Gridworks submission to the International Development Committee inquiry, Investment for Development: the UK’s strategy towards development finance institutions.
Gridworks develops and invests in Africa’s electricity networks. We are wholly owned by British International Investment (BII) and were established in 2019 as a dedicated, independent platform to provide long-term capital to transmission, distribution and distributed renewable energy businesses, both on and off-grid. As a partner to governments, utilities, and companies in the energy sector, we aim to connect Africa’s people and its businesses to reliable, affordable, and clean power.
The mandate given to us by BII enables us to spend time developing impactful, early-stage projects. In doing so, we have the flexibility to invest across a whole range of electricity network sub-sectors.
There is an enormous, multi-billion-dollar shortfall in investment for electricity network improvements. This under-investment has had a number of negative effects. These include poor quality and quantity of electricity supply, low levels of energy access, an inability of electricity grids to absorb renewable power, and the inability of power generation projects to be financed because of the lack of a solvent buyer for their power. Crucially, loss-making utilities will place increasing burdens on their governments as the demand for energy grows.
There is now a growing recognition that in Africa, as in every other region in the world, private sector investment will be necessary alongside government and multilateral funding. Our role is to create investable and sustainable business models that can bring in the private sector capital necessary to tackle this funding shortfall.
(N.B we use the terms transmission & distribution (T&D) and electricity networks interchangeably in this submission)
No economy can achieve high, sustained growth without the right infrastructure, and power is by far Africa’s largest infrastructure challenge. In the global north, the big energy issue is how to make the energy supply cleaner, in Africa the problem is how to generate and consume more energy.
- Almost 650 million Africans (just under half the population) are still without electricity. Only 8 countries in Africa have national energy access rates of over 60%.
- Average consumption per person in sub-Saharan Africa (excluding South Africa) is only 185 kilowatt-hours (kWh) a year, compared with about 6,500kWh in Europe and 12,700kWh in America.
- 51% of businesses in sub-Saharan Africa have to rely on diesel generators.
- By area, and by population, Africa has the lowest numbers of transmission lines of any continent.
- In 2015 McKinsey[1] estimated that US$345 billion would be needed by 2040 to meet the shortfall of investment in transmission & distribution. Eight years on, this figure remains well out of reach.
- The International Energy Agency (IEA[2]) estimates that operating losses among all African electricity utilities exceeded US$150 billion in 2020. This figure continues to increase.
As demand for energy services in Africa grows rapidly, maintaining affordability for citizens remains an urgent priority. As population and incomes grow, the IEA estimates that Africa’s demand for modern energy will expand by a third between 2020 and 2030.
Private investment in Africa’s electricity sector to date has largely focused on the power generation sector. The first independent power producer (IPP) was financed in 1994 and more than $26bn dollars has since flowed into the funding of generation. This has been enormously successful and has added more than 11 GW of generation to African electricity networks. An environment has developed where successful renewable generation projects have driven down the price of power to end-users.
However, during the last twenty years there has not been the equivalent investment in the African utility companies. These companies off-take the power from the IPPs and transmit and distribute it to customers while, crucially, collecting the money from customers to fund maintenance and new infrastructure required in the sector. This lack of investment has had a significant impact on the sector’s economics. Utility companies cannot sustainably expand their reach and improve quality of power supply to existing users if they are loss making, and funding infrastructure upgrades and operational turnarounds requires significant investment."
Our view is that, while increasing electricity generation and boosting new connections are both important, the key to solving Africa’s energy challenge is to build utilities that connect the increased generation capacity to the increasing number of new customers in a sustainable way. Financial sustainability really matters in this sector. If African utility companies are loss-making then they cannot pay for new renewable energy to be commissioned, and they cannot update their grids to meet the considerable challenges posed by the energy transition and the demographics of the 21st century.
BII created Gridworks because it had the vision and foresight to recognise that the lack of funding for Africa’s electricity networks was a major barrier to economic and social development in Africa. BII recognised the huge potential inherent in a sector with investable, financially sustainable businesses.
The creation of Gridworks was the result of several years of in-house incubation within BII. At this time, there were very few opportunities for investors to fund business in the electricity network space. Developing new investment opportunities was considered too difficult and there was a perception that, in T&D, risks outweighed potential returns.
BII recognised that under-investment in Africa’s electricity networks represented a significant market failure. In order to address this market failure, and using capital from its Catalyst strategy, BII created Gridworks, an independent company with the expertise to develop, invest, and support T&D investments to drive grid improvements and expansion. Unlike the African power generation sector, where BII had previously been able to re-acquire a controlling stake in Globeleq and mandate the company to develop more projects in its markets, there was no existing, ready-made, equivalent platform which BII was able to buy in the T&D sector. No other development finance institution (DFI) was willing to take this bold step.
Sustainable Power Solutions: We made our first investment in Sustainable Power Solutions, a renewable energy company providing solar power and battery storage solutions to businesses across sub-Saharan Africa. Our investment has enabled SPS to expand into new African markets and increase its generation capacity, with many more projects currently under construction. Its operations have saved the equivalent of 80,000 tonnes of CO2 emissions and provide green, reliable power to businesses that will go on to create jobs and economic opportunity.
