Horizon | Mar 2022

The future of energy is electric. As the world lurches towards net zero amid unrelenting climate change, electricity networks will become even more critical to the modern economy. Investments in renewable and decarbonised electricity systems will continue to boom, especially as more sectors electrify their operations. Nearly 800 million people globally live without access to any electricity, three-quarters of them in Sub-Saharan Africa. Almost half of the world’s population lives without ‘reasonably reliable’ access to power,(1) with frequent outages interrupting their daily lives. The consumption deficit is staggering: the average Nigerian consumes less than a third of the electricity used every year by a moderately efficient American refrigerator.(2) Sub-Saharan Africa has a persistent lack of electricity access in part due to massive underinvestment in electricity infrastructure. Most of its public electric utilities are loss-making, with limited ability to maintain existing assets or invest in new ones. This hampers top-down growth in power supply and improvements in the availability, reliability and affordability of power. Stalled or partially complete power-sector liberalisation efforts(3) have allowed investments in generation capacity to grow steadily but have left the transmission and distribution segments behind. This is a major bottleneck to further electrification and a constraint on off-taker bankability for future generation projects. In adversity lies opportunity. Wood Mackenzie estimates that achieving universal electricity access in Sub-Saharan Africa by 2030 presents a US$350 billion opportunity, nearly one-fifth of it off the grid. Decentralised, bottom-up, solar-and-storage grids could not only reshape Africa’s energy future but carry important lessons for the next generation of thinking on utility business models globally. The future of energy may be forged in Africa.

HORIZONS

Utility 3.0:

How Africa is remaking the grid

March 2022

Benjamin Attia, Principal Research Analyst, Emerging Markets in Transition

Contents

Powerful fundamentals Time to go off-grid? Utility 3.0: Customer-centric service provision The Dilemma for African Utilities: Cooperate or compete?

1. 2. 3. 4.

Powerful fundamentals

Due to the rapid decline in renewable energy costs and innovative business models, addressing this chasm of consumption and investment to provide universal, reliable, affordable and decarbonised access to electricity in Sub-Saharan Africa presents a massive and growing market opportunity within the energy transition. Three fundamental macroeconomic trends underpin future electricity demand growth in Sub-Saharan Africa:

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Time to go off-grid?

Investible opportunities are emerging beyond the grid for three customer segments:

Conclusion: Africa’s role in the energy transition

The evolution of the utility business model on and off the grid in Sub-Saharan Africa will fundamentally reshape the trajectory of global electricity demand. It’s an essential piece in the energy transition puzzle. Decentralised, bottom-up, solar-and-storage grids could not only reshape Africa’s energy future but carry important lessons for utility business models around the world. These trends also present a narrow set of options for the region’s state utilities and an opportunity to earn healthy returns by addressing one of the energy transition’s largest challenges as it unfolds over the coming decades.

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How Africa is remaking the grid

August 2021

Figure 1: Under AET-1.5, Africa’s on-grid electricity output will grow nearly 4x by 2050 to meet booming demand

Source: Wood Mackenzie

Utility 3.0: Customer-centric service provision

These opportunities beyond the grid represent more than basic access and bill savings. They represent the early stages of a dramatic, fundamental evolution in the utility business model towards broader, customer-centric service provision. At the grid’s edge in advanced electricity sectors, a different utility evolution is already occurring. The conventional, source-to-sink electric Utility 1.0 business model of generating, transmitting and distributing electricity to consumers is being disrupted by the Utility 2.0 model.(19) This model sees increasing prominence for customer-owned, behind-the-meter generation, battery storage, electric vehicles and demand response, in which both customers and utilities have value propositions for each other. This 2.0 evolution has not begun in most under-electrified economies. In fact, those markets are mostly remedial in terms of their performance under the 1.0 model. But the vacuum left by public utility bottlenecks and far-from-universal electrification is being occupied by private firms with a new vision and a value proposition for their customers. Utility 3.0, if you will. Because of the cost declines in solar and battery technology and the flexible prepaid service model, these distributed energy service companies are aligning cost with value for energy delivery. They can also manage credit risk directly and digitally outside the bounds of traditional utility cost-recovery mechanisms. Off-grid electricity service provision – initially for residential customers beyond the grid through the pay-as-you-go (PAYG) business model – is becoming an enabling mechanism for a host of other goods and services that customers are willing to pay for, most of which require basic electricity service. For example, many of these next-generation private utilities are now leveraging their existing

