This chapter primarily targets project developers and managers. Apart from the public policies and initiatives, as well as the private financial schemes previously presented, private actions emanating from the persons behind clean energy access projects have also a crucial role to play in the allocation of capital. Capital providers, profit-oriented or not, usually value the way a business is conducted, including how potential risks are managed as well as the capacities of the team to deal with complex situations.

This section presents different actions available to private actors, targeting specific risks linked to the various investment opportunities previously explored. More specifically, it focuses on strategies for risk transfer, avoidance and compensation, principally targeting customer, political, counterparty, business and social acceptance risks (cf. Chap. 3 for a complete definition of investment risks considered in this book). Moreover, additional solutions are explored to support internal risk management processes and business management in the energy sector.

Since this book does not concentrate on a specific country or market, this section does not pretend to be exhaustive. In addition, innovative approaches to manage risks in the energy industry are constantly emerging around the world, with different levels of performance that should be properly analysed. Nevertheless, this chapter has the objective to offer some avenues to be explored in order to manage the risks associated with different energy companies or projects, with a particular focus on sub-Saharan African contexts.

Project developers may adapt their business models to improve the risk perception of potential capital providers. In order to upgrade their risk-reward profiles, several alternatives are available, depending on the context, sector and type of business.

The first step consists of ensuring a comprehensive understanding of the risks, real and perceived, associated with a specific business model through an adequate mapping. Those investment barriers should be properly assessed using associated loss potential and probability of occurrence.

Once a comprehensive analysis of risks has been realised, effective risk management approaches need to be developed and implemented in order to avoid, mitigate or transfer them, when technically and financially feasible.

A successful risk management process should result in a notable reduction in the loss potential and the probability of risk occurrence, as presented in Fig. 8.1.

Fig. 8.1
figure 1

Loss potential and probability of occurrence before (left) and after (right) risk treatment. Source Authors’ elaboration, based on Alliance for Rural Electrification et al. (2015)

Full size image

Several industries have tailored-made risk management procedures that are clear and easy-to-handle for all stakeholders. They provide key information to investors and decrease knowledge and language gap with project developers. Moreover, they allow an understanding of existing risk mitigation actions within the specific sector.

Those mechanisms are generally available when an industry reaches maturity. For instance, microfinance institutions have developed several risk management techniques. In addition, they disclose specific information and ratios to properly communicate with capital providers and other stakeholders active in the industry. Even though global standards and risk management solutions do not exist for every business model within the clean energy sector, certain initiatives have started to emerge over the years.

8.1 Strategies for Risk Transfer

Some of the business models considered in the present book have the opportunity to transfer part of the risks associated with their activities to external entities, either public or private ones, by using insurance and guarantee instruments.

As previously mentioned, those mechanisms can target various investment risks, ranging from political to currency and counterparty risks. However, the related costs can be high and therefore not affordable for certain business models. Moreover, those instruments are usually created for large-scale investments and project finance and may not be available and/or accessible for smaller energy projects, such as clean cooking companies or the off-grid sector.

In addition, project developers may use products and assets including warranties, decreasing the counterparty and social acceptance risk. This practice can be applied when a company is selling energy devices as well as energy as a service.

Risk transfer schemes are powerful tools to catalyse private investments, as they improve risk-reward profiles of investment opportunities and clearly establish the consequences may an unexpected event occur. Nevertheless, their use is still low in the clean energy sector, with the exception of off-balance sheet financing and large-scale investments in power generation plants. Accordingly, public and private actors should develop new risk transfer mechanisms, adapted to various financing structures and ticket sizes, as well as foster their utilisation by raising awareness around those instruments and increase their affordability.

8.2 Strategies for Risk Avoidance and Compensation

Those strategies aim at significantly decreasing the probability of occurrence of an event that may negatively affect a company or a project. In addition, this subsection includes some actions outside risk transfer instruments that may compensate, partly or entirely, potential financial losses should this event occur.

8.2.1 Customer Risk in the Off-Grid and Clean Cooking Sectors

In order to mitigate the risk of customer non-payment, project developers active in the off-grid and clean cooking sectors have several schemes at their disposal to improve the collection rate.

