Our Investment In Rensource
Oil is the World’s most valuable commodity, totalling approx. US$1.2 trillion in annual traded value. Nigeria, which holds the World’s eleventh largest proven oil reserves, is one of its biggest vendors on the international market. This would lead a reasonable person to assume that the country’s own internal economy is replete with energy derived from its own natural resources. In reality, this is not the case.
Oil Oil Everywhere, Nor Any Drop to Drink (for ordinary Nigerians at least)
Ironically, Africa’s most petroleum-rich nation has been in an energy crisis for decades. The reasons are complex and multivariate, but can usefully be distilled into two overarching contributing factors: Western demand and local policy failure.
The great curse of Nigeria’s crude oil reserves is that they are particularly well suited to the needs of the World’s largest and fastest growing economies and are, therefore, more valuable as an export — at least to those who control their movements, and this situation will persist so long as there is overseas demand (particularly from the US, India and China).
And so, for the past half-century, foreign oil companies, operating largely without restraint due to a failure in governmental policymaking, have extracted more than a billion barrels of oil from the Delta Basin, only to bypass the country’s own internal economy in order to sell it on the international market.
In fact, if you were to travel to Nigeria’s Delta Basin tomorrow, you would witness the World’s most valuable energy companies deploying the World’s most advanced extraction technologies, alongside devastatingly impoverished local communities, most of whom have yet to be connected to the national grid (thus denying them opportunities for economic and social advancement).
This confluence of factors has resulted in little investment being made into Nigeria’s energy production capabilities or internal transmission networks. The national grid supplies a mere five gigawatts of electricity annually to its 190 million citizens. For comparison, Brazil, with the same approximate population, outputs 150 gigawatts annually.
What’s more, only 40% of Nigerians are actually connected to the grid and those who are can expect supply a mere 40% of the time (with outages frequently lasting days and even weeks). Needless to say, this is a dismal environment in which to live and do business.
The country’s distribution equipment is so underdeveloped that technical losses stand at around 30% (for comparison, technical losses in the US, UK and Saudi Arabia stand at around 7%). With such an unreliable service, those who receive power from the national grid often refuse to pay for what they consume. In fact, there really isn’t much incentive for Nigerians to pay their energy bills, since collection efforts are largely ineffective as a result of poor or improper administration.
Here’s a useful way of conceptualising Nigeria’s internal energy supply inefficiencies: For every 100 electrons that leave a power station, only 70 of them will make it to the customer and only 14 will ever be paid for.
This has made building power plants and improving the transmission network unattractive prospects for successive governments and private investors alike. Add to this a dismal regulatory environment, corruption, ethnic violence and oil piracy and what you’re left with is an environment unfit for project finance backed energy infrastructure propositions.
The resulting energy crisis has led to crippling constraints on Nigeria’s economic development, with particularly devastating effects on its agricultural, industrial and mining sectors.
Blue Skies, Black Death
Nonetheless, Nigeria’s internal economy marches on under the resourcefulness of her own citizens. The majority of residencies and businesses produce their own energy from privately owned, off-grid diesel generators. Together these generators produce a staggering 20 gigawatts of power annually, four times the amount supplied by the national grid.
But diesel generators carry with them significant risks: they are loud, dangerous, dirty and expensive. In particular, toxic emissions fuel widespread illness and premature deaths among Nigeria’s population and are a significant contributing factor to the country’s carbon output.
Nigeria has recognised the need to wean itself off of fossil fuel consumption. In its INDC, it pledged to unconditionally reduce carbon emissions by 20% by 2030. According to the World Bank, the key measures to achieve this target are: 1) increasing energy efficiency, 2) significantly reducing the use of generators, and 3) achieving off-grid solar photovoltaic power generation of 13 gigawatts annually.
Why is this relevant to us at Playfair Capital?
For the best part of a decade at Playfair, we’ve held the view that major social and economic ills may be solved by dutiful, privately-backed entrepreneurs developing frontier technologies, when market forces and policy failure* combine to maintain those ills in perpetuity. That’s why we’ve backed the likes of Oradian, SensorFlow and uMed.
(*Policy failure should not be thought of simply as corruption, nor should we start pointing the finger thinking this will solve the problem. Many dutiful government ministers and civil service employees have attempted to tackle the problems with Nigeria’s energy sector, but most have failed due to the complexity and size of the challenge.)
And so, after becoming familiar with Nigeria’s energy crisis, and having little optimism in the situation resolving itself, our view is that there is not only a significant market opportunity for privately-backed emerging technologies to play a key role in ending its reliance on diesel generators, but there is also a moral imperative for those of us with the means to make it happen to do so.
As venture investors looking into this frontier market, we asked ourselves what the most compelling market opportunity for private companies is. Since building a business is always really hard, we tend to look for those entrepreneurs focusing on beachhead opportunities that are begging for new entrants; which, to state the obvious, tend to be those markets that are massively underserved by incumbents. And this is where the story of Nigeria’s SME clusters comes into play.
Nigeria’s “SME Clusters” — a Compelling Use Case for Private Energy Initiatives
In Nigeria there exist massive informal markets, scattered around the country, each containing up to 15,000 individual merchants, often referred to as SME clusters.
Some clusters have a wide variety of vendors selling everything from refrigerators to livestock feed, while others have a unified theme, such as Lagos’ Otigba Computer Village, Africa’s largest market for consumer electronics.
