Interview – Equatorial Power shares Lessons Learned
Equatorial Power (EP) is a clean energy company specialising in the development, construction, and operation of solar hybrid mini-grids, typically ranging between 50-100kW, in Uganda, Rwanda and the Democratic Republic of the Congo (DRC). Established in January 2018, the company plays a vital role in providing essential power to rural off-grid areas serving local SMEs, communities, and agro-processing hubs owned and managed by EP.
EP’s unique approach integrates mini-grids, agro-processing hubs and demand stimulation, to accelerate energy access. With a focus on technology and strategic partnerships, EP has acquired significant expertise in executing projects in remote areas and islands. Looking ahead, EP has plans to expand its operations to additional countries, including Mozambique and Ethiopia, in 2024. The company has already established key partnerships, such as a joint venture with Engie in Africa and collaboration with Infraco in the DRC. EP has successfully deployed nearly 1MW of solar based mini-grids across five projects in three countries, resulting in approximately 5,600 connections and the establishment of two productive hubs where local farmers can avail tools and services. Currently EP is in the advanced stages of securing Series A funding, a critical step that will enable EP to scale up its operations in existing countries and potentially entering new geographic markets while sustaining its integrated energy infrastructure-based model.
Energy Catalyst had the pleasure of interviewing EP’s Chief Technology Officer Abishek Bharadwaj to gather valuable insights relevant to other portfolio companies under the ECAP initiative.
Q: Could you describe your business model and highlight its distinguishing features in comparison to other approaches?
A: EP has developed a resilient and truly integrated mini-grid model going beyond the mere provision of electricity to deliver impactful services in a commercially viable manner. EP brings innovation to the mini-grid sector by adopting a “mini-grid 2.0” model that addresses customer needs more holistically, while ensuring enhanced profitability.
Beyond a larger solar PV & storage power generation unit, EP’s model features the integration of two core demand centres:
Supported business customers. We support our customers through a Business Incubation Programme, focussed on providing basic business skills and financing for energy-intensive productive assets to local entrepreneurs and SMEs. This programme is delivered either in-house by the EP Team or in partnership with external companies and NGOs, depending on the specific mini-grid location.
EP’s productive hub serves as a pivotal anchor load for the mini-grid site, accounting for up to 60-70% of the total energy demand. This hub is an agro-processing centre fully owned and operated by EP, specialising in the provision of energy-intensive agriculture-based processing products and services, as well as e-mobility solutions to cater for the needs of the local communities. This includes services tailored to specific regions such as ice production for fish storage on Lake Victoria (Uganda) and Lake Kivu (DRC), flour milling in Rwanda, fish drying for silverfish on Lake Victoria (Uganda), pineapple processing in DRC, and electric boats on Lake Victoria. Importantly, this approach ensures that there are no market disruptions, offering more affordable goods and services compared to the market rates and actively involving the local community through local employment or distribution chains (e.g. for water or ice).
Q: Can you tell us more about what the productive hub offers to local communities?
A: EP’s agro-processing hub, accounting for a substantial slice of the energy demand (50-75%) but demanding a smaller fraction of the project CAPEX (15-20%), offer four distinct benefits:
- Enhanced service: These hubs provide agriculture-based processing products and services to both residential and business customers. By operating in the captive high-demand market of remote off- or weak-grid communities, our hubs deliver more efficient energy-enabled services at a lower cost, thanks to the economies of scale and asset mutualisation effects.
- Improved returns: Given that the electricity tariff is regulated by the government in most contexts and so not entirely cost reflective, delivering energy access alone was not deemed commercially viable. But the deployment of larger generation systems like our own, when driven by robust demand stimulation amongst local businesses, results in higher returns while maintaining similar management and system costs to smaller systems. Moreover, by converting electricity into a useful product or service which is not regulated like electricity, which can also be priced competitively to the market, allows mini-grid developers to reap improved returns from greater consumption.
- Reduced tariff: Efficient CAPEX decisions are facilitated by optimising the generation unit sizing, enabled by controlling the agro-processing hub in response to overall system demand. Demand response technology and remote monitoring enhance the demand-supply correlation, lowering both the levelised cost of energy (LCOE) and end-user tariffs.
- Greater resilience: In the event of any socio-economic shocks that reduce the electricity tariff, the margin from the other services (a significant energy input) increases. This effectively mitigates tariff losses from energy sales, providing greater resilience compared to “traditional” mini-grid models.
Q: What were the main challenges and how did EP overcome them?
A: Managing multiple stakeholders was a challenge. Each mini-grid or portfolio involves multiple stakeholders, including regulatory bodies, renewable energy associations, and government ministries, as well as various financiers, such as equity providers, grant providers, and, in some cases, debt providers. Coordinating with these stakeholders elongates project timelines. The way EP shortens the time spent liaising with stakeholders is to have weekly meetings that provide them with as much information as possible and following up on their questions, thus getting ahead of their concerns. In addition to this, it is imperative to frequently set expectations through monthly project status reports with all of the stakeholders, particularly the investors.
