Kenya off-grid power accelerator program Innovation Lab –Summary NAIROBI, KENYA, 5-6 DECEMBER 2016 DRAFT – PROPRIETARY AND PRE-DECISIONAL Any use of this material without specific permission is strictly prohibited This report is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this study are the sole responsibility of McKinsey & Company, Inc. Washington D.C. and do not necessarily reflect the views of USAID or the United States Government.
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Kenya off-grid power accelerator program Innovation Lab ......Dec 06, 2016 · 8 Summary findings from off-grid diagnostic Over 300M USD has been raised (not Kenya-specific), largely
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Kenya off-grid power accelerator program
Innovation Lab – Summary
NAIROBI, KENYA, 5-6 DECEMBER 2016
DRAFT – PROPRIETARY AND PRE-DECISIONALAny use of this material without specific permission is strictly prohibited
This report is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this study are the sole responsibility of McKinsey & Company, Inc. Washington D.C. and do not necessarily reflect the views of USAID or the United States Government.
1
Contents
• Off-Grid Innovation Lab overview
• Summarized findings from Solar Home System Diagnostic
• Recommendations and next steps from Lab
• Recommendation detail
2
Off-Grid Accelerator Lab – Agenda
Day 1 – December 5 Day 2 – December 6
8:00 - 8:30 Introductory remarks
8:30 - 9:30 Findings from off-grid diagnostic
1:00 - 2:00 Lunch
2:00 – 4:30 How do we increase access in remote
counties?
9:30 - 1:00 How do we improve affordability for
consumers?
4:30 – 5:00 Day 2 preview and closing
Time Content
5:00 – 7:00 Cocktail event
7:00 - 8:00 Registration
Time
8:00 - 8:30 Recap of day 1 and overview of day 2
agenda
Content
1:00 - 2:00 Lunch
9:00 - 11:00 How do we improve financing for the
SHS sector?
2:00- 3:00 Synthesis session
3:00 - 3:30 Summary of final recommendations
3:30 - 4:00 Day 2 closing
11:30 -1:00 Product design-to-value
11:00 – 11:30 Tea and coffee break
3
The Off-Grid Innovation Lab was attended by 40+ people
Participants
GOVERNMENT / UTILITIES
MoEP
• Eng. Isaac Kiva
• Jacob Chepkwony
REA
• Edward Gakunju
Kenya Power
• Onesmus Maina
USAID
• Mark Carrato
• William Madara
PATRP
• Carolina Barreto
• Pepin Tchouate
US DEPT OF COMMERCE
• Tamarind Murrieta
DONORS/DFI
AFD
• Guillame Laurioz
• Mavin Kneib
GIZ
• Venice Makori
Swedish Embassy
• Lena Berglow
SHS PROVIDERS
d.light
• Rohit Jain
SHS PROVIDERS (cont’d)
Greenlight Planet
• Radhika Thakkar
• Oscar Njuguna
• Patrick Muriuki
M-KOPA
• Pauline Githugu
• Kevin Reider
BBOXX
• Anshul Patel
• Andrew Kent
Barefoot Power
• Jackson Machuhi
• Rose Maket
Mobisol
• Henrik Axelsson
Azuri Technologies
• Snehar Shah
• Simon Bransfield-Garth
Pawame
• Majd Chaaya
• Ronald Okumu
BANKS
Coop Bank
• Chris Chege
Stanbic Bank
• Stephen Lovell
• Evelyn Ngatia
FINANCIERS
Acumen Fund
• Lawrence Riungu
Energy Access Ventures
• Ravi Sikand
FSD Africa
• Evans Osano
Energy4Impact
• Shashank Verma
MFX Solutions
• Luz Leyva
TECHNOLOGY PROVIDERS
Angaza Design
• Rasmus Hansen
Grafica
• Yoann Berno
INDUSTRY ASSOCIATION
GOGLA
• Charlie Miller
OTHER INDUSTRY PLAYERS
Open Capital Advisors
• David Loew
• Irene Hu
Formerly with Barclay’s
• Raj Shah
4
Context and objectives for the off-grid innovation lab
The innovation lab
will focus exclusively
on solar home
systems
Outcome
• Prioritized set of solutions (including how to serve
remote counties) that will serve as input into the
Kenya National Electrification Strategy and sector
initiatives
• High-level action plan for the next 2-3 years
5
How do we get to 2 million off-grid connections to
support Kenya’s goal of universal energy access by
2020?
