Worldwide, there are over 1.4 billion people without energy access. On the African continent alone, 620 million people lack access not only to the electricity grid, but also to all the accompanying benefits that go along with a connection, with only kerosene-powered solutions. The issue is both a pressing humanitarian problem and an environmental opportunity. Responding to the risks and rewards, venture capital is increasingly being mobilized within the sector – with over $100 million invested in 2017 Q4, according to our i3 data.
We explored the progress of SteamaCo, a developer of smart metering technology for off-grid utilities, with reflections on the wider progress being made in the energy access industry, largely facilitated by validation via improved ways of collecting and analyzing data.
An uptick in energy access funding
SteamaCo was founded in 2012 at a time when there was a limited market for energy access solutions, largely driven by development aid agencies and philanthropic initiatives who heavily subsidized the distribution of cheap (and not very good) off-grid lighting products, either focused on a single customer (e.g. solar lights) or larger localized mini-grids. While this initial conception of energy access focused on providing energy to the widest range of people possible, there was no follow-on service offering, nor any way of gaining an understanding of the real usage needs of end consumers – products broke, needs were unfulfilled, and efforts failed.
Today, we are beginning to see a different picture. The market has begun to grow, driven by startups and corporates providing better services, an uptick in funding, and a better understanding of end consumer needs.
Last month, SteamaCo announced it had raised $2.9 million in Series A funding. Investors in the round include Shell, the Ashden Trust, and GReeN – a group of prominent angel investors from renewable infrastructure development backgrounds. In addition to the funding received by SteamaCo, there has been a broader uptick in funding across the board in the energy access sector, driven by the participation of key strategic players in the sector. Along with Shell’s Technology Ventures and Energy Access units, French utility Engie is becoming increasingly active in the sector, with activity ranging from venture funding to acquisitions, as in the case of acquiring off-grid energy startup, Fenix International.
But why now?
A better understanding of consumer needs
Strategic investment in the sector is a relatively recent development, and reflects changes in terms of innovation, investment, and understanding of the risks and rewards within energy access. Investment has traditionally come in the form of philanthropy, impact investing, or governmental grant funding (which is drying up under the current US administration). As with energy on the grid, the provision of accurate data has become crucial for the future growth of decentralized energy – data on both aggregated consumption, as well as the specific needs and spending habits of end consumers. This data validates business models and quantifies the opportunity for strategic participation.
One such source of data validation has come in a recent whitepaper that was published by SteamaCo and Vulcan, specifically addressing the financial viability of mini-grids in developing countries. The paper examines Vulcan’s mini-grid portfolio in Kenya, tracking its performance over the last two and a half years, and showing that mini-grid projects stand to become commercially viable over the coming years with a 10-year internal rate of return of around 15 percent – a big deal for this type of project, as well as future projects seeking deployment finance. This return can be achieved through a three-pronged strategy – first, by focusing on a reduction of capex; second, a 20-40 percent increase in organic demand; and third, government support through subsidy programs to catalyze scaling in the short term.
End consumer management is key in changing paradigms and ensuring a strong IRR in existing projects (profits = financing for future deployment). SteamaCo specializes in analyzing and providing solutions to such issues through methods including:
- Load shifting: Shifting the powercurve from evening to afternoon/daytime use, ensuring much improved solar+storage efficiency.
- On-built financing of appliances: SteamaCo reports when customers are provided with a choice of various appliances. These appliances ensure there is not only a productivity increase in many cases (for example, in businesses using energy-hungry fridge units), but also a strong repayment rate. This is a win/win scenario for operators and customers: customers are happier, and they are using more power!
- Tariff optimization: Data can be used to ensure that power is priced correctly, and that end consumers understand what they are buying. With technological advances in automation and other technologies, coupled with proof of financials, the customer experience will shift up – again, ensuring a positive cycle of happy end consumers, happy utilities and operators.
Energy Access: The future of the market
It is a false dichotomy to pitch providers of micro-grids as a direct competitor to other methods of providing energy access, such as solar home systems (SHS). Much of the investment in energy access has tended to focus upon the provision of solar home systems, with companies such as M-KOPA Solar, Off Grid Electric and BBOXX drawing both headlines and many millions in investment. But the needs of those that are unconnected to the grid are a broad spectrum, and therefore so must be the solutions. Evidence of this can be seen in the funding and research output of SteamaCo, as well as $20 million invested into Husk Power Systems recently, in which Shell and Engie both participated. SteamaCo’s relatively modest funding round also highlights an emerging trend in energy access – a capital-light solution that moves away from expensive deployment capital, and towards a scalable platform offering that has proved so attractive to investors in an array of other cleantech industries.
If we are to address the many issues related to providing energy to the poorest peoples on earth, there will be space for a broad range of solutions, with collection and analysis of data key to unlocking further productivity gains, capex reductions, and capital investment.