  • Flexible payment methods

In the off-grid and clean cooking sectors, different payment schemes can be envisaged in order to be aligned with financial capacities and constraints of targeted customers:

  • Fixed or flexible payment plans spread over several months or years

  • Lease systems, either lease-to-own or perpetual lease

  • Pays-as-you-go (PAYGO), a scheme whereby customers unlock an energy system with irregular payments according to their consumption

Mobile money penetration has paved the way for flexible and digital payment schemes. It has become one of the most significant technology advancements in the enhancement of clean energy access in many developing and emerging countries.

  • Clear consequences of non-payment

Project developers can define in advance specific consequences for customers in case of payment default. Depending on the business model and payment schemes, penalties can be imposed due to payment delay. Moreover, the energy supply can be cut-off through the use of smart metres. Finally, the company may retake possession of the energy device and reuse it for further transactions.

  • Increase the capacity and willingness to pay

By providing high-quality services and maintaining good relationships with customer and the communities, companies may increase the willingness to pay of customers. Moreover, they can ease bill settlements and bureaucratic procedures in order to reduce burdensome processes for their clients.

In addition, project developers can promote and support productive uses, thus linking electrification with entrepreneurship initiatives and commercial activities in order to increase incomes within the served community.

Smiling Through LightFootnote 1 is a social enterprise that focuses on clean electricity access in Sierra Leone. By setting up distribution networks and supporting women-led businesses, the company focuses on the last mile distribution to help communities access safe and clean light technologies, while simultaneously improving income levels. Thus, the organisation is able to foster economic growth, strengthen environmental awareness and address air pollution through its dual approach targeting the creation of thriving business opportunities as well as the provision of clean energy access. In addition, profits are reinvested to acquire new solar products as well as provide training and ongoing support to local women.

  • Portfolio diversification and management

By serving customers in different geographic areas and with distinct socioeconomic profiles, project developers minimise the default risk through portfolio diversification. In addition, management systems for large portfolios are available to monitor customers, providing clear data and reporting as well as assessing credit default risk.

Regarding the lack of information related to energy consumption and socioeconomic status of targeted clients, two distinct options, non-mutually exclusive, are open to project developers to mitigate this customer-related risk:

  • Prefeasibility and market study

Project developers can release by themselves a feasibility and market study in order to get information about socioeconomic conditions and energy demand in their addressable market. Even though financial and human resources are needed to do so, it may help develop a business model tailored to the local context.

  • Start with small-scale projects

Especially in the mini-grid sector, lack of adequate information regarding energy consumption may push project developers to deploy installations with over-capacity, implying expensive maintenance costs not covered by revenues. Starting with lower installed capacity and a flexible power generating system let mini-grid projects the opportunity to adjust installations based on energy demand, without incurring significant additional expenses and within a reasonable time frame.

OnePower AfricaFootnote 2 is a fast-growing energy start-up that is currently planning to install 25 mini-grids across Lesotho. Rather than looking at each system in isolation, the company has bundled construction and operation into an efficient portfolio approach. The mini-grids aim to serve remote communities, varying in sizes and locations but similar in consumption patterns. On top of this, OnePower recognises the challenges inherent in deploying power systems for previously unconnected customers, with little-to-no historical data about energy consumption and uses. In response, the company developed an innovative tool aimed at determining the optimal installation configuration, based on available data, such as population, sun radiation, as well as on energy demand projected from similar communities.

  • Satellite imagery

New methodologies to estimate energy access and consumption through satellite imagery are being developed and tested, allowing a better understanding of energy status, especially in remote areas (Falchetta et al. 2019a, b ).

8.2.2 Power Utilities and Low-Income Households

As previously reported, grid extension and last-mile distribution are complex and require substantial investments. In addition, many African power utilities run on quasi-fiscal deficits due to several factors such as (Attia and Shirley, 2018):

  • Non-cost-reflective tariffs

  • Line losses and system underperformance

  • Power theft

  • Payment delinquency

  • Mis-management and corruption

Consequently, it may be difficult to extend their services in hard-to-reach zones and to low-income households.

