There are signs of post-pandemic recovery for Africa’s off-grid solar industry. Now it needs to lure back the investors
Africa’s off-grid solar power industry is growing but is in urgent need of further support, as the sector struggles to shake off the negative impact of the Covid pandemic on providers of equipment and services, and the ability of customers to pay.
Bringing solar power to communities both remote and in more populous areas that suffer from inadequate grid provision is regarded as vital if the UN sustainable development goal of bringing universal electricity access to all by 2030 is to be realised.
It also promises to replace polluting kerosene with cleaner – and cheaper – solar powered devices for lighting, so helping to meet climate goals as well as achieving social and economic benefits.
Falling costs for solar products and an increase in the number of suppliers in sub-Saharan Africa has seen the sector take off over the last 10-15 years.
By the end of 2020, the global off-grid sector had developed into a $1.75bn annual market, serving 420m users, mainly in sub-Saharan Africa, according to the World Bank’s Lighting Global Programme. That was reflected in 30% annual revenue increases for off-grid solar firms in 2017-19.
But the pandemic put an end to those sort of growth rates in many parts of Africa, even if the market is still expanding faster in some countries than others.
Overall growth in sales volumes for appliances and services powered by built-in or household solar panels – such as solar lanterns, multi-light systems, batteries for phone charging and solar home systems – have faltered.
Spending cuts due to the strain on incomes, movement restrictions for suppliers and supply chain problems caused by the pandemic are holding it back. Further disruption to global trade due to the impact of the war in Ukraine has only added to these problems.
Mixed regional picture
In East Africa, a hotspot for home solar products, sales of off-grid lighting products reached almost 2.1m units in the July-December 2021 period. That represented a 4% increase compared to the first half of 2021, but a 15% decrease compared to the second half of 2019, according to GOGLA, a global association for the off-grid solar energy industry.
However there were large disparities between countries, with traditional market leaders Kenya and Ethiopia suffering further sales slumps, while Uganda, Zambia, Rwanda, Malawi and others reported strong growth.
In West Africa, sales of 586,000 units in July-December 2021 represented a 23% increase compared to the first half of 2021 and a 60% increase compared to the second half of 2019. Again, this positive looking picture hides national disparities, with strong growth in Nigeria, which represented two-thirds of sales in West Africa, outweighing poorer sales in the region’s smaller economies, GOGLA said.
This data mostly reflects sales of direct purchases of equipment such as solar lanterns or panels by consumers rather than via so-called pay-as-you-go (PAYG) solar services, which have continued to grow, but comprise a small part of the overall market.
With PAYG, customers effectively rent a panel and equipment that it powers, such as lights, rechargers, radios and televisions, from a provider company, typically on a two-to-three-year contract, after which time the customer owns the equipment and can get their power free of charge.
Building a local supply chain
The pandemic may not have been kind to the industry, heaping extra costs on providers and hitting the spending power of customers, but lessons learned from it can be used to make the sector more resilient, according to sector specialists.
As with many other industries around the world, the African off-grid solar sector has been hit hard by disruptions to global supply chains, which has led to a shortage of panels and other equipment.
Companies have been able to offset these problems to an extent by repurposing parts from other industries to carry out repairs, for example, but inevitably companies and their customers have still been affected by delays.
Local companies in East Africa have recognised the advantages of shortening supply chains and increasing regional and local manufacturing to reduce the impact, say researchers at the Smith School of Enterprise and the Environment, University of Oxford.
In a policy brief published in March 2022 entitled Supporting the East African Off-grid Energy Industry Post Covid-19, Tonny Kukeera and Aoife Brophy said that while some local off-grid companies faced with rising costs and long delays for deliveries from Asia shut down, others sought new suppliers and manufacturers within the East African region.
Most of the companies started new partnership deals with manufacturers in Kenya and Tanzania. In one case, a company switched to adapting batteries from a Tanzanian motorcycle battery supplier as an alternative to solar battery imports from China.
“This evidence indicates the need for regional governments to create an environment that allows local manufacturing and cross-border trade to thrive,” the researchers say, adding that it also provides an opportunity to develop local systems that can cut down on waste and improve resource use locally.
African governments could draw lessons from India, where production linked incentives boosted the country’s electronics manufacturing production. “Such support is urgent for East Africa to rebuild economies that are more resilient to future risks and crises,” they say.
Donor funding wanes
Another area for concern is donor support for the sector. An overall decline in investment commitments towards the East African off-grid sector over the last five years has been exacerbated by Covid-19 crisis, as financing from governments, donors and development partners shifted towards pandemic emergency measures.
Some off-grid organisations reported having had their operational plans stalled due to funding withdrawals by the donors, while in Uganda, a subsidy programme for public electricity access was suspended, the Smith researchers note.
Regional governments, multilaterals and other development partners need to do more by focusing on setting up schemes to reduce investment risks and attract more foreign direct investment in the off-grid sector, they say.
The authors share the increasingly popular view within the investment community that there should be more of a focus on funding initiatives that recognise the impact of investment in one sector on others – in this case by acknowledging the role increased electricity access plays in protecting health and fighting poverty.
“The off-grid renewable sector plays and continues to play a tremendous role in enabling services such as access to affordable and electrified health care and water pumping services in the majority of the African countries,” according to the policy brief, which stresses that the role of electricity access in schools, powering digital tools and promoting digital literacy also helps improve health outcomes.
More regulatory certainty needed
Above all, the off-grid sector is looking for more certainty in terms of operating conditions for the sector in order to attract more investment such as equity financing, which has fallen.
Investors have become more reluctant to fund the sector at a time when emergency fiscal measures related to the impact of the pandemic, such as temporary changes in VAT and other taxes, have made assessments of revenue streams and profits difficult to assess.
“To achieve this, governments will have to ensure working frameworks and mobile network standards align with the minimum investment period. That is to say governments need to be consistent and not impose changes in short time periods,” say Kukeera and Brophy.
That extends to ensuring similar reassurance for investors regarding the business framework for other services with which PAYG solar system sales are dependent, such as mobile money, smart metering and Internet of Things (IoT).
“Investments in solar products are attracted by the promise that there is a suitable connection methodology for a minimum period like five years. Hence, consistent mobile money, IoT, and mobile networks regulations are critical,” they say.