Applying for grants and getting the funding mix right was another challenge. As previously mentioned, every project necessitates funding from multiple sources, a portion of which must come in the form of grants. This is because the regulatory frameworks often impose limits on the tariffs that can be charged to end customers, which may not necessarily cover the actual costs, even if customers have the capacity to pay more. Securing the ideal capital mix, particularly when it comes to obtaining grants from appropriate development partners, can be difficult. The tendering, due diligence, and contracting processes of development organisations can be cumbersome, so we recommend identifying internal or external resources that can shepherd the company through the application process efficiently. Moreover, popular grant mechanisms such as results-based financing come with stringent co-financing requirements that disqualify many small companies, or require us to secure bridge financing with high interest rates during the early stage. We recommend that other companies do a comprehensive assessment of stage-by-staging financing requirements before applying for a grant.
Beyond securing grants, the initial pilots set-up by EP helped us determine a project finance model that accounted for financial risks such as delays, costs and cashflow constraints. This has helped EP determine the right financial mix early on in relation to any new portfolio, enabling us to approach the most suitable investors.
Obtaining the necessary permits and licenses can be challenging, as the processes are often unclear or take longer than the timeline imposed by developers and investors allows. Companies also sometimes find themselves in a catch-22: investors typically require permits and licenses to be in place before committing any funds, but regulatory authorities may request proof of funds to approve these permits. Resolving that misalignment can lead to significant delays out of the developer’s control. EP overcame this by piloting projects in parallel in 3 different countries, so that unreasonable delays in one country does not alter the growth trajectory of the overall company too severely.
Finally, ensuring adequate demand stimulation through the productive use of energy (PUE) has become essential for mini-grids. It is also economical: investment in PUE typically comes in a 3-5% of overall project costs. However, standardising products and services for PUE is challenging because the livelihood needs of customers differ significantly between one district or region to the next. So EP has benefitted from support from development organisations and programmes such as Energy Catalyst to research the most appropriate PUE opportunities across portfolios.
Q: What valuable lessons can other companies and the broader sector glean from this journey? Were there any unexpected insights that stood out for you?
A: EP was initially established with the aim of developing mini-grid projects in Uganda. However, the realisation that the project development phase of mini-grids often takes longer than initially estimated led to EP expanding its operations to DRC. This extended timeline, often spanning 1 to 2 years from the project’s conception to financial close, is due to the various dependencies on external stakeholders throughout the project cycle. At first, funders investing in EP’s corporate entity were not particularly enthusiastic about the idea of expanding into new countries in the initial stages. EP overcame their reluctance by leveraging its growing experience, initially starting with project development activities in Uganda, to eventually extend its operations into the Democratic Republic of Congo (DRC).
Demand stimulation is critical for the effective utilisation of a mini-grid, revenue generation, and demand-side management. While many developers typically view this as an operational activity aimed at enhancing asset utilisation post-installation, EP’s experience has demonstrated that much of the decision-making and the approach to PUE should be integrated into the project development stage. To achieve this, EP employs Human-Centred Design[1] techniques to evaluate PUE potential, resulting in more efficient and well-informed design right from the project’s outset.
Mini-grid projects are often established in greenfield areas where the community has never had access to a reliable power source. Therefore, assessing the potential demand for power is particularly hard and requires making assumptions. This has historically resulted in many mini-grid projects in Africa being oversized and minimally utilised. EP has introduced a shift in approach by incorporating repowering into its business model. Instead of designing systems based on unfounded assumptions, EP uses the East African average consumption data from African Minigrid Developers Association (AMDA) publications and created systems that match a fraction of this demand. The expectation is that EP will add more capacity as demand grows. This modular approach ensures that the system is at least 70% utilised right from the start.
Q: What advice would you offer to a predominantly early-stage European company looking to offer products or services in Africa?
A: There is ample evidence that while the mini-grid business model presents challenges, it is workable, or at least has the potential to work if suitable team expertise, robust piloting and optimising for local context are in place. It is most essential that early-stage companies focus on ensuring that the unit economics of a pilot work before considering scaling up. Scaling would resulting in a larger EBITDA (earnings before interest, taxes, depreciation and amortisation), but the EBITDA needs to be positive for every project to begin with.
Being bold and continuously innovating until the company achieves success is essential, as our experience has shown that just following templates doesn’t guarantee profitability for an early-stage company. This sector needs more innovation and EP has not shied away from testing innovations in every pilot, not hesitating to discard an idea if the results do not look promising. This process relies on analytics from smart meters and IOT devices, supported by a strong data team capable of providing rapid feedback to the strategy team. We have certainly learned that having a solid data team with excellent analytical skills is indispensable for the success of an early-stage company.
[1] Human-Centred Design involves surveying the community and gathering repeated feedback on the innovation. For more about the concept, please visit: https://www.interaction-design.org/