Additionally, even when grid extensions are completed, they often result in unprofitable projects, mainly due to high marginal costs and low-consumption levels. On top of that, illegal connections may be frequent in previously unconnected areas, thus worsening financial performances (WB, 2015).

As an example, Kenya Power and Lighting Company (KPLC), the national utility, launched the Last Mile Connectivity Project back in 2015 (Attia and Shirley, 2018). This $150 million project aimed at extending power distribution network as well as introducing a subsidised connection fee in low-income areas. Even if the customer base increased significantly, the project faced cost overruns owing to low concentrated power demand. Moreover, many newly connected households did not own sufficient financial resources to cover connection expenses, even at a subsidised rate.

Accordingly, many poor households across sub-Saharan Africa are not connected to the national power network, even though some live in areas where the grid has already expanded (Attia and Shirley, 2017). This is mainly due to non-affordable connection costs and electricity tariffs, lack of access to formal billing channels and/or little consideration towards certain low-income and marginalised consumers from power utilities.

However, reaching new communities would not only electrify unconnected individuals, but also increase the utilities’ customer bases. Therefore, it may potentially improve the attractiveness for capital providers, if the appropriate schemes are proposed, namely offering affordable and reliable services while securing positive financial margins.

Certain solutions exist to provide electricity services adapted to low-income communities and extend them in unconnected zones:

  • Understanding of customer electricity needs

Power utilities could start by releasing customer surveys to understand electricity uses and consumption within their addressable market. As a result, they are better able to develop tailored-made services adapted to financial capacities and energy needs, when technically and financially possible. Furthermore, investing in prepayment metres may decrease financial risks associated with the elasticity of demand as well as illegal connections.

  • Tailor-made services

When technically and financially feasible, power utilities can improve the affordability of connection costs and electricity tariffs in two different ways. First by offering payment plans adapted to financial constraints, including payments spread over several months or years. Second by cross-subsidising certain neighbourhoods where low-income households are living.

In addition, power utilities can support poor customers with their electricity bills, by hiring local persons to serve as bill collection agents for instance. On top of that, this customer engagement strategy may improve uptake and retention of clients.

  • Public–private partnership

Through utility concessions or distribution franchising, publicly owned utilities can involve private actors in the distribution and transmission sector. However, considering the low financial returns generally associated with this part of the power value chain, additional public measures would be needed, such as subsidies and guarantees.

  • Decentralised business model

Where energy consumption is low, power utilities can support the deployment of decentralised solutions, being less expensive and faster to install than an extension of the national grid. Furthermore, off-grid systems may adapt their installed capacities to power demand, set specific tariff schemes and be connected to the main grid when it reaches the area.

This can be done through rural electrification cooperation, privately owned companies or direct involvement of public power utilities. Indeed, moving away from the binary thinking of on- and off-grid solutions may allow the access to electricity for many unconnected communities across sub-Saharan Africa within a reasonable time frame.

The Moroccan case is an interesting example of well-performing utility-led rural electrification. As a matter of fact, the national utility successfully used a combination of grid extension and decentralised solutions to increase the electrification rate from 20% in 1995 to 100% in 2020 (SEforAll, 2020), adapting energy services to customers’ financial constraints and consumption. Three main principles are considered to have contributed to a rapid improvement of levels of electrification: (i) a clear vision and political commitment, (ii) a solid institutional framework allowing the involvement of both national and international players and (iii) a financial model that includes all core stakeholders (Nygaard and Dafrallah, 2016).

In order to ensure high-quality services in rural areas, the national power utility decided to outsource the off-grid component to the private sector, through an international bidding process for ten-year concession contracts (ibid). This public–private partnership strengthened the entire approach and facilitated the mobilisation of international funding (ibid).

At the same time, some specific factors helped achieve those outcomes: (i) a relatively high GDP compared to many sub-Saharan African countries and (ii) a high level of urban electrification, allowing cross-subsidisation (ibid).

8.2.3 Political Risk

Project developers can lessen the risks linked to political decisions and possible legislative changes by continuously engaging with and consulting local public authorities during development, implementation and operations, as well as constantly seeking dialogue.

