The new EEP Africa study, Generating Success, explores how flexible grant financing can be used effectively to build sustainable clean energy companies in Sub Saharan Africa.
Grant financing has a critical role to play in the development of the clean energy sector in Africa. However, the sector will only reach the scale needed to achieve a real energy transition if follow-on investment is catalysed. It is therefore vital that grant funds be used to build commercially viable companies that provide products and services fit for the market and are able to attract customers and investors.
The study examines how grants can be best deployed to generate long-term success. Research conducted for the study, including focus groups and interviews with portfolio companies and partners, builds on EEP Africa’s long experience in the sector. The findings suggest what works, and what does not work, when supporting developing businesses in the complex and challenging markets of Southern and East Africa.
Risk-tolerant early-stage financing is scarce in the clean energy sector and hence it is of utmost importance to put that financing to good use. EEP Africa has been providing grants for more than a decade and the sector has evolved massively during that time. This study provided us a great opportunity to listen to our key stakeholders and critically assess how grants can better serve the scale up of sustainable clean energy solutions. We will use the findings to critically review our own activities and hope others find them insightful too. - Jussi Viding, Fund Manager for EEP Africa, Nordic Development Fund
Grant financing has traditionally been prescribed top-down, with a focus on achieving high-level outcomes that contribute to national or global goals. This report argues for a more progressive, developer-led approach that allows companies room to pivot their business model based on lessons learned or changing market conditions.
Such an approach requires a broader definition of success, one that goes beyond pre-set contract milestones such as number of households reached. When funding the private sector, the success of a grant should also be measured in terms of the value the business brings to end users, the commercial progression and investment readiness of the company, and the learnings generated for the sector.
Grant funds structured to the growth needs of companies, such as talent acquisition and financial, credit and operating system improvements, and skills transfers, can greatly enhance company investment readiness and sustainability. Solely tying grant funds to project-like metrics can be a distraction and lost opportunity for enterprises. -Christine Eibs Singer, Senior Advisor, Catalyst Off-Grid Advisors
Building on this analysis, the report offers recommendations for how to structure grant financing to foster success. The key themes of the recommendations are flexibility and inclusivity. Funding for both start-ups and mature companies should be targeted towards testing new products, services, or markets. Grants should also be used to address the sector’s under-investment in local and women-led companies and must be designed with the interests of all stakeholders in mind.
For local ventures in particular, grant financing is often more easily available than equity or debt and can provide critical funding to test and iterate the business model. However, we have also seen the reliance on grants distract entrepreneurs from the core business needs, which can skew the company’s growth trajectory, or worse, lead to a vicious cycle of grant dependency that does little to build commercially viable ventures. Ideally, grant financing is used to de-risk businesses for future equity and debt investment. – Sarah Bieber, Head of Energy Partnerships, Acumen
Effective financing of companies can only happen when project funding is viewed as part of the broader development continuum of a company or market. The main recommendations from this study are intended to help stakeholders understand each other and collectively achieve success:
- Use grant financing to de-risk the development of commercially viable products and business models.
- Allow developers to pivot in response to grant-enabled learnings or changes in market conditions.
- Facilitate efficient, open, and continuous communication between funders and developers.
- Take a holistic view of success and monitor broader value created by the grant.
- Foster long-term relationships with grantees.
- Build a more inclusive sector by directing support to local and women-led businesses.
Download the full report at https://eepafrica.org/publications/#studies
Initial findings from this study were presented at the session on Financing: Growing Beyond Grant Financing during EEP Africa Knowledge Week 2021.