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Benjamin Attia

Principal Research Analyst, Emerging Markets in Transition

Benjamin Attia is a Principal Research Analyst in the Energy Transition practice at Wood Mackenzie. He leads the firm’s coverage of on-grid and off-grid power and renewables in emerging markets in Africa, the Middle East, and parts of developing Asia. He previously spent over 5 years as Wood Mackenzie’s lead analyst for solar PV markets in Africa and the Middle East, and of off-grid power in emerging markets globally. His research covers market developments in the policy, supply chain and project development landscapes, forecasting scenarios, and investment trends. He joined Wood Mackenzie via its acquisition of Greentech Media in 2016. He previously worked in solar asset management and commercial operations at SunEdison and on clean energy transition focused regulatory research for utilities and policymakers at the National Regulatory Research Institute.

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Value-stacking goods and services Upselling ‘value-stacked’ goods and services on top of basic electricity connections expands a customer’s value. It also amortises costly last-mile logistics and customer acquisition costs over multiple long-term revenue streams that face little if any competition from incumbents. Firms like BBOXX, Zola Electric, PowerGen Renewable Energy and others are piloting value-stacking approaches across Africa and developing Asia.

David Brown, Head of Markets and Transitions, Americas Ram Chandrasekaran, Head of Road Transport Brian Mcintosh, Title

Plastic surgery:

Reshaping the profile of the plastics industry

Distributed segments in Sub-Saharan Africa collectively account for

US$62 billion of the total African electricity investment opportunity this decade

Off-grid electricity service provision

is becoming an enabling mechanism for a host of other goods and services

This bubbling market activity beyond the grid will begin to take a larger and larger bite out of future on-grid electricity demand, leaving two future pathways for incumbent utilities: cooperate or compete. Where centralised utilities and off-grid service providers clash, quality and cost of service will determine where consumer spending flows, especially for commercial and industrial users who suffer major productivity losses from interrupted service.(20) A wave of grid defection could spell trouble for utilities like Kenya Power, which earns more than 54% of its revenues from roughly 700 anchor customers that represent less than 0.01% of metered customers.(21) As more high-value customers favour cheaper, cleaner, more reliable captive solutions, cash-strapped utilities will see reduced revenues without equivalent reductions in cost, so will face more and more difficulty maintaining and expanding their networks. Some utilities may fight to keep these customers by lowering tariffs, prioritising their demand, moving to flexible customer solutions, or even entering the C&I solar market themselves.(22) However, their ability to compete is primarily limited to vying to sell electricity to customers that already have a grid connection, due to the high costs of grid extension projects.(23) Then there’s the fact that regulated utilities will struggle to sell non-regulated services like those in the Utility 3.0 model. It remains to be seen how constrained Sub-Saharan African state utilities will respond to this nimbler competition as it scales up. Where the national grid is almost non-existent, like the Democratic Republic of the Congo, the building of a bottom-up, distributed grid (rather than adding distributed energy resources to an existing centralised grid) could even fundamentally change the role of the distribution utility. Their value would be based on the capex and opex savings customers can benefit from when they interconnect and trade with nearby sources of generation and load rather than operating on a fully captive basis. This could turn some pure distribution utilities from ‘gentailers’ into something akin to clearinghouses for distributed energy resources.

The Dilemma for African Utilities: Cooperate or compete?

The future of energy may be forged in Africa

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Population explosion: By 2050 Sub-Saharan Africa alone will be home to more than 2 billion people, almost double current levels. While the populations of most of today’s largest economies will shrink over the coming decades,(4) in some cases dramatically, Sub-Saharan Africa will be the only region where the population is still growing in 2100.(5) Rapid urbanisation: Some 80% of this population growth is likely to occur in urban areas.(6) The populations of African cities will triple by 2050. By the end of the century, 13 of the world’s 20 biggest urban areas will be in Africa, including the largest three.(7,8) These sprawling cities will spawn booms in industrial production and increase the need for residential services, public lighting, mass transit systems and personal mobility. Structural economic transformation: Four-fifths of Sub-Saharan African economies will double their 2020 gross domestic product by mid-century. Uganda, Tanzania, Mali, Mozambique, Kenya and Ethiopia are forecast to be among the 15 fastest-growing economies globally over the next five years.(9) These growth trajectories have steadily expanded the African middle-class, tripling over the last three decades. They now comprise more than one-third of the continent’s population, in no small part due to new job opportunities from urbanisation.(10)

