Big Energy Eyes Off-Grid Electrification
This article appeared in the March 2018 edition of PV Magazine and can be found online - here.
The International Energy Agency estimates that off-grid energy system will receive 70% of the nearly $400 billion in investments required to provide energy access to the 1.1 billion people without electricity. Large energy companies like utility and oil and gas firms are increasingly taking notice of the opportunities in off-grid electrification through investments and acquisitions.
Manoj Sinha, CEO of Husk Power, a microgrid developer that recently raised a $20 million funding round from Shell and ENGIE amongst other investors, explained to pv magazine, “Large energy companies are interested in the off-grid market because that is where future growth will come from. Investing in the sector is a strategic imperative. Whoever makes the first move will get more market share, and large energy companies can’t afford to be left behind.”
Rik Wuts, Cofounder and VP of Business Development at Powerhive, a microgrid developer in Kenya and Nigeria, expanded on this sentiment by explaining, “Many large energy companies want to be active in Africa but haven’t found a way to access the market. There aren’t many independent power producer (IPP) opportunities, and those available are hard to obtain. Energy companies are on the lookout for the next opportunity to enter the African market, and many are betting that minigrids will be just that.”
Investments and acquisitions
The most notable investment activity in the off-grid solar sector has been the recent acquisition of Fenix International by ENGIE. Lyndsay Handler, CEO of Fenix International, a pay-as-you-go solar home system company, told pv magazine, “Everyone in the solar home system sector was asking the question: are large-scale energy players interested in this space? Fenix’s acquisition by ENGIE shows that the answer is: Yes.”
“ENGIE’s goal is to provide 20 million people around the world with access to decarbonized, decentralized energy by 2020, using the latest digital technologies,” says Raphael Tilot, Chief Customers Solutions Officer at ENGIE Africa. Through the acquisition of Fenix International, ENGIE now has its own solar home system offering. For microgrids, ENGIE has started an internal startup called Power Corner, which has built 8 microgrids in Tanzania.
“ENGIE is an active player well beyond solar home systems and microgrids in Africa. From large-scale power plants to off-grid systems and energy services, these systems combine together to offer our clients a broad set of solutions whether these clients be off-grid residents or national governments,” explained Tilot.
ENGIE has also invested in other solar home system companies through its impact investment arm, which has minority stakes in BBOXX and PEG. Other investments by large energy companies in the solar home system sector include Total, General Electric, and EDF’s investment in Off-Grid Electric and Shell’s investment in Solar Now.
For the off-grid microgrid sector, E.ON, a Germany utility, has funded an internal startup called Rafiki Power, which has built eight microgrids in Tanzania. Equity investments in microgrid companies include Shell’s funding of Steamaco, Shell and ENGIE’s investment into Husk Power, Mitsui’s funding of OMC Power, and Powerhive’s funding rounds supported by Total, Enel, and Caterpillar.
Rob Schueffner, Microgrid Manager of Caterpillar’s Global Power Solutions Division, explained to pv magazine, “Caterpillar has been providing off-grid electrification solutions for more than 90 years through reciprocating generator sets and turbine generator sets. We see rural electrification as a tremendous opportunity for Caterpillar and our dealers to support progress. Providing power to those without it unleashes the potential of the individuals to focus on higher value activities and creates a whole range of entrepreneurial opportunities.”
Schueffner continued, “Today we are installing complete Cat hybrid systems in applications all over the world. Cat dealers have proven the ability to install and support a whole range of remote hybrid power installations including small remote telecommunications towers, villages, and mining sites.”
Strategic investors
Just as large energy companies are interested in investing in off-grid electrification, off-grid energy companies actively seek large energy companies as investors for their expertise, business connections, and understanding of infrastructure investments.
Sinha, of Husk Power, which operates 75 microgrids in India and five in Tanzania, explained to pv magazine, “We deliberately brought large energy companies on as investors to gain a strategic partner to help us put in place processes that will allow Husk Power to scale. We could have gotten the same money from a financial investor, but they would not have been as helpful in fueling our growth.”
The global operations of large energy companies allow them to provide advice on navigating complex regulatory environments across many countries. Harrison Leaf, CEO at SteamaCo, which recently raised a $2.9 million series A funding round lead by Shell, told pv magazine, “While many investors offer strategic support, Shell also comes with a wealth of supply chain, policy, and utility sector expertise. As the off-grid industry matures, the key success factors will be economics, regulatory support, and financing, and large energy companies are well placed to address all of these areas.”