Our innovation lab “problem statement”
6
Contents
• Off-Grid Innovation Lab overview
• Summarized findings from Solar Home System Diagnostic
• Recommendations and next steps from Lab
• Recommendation detail
7
For our SHS diagnostic, we interviewed over 50 stakeholders active in the
SHS space and leveraged recent sector reports
9
50
22
12
7
50 stakeholder interviews have been completed to date …… supplemented by various recent reports
Example recent reports
• ECA (2016): Consultancy services for
development of regulations, revenue
arrangements, and technical
requirements for private sector
renewable energy mini-grids
• Energy Africa (2016): Compact and
plan of action
• SE4All (2016): Kenya Action Agenda
• ESMAP (2016): Current Activities and
Challenges to Scaling Up Mini-Grids in
Kenya
• IFC / ERC (2015): Kenya Market
Assessment for Off-Grid Electrification
• ECA (2014): Project Design Study on
the Renewable Energy Development
for Off-Grid Power Supply in Rural
Regions of Kenya
• RECP: Rural Electrification with
Renewable Energies in East Africa
• Bloomberg New Energy Finance
report (2016)
Other:
SHS
Providers
and
Distributors
Donor /
DFI:
AS OF NOV 16
Financiers:
Raju Shanga
Mobisol
Azuri Technologies
Energy 4 Impact
Renewable world
DFID
Energy Access
Ventures
Bloomberg New
Energy Finance
Greenlight Planet
Solar Now
SunFunder
Oikocredit
Stanbic
Standard Chartered
M-KOPA
d.light
BBOXX
Barefoot Power
Strauss EnergyOpen Capital AdvisorsMeru County IDC
World Bank
AFD
GIZ
Camco Energy
Acumen
KawiSafi Fund
Co-Op Bank
Shell Foundation
Actis
ResponsAbility
Mibawa
SIDA
Sollatek
Equity Bank
CDC
Commercial Bank of
Africa
GOGLA
Pawame
Lendable
Angaza Designs
IFC
Safricom SACCO
Mercy Corps
FSD Africa
CGAP
TALA
Safal Group
KCB
Family Bank
Deutsche Bank
8
Summary findings from off-grid diagnostic
Over 300M USD has been raised (not Kenya-specific), largely equity;
to deliver an additional 1.5M units in Kenya, industry cost would be 260 -
280M USD
~710,000 solar home systems have been delivered to-date,
concentrated within a few large players and in central and western Kenya2.
1. Off-grid solutions are most economically viable for ~2 million households
3.
9
Experience from other African countries suggest that 20-30% of the popula-tion (or 1.5 – 2
mn households) could best be served by off-grid solutions
South Africa showed that connection cost increased 1.5x past 75%
electrification rate
1.5x
6,025
>75%
8,920
Up to 75%
Average cost per connection in South Africa as electrification scaled
Rand per connection
A similar trend in Kenya
would suggest 20-30%
of the population (~1.5 –
2 million households)
would best be served
through an off-grid
solution
Source: Department of Energy; Stats SA; Eskom; INEP; Team analysis
1.
10
To date, off-grid solutions in Kenya have delivered energy to
~710,000 households
SOURCE: Team analysis
711,300
710,000
1,300
Total off-grid
Solar Home Systems1
Mini-grids2
Focus today
1 Include multiple light points and cell phone charging, >5W capacity
2 All those delivered by private sector; excludes KPLC mini-grids (already counted in national electrification rate) and captive power (including those for tea estates)
Total off-grid connections delivered
Thousand connections, 2011-2016
2.
11
Kenya has one of the most vibrant and successful solar home system
industries in the world
Comparison of Bangladesh and Kenya’s SHS delivery
• Bangladesh considered to have most
successful SHS market
• Bangladesh delivered SHS through
the IDCOL program (including
subsidies and incentives)
• Kenya has achieved a similar
penetration rate of solar home
systems (SHS) in a shorter time
period as compared to Bangladesh.
Kenya’s private off-grid sector has
had tremendous success
2 900
680
KenyaBangladesh
161 44Population
(millions)
~9% ~7%Households
with a SHS2
4 3
Years to
deliver 80% of
the SHS3
Source: World Bank, IDCOL, Kenya SHS companies
Number of SHS sold1
Thousands
1 Represents units delivered between 2003 - March 2014 in Bangladesh and 2011 - 2016F in Kenya
2 8M households in Kenya, assuming 20% of SHS units were to households already with a grid connection
3 The IDCOL program had a slow ramp up (20% of the units took 7 years to be delivered). To equalize, the last 80% were taken to compare timeframes
2.