• • •

The result? Africans are going to need a lot more electricity over the coming decades. The continent’s electricity demand has doubled over the last fifteen years, and under Wood Mackenzie’s 1.5 °C Accelerated Energy Transition scenario (AET-1.5), could double twice more by mid-century.(11) A US$350 billion beacon of opportunity Investment in this $350 billion opportunity is increasingly working around the fiscal and operational bottlenecks posed by some of Sub-Saharan Africa’s state utilities. Service providers are going straight to the bankable segments of residential, commercial, and industrial electricity demand, typically through distributed, renewable, off-grid solutions where the public utility does not feature. Today, about half of African businesses rely on back-up diesel generators to keep the lights on when the grid goes out, despite high and unpredictable costs.(12) Wood Mackenzie conservatively estimates that 123 GVA of distributed diesel capacity is operational across Africa today, and our findings suggest that at least 17 African countries have more distributed diesel genset capacity than they do grid-connected power-generation capacity. Across Sub-Saharan Africa (excluding South Africa), consumers spend just under US$20 billion a year on fuel for back-up generators, around 80% of what they spend on grid electricity. Even so, generators provide only 7% of total electricity service.(13) Solar panels have declined in cost by more than 90% over the past decade and a similar trend is evident in the battery storage landscape. These cheap, modular forms of power offer significant value compared with incumbent systems. For commercial and industrial users, diesel generators have been hybridised with solar and batteries or displaced entirely, improving reliability and price certainty, reducing costs and significantly decarbonising operations. This has created a compelling value proposition in many markets, taking these customers mostly or completely off the grid if they weren’t already.

Source: Wood Mackenzie.

Figure 2: Levelised cost competitiveness of captive solar PV, distributed diesel gensets, and commercial grid tariffs in major African markets

Residential: Off-grid residential demand is being served by standalone solar home systems and solar mini-grids. These often rely on prepaid mobile network-enabled business models to lower upfront costs and allow flexible and scalable use and repayment. As of 2020, there were an estimated 370 million(14) private solar home-system consumers and 250,000 (15) private mini-grid consumers in Sub-Saharan Africa. Wood Mackenzie analysis shows that Sub-Saharan Africa’s standalone solar segment has to date raised more than US$2.3 billion of corporate-level investment since 2010, while the mini-grid sector has attracted US$800 million. If a universal electricity access scenario is achieved in Africa, both could account for over half of new connections.(16) Commercial: Businesses need reliable and affordable electricity to power, so many turn to diesel generators to keep the lights on. This electricity from distributed gensets typically costs 1.5–2.5 times utility tariffs, illustrating the reliability premium customers are willing to pay. On a levelised basis, captive solar costs are 25–40% below commercial grid tariffs in markets like Kenya, South Africa and Nigeria. While diesel prices rise, they are forecast to fall about 25% further by 2025, by when we expect at least 10 GW of distributed C&I solar to be installed across the continent.(17) See Figure 2. Industrial: Where grid service is unavailable, unreliable or unaffordable, large, energy-intensive users such as mines, smelters, cement and steel mills, and major manufacturers are increasingly turning to captive renewable generation to power their operations. Our tracking of renewable procurements for mine sites, for example, shows that nearly two-thirds of mines across Sub-Saharan Africa have procured or are procuring onsite renewables, largely to reduce costs and emissions and increase reliability and resilience.(18)

• • •

Wood Mackenzie estimates that these distributed segments in Sub-Saharan Africa collectively account for US$62 billion of the total African electricity investment opportunity this decade.

• • •

software platforms to offer energy management services and remote maintenance digital payment networks to cross-sell financial products and insurance last-mile distribution rails to sell other retail and fast-moving consumer goods, swap batteries for e-mobility, and even pilot delivery of water, internet and other incumbent utility services

Source: Wood Mackenzie

Figure 3: Value-stacking ‘utility 3.0’ services at the last mile

This model, Utility 3.0, has attracted global strategic investors – firms like Engie, EDF, TotalEnergies, Shell, Schneider Electric and Marubeni – seeking to seize the opportunity to accelerate their business transitions by cornering the next billion customers at a far lower acquisition cost and with far less competition than in their home markets. They are then increasingly transferring these lessons on adjacent service offerings back to their existing customers. Take Engie’s formation of an energy access business unit across Africa with about 7 million customers and Shell’s acquisition of First Utility in the United Kingdom, who is already offering value-stacked services such as broadband, home security, discounts at filling stations and more. Just last week, Kenya Power announced it would start rolling out bundled internet alongside its power service for corporate customers in an effort to diversify its revenue streams These partnerships also work in the other direction, with telecoms companies Orange and Safaricom in Africa looking to sell solar home systems or even retail electricity in Africa, and firms like Coca-Cola, Unilever and Uber partnering with solar distributors to share last-mile distribution rails.

