Can Carbon Markets Help to Power Africa

In sub–Saharan Africa, the challenge is more acute and persistent - currently, 573 million people (55% of the world's energy poor population) live in extreme energy poverty in Africa. This is a major hindrance to the productivity and well-being of people. Without reliable electricity, families are unable to light their homes or perform household tasks efficiently, primary healthcare centres are unable to provide effective care, and the transition of Agriculture based economies from subsistence farming to value – linked models is hindered. The number of non-electrified Africans is expected to increase by 2030 as population growth outpaces the expansion of electricity infrastructure such as generators and distribution lines.

As an Impact Investor, I leverage financial markets to support sustainable sectors, entrepreneurs and business models that improve the lives of people in Africa (especially unserved communities) and push society forward. Since 2018 I have been focused on bridging energy access in Nigeria through All On, a clean energy investment company where I’ve worked as a senior investment associate. This work affords me the opportunity to discover, invest in and support entrepreneurs who are developing innovative models and business solutions to the energy poverty endemic in Nigeria and improving energy access. Over the last four years, we have identified and funded companies innovating around mini grids, local solar panel assembly, solar home systems, battery technology, second life recycling of electric vehicle batteries, meters, and software and financial technology companies who are enabling energy access business models.

One of the things that I think about a lot is ensuring the sustainability of business models in the energy access space. In a space with so many SMEs, ensuring sustainability for these companies is key. The provision of power is a capital-intensive endeavour, and off grid solar developers need to meet commercial return targets in order to achieve scale and manage investors. However, the low-income customers that they serve are highly vulnerable to things like rainfall, harvests, seasons and loss of income through unemployment and breadwinner mortality. These are some of the most vulnerable populations in our society, and despite their willingness and need for energy access, it is difficult to build sustainable revenue models around them without inadvertently adding to debt burdens and challenging their livelihoods.

There are several initiatives that are focused on improving the revenue profile of renewable energy companies, while managing the affordability of their solutions for the low-income households and entrepreneurs who rely on them. The World Bank funded Nigeria Electrification Project for example provides a results-based subsidy that can return the cost of deploying a mini grid or solar system connection back to a developer within a short period following deployment. The program provides revenue assurance for eligible local and international developers, helping to unlock CAPEX financing for companies building clean energy projects for the unserved. While the program has made tremendous progress and is a cornerstone of the development of the industry, more sustainable, market-driven approaches are required to strengthen revenue models and achieve the dream of clean, sustainable electrification for Nigeria's unserved population.

A potential opportunity exists in tapping into the global carbon markets for financing of carbon offsetting projects, a description to which the clean energy projects outlined above qualify. Since the Paris Agreement of 2015, nearly 200 countries have endorsed the global goal of limiting the rise of global average temperatures to 1.5 degrees above pre industrial levels. Reaching that target would require cutting global greenhouse gas emissions to 50% of current levels by 2030 and to “net zero” by 2050. Over the last few years, many countries – including Nigeria – and companies have subscribed to net zero pledges. To meet these net targets, companies (and countries) need to measurably reduce the carbon emissions from their operations.

For some companies however, the cost of reducing emissions using today’s technologies is prohibitively expensive, and for some, certain sources of emissions cannot be eliminated at all. (For example, industrial scale cement making typically involves a chemical reaction, calcination, which accounts for a large share of the cement sector’s carbon emissions. The travel and Oil & Gas industry face similar problems). Therefore, for a lot of the developed world, the reduction pathway to redeeming their target effectively requires “negative emissions,” which are achieved by removing greenhouse gases from the atmosphere and financially supporting the development of projects that prevent carbon emissions.

A market driven solution to this problem of negative externalities created by pollution is found in an economics concept called the Coase Theorem, a theoretical framework behind the development of the carbon markets, as a means to offset carbon emissions by purchasing carbon credits from carbon removing projects. Carbon credits are basically certificates representing quantities of greenhouse gases that have been kept out of the air or removed from it by projects.

There are basically two types of carbon markets, compliance carbon markets (marketplaces through which regulated entities obtain and surrender emissions permits (allowances) or offsets in order to meet predetermined regulatory targets under the Paris Agreement), and voluntary carbon markets, which are traded by companies and individuals to achieve negative emissions or carbon compensation. Carbon compensating projects avoid further emissions like forest preservation and renewable energy.

The voluntary carbon market offers the opportunity for off grid solar providers to monetize the carbon offsets from their installations. At $0.6Bn, the voluntary market represents just 0.01% of the compliance carbon market today according to HSBC, but it holds significant potential for growth, with corporates becoming more vocal about their climate ambition and net-zero roadmaps. McKinsey estimates that in 2020, buyers retired carbon credits for some 95 million tons of carbon-dioxide equivalent (MtCO2e), which would be more than twice as much as in 2017. Given the availability of a market for offsets - if you could tokenize and trade the carbon emissions offset by active solar systems under lease to own contracts, could you potentially generate an additional source of long tail revenues from the systems and free up capital for expansion and better pricing for their customers? Over the past year I have explored this question and other aspects of the carbon market while I led All On’s investment into a Danish technology platform called Solstroem.

Solstroem provides off-grid solar providers access to the carbon market by generating and storing Micro Carbon Offsets (live data streams of solar energy production data combined with carbon intensity data, time stamps and geotags) from active solar home systems from off grid developers and selling them on voluntary carbon markets to people and companies looking to offset their carbon footprint. Through their distributed ledger platform, which ensures offsets are retired upon purchase and that double counting doesn’t occur; off grid providers can earn additional revenue by selling offsets from the use of their systems (compared to more environmentally harmful alternative sources of energy such as charcoal and kerosene which their customers would have used). If demand for these offsets on the voluntary carbon market continues to rise – the rise of carbon offsetting apps like joro and klima are encouraging for retail opportunities – then companies like Solstroem could provide another source of sustainable revenue to the off grid energy providers who need financing to meet the needs of their customers enabling them to scale and improve pricing for end users.

Solstroem has tested out its model with off grid providers in different markets, and our partnership enables the company to further build out its technology platform and onboard pilots with developers in the Nigerian off grid ecosystem. I’m excited to see how this develops, as it has a lot of potential to scale the business case of the sector. There are some risks attached to this bet. Carbon markets are still early in their development and need to develop safeguards and better tools to protect the integrity of the market. These include price transparency, verification standards and consistent methodology for tracking, generating and selling offsets. The market also needs to deepen liquidity. Developing effective ways for buyers of carbon credits to signal their future demand would help encourage project developers to increase the supply of carbon credits. Recently Stripe, Alphabet, McKinsey and other major companies announced Frontier Climate, an advance market commitment to buy an initial $925m of permanent carbon removal between 2022 and 2030.

It is exciting to do work at the edge of innovation and new market development. There are many other initiatives happening around the world, all in early stages of development and market acceptance - one example is carbon capture and removal projects such as Heirloom Carbon. I believe that companies like Solstroem and others working to connect off grid developers to global markets will play a critical role in strengthening the business case for renewable energy projects, especially in countries like Nigeria and the developing world. For this promise to be achieved, there needs to be continued collaboration, support and advocacy around the development of market based solutions. Together, these private sector solutions can give impetus to the push to end energy poverty and move our society forward.