12
~710k total SHS connections will be delivered in Kenya by 2016,
based on SHS players’ historical sales and end-of-year projections
2016F2015
301
2014
147
2012
11
205
49
2013
712
Total
Source: Power Africa Analysis; Interviews with SHS companies
Cumulative off-grid
Electrification rate1xx
<1% <1% 2% 4% ~7%
95% CAGR
1 Based on 8 million households 2 Assumes 20% of customers currently have grid connections
2 Other includes Greenlight Planet, Sun Transfer, Sollatek, etc.
Annual SHS sales volume per company
Thousand connections, 2012-2016
M-KOPA
and d.light
have 80%
of the
volume
delivered
to-date
2.
13
Nyanza, Rift Valley & Western provinces contain >65% of SHS connections,
with companies targeting middle-class and low-income customers
Geographic distribution of SHS
connections
Vihiga Nandi
KakamegaBus ia
Trans-Nzoia
BungomaElgeyo-Marakwet
BaringoUas in
GishuLa ikipia
Meru
Is iolo
Samburu
Turkana
West
Pokot
Marsabit
Mandera
Lamu
Tana River
MachakosNairobi
Kiambu
Murang’aEmbu
Kirinyaga
Tharaka
NyeriNyandarua
Karicho
KisumuSiaya
Homa Bay
Nyamira
Kis ii
Migori
Narok
Bomet
MakueniKajiado
Kitui
Ta i ta Taveta
KwaleMombasa
Ki l i fi
Waji r
GarissaNakuru
Counties with >5000 existing SHS
SHS connections by Kenya
provincesShare of cumulative units sold, %, 2016
10
20
25
10
Coast <5
Eastern
Nairobi
<5
North
<5Central
East
100Total
Rift
Valley
Nyanza 25
Western
Source: Power Africa Analysis; Interviews with SHS companies
~80% of households (HHs) with
SHS connections are located
within 5-10km of the grid
Underserved counties
Underpenetrated counties
2.
14
SHS companies have raised over ~300 USD mn in funding over the
last 5 years, though not all funds were directly invested in Kenya
Source: Press Search; World Resources Institute; New Ventures; CTI Private Financing Advisory Network; Unitus Capital
PRELIMINARY
89
205
TotalGrantEquity Debt
306
15
Insights
• SHS companies have
experienced a marked
increase in equity
investments since 2014
• Raising commercial debt
finance has been a
challenge (~2x more equity
raised than debt)
Funding raised (non-Kenya specific)
USD million, 2011-2016
3.
15
SHS providers are required to finance 5 main capital requirements –
with main funding requirements in inventory and credit receivables
Capital
requirements
InventoryExpansion
capex
Customer
receivables
Other
working capital
Overheads
Overheads
• To fund day-to-day cost of operations (e.g. SG&A, IT and finance systems,
etc.) that are necessary for running the business as usual
• Includes commercial and process costs
Other working capital
• To level out company cash flows as needed to cover unfavorable supplier
terms, delayed receivables and incidentals – especially unexpected FX
that has not been hedged
Inventory
• To finance down payments to order stock from suppliers, typically paid in
hard currencies
• Recouped within 6-9 months and comprises 30-50% of final retail selling
price to consumers
• Typically low risk capital as products are insured and quality guaranteed
by suppliers, but remains a challenge
Customer receivables
• To extend credit to customers to bridge gap in ability to pay retail selling
price in cash – perceived as high risk due to lack of visibility into customer
creditworthiness
• Debt capital is recouped over 12-24 months, depending on PAYG plan
and products
Expansion capex
• To enable SHS providers to grow operations, drive customer acquisition
and improve capabilities (e.g. financial planning, analytics, pricing, etc.)
Source: Power Africa analysis; Stakeholder interviews
3.
