Opportunities in Off-Grid Energy for Productive Use
A deep dive on the productive use of off-grid energy for uplifting local communities’ livelihoods and enhancing their resilience to climate shocks.
Executive Summary
In Sub-Saharan Africa, only around half of the population has access to electricity and the actual usage is still very low, mostly for lighting. The average consumption per person in sub-Saharan Africa, excluding South Africa, is a mere 185 kilowatt-hours (kWh) a year, compared with about 6,500kWh in Europe and 12,700kWh in America. With the latest technologies combined with off-grid energy, a new revolution in energy access is starting, targeting productive use cases in agriculture, industry, commerce, and social or public services. In line with the Mercy Corps Ventures Climate Fund thesis (Resilience Future Fund), these solutions, such as mini-grids, create value in the form of increased productivity, enhanced income and livelihoods, and strengthened resilience against climate shocks.
For this investment research, we reviewed the trends in our pipeline and gathered experts opinions about off-grid energy for productive, climate-smart use cases in emerging countries. The mapping is intentionally broad to cover the entire value chain, from sources of energy, production, and distribution up to actual use cases in various sectors. For each stage, we looked at the interesting value propositions which may soon become instrumental in the energy revolution.
- Production: This layer is and will likely still be dominated by solar panels, though some alternatives, such as Lytefire, are using solar mirrors to generate heat. This solution powers more energy intensive usages (like drying, roasting, and baking) in an integrated production and usage setup.
- Storage & Distribution: This is a layer where we expect to see more innovations in the ways users (i.e. farms, facilities, businesses, and households) access off-grid infrastructure. The most intensive competition is occurring in this space, with thousands of solar installers, operators, equipment suppliers, and device manufacturers operating in a highly fragmented market. While today most effort is spent on origination (i.e. pre-sales and sales) and installation, we anticipate the most effective and successful players to employ tech-led, energy-as-a-service platforms. When combined with community shared batteries, the business case becomes even more efficient: the community station can power a host while offering battery swapping.
- Usage: From irrigation to processing in rural areas to mobility and logistics for urban and peri-urban populations, there are countless use cases for off-grid energy. While this is a great positioning for equipment providers and solar installers but likely not a great fit for VC-style investments. It is possible to overcome this limitation by pre-packaging ready-for-use kits which include solar panels, target use case equipment, and battery. We anticipate some winners in this layer, especially when the packaged solution is custom-designed, taking into account the consumption profile and real world operating conditions. There is a chance we will see “fabless” battery networks with sophisticated data-driven operations and logistics driving the energy revolution just like artificial intelligence (AI) chips are today.
- Financing: Almost every project needs some upfront financing. Lending platforms are pivoting and tremendous innovations are surfacing to seize this major opportunity. Instead of new pure-plays, we expect this to be embedded in energy-as-a-service distribution or pre-packed solutions.
The recommendation is to focus on innovative community storage and distribution and “fabless” battery networks offering data-driven custom solutions for high growth use cases.
Overview
Off-grid energy is becoming the norm in Sub-Saharan Africa — a region where centralized, wired networks are hard to scale. Over two decades ago, the communications industry (which is only about bits) had to go wireless in order to reach massive penetration rates in the Global South. Energy is even harder to distribute at the scale required (a result of losses, heat, and capex costs).
In this document, we scan and analyze companies offering unique approaches to build and scale off-grid energy platforms for climate-smart, productive usages in peri-urban and rural areas.
Most companies we encountered fall under one of the following categories:
- Production of energy by solar panel, solar mirrors, biogas, offshore wave-energy, and even small-scale nuclear reactors from individual kits, stations, or off-grid plants.
- Storage of batteries, pumped hydro, flywheels, and capacitors.
- Distribution of off-grid energy from production sites to the final usage destinations using proximity connectivity (a few miles max), electric batteries, and bottles (gas). The distribution may extend to post-production with operations and maintenance, end of life management, battery recycling, and more.
- Usages: including lighting, mobility, cooking, heating (e.g. solar mirrors for productive uses such as roasting and baking), cold chain, waste management, storage, grid replacement (for small and medium-sized businesses, artisans, farmers, food processors), or grid backup (for households).
Some companies offer sophisticated financing plans for the assets while others package pre-designed, ready-for-use solutions such as solar kits for lighting (in rural areas), solar pumps for irrigation, and solar kits for cold storage and refrigeration including custom-designed battery packs for specific usages.
