Silverman & Chaplin
Dec 11, 2020
Tags: Energy, Agriculture,
The Nexus of Agriculture and Energy in Africa: Five Lessons for Bridging the Ag-Energy Gap
This article was originally published on NextBillion.
Even as the continent urbanizes rapidly, Africa’s economies are still agrarian. Agriculture plays an important role in driving the sustainable development goals by achieving food security, reducing poverty and improving nutrition. By 2030 the African agribusiness sector is projected to be worth $1 trillion, expanding threefold from its recent valuation. But this is far from guaranteed.
Agricultural systems in sub-Saharan Africa are underpowered. Energy is an essential service for modern agricultural economies, enabling farmers to irrigate, work the land, refrigerate, dry, heat, process and transport crops. However, the lack of robust energy services in rural areas is a fundamental obstacle to development. Without energy and technology to grow, harvest and process crops, farm profits are lower, limiting potential income for farmers and frustrating the growth of rural communities and the agricultural sector.
Growing agribusinesses and smallholder farmers need modern energy to thrive, but generally lack the technical knowledge, financing, and project development and management capacity to access energy services. Rural energy enterprises, in turn, need reliable energy consumers anchoring demand for their services. Agriculture should be a key market for rural energy providers. However, these energy providers generally don’t have the customer and market understanding, or the capacity and interest to pursue opportunities in agriculture. With few examples of successful projects at scale and many barriers to entry, investors understandably view the opportunity as high-risk with questionable returns.
There is a clear gap in designing and demonstrating ag-energy projects that can be attractive candidates for commercial investment. To explore the most promising ways to fill that gap, Factor[e] Ventures, with the support of the Rockefeller Foundation and the Windward Fund, building on the backing of the Shell Foundation and the UK Department for International Development, launched a program to develop projects at the intersection of agriculture and energy in off-grid contexts. Factor[e] is an impact venture builder that provides capital and hands-on support to early-stage, technology-enabled companies solving challenges in energy, agriculture, mobility and waste in emerging and frontier markets. We approached this opportunity with technical and sectoral expertise and the perspective of an investor seeking returns and impact. Through this lens, we were able to evaluate potential opportunities for progress from a combined commercial and developmental view.
In this program, we developed four off-grid ag-energy opportunities including (1) scaling solar irrigation in Kenya, (2) electrifying common agricultural loads at a mini-grid site in Nigeria, (3) introducing advanced distributed technology to transform community drying centers in Uganda, and (4) unlocking productivity for dairy farmers in Kenya with biogas-powered appliances. A fifth project linking commercial cold storage with a mini-grid to serve agricultural trading, which we explored across multiple countries, was frustrated by the challenge of finding a competitive agricultural trader active in the same place as an existing or planned remote mini-grid.
This portfolio was built around selection criteria that focused on innovation, which necessarily drove us towards projects with a higher risk profile. By design, therefore, the early results are a decidedly mixed bag: Some opportunities have clearly come up short, while others are showing meaningful promise.
In our report on the program, we outline the key lessons that emerged. We’ll discuss some of the most important below – along with our recommendations for how these lessons can be applied to boost energy access among smallholders and agribusinesses.
AG-ENERGY OPPORTUNITIES ARE REAL AND COMPELLING, BUT DIFFICULT TO REALIZE AND ACCESS
We need to focus first on how energy meets agricultural needs, not the other way around. Agriculture cannot neatly “solve” the rural electrification business model. The development community must focus on what it takes to create impact for the smallholder farmer.
Agricultural systems are profoundly complex, affected by markets, weather, climate, farmer and customer behavior, political context, and more. Something as fundamental as seasonality in agriculture can frustrate an attractive ag-energy opportunity and flummox energy service providers. This complexity underscores why ag-energy opportunities need to be carefully planned, with the agricultural demand at the center. Fundamentally, energy is a service, and agricultural actors are the potential customers. When thinking about the role agricultural customers can play in building the business case for rural energy services, it is important to recognize that agricultural processors and traders will be naturally drawn to better infrastructure and lower costs on-grid or at the “grid edge,” rather than to complex off-grid operating environments.
In this program, we looked for an agri-trading company willing to operate using a cold storage unit on a remote mini-grid. Though our search, we learned that the inconvenience and logistical complexity of remoteness and the uncertainty associated with mini-grid project development are significant deterrents. Likewise, grain milling is ubiquitous in rural areas, and is often thought to be a prime opportunity to improve the financial performance of remote mini-grids. However, in Nigeria we saw that, on closer inspection, milling activity at one mini-grid site was not sustained or substantial enough to justify that project.
Recommendation: Ag-energy opportunities need to be driven by the agricultural imperative; energy is a service, after all. This requires an understanding of the unmet needs – only some of which are related to energy – of smallholder farmers and of the agribusinesses growing up around them. Those needs must drive project design and development.
FOR AGRICULTURE TO LEAD, A STRONGER FOUNDATION ACROSS THE AGRICULTURAL SECTOR IS REQUIRED
Quality execution is the key to a successful ag-energy project. Yet most agribusinesses in the region today lack the resources, expertise and management capacity for complex projects. In our project design and selection, we filtered thousands of ventures and prospective partners, but this large pool was quickly winnowed to only a few serious candidates who possessed these capabilities.