In addition to expertise, large energy companies also provide access to a network of business connections. Wuts of Powerhive, which is developing 100 microgrids in Kenya and recently received a $1 million grant from US Trade and Development Agency to enter Nigeria, explained to pv magazine, “After bringing Caterpillar on as an investor, we were able to leverage their dealer network, which is made up of some of the largest businesses in Africa. If we want to enter a new country, we can ask Caterpillar to connect us with their dealer in that country, and the dealer can help us enter the market.”
Large energy companies also have investment horizons that are more compatible with microgrid investments. Wuts continued, “Minigrids are hard infrastructure, not simply technology. Unlike pure tech startups, minigrid companies can’t lose money for over 10 years and then be listed for billions of dollars like a Twitter. Large energy companies understand the timeframes and returns that come with infrastructure investments. Venture capitalists, especially those in Silicon Valley, typically have a different outlook. They are in it to help prove the model, but true scale will require other sources of finance.”
Sinha of Husk Power highlighted greater access to lower-cost capital as another area where large energy companies can support off-grid businesses. “We are trying to become a rural utility company, which require low-cost, long-term debt financing. In India, a ten-year loan carries a 10 percent interest rate, and we need that interest rate, at a minimum. That is hard to achieve as a small company, but with their balance sheet, we can get close.”
Wuts echoed this sentiment by saying, “Ultimately, the cost of capital is what matters. We are doing everything we can to reduce our capital expenditure, but in the long-run, the cost of capital is what matters most.”
Scaling the sector
Over the long term, large energy companies will play a critical role in the development of the off-grid electrification market.
Wuts laid out his vision for Powerhive and the sector as a whole. “The minigrid market will not thrive on project finance. We will develop a business model that can make money consistently, reliably, and at a given return. Then, someone with a big balance sheet will partner with us, and we will put their capital to work.”
Wuts’s outlook contrasts with those that see project finance as the primary vehicle for off-grid microgrids to scale. “Reaching true scale won’t come from project finance just yet. Project finance requires fixed, predictable revenue from a bankable off-takers. Our customers aren’t necessarily considered bankable today, and that is unlikely to change anytime soon.”
Wuts continued, “Additionally, project finance comes with many covenants that make it hard to experiment and innovate with additional services. At some point in the future, project finance will work for off-grid minigrids, but in the near-term, scale will be achieved by leveraging the balance sheet of a large company to reach millions of customers.”
The International Energy Agency estimates that off-grid energy system will receive 70% of the nearly $400 billion in investments required to provide energy access to the 1.1 billion people without electricity. Large energy companies like utility and oil and gas firms are increasingly taking notice of the opportunities in off-grid electrification through investments and acquisitions.
 |
| Pay-as-you-go solar home system companies have raised over $600 million in equity and debt financing demonstrating the commercial viability of this off-grid electrification model. Photo: SteamaCo. |
Manoj Sinha, CEO of Husk Power, a microgrid developer that recently raised a $20 million funding round from Shell and ENGIE amongst other investors, explained to pv magazine, “Large energy companies are interested in the off-grid market because that is where future growth will come from. Investing in the sector is a strategic imperative. Whoever makes the first move will get more market share, and large energy companies can’t afford to be left behind.”
Rik Wuts, Cofounder and VP of Business Development at Powerhive, a microgrid developer in Kenya and Nigeria, expanded on this sentiment by explaining, “Many large energy companies want to be active in Africa but haven’t found a way to access the market. There aren’t many independent power producer (IPP) opportunities, and those available are hard to obtain. Energy companies are on the lookout for the next opportunity to enter the African market, and many are betting that minigrids will be just that.”
Investments and acquisitions
The most notable investment activity in the off-grid solar sector has been the recent acquisition of Fenix International by ENGIE. Lyndsay Handler, CEO of Fenix International, a pay-as-you-go solar home system company, told pv magazine, “Everyone in the solar home system sector was asking the question: are large-scale energy players interested in this space? Fenix’s acquisition by ENGIE shows that the answer is: Yes.”
“ENGIE’s goal is to provide 20 million people around the world with access to decarbonized, decentralized energy by 2020, using the latest digital technologies,” says Raphael Tilot, Chief Customers Solutions Officer at ENGIE Africa. Through the acquisition of Fenix International, ENGIE now has its own solar home system offering. For microgrids, ENGIE has started an internal startup called Power Corner, which has built 8 microgrids in Tanzania.
“ENGIE is an active player well beyond solar home systems and microgrids in Africa. From large-scale power plants to off-grid systems and energy services, these systems combine together to offer our clients a broad set of solutions whether these clients be off-grid residents or national governments,” explained Tilot.
ENGIE has also invested in other solar home system companies through its impact investment arm, which has minority stakes in BBOXX and PEG. Other investments by large energy companies in the solar home system sector include Total, General Electric, and EDF’s investment in Off-Grid Electric and Shell’s investment in Solar Now.