USAID Case Study
USAID is catalyzing an initiative to increase the supply and uptake of the productive use of off-grid energy across Africa, targeting 6 million off-grid nodes and expecting to attract about $500 million in total funding. The project lists a broad set of use cases, from irrigation to agri-processing and mini-grids.
Analysis
This analysis is the result of various exchanges with sector experts and a review of the latest solutions in our pipeline across Africa. At every stage of the off-grid energy value chain, we found interesting, impactful solutions with a huge potential to scale.
In line with our Resilience Future Fund, off-grid energy is a critical infrastructure offering rural and peri-urban communities greater resilience against climate shocks (see the analysis Popular Power). Solar-powered water pumps, for instance, allow irrigation in remote rural communities which creates less dependency on rain and reduces vulnerability to drought. It is a sustainable layer independent from weather conditions and seasons.
1. Off-Grid Production
The most interesting solutions found in energy production offer a mix of solar and wind (to generate power all times of day). There are also mini-nuclear experiments happening in Rwanda which may be interesting to test elsewhere in the region, but this will likely take time. Solar panels are clearly the production mode and will likely become even more accessible in the months and years to come; they are durable and proving to be more cost-effective in many regions).
One noteworthy alternative, however, is LyteFire, which uses solar mirrors to generate heat and steam and offer power for multiple use cases: baking, drying, roasting, and even cold storage. The company is building a strong software layer to operate the units remotely (enabling rotation of the mirrors based on the sun’s journey, adjustment of the temperature by programming, and APIs for over-the-top developers) and a licensing model for others to build on top of it. This diversifies the use of sun beyond just solar panels and allows for much more energy-intensive agro-processing usages.
2. Storage & Distribution
Off-grid offers less energy density but makes it easier for communities everywhere to access electricity. This is similar to the telecommunications industry: Wireless mobile networks initially offered less bandwidth than fixed lines and fiber but mobile is how Africa and many emerging countries got access (to voice and data). Off-grid may follow the same path as the mobile industry, where the same wireless node connects consumers and businesses located a few kilometers around a tower, allowing multiple usages (e.g. voice, SMS, data, and more) before connecting all nodes (e.g. backhaul) and maintaining connectivity seamlessly from tower and another. Instead of a single onsite installation per customer, the off-grid nodes will centrally connect various proximity customers in a shared fashion. This can be via batteries (i.e. a packet of energy to recharge or swap) or by simple wire (e.g. micro-grid), and different nodes may connect to the grid (in this case, the backhaul). Charging stations may evolve to eventually deliver this type of solution with custom swappable battery packs based on consumption profiles and usages of the customers around the station.
There are few interesting solutions here in our pipeline:
- Kofa (a multi-play battery network for mobile and artisans)
- Liquidstar (versatile multi-play charging stations)
- Rana Energy (democratizes access to clean and reliable power by connecting affordable financing to impactful and bankable projects through a B2B energy-as-a-service platform)
- ICE Solar (energy-as-a-service for off-takers within small commercial clusters)
- First Electric (energy-as-a-service for rural homes and microenterprises)
- Popular Power (a software platform for solar post-installation operations)
Community battery case
A community battery is a shared solution for a local neighborhood.
- Households and businesses with rooftop can discharge on the battery (for $) while others without solar panels can use the battery as a backup to the grid without diesel generators.
- Can operate as a charging or swapping station for electric vehicles and devices.
- Offers a flexible alternative to traditional poles and wires, lowering the network costs.
This makes a huge difference in African market hubs like Lagos, Dar Kariako, and Nakuru.
3. Usages
While there are countless solar installation and financing players, especially in Nigeria, many are just not investable from a VC standpoint and the market is too fragmented. The most promising startups are the ones offering a platform where various installers can plug in to operate their different nodes with alerts, remote diagnosis, and billing capabilities. This is critical, as off-grid requires significant upfront investment in order to last years after the installation. Energy is also mission critical and end customers can expect even better availability and reliability than the current grid system.
Some of the interesting startups in this space include:
- Freezelink (a new operations platform for cold-chain facilities and demand management)
- Keep it Cool
- EarthBond
4. Financing
Each of the off-grid energy transition layers requires some financing: short-term loans, long-term debt with credit guarantees, green bonds, PPP off-grid financing for remote or sensitive areas, carbon credits to cover infrastructure costs, and many more.