Here is an aerial view of a section of the more developed Sabon Gari Market, an SME cluster with around 12,000 individual merchants:
All over Nigeria, these SME clusters, operating from early morning to late at night, and requiring a reliable and stable source of energy, are powered by an army of off-grid diesel generators, spewing pollutants into the lungs of merchants and shoppers alike.
What’s more, these generators pose a significant fire hazard to their surroundings. Here is a section of Sabon Gari Market ablaze in 2016, resulting from a single diesel generator malfunction:
Now let’s explore one of the reasons for these clusters existing, and why the answer is relevant to helping solve Nigeria’s energy crisis. Fundamentally, these markets facilitate the creation of a support system amongst their merchants, all of whom share similar goals, impediments and, crucially, resources.
Much like a labour force, these clustered merchants are quasi-unionised. Decisions which affect all merchants — such as security, waste management and energy supply — are taken at a market level and usually by a “union leader” type person who handles negotiations on behalf of the entire cluster. As such, a single contract can result in thousands of customers being signed up at once.
Clearly this environment presents a compelling market opportunity for private enterprise. The question which then arises is, who is best positioned to take advantage of it?
Searching for Solarman
In May 2015, Playfair Capital made a strategic LP commitment into pan-African VC fund CRE, run by the exceptional Pardon Makumbe and Pule Taukobong. Fede, our Chairman and Founding Partner, has long supported entrepreneurship on the African continent and we couldn’t find a better team than CRE through which to continue building on this.
That same month, Playfair Capital Fund 1 invested alongside CRE into Andela’s Series A, which has turned out to be a pretty good bet. Needless to say, CRE remains our go-to fund for discovering syndication opportunities in Africa.
So when Pardon walked into our London office last summer to excitedly tell us about a new co-investment opportunity operating in the Nigerian energy sector, we were all ears. What followed was a riveting recounting (in far gorier detail than I have managed above) of the woeful energy situation facing Nigeria’s SMEs and the story of three entrepreneurs — Demmy Adesina, Jussi Savukoski and Anu Adasolum — who are solving this problem, once and for all, in the most simple and elegant way possible.
Clean, Distributed and Private Power for Nigeria’s SMEs
Demmy, Jussi and Anu’s startup, Rensource, is delivering SME clusters all over Nigeria from the woes of diesel generators through the deployment of distributed and connected solar power installations.
“Hold on, what an anticlimax to this story,” I hear you say, “and also, Rensource clearly didn’t invent photovoltaics; nor was it the first company to offer solar power installations in Nigeria.” That’s absolutely correct, but the operative words in the previous paragraph are distributed and connected.
Rensource has built interconnected networks of solar installations on the rooftops of several SME clusters, including Sabon Gari Market. Remember that aerial view of the market I showed you above? That shot was taken several years ago. Here is that same section today:
So why solar? Well, because it is a relatively simple and inexpensive technology to manufacture, deploy and maintain. Pardon, with vast experience in the energy sector, taught us that the golden rule of energy production is to “avoid anything with moving parts” (e.g., hydro). Oh, and in case you didn’t know, Nigeria gets a lot of direct sunlight.
Furthermore, by signing up entire clusters en masse, Rensource is allowing these markets to rid themselves of expensive and dangerous diesel consuming generators in favour of clean, safe and cheap solar power.
Yes, it’s that simple. Well, almost; there’s still the small matter of who pays for it all.
Capital Constraints: That Old Chestnut
One critical impediment in Rensource’s early days was that, for the most part, merchants were not willing to bear the up-front costs of purchasing and installing solar equipment — particularly when most of them had functioning diesel generators that would represent a significant sunk cost on their balance sheets— nor the responsibility of maintaining it on an ongoing basis.
To solve the dual problems of capital constraints and ongoing maintenance, Rensource decided to bear the CapEx costs itself and now employs its own team of engineers to install and maintain the solar infrastructure in perpetuity. Under this arrangement, greatly preferred by its clients, the company manages everything itself and charges each individual merchant for the electricity that they actually use. It then stores any surplus electricity on-site and provides it back to its merchant customers as needed (typically on days when the sun doesn’t shine).
And suddenly, the merchants were on board 😊
“But wait,” I hear you ask, “how does a startup like Rensource bear these costs itself?” To answer this question, we must go back to the foreign energy companies I mentioned at the top of this article. You see, these companies aren’t just interested in exporting Nigeria’s oil reserves; they’ve also long held an interested in the potential of Nigeria’s nascent internal economy of 200 million energy consumers. For decades, and through many failed attempts, global energy companies have been unable to crack Nigeria’s energy market.
Rensource, recognising the desire of capital rich energy companies to enter this market, has created an asset finance vehicle that funds the capital costs of deploying their solar installations across Nigeria’s SME clusters. This is a perfect route-to-market for these risk-averse companies, who prefer the steady income of an asset finance vehicle to the aforementioned massively unappealing business of trying to build traditional power plants.
At the time of writing, Rensource’s asset finance vehicle has secured over US$35MM in commitments and the company is now in full scale-up mode, deploying its cheap and clean energy solution to Nigerian businesspeople the country over.
We’re delighted to have once again partnered with CRE to back an incredible company using clean technology and a disruptive business model to fix the problem of Nigeria’s lack of stable electricity supply that has held her people back for decades.
