Total annual investment in the off-grid energy access sector surpassed $500 million in 2018, according to a new report from Wood Mackenzie Power & Renewables and Energy 4 Impact. Global energy giants are significantly investing in the sector.
Strategic investments in off-grid energy access: Scaling the utility of the future for the last mile highlights the rapid acceleration in investment across the energy access sector. Nearly $1.7 billion in cumulative disclosed investment was deployed into energy access markets by the end of 2018, with over $1.2 billion deployed since the beginning of 2016.
In 2017, year-on-year transaction volume grew 37% and total capital composition by volume shifted to over 50% debt, signalling scale-up and further maturation of the sector. In 2018, total transaction volumes grew another 22% year-on-year, and the average equity investments doubled and debt increased nearly 5.5x.
Commenting on the report, Benjamin Attia, Wood Mackenzie Power & Renewables Analyst and lead author, said:
"Investments in the energy access space have accelerated rapidly in the last few years but total volumes still fall well short of the total estimated financing needed to reach universal electricity access globally by 2030. The pace and manner at which electricity is provided to almost 1 billion people who still do not have access to energy will have a dramatic impact on power demand, electricity generation, grid infrastructure investments and future carbon emissions reductions."
"This emerging sector has seen a steep uptick in investments and partnerships from strategic groups within many of the oil and gas majors, European utilities and IPPs, clean energy OEMs, and the technology sector looking to capitalise on new opportunities in fast-growing emerging economies. As the off-grid energy access sector begins to mature, strategic investors will deeply shape the market’s trajectory and redefine the customer-centric utility business model yet again by expanding service offerings beyond a basic electricity connection. Ultimately, the energy access opportunity represents the prospect of ‘owning’ the next billion customers, their evolving needs and their data."
Peter Weston, Energy 4 Impact Director of Programmes, said:
"Strategic investors are playing an increasingly important role in the off-grid sector, attracted by the size and potential growth opportunities in the market. Most of the interest so far has been in pay-as-you-go solar home system companies, although there have also been some notable investments in mini-grids as well."
"Engie's recent acquisition of Fenix is one of the first successful exits in the sector and illustrates the market is becoming more mature. However, there is a still a long way to go and it will be important for donors and NGOs, such as Energy 4 Impact, to continue supporting the sector and creating an enabling environment to encourage further investments."
How is strategic investment fueling off-grid energy access?
Particularly for utility-minded strategic investors like Engie, Shell, EDF, and Total, there is strong interest in evolving the utility business model beyond electricity service provision. Leading distributed energy service companies and their strategic partners are experimenting with ‘value-stacking’ add-on services like internet, water, productive appliances, financial products and services, and other retail goods.
According to the report, 75% of all strategic activity in the off-grid energy access sector is commercial in nature. Of that figure, direct investments and M&A represent nearly 25%. Strategic investors and their affiliates have made or been involved in over 110 direct investments in the energy access sector - worth over $383 million in disclosed value.
Strategic investors have formed over 30 partnerships and joint ventures with off-grid energy access companies. These allow a diverse array of technical partners and the leveraging of internal resources, such as R&D and marketing. Many are also motivated by strategic plans or targets to operate in multiple markets by 2030.
Strategic investors have also participated in indirect fund investments worth over US $461 million. Most of these investments by volume are into funds managed or created within or alongside the corporate structure of the investor, and allow the investor to learn from a broad set of vendors across different product categories, geographies, and scales.
What’s in store for the energy access sector in 2019?
"An investment cliff could be looming in the short-term future of the sector, particularly for pay-as-you-go solar home systems. Capital concentration by company, technology, geography and business model, paired with aggressive growth expectations from VCs and few successful exits to date, leads to some outsized macro-level risks that may cause a dip in annual investment in 2019."
"More broadly, in the face of the risk and reward of unbundling, the energy access sector in general and the SHS sector in particular may face a slight identity crisis in the near-term. Are they ultimately energy service providers or utilities? Are they ultimately consumer finance institutions? Retail product sales? Or all of the above?," added Mr. Attia.