Of course, this is easier said than done, and the outcomes are not assured. Yet, those efforts can significantly influence political commitment and foster decisions that would best achieve energy access objectives.

8.2.4 Strategic Partnerships

By establishing and maintaining strategic partnerships, project developers active in the clean energy sector can decrease business risks linked with their supply chain and internal operations as well as ease the access to affordable financing.

Business models offering energy devices may partner with microfinance institutions (MFIs). Indeed, access to modern energy services might be facilitated if potential customers have access to tailored financial services to cover the costs related to their energy consumption. Moreover, MFIs can help energy companies reach new markets, benefiting from a wider outreach and distribution channels. From an MFI perspective, energy products allow portfolio diversification and present an opportunity to expand their client base, since the addressable market is significant (Qayyum, 2017).

Similarly, energy-related projects can look for strategic agreements in order to strengthen their business model and decrease the associated perceived risks. As an example, corporate purchase power agreements (corporate PPAs) may reduce financial uncertainties for project developers, thus removing a significant roadblock to financing. They are long-term contracts under which a business agrees to purchase electricity directly from a power producer. Therefore, with a financially strong counterparty, corporate PPA is an interesting component to improve the bankability of an energy facility. Moreover, it increases certainty for the power off-taker, by fixing the electricity price in the long run and relying on a consistent energy supply.

Moreover, strategic partnerships have the potential to decrease other business-related risks, associated with fuel supply or decommissioning to name a few. Indeed, project developers should create a network of high-quality partners, following the project finance approach described in the corresponding section, in order to strengthen their business models. In the same vein, agreements can be reached with anchor consumers with strong creditworthiness, thus reinforcing the soundness of their commercial network.

Furthermore, similar agreements may be concluded with strategic investors with significant experience and know-how in the clean energy sector in sub-Saharan Africa. Besides, close relationships with key capital providers may also facilitate the access to affordable and bridge financing, thus increasing the supply of capital and reducing the refinancing risk.

8.2.5 Operational Risk

Several actions can be undertaken to improve operational efficiency, including:

  • Standardisation of procedures

  • Integration of internal rules and processes

  • Staff training

  • Establishment of good governance practices (including for financial managementFootnote 3)

  • Adoption of technical standards

In addition, once the sector is mature enough and project developers get a comprehensive understanding of their whole value chain, vertical disintegration may bring specialisation (i.e. manufacturing, distribution, operation, financing) and improve efficiency of the entire industry.

8.2.6 Social Acceptance Risk

Several initiatives can be undertaken by project developers to decrease the social acceptance risk, including:

  • Community involvement from development to operations

  • Partnership with local organisations

  • Proper stakeholder management

  • Community-owned systems

Community-owned businesses offer the possibility to develop a sense of ownership as well as an equitable distribution within a community. Moreover, they may potentially decrease electricity tariffs, as they are driven by financial sustainability rather than profit maximising models. However, there is a need to build capacity among community members to ensure proper operation and maintenance of the system.

8.3 External Consulting

Additionally to those internal actions, project developers may be supported by external actors in order to improve their risk-reward profiles as well as to strengthen their business models and value propositions.

Incubators, accelerators and consultantsFootnote 4 support project developers at different development stages to launch and grow their businesses, using advisory services and technical assistance. They provide companies with tailored mentorship, sound expertise and facilitated networking. Moreover, they can assist entrepreneurs in financial structuring and fundraising processes. Those initiatives may be created by the state or private players.

As an example, INDIE (Smart Investment Strategy)Footnote 5 is a consulting company specialised in financial strategies and financial modelling for small growing businesses (SGBs). It has the objective of fostering the access to affordable capital and support the growth of promising and innovative business models active in the energy, agriculture, water, recycling and fintech sectors to name a few. The team provides tailored consulting services with the aim of optimising financing strategies at any development stage and mitigating some investment risks. It also collaborates with capital providers (public and private) and incubators, in order to enhance the use and effectiveness of innovative financial instruments and schemes, capable of aligning risk-return profiles.