Access to electricity in Sub-Saharan Africa presents

a massive and growing market opportunity

Across Sub-Saharan Africa (excluding South Africa), consumers spend just under

US$20 billion a year on fuel for back-up generators

that customers are willing to pay for

Wood Mackenzie’s new mapping tool

References

(1) Ayaburi, J., Bazilian, M., Kincer, J. and Moss, T. (2020), “Measuring ‘reasonably reliable’ access to electricity services”, The Electricity Journal, 33(7): 106828 (2) Klein, E. (2013), “After seeing this graph, you’ll never look at your refrigerator the same way again”, The Washington Post, 18 September (3) Foster, V. and Rana, A. (2020), Rethinking Power Sector Reform in the Developing World, Washington, DC: World Bank (4) Paice, E. (2022), “By 2050, a quarter of the world’s people will be African – this will shape our future”, The Guardian, 20 January (5) Hoornweg, D. and Pope, K. (2014), Socioeconomic Pathways and Regional Distribution of the World’s 101 Largest Cities, Toronto, Global Cities Institute (6) Muggah, R. and Kilcullen, D. (2016), “These are Africa’s fastest-growing cities – and they’ll make or break the continent”, Geneva, Switzerland: World Economic Forum (7) Hoornweg, D. and Pope, K. (2014), Socioeconomic Pathways and Regional Distribution of the World’s 101 Largest Cities, Toronto, Global Cities Institute (8) Satterthwaite, D. (2017), “Will Africa have most of the world’s largest cities in 2100?”, Environment & Urbanization, 29(1): 217–220 (9) Atlas of Economic Complexity (2019), “India Slowing, China Resilient in Harvard’s New Global Growth Projections”, Cambridge, MA: Harvard Growth Lab (10) African Development Bank (2011), “Africa’s Middle Class Triples to more than 310m over Past 30 Years Due to Economic Growth and Rising Job Culture, Reports AfDB”, Abidjan, 10 May (11) Wood Mackenzie (2022), Accelerated Energy Transition 1.5 degree C Scenario, 15 Feb (12) International Finance Corporation (2019), The Dirty Footprint of the Broken Grid, Washington, DC (13) International Finance Corporation (2019), The Dirty Footprint of the Broken Grid, Washington, DC (14) Lighting Global (2020), The 2020 Global Off-Grid Solar Market Trends Report, Washington, DC: International Finance Corporation (15) Africa Minigrids Developers Association (AMDA) (2020), “Africa Minigrid Benchmarking Report Launched”, Nairobi, 13 August (16) International Energy Agency (2019), Africa Energy Outlook 2019, Paris, France, 9 November (17) Wood Mackenzie (2020), The commercial and industrial (C&I) solar PV landscape in Africa: A bottom-up analysis of emerging markets and drivers, 25 November (18) Wood Mackenzie (2020), Renewables for the Mining Sector: Quantifying the linked drivers of renewable procurement and decarbonization, 16 December (19) MIT Energy Initiative (2016), Utility of the Future: An MIT Energy Initiative response to an industry in transition, Cambridge, MA: Massachusetts Institute of Technology (20) World Bank Enterprise Surveys (n.d.), “Infrastructure”, Washington, DC (21) Attia, B. and Shirley, R. (2021), “Commercial & Industrial Solar PV: Threat or Opportunity for KPLC?”, Energy for Growth Hub, 1 September (22) Ibid (23) Attia, B. and Shirley R. (2018), “Distributed Models for Grid Extension Could Save African Utilities Billions of Dollars”, GTM, 13 June

Least-Cost Geospatial Electrification Tool view, Nigeria

View References

Wood Mackenzie has developed a geospatial least-cost electrification tool that maps on-grid generation, transmission, and distribution infrastructure, population clusters and available resources. Optimising for the lowest-cost, most appropriate solution based on the energy needs, current and future costs, and other factors, it forecasts a total addressable market for on-grid and off-grid market segments to help inform investment decisions, and estimates demand for solar equipment, diesel fuel and grid power and assists in planning new capital-efficient grid infrastructure investments. Fill out the form on this page to learn more.

Wood Mackenzie’s new mapping tool