Source/author : Wood Mackenzie
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Providing access to clean and reliable energy to off-grid populations represents a massive market opportunity within the energy transition, and global energy players are taking notice.
Off-grid energy access: A fundamental piece of the energy transition
Just under 1 billion people—about 13 percent of the current global population—still do not have access to electricity, and over 1 billion more do not have access to reliable power. Although 600 million people are expected to gain access to electricity in the next decade, at the current trajectory, population growth is on track to outpace new connections, particularly in Sub-Saharan Africa.
But in many of the world’s fastest-growing economies, off-grid energy players are quickly capturing market share and entrenching themselves as sustainable and low-cost electricity service providers. Between 2010 and 2017, over 400 million people globally gained access to electricity from off-grid solar solutions, and by 2030, an estimated 71 percent of new electricity connections will be provided via off-grid or mini-grid solutions.
As energy access markets evolve and scale, off-grid energy provision will have increasingly significant impacts on power demand, grid extension and modernization investments, the siting of new generation sources, and future carbon emissions reduction pathways. Off-grid energy technologies and business models are also, in many ways, on the cutting edge of low-cost solar technology, advanced metering and remote demand-side management, energy efficiency, and other trends shaping advanced electricity markets. As a result, previously ignored off-grid populations are quickly becoming a fundamental piece of the energy transition puzzle.
Recently, the sector has seen accelerating investment and participation from global energy players taking steps toward becoming customer-centric virtual utilities and OEMs looking to test and develop new markets for components. European utilities like EDF, Engie, and E.ON have entered strategic partnerships, deployed hundreds of millions of dollars in equity, launched business units solely focused on this space, and made strategic acquisitions. Likewise, oil and gas majors, led by Shell and Total, have made similar investments and partnerships, invested in financial intermediaries, and launched a branded product line of off-grid solar products.
‘Strategic investments in off-grid energy access: Scaling the utility of the future for the last mile’, a new report from Wood Mackenzie Power & Renewables in partnership with Energy 4 Impact, highlights the rapid acceleration in investment in off-grid solutions, and the growing role of strategic investments from global energy players shaping the future trajectory of off-grid markets—for more than just electricity.
The energy access investment landscape
2018 was a banner year for energy access investing. According to new data from Wood Mackenzie Power & Renewables, the sector saw deployments of over $511M USDequivalent across all types of corporate-level investment and relevant off-grid technologies, the highest annual total ever.
Corporate-level investment into off-grid enregy access companies by year and type of financing through year-end 2018
Across all relevant categories of solutions, nearly $1.7 billion in cumulative disclosed investment has been deployed into energy access markets through the end of 2018, over $1.2 billion of which was deployed since the beginning of 2016. The sector’s investment landscape shows signs of maturation. In 2017, year-on-year transaction volume grew 37 percent and total capital composition by volume shifted to over 50 percent debt. Beyond the uptick in deployments, deals are also getting bigger. Despite a decline in annual deal count, 2018 saw total transaction volumes grow another 22 percent year-on-year, the average equity deal value double, and debt deal values rise nearly 5.5 times.
The investment landscape also has clear leaders. Deals are overwhelmingly sourced from dollar-denominated (86 percent) private capital (71 percent), though innovative local currency deals and lending facilities are picking up. Additionally, companies deploying solar home systems (SHS), pay-as-you-go (PAYG) business models have attracted 81 percent and 91 percent of investment to date, respectively.
However, capital concentration is a looming risk in off-grid markets across multiple dimensions. The report finds that the top 10 deals represent $564 million USD equivalent, or one third of total investment to date. 58 percent of total investment has flowed to East African markets. The top 10 investors by total deal value (meaning the sum of deal totals in which the investor participated, given that many deals are made in consortia) have participated in transactions worth just shy of $1.1 billion USD equivalent, or two thirds of total global investment into energy access markets. Likewise, the top 10 SHS providers have raised two-thirds of the total investment into the energy access sector, and over 84 percentof total SHS funding. Likewise, the top 10 pure-play mini-grid providers have raised 77 percent of total mini-grid funding through year-end 2018. This represents an outsized risk to the sector as it may cause heightened investor caution, particularly given the shortage of successful exits to date.
Strategic investments in energy access markets
Strategic groups within many of the European oil and gas majors, utilities, and IPPs, clean energy equipment manufacturers, and the technology sector have paid increasing commercial attention to the energy access space.
They take three broad go-to-market routes:
- Direct investments and M&A: Strategic investors and their affiliates have made or been involved in at least 110 direct investments in the energy access sector worth over $383M USD equivalent is disclosed value, representing nearly 25 percent of their total investment volume.
- Commercial partnerships and joint ventures: Strategic investors have formed at least 30 commercial partnerships and joint ventures with off-grid energy access companies, ranging from channel distribution partnerships to product development and licensing to leveraging operational synergies.
- Indirect investments (via funds and financial intermediaries): Strategic investors have participated in fund investments worth at least $461M USD equivalent. Most of these investments by volume are into funds managed or created within or alongside the corporate structure of the investor.