Green Aggregation Tech Enterprise (GATE)

About

Africa faces the challenge of providing electricity to 600 million people by 2040. The vast majority of Africans without power in Sub-Saharan Africa live in remote areas, and mini-grids represent an opportunity to address energy access without the challenges of standard grid electrification. According to the IEA, about 40% of all new electricity connections until 2030 could be delivered economically through mini-grids.

However, the scale-up of mini-grids faces significant challenges, including regulatory uncertainty, nascent financing structures, and cost-unreflective tariff setting methodologies. In particular, mini-grids’ efforts to raise private financing have been hamstrung by the lack of legally binding offtake arrangement, and on the other hand rural residential and commercial customers often have non-existent or extremely limited credit histories. These in turn translate to difficulties in assessing the revenue-generating potential of a project and therefore its bankability.

This revenue uncertainty can be disaggregated to two constituent risks. First and most importantly is demand risk, which is the risk that electricity demand is lower than forecast. Second, and to a lesser extent, is payment risk, which is the risk that consumers default on electricity payments, especially for mini-grids that are not operating on a prepayment basis.

The Green Aggregation Tech Enterprise addresses demand risk and payment risk in mini-grids by providing guarantees over a baseline level of revenues, thereby improving revenue certainty and the credit quality of mini-grids.

Our discussions with private financiers have identified the lack of certain and predictable cashflows as a key reason why they have been unable to finance mini-grids in Africa. GATE addresses this barrier through virtually aggregating mini-grid demand and payment risks into a pool. It “tops up” any revenue shortfall associated with reduced demand and/or nonpayment by customers. Through risk pooling and aggregation, GATE acts as a centralizer of market information, which can price these risks more effectively than individual investors. This will greatly improve mini-grid bankability and reduce their cost of capital.

GATE addresses the market gap in guaranteeing mini-grid revenues. It complements existing mini-grid capital subsidies in the market and provides an alternative to channel concessional capital efficiently and in a manner which does not distort the market. GATE also allows a transition from concessional and grant financing in mini-grids to private investment. GATE has the potential to transform mini-grid financing practices and reduce mini-grid cost of capital in a number of target countries in Sub-Saharan Africa, where GATE plans to operate.

DESIGN

Mini-grids with diverse geographic locations and customer bases face their own, distinct revenue risks. GATE virtually aggregates these revenue risks to form a pool. It uses metering and payment data to forecast a baseline level of revenue and provides a guarantee over this baseline. Each mini-grid provider pays a guarantee premium to GATE, which will pay out claims when revenues fall short of expectation. Through risk diversification and guarantees, GATE increases the revenue certainty of mini-grids and reduces their cost of capital.

In the initial phase, GATE will prove the concept and build a track record by using grants and concessional equity capital from impact investors, DFIs, and philanthropies to cover the initial working capital and guarantee liabilities. In the intermediate phase, GATE will expand the concessional capital and leverage additional counter-guarantees to meet the capital requirement for the increased guarantee exposure. Finally, when the guarantee portfolio reaches a certain scale, it can be split into different tranches with different risks. While public and concessional capital will continue to cover the high risk and first loss tranches, commercial capital from private investors can enter the lower risk tranches and replace part of the public finance. Over time, with the increased risk diversification and tranching, data management, and potential credit rating of GATE, the instrument will achieve financial sustainability.