- M-Kopa: Assets financing covering everything from electronic devices to motor bikes.
- InfraCredit: Infrastructure loans guaranteed in local currency (enabling easier liquidity from local pensions funds).
- PayHippo: Fast upfront investment in solar (can also be a primer before longer-term loans).
- Moon Community: Infrastructure funded by PPP (government), with households only paying maintenance.
- The Green Exchange: Green bonds for renewable energy companies, sold to international funders and local pension funds to even diaspora in the future.
- EarthBond: Clean energy financing platform using carbon credits to lower upfront costs.
The off-grid revolution will attract winning fintechs. For existing lending platforms, the off-grid sector is an interesting pivot and a way to attract more liquidity and get a clean loan book. This is the case for m-Kopa and Payhippo. It will likely be one major financing use case for the companies but most will be obliged to broaden their coverage beyond just off-grid.
5. Packaging
The off-grid revolution is highly dependent on equipment and appliances including solar panels, batteries, inverters, smart meters, and vehicles (bikes), most of which are imported to the region. Manufacturers include BYD, Pylon Technologies, Steameco, TailG, and more.
We are seeing more and more integrated “productive” kits designed for specific use cases, like solar freezers for retailers, solar generators to replace diesel generators, and solar farm kits with electric pumps. Given the overcapacity in battery production, there is a chance this will also be dominated by Chinese manufacturers.
There is a chance for local custom design boards and appliance manufacturers such as Kenya-based GearBox and Lytefire to scale. The “Transsion approach” to mobile phones — that is, custom designs and manufacturing from Africa for the African market — may well be the winning strategy given the variety of productive use cases and local market sensibility.
Fabless smart battery packs
Many years ago, American businessman Morris Chang left Texas Instrument, the generic chip maker. He was sidelined when he tried to convince TI executives that many customers would want to design their own custom chips. Soon after leaving and founding TSMC in Taiwan, “fabless” chip companies appeared. These companies focus on the innovation and design of chips for specific usages — like AI chips, video processing chips, and chips for self-driving vehicles — and need a partner exclusively focused on manufacturing them (without trying to own the IP). This is what made TSMSC dominant. NVIDIA is one of the largest fabless chip companies.
A notable startup in this category, SLS Energy started anticipating a surplus of batteries to cost-effectively recycle and repurpose. They then noticed that batteries deplete very quickly in Africa (much faster than the claimed five years) if not designed in particular ways. The type of usage and overall consumption profile also has strong implications for battery design. Today SLS Energy designs the battery and has it manufactured in China. Ampersand is one of their customers.
We expect to see fabless smart batteries in the market. These are startups using consumption data profiles to design specific regionally-optimized battery packs for certain usages: cold chains, irrigation, retailer fridges, artisan’s machinery, electric motorbikes, and more.
Recommendations
Few companies will dominate the market in each category, from production to distribution, financing, use cases, and packaging. We screened and highlighted some of those companies in the current pipeline. This will evolve in the coming months, but early movers often have an edge.
The likely winners in every category will be companies capable of leveraging:
- Data from energy consumption profiles and target sectorial usages in order to custom design not only the production and distribution but also the actual design of smart batteries.
- Software platforms to monitor, detect, and anticipate the needs and failures. Energy is a mission critical service and replacing the grid needs higher reliability.
- Smart financing plans such as bonds and involving regional development finance institutions s and governments to fund the assets they rely on (i.e. panels, batteries, stations, and kits)
- Climate off-sets as incentives to accelerate this transition if not to lower the barrier to access.
It is this unique combination of data, software, smart financing, and climate off-sets with a company’s sectoral expertise which will make it VC investable. We will focus on such companies for piloting and investing.
Inline with our thesis, our recommendation is to proceed with
- Pilots in the distribution and appliances and productive assets segments with cutting edge solutions (such as LyteFire or SLS)
- Investment (at least one) in the distribution, usages, or financing segments based on current early movers in our pipeline: First Electric, Rana Energy, ICE Solar, Asoba, Earthbond, Keep it Cool, Green Exchange, and more.
If relevant, a deeper case study on the distribution layer may be interesting. The case study should:
- Detail the entire value chain from origination up to operations (post-installation)
- Determine where the market is likely to scale from
- Determine, from one region to another, what factors will be critical for success (e.g. energy regulation, fuel costs, inflation etc.)