And even among this group, we soon encountered challenges related to project management. For instance, we worked eagerly to develop an opportunity with a hatchery in Ethiopia, but over time it became clear that management capacity and financing were at least as important to the company’s success as energy access.
Across this program’s portfolio, the projects that came up short of their potential were the ones where the lead implementor strained under the challenge of executing the plan while staying faithful to the original concept. Under pressure, projects reverted to higher-touch approaches, like individual farmer sales and demonstration plots in each community. These solutions are well-trodden, but they are unlikely to replicate and scale rapidly.
Recommendation: Growing agribusinesses and smallholder farmers need support to develop technical and management capacity, as well as access to working capital and asset finance. Foundations and governments should recognize the critical role they play as engines of rural growth, and establish combined finance and capacity facilities to support them in each country or regional market context.
EVEN WITH STRONG AGRICULTURAL PARTNERS IN THE LEAD, A DEEPER POOL OF QUALITY INNOVATIVE ENTERPRISES IS NEEDED TO SEIZE AG-ENERGY OPPORTUNITIES
We have long known from our investment experience that bringing off-the-shelf technology and solutions to rural environments does not work without contextualization and business model innovation. Appliances and energy solutions need to be carefully matched to the rural context and nuanced demand of each customer. While there are elements of technology convergence between industrialized and “energy access” markets, distributed, renewable energies are not inherently well-suited for agricultural applications. The biggest challenge is that agricultural energy requirements are often seasonal and require an uninterrupted supply of high power. The supply of innovative impact enterprises that can overcome these challenges is still far too limited to bridge this gap. We need to invest in a rich pipeline of innovative impact ventures for these markets.
Fortunately, we were able to rely on several innovative enterprises in our investment portfolio, like S4S Technologies, Sistema.bio and Inspira Farms, to anchor this program. These companies are category leaders that have been put through the paces and are aligned to scale innovative solutions. We need more companies like these operating in the sector.
Recommendation: Philanthropy must recognize the need – and directly invest in – building innovative enterprises that serve agribusiness, farmers and energy service providers across multiple markets. In exchange for its extremely risk tolerant capital, philanthropy should demand transformative potential and scale from these investments.
A MATCHMAKER IS NEEDED TO BRING INNOVATIVE ENTERPRISES AND ROBUST AGRIBUSINESSES TOGETHER AROUND AG-ENERGY OPPORTUNITIES AT SCALE
With looming SDG deadlines and big opportunities to realize at the ag-energy nexus, we need faster progress than the status quo will supply.
Most ag-energy projects combine an energy services provider, an agribusiness customer and a technology solution. The role of matchmaking to filter for high-quality partners and bring them together is an important function in accelerating development. Sometimes all these components are brought together by a single company, at other times three or more entities are needed.
For instance in Uganda, we brought in a tech-fueled drying solution from S4S Technologies to support the local agribusiness joint venture Enimiro. It is doubtful that Enimiro, operating in Uganda, would have encountered S4S Technologies (which operates in India) and their solution on its own. And in Kenya, we matched Amiran (a farm inputs supply company) and its experimental asset finance unit, Madaraka (which helps its farmer customers access quality inputs and assets), with Lorentz, a leading irrigation equipment company, and FarmHand, an innovative irrigation asset management upstart. Thus, grant funding and matchmaking helped to create partnerships and transfer technology that otherwise would not have happened.
Recommendation: Funders and governments with interest in powering agricultural development should work to both establish and sustain project development facilities. To accelerate the adoption of new technology by new customers and in new markets, explicit support and matchmaking is required. These facilities need to be staffed with teams that combine expertise in agronomy, energy technology, and project development and management.
WHEN IT COMES TO THE AG-ENERGY OPPORTUNITY, SCALE MATTERS
Although there are higher risks, larger projects may be more likely to succeed than small ones. Larger projects offer greater returns and attract the attention of high-quality developers and partners. Larger projects also allow for planning on a 3-5+ year horizon and in a way that integrates agricultural development and energy infrastructure investments.
We observed this dynamic throughout the program. For instance, a project to test new approaches to scaling solar irrigation was hamstrung by the limited scale of the pilot, which struggled to sustain the focus and interest of a larger partner. Our efforts to match cold storage with rural mini-grids were not fruitful within the time and resource constraints of this program. However, a larger-scale effort that matches mini-grid concessions with agricultural value chain development, including investments in the cold chain, would provide the kind of planning needed to pull agricultural and energy investments together in the same places at the same times.
Recommendation: The public sector must take the lead in developing large-scale opportunities. Planned, regional initiatives with clear incentives or subsidies are needed to realize the potential of cold storage and irrigation. Government must play a role in educating farmers and agribusinesses about modern practices and new technologies.
The ag-energy opportunity remains an area of chronic under-investment. But with a clear understanding of where investment is needed, a laser focus on quality execution, an appetite for impact, and the sustained and productive commitment of foundations and government partners, the prospects for accelerating development at the intersection of agriculture and energy are exciting. While many of these opportunities are not yet ready for harvest at a meaningful scale, they are surely ripening.