16
To deliver an additional ~1.5M connections, SHS companies have capital
requirements of 260-280 mn USD
SOURCE: Power Africa Analysis
PRELIMINARY
TBD
Capital
requirements
260-280
Expansion
funding (subsidy,
results-based
financing, etc)
Inventory and
receivables
financing gap
140-160
Customer
payments (deposit
and monthly fee)
120-130
Financial requirements and funding waterfall
USD million• Total industry cost of
260-280 USD mn,
mitigated by ~120M
USD mn in deposits and
repayments, resulting
in 140-160 USD mn in
funding requirements
with current payment
structure
• However, financing gap
could increase
depending on:
– Changes to
payment structure
to facilitate
affordability (which
may require
guarantees)
– Expansion funding
or subsidy to go to
remote counties
3.
17Source: Power Africa analysis; Stakeholder interviews
• Over 80% of consumers surveyed1 state that they cannot afford the deposit fee of a mid-range SHS
• Approximately 45% of consumers surveyed1 have periodic income streams, which may limit ability to
make monthly payments
• 15% of consumers surveyed1 said that the major barrier to purchasing an SHS was lack of availability
• Weak enforcement of quality standards leading to >20% defective rate and poor quality perception
• Lack of policy on off-grid in national electrification plans, undermining legitimacy of SHS companies
Barriers to SHS expansion
Consumer
affordability
and
awareness
Regulatory
framework
Themes
• Inventory financing: deficit in large-ticket commercial debt (without significant guarantees) to cover
inventory working capital required to scale rapidly:
– challenge in collateralizing SHS units
– perceived lack of clarity surrounding business models (e.g. unpredictable cash flows, debt-equity
gearing, etc.)
• Accounts receivables financing: deficit in debt to cover receivables working capital required to bridge
customer payment period of ~2 years.
– Perceived risk to lend against SHS providers’ cash flows without transparency into consumer
profiles (i.e. income streams and credit worthiness)
– Perceived lack of clarity in delinquency controls set up (e.g. non-performing loan (NPL) predictive
systems, creditworthiness assessments, etc.)
• Local currency debt: Borrowing in hard foreign currency leaves SHS developers exposed to depreciation
of Kenyan Shilling
Company
access to
finance
• Customer acquisition costs in remote counties can be very high due to low population density and
demand
• Reliance on direct customer interaction in business models makes it challenging to combine customer
acquisition and distribution channels
Remote
county
expansion
We identified several barriers to SHS expansion in Kenya that
need to be addressed
1 Based on October 2016 mobile consumer survey (n=1245)
18
Contents
• Off-Grid Innovation Lab overview
• Summarized findings from Solar Home System Diagnostic
• Recommendations and next steps from Lab
• Recommendation detail
19
Outcomes – 5 recommendations and 6 ideas to test further to connect 2
million households with solar home systems in 3 years (1/2)
Source: Power Africa analysis
Themes Proposed solutions discussed in Off-Grid Lab Outcomes of discussions
Scale
financing
through
platform• Financing arm – SPV backed by equity from participating
investors and SHS companies that specializes in
financing customer loans (accounts receivables)
• Centralized investment fund – pooling multiple
investors into a single fund that purchases and
securitizes loan book of SHS providers
6
5
• Cash transfer – subsidy or voucher covering cost of
regular instalments and/or deposit fee, supported by a
customer affordability assessment mechanism
• Extended repayment program – loan product covering
SHS deposit fee that is repaid by customer through
longer repayment tenor
Yes – need to explore how
risks are to be allocated
1
2
Expand
customer
access to
finance
Optimize
cost to
serve
• Results-based financing:
– social impact bond with incentive (grant or lower
debt price) for achieving targets
– subsidy auction and incentive to set level of subsidy
in remote areas
• Shared customer acquisition and care utility – co-
resourcing marketing and after-sale services in remote
to capture scale economies
Incentivize
SHS
providers
3
4
Partial – targeted in remote
counties through broad-
based program
Yes – coordinated public
awareness
Partial – joint operations in
installation and repairs
Yes – details to defined
Yes – details to be defined
(e.g., tranches, moral hazard
approach & fund manager)
No – would require SHS
providers to relinquish
customer management
control
Increase
company
access to
finance
Improve
customer
affordab-
ility
Expand
customer
acquisition
in remote
counties
20
Outcomes – 5 recommendations and 6 ideas to test further to connect 2
million households with solar home systems in 3 years (2/2)
Source: Power Africa analysis
Increase
leverage
Partial – supplier/ExIm
conversation
No – already happening
Partial – for early-stage
companies
Partial – one company to
volunteer
• Manufacturer financing – contract negotiations with
suppliers to extend better payment terms on inventory