Moyi Power: In 2021, we launched Moyi Power, an ambitious program to build greenfield, solar-powered utilities that will provide electricity to a million people in three isolated cities in the north of the Democratic Republic of Congo. In a country where less than 1 in 6 people have access to electricity, we have created a model that has the regulation and scale to deliver long-term financial sustainability. Moyi has attracted a blend of different types of capital and once it is operational it will have a model that does not require continual subsidy, something which cannot currently be said for many mini-grid projects in Africa. Moyi is a pioneer project for large scale “metro-grid” projects which can spread to many more cities across DRC and is replicable in a number of other countries in Africa.
Amari Power Transmission: In June 2022, alongside the Government of Uganda, we announced Amari Power Transmission. Amari is a US$90 million independent power transmission project that will upgrade four key substations on the country’s grid. Amari is a first-of its-kind pilot for the introduction of private sector capital in the country’s transmission sector. Transmission infrastructure is essential for economic growth, electricity access, sustainable power networks and a green energy transition. The project has taken several years to develop and will benefit households and businesses in Uganda and ensure that high quality renewable power is available to drive economic development. It also sends a clear message to the market that a model for financing infrastructure that has been used successfully on other continents can also work in Africa.
Virunga Power: In December 2022, we invested up to US$50 million in Virunga Power. Virunga Power develops, invests and operates hydropower-backed distributed renewable power generation projects and grid distribution networks that bring reliable and sustainable electricity to rural communities and businesses in East and Southern Africa. Our investment will fund new projects in Burundi, Malawi, Kenya and Zambia. These countries have very low rural electrification rates (only 2% in the case of Burundi) and Virunga Power can play a transformative role in the communities it serves. Virunga Power often works with newly connected communities to generate additional income by using electricity for industrial and commercial use. As with all our investments, we believe that our commitment to Virunga Power can be a commercial success and, as a result, will be able to deliver significant development impact.
Since our creation by BII in 2019, development impact has been at the core of our mandate. We look at impact through the micro level of our individual investments, and through the macro impact of the market-shaping role our investments can have.
For every business we finance, we assess our potential development impact before investment and measure that impact during, and after, the life of the investment. Bespoke metrics are tracked for each investment and can include:
- Network loss reduction (both technical and commercial)
- Number of new connections
- CO2 emissions saved
- Power traded
- Job creation, specifically induced and indirect jobs
- New renewable capacity added to the grid
At the macro level, we know that investment in effective, modern electricity networks will play a vital role in delivering a just energy transition by:
- Giving households and businesses access to electricity for the very first time,
- Connecting power in one part of a country or region to demand in another, and
- Enabling more renewable energy to be absorbed into a country’s energy mix
- Supporting economic growth as a consequence of reliable, affordable power
However, none of this will be possible without a significant increase in the amount of funding available to the sector. Perhaps the most significant impact challenge for Gridworks, and one that has been envisioned by BII from the time of our creation, is demonstrating that African transmission & distribution can be an investable asset class. An asset class that can attract commercial capital, as it does in Europe, the Americas and Asia. By establishing precedents for new, financially sustainable business models that crowd in private sector capital, our market-shaping impact can be transformational.
With the support of BII and the UK Government, we have been able to offer several African governments a private sector solution to their electricity funding shortfalls, which complements the limited public sector solutions they have at present. Gridworks works in a sector where there have not traditionally been private sector opportunities, but African governments are increasingly interested in the role of the private sector in electricity networks.
As an example, our transmission project in Uganda has involved working with the Government, the transmission utility, and the regulator to encourage private investment in the sector in general, and for this project specifically. With no existing framework for private investment in the transmission sector, the Gridworks team created a new project structure to fit with existing local legislation. The Amari project has subsequently been adopted as an official pilot project for the sector and should shape the Ugandan transmission sector as well as serving as an example to other countries. Uganda currently has more than $1.6bn of additional sector funding required for transmission as part of its 2020-30 energy plan. A large proportion of this will need to come from the private sector and a reference project like Amari will serve a critical purpose in the country’s medium term infrastructure plans.
In 2019, with the exception of BII, there was little or no appetite amongst DFIs to take the risk of developing T&D projects in Africa. BII recognised that under-investment in Africa’s electricity networks was a significant market failure and needed to be addressed.
In the almost four years since Gridworks was created, the sentiment towards encouraging private investment into this vital sector has slowly improved, both amongst African governments, and impact and commercial investors. Our market-shaping activity has prompted growing interest among other DFIs in offering private sector solutions to complement the public sector solutions African governments currently have to the funding shortfall.
BII demonstrated patience in recognising that large-scale network infrastructure projects can be several years in the making. It recognised that to change the status quo in the transmission & distribution sector would take a bold approach similar to the development of the African IPP generation market in the 1990s. This has enabled Gridworks to work on early-stage projects and to make long-term, patient capital available to the companies in which we invest.
Our projects have received serious expressions of interest from both DFIs and fully commercial investors to provide much-needed debt and equity funding. In addition, there is a growing recognition among many stakeholders that sustainable business models that attract private sector capital are vital to the transformation of electricity networks in Africa, and to achieving the climate change and energy access goals the continent has set itself.
[1] Brighter Africa, the potential of the sub-Saharan electricity sector: https://www.mckinsey.com/~/media/McKinsey/dotcom/client_service/EPNG/PDFs/Brighter_Africa-The_growth_potential_of_the_sub-Saharan_electricity_sector.ashx
[2] IEA’s Africa Energy Outlook 2022: https://www.iea.org/reports/africa-energy-outlook-2022