For the off-grid microgrid sector, E.ON, a Germany utility, has funded an internal startup called Rafiki Power, which has built eight microgrids in Tanzania. Equity investments in microgrid companies include Shell’s funding of Steamaco, Shell and ENGIE’s investment into Husk Power, Mitsui’s funding of OMC Power, and Powerhive’s funding rounds supported by Total, Enel, and Caterpillar.
Rob Schueffner, Microgrid Manager of Caterpillar’s Global Power Solutions Division, explained to pv magazine, “Caterpillar has been providing off-grid electrification solutions for more than 90 years through reciprocating generator sets and turbine generator sets. We see rural electrification as a tremendous opportunity for Caterpillar and our dealers to support progress. Providing power to those without it unleashes the potential of the individuals to focus on higher value activities and creates a whole range of entrepreneurial opportunities.”
Schueffner continued, “Today we are installing complete Cat hybrid systems in applications all over the world. Cat dealers have proven the ability to install and support a whole range of remote hybrid power installations including small remote telecommunications towers, villages, and mining sites.”
 |
| Beyond selling electrons, Powerhive has fostered and financed agriculture and technology-based businesses such as internet cafes within the villages it operates. Photo: Powerhive. |
Strategic investors
Just as large energy companies are interested in investing in off-grid electrification, off-grid energy companies actively seek large energy companies as investors for their expertise, business connections, and understanding of infrastructure investments.
Sinha, of Husk Power, which operates 75 microgrids in India and five in Tanzania, explained to pv magazine, “We deliberately brought large energy companies on as investors to gain a strategic partner to help us put in place processes that will allow Husk Power to scale. We could have gotten the same money from a financial investor, but they would not have been as helpful in fueling our growth.”
The global operations of large energy companies allow them to provide advice on navigating complex regulatory environments across many countries. Harrison Leaf, CEO at SteamaCo, which recently raised a $2.9 million series A funding round lead by Shell, told pv magazine, “While many investors offer strategic support, Shell also comes with a wealth of supply chain, policy, and utility sector expertise. As the off-grid industry matures, the key success factors will be economics, regulatory support, and financing, and large energy companies are well placed to address all of these areas.”
In addition to expertise, large energy companies also provide access to a network of business connections. Wuts of Powerhive, which is developing 100 microgrids in Kenya and recently received a $1 million grant from US Trade and Development Agency to enter Nigeria, explained to pv magazine, “After bringing Caterpillar on as an investor, we were able to leverage their dealer network, which is made up of some of the largest businesses in Africa. If we want to enter a new country, we can ask Caterpillar to connect us with their dealer in that country, and the dealer can help us enter the market.”
Large energy companies also have investment horizons that are more compatible with microgrid investments. Wuts continued, “Minigrids are hard infrastructure, not simply technology. Unlike pure tech startups, minigrid companies can’t lose money for over 10 years and then be listed for billions of dollars like a Twitter. Large energy companies understand the timeframes and returns that come with infrastructure investments. Venture capitalists, especially those in Silicon Valley, typically have a different outlook. They are in it to help prove the model, but true scale will require other sources of finance.”
Sinha of Husk Power highlighted greater access to lower-cost capital as another area where large energy companies can support off-grid businesses. “We are trying to become a rural utility company, which require low-cost, long-term debt financing. In India, a ten-year loan carries a 10 percent interest rate, and we need that interest rate, at a minimum. That is hard to achieve as a small company, but with their balance sheet, we can get close.”
Wuts echoed this sentiment by saying, “Ultimately, the cost of capital is what matters. We are doing everything we can to reduce our capital expenditure, but in the long-run, the cost of capital is what matters most.”
Scaling the sector
Over the long term, large energy companies will play a critical role in the development of the off-grid electrification market.
Wuts laid out his vision for Powerhive and the sector as a whole. “The minigrid market will not thrive on project finance. We will develop a business model that can make money consistently, reliably, and at a given return. Then, someone with a big balance sheet will partner with us, and we will put their capital to work.”
Wuts’s outlook contrasts with those that see project finance as the primary vehicle for off-grid microgrids to scale. “Reaching true scale won’t come from project finance just yet. Project finance requires fixed, predictable revenue from a bankable off-takers. Our customers aren’t necessarily considered bankable today, and that is unlikely to change anytime soon.”
Wuts continued, “Additionally, project finance comes with many covenants that make it hard to experiment and innovate with additional services. At some point in the future, project finance will work for off-grid minigrids, but in the near-term, scale will be achieved by leveraging the balance sheet of a large company to reach millions of customers.”
