Distributed energy profits largely not remaining in Africa – 3 recommendations how to change

Oil Change International

Picture: Pexel

Only about 1-2% of finance for electricity in Africa is currently flowing to distributed renewable energy (off-grid and mini-grid). Of this, the vast majority has been for multinational companies that are based in Europe or North America or led by entrepreneurs from these regions, meaning profits are largely not remaining in Africa.

Local investment yields more local benefits

Locally-owned and -operated distributed renewable energy initiatives – whether forprofit, community-owned, or public – have more spillover benefits for sustainable development relative to those run by companies based abroad. They result in a higher proportion of revenue circulating locally.14 They also tend to create more local jobs — both direct and indirect — because they are more likely to be integrated with local economic activity.15 Renewable energy projects in Africa have often been implemented without the participation and consent of local communities.16 This is a continuation of a long history of aid projects that encroach on local sovereignty. Because of this, there are strong calls for a code of conduct between donor countries, donor institutions, and African governments to help ensure local recipient communities have oversight and receive the bulk of the benefits from these development projects.17 Small-to-medium, locallyowned distributed renewable energy entities financed through local financial institutions are more likely to ensure the participation and acceptance of the communities they are working in.

Three recommendation how to change current situation

To support local participation in and ownership of distributed renewable energy entities throughout Africa, international public finance institutions should:

1. Support the entry of local finance institutions into the distributed renewable energy sector

  • Design early-stage finance for locally owned distributed renewable energy companies to include grant-to-debt sequencing and reporting requirements aimed at strengthening internal processes.
  • Support capacity-building for distributed renewable energy lending in local financial institutions. Specifically, enable programs that pair experts with local financial institutions for six months or more to set up systems and training for assessing risk and opportunities in this sector.
  • De-risk early distributed renewable energy investments for local financial institutions by enabling the establishment of catalytic first-loss capital, including first-loss guarantees.

2. Facilitate coordination, research, and planning

  • Design locally relevant and accessible guarantee facilities by providing forums for discussion between international public finance institutions, local financial institutions, and small-tomedium distributed renewable energy companies.
  • Provide grant and concessional finance to facilitate the provision of local market information, including feasibility studies, the development of standardized metrics, and advisory services for project preparation.
  • Dedicate more resources to communicating and coordinating distributed renewable energy initiatives between different international public finance institutions as well as internally between related program areas like agriculture and water.

3. Increase support for distributed renewable energy with an emphasis on community-owned and cooperative models

  • For institutions providing policy and technical assistance to governments, support the domestic provision of at least equal support for off-grid and mini-grid solutions as for grid extension.
  • Target grants and concessional finance towards the up-front costs of community-owned and cooperative mini-grid initiatives.

Excerpt from: Distributed Funds for Distributed Renewable Energy: Ensuring African Energy Access Finance Reaches Local Actors (Oil Change International, 2020)