate with the fact that governments have been affected and they are trying to shore up whatever revenues they can and so some of the exemptions that were provided in [the past], they are [currently] revisiting Duty as a common target within East Africa and [at the same time] VAT is being applied. Basically, these products are now more expensive, at a time when disposable incomes are shrinking. We expect that this will have an impact on sales for the second half of 2020 and so that recovery process [for sector businesses] will take much longer,” he explains.
While tidings for the East African energy sector may seem bleak, for now, there is a silver lining for entrepreneurs in the sector. Turning back to Cheng of PowerGen, despite present difficulties, he believes the outlook remains positive for businesses like his, across the region.
“There still remains about 600 million people without power, and that hasn’t changed. Through Covid-19, and the slump of 2020, there still isn’t a much cheaper grid extension model and there hasn’t been a radical improvement in energy access. You still have high diesel costs and high grid unreliability and that’s actually driven commercial clients to alternative energy solutions. Now, it’s just a matter of continuing to execute and using good economics in these projects and ultimately using the end of 2020 or 2021, if Covid-19 ever slows down, to rebuild investor confidence and get back to the levels we were at in 2019 but we do believe we can get there because the fundamentals remain in the market.”
-By Marie Shabaya