Articles

https://doi.org/10.1038/s41560-022-01041-6

Accounting for finance in electrification models

for sub-Saharan Africa
Churchill Agutu 1,2 ✉, Florian Egli 1,3 ✉, Nathaniel J. Williams 2,4
, Tobias S. Schmidt 1,5 ✉ and
Bjarne Steffen 5,6 ✉

Electrifying 600 million people in sub-Saharan Africa will require substantial investments. Integrated electrification models
inform key policy decisions and electricity access investments in many countries. While current electrification models apply
sophisticated geospatial methods, they often make simplistic assumptions about financing conditions. Here we establish cost
of capital values, reflecting country and electrification mode (that is, grid extension, minigrids and stand-alone systems), and
specific risks faced by investors and integrate them into an open source electrification model. We find that the cost of capital
for off-grid electrification is much higher than currently assumed, up to 32.2%. Accounting for finance shifts approximately
240 million people from minigrids to stand-alone systems in our main scenario, suggesting a more cost-effective electrifica-
tion mode mix than previously suggested. In turn, electrification models based on uniform cost of capital assumptions increase
the per kWh cost of electricity by 20%, on average. Upscaling and mainstreaming off-grid finance can lower electrification
cost substantially.

A
s of 2018, an estimated 600 million people in sub-Saharan
Africa did not have access to electricity1. Because electri-
fication has been identified as a key factor in eradicating
poverty2, the United Nations Sustainable Development Goal (SDG)
7 has set a goal to ‘ensure universal access to affordable, reliable,
sustainable and modern energy services’ by 20303. Historically,
electrification has happened through grid extension. More recently,
the emergence of off-grid solar-powered minigrids (MGs) and
stand-alone systems (SASs) has created new electrification modes
for rural regions, where most of the continent’s un-electrified popu-
lation lives1,4,5. The diversity of electrification modes (grid extension,
MGs and SASs) and the rapid cost declines of the off-grid modes
has spurred the need for planning based on integrated geospatial
electrification models, which inform electrification choices based
on cost criteria, typically the levelized cost of electricity (LCOE).
These models have reached relatively high levels of sophistication
and have become prominent in the academic and grey literature1,6–12
and policy design13–15. While the LCOE of different electrifica-
tion modes is typically derived from a detailed representation of
equipment cost, the established models do not consider the cost of
capital, specifically. They assume a standard discount rate across
all electrification modes and geographies (typically around 8%)
(refs. 6–8,16) with a few studies assessing sensitivity to this rate assump-
tion but without differentiating between electrification modes7,9,17,18.
To compare the LCOE of different electrification modes in a real
world setting, however, the cost of capital needs to be taken into
account19. A uniform discount rate of 8% does not reflect the actual
financing situation and might introduce substantial bias20,21.
Here we estimate representative cost of capital and implement
them in a geospatial electrification model that assigns least-cost elec-
trification modes to population clusters across sub-Saharan Africa.
More specifically, we differentiate cost of capital by country and elec-
trification mode and thereby extend the widely used Open Source
Spatial Electrification Tool (OnSSET)1,6,7,11,22 (Methods provide a
detailed model description). The model derives least-cost path-
ways to 100% electrification of sub-Saharan Africa by 2030 with an
intermediate target of 50% in 2025 (Methods). We first quantify the
cost of capital for different electrification modes for all sub-Saharan
African countries (Methods provide electrification-mode specifica-
tions). Second, we define four financing scenarios reflecting differ-
ent possible sources of capital and maturities of the off-grid finance
sector (Table 1). Third, we apply the model (Table 2 lists model
inputs), to the financing scenarios in two defined grid-extension
pathways that typically rely on government intervention for grid
extension: an extended-area grid pathway where electrification of
a cluster is solely based on the least-cost electrification mode opti-
mization through grid extension, MG or SAS, and an existing-area
grid pathway where grid extension beyond already electrified grid
areas is halted in the model, while off-grid options are allowed. This
second model is to account for the limited success in extending the
grid in sub-Saharan Africa. We analyse results for all of sub-Saharan
Africa and deep dive into focus countries, the Democratic Republic
of the Congo (DRC), Ethiopia, Nigeria and Zimbabwe, to highlight
the differing effects of the representative financing cost assump-
tions. Finally, we derive implications for electrification researchers,
international organizations and national policymakers.
Cost of capital for electrification
In most sub-Saharan African countries, grid extension is primarily
financed by the public sector (that is, from tax revenues or sovereign
debt)4,20, while MGs and SASs are primarily financed by the private
sector (that is, from privately owned companies)20,23. For public
finance, the cost of capital varies widely across countries20,24 but rep-
resents the sovereign risk of lending to a government. For private
finance, investors typically finance off-grid companies at a premium
above the sovereign risk, which increases the cost of capital23,25.

1
Energy and Technology Policy Group, ETH, Zurich, Switzerland. 2Kigali Collaborative Research Centre (KCRC), Kigali, Rwanda. 3UCL Institute for Innovation
and Public Purpose (IIPP), London, UK. 4Golisano Institute for Sustainability, Rochester Institute of Technology, Rochester, NY, USA. 5Institute of Science,
Technology and Policy, ETH, Zurich, Switzerland. 6Climate Finance and Policy Group, ETH, Zurich, Switzerland. ✉e-mail: churchill.agutu@gess.ethz.ch;
florian.egli@gess.ethz.ch; tobiasschmidt@ethz.ch; bjarne.steffen@gess.ethz.ch

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Articles NATUrE EnErgy

Table 1 | Description of financing scenarios. Methods provide details on scenario description and the derivation of country- and
mode-specific costs of capital
Scenario
Uniform
Public sector financing
Niche (status quo) financing
Mainstream financing
Description Financing sources
Grid extension MGs SASs
• Standard assumption in the literature Not specified Not specified Not specified
• Cost of capital is uniform (8%) across countries and
electrification modes
• Electrification is solely financed by the government Public sector Public sector Public sector
• Cost of capital is country specific and identical across
electrification modes
• Status quo financing where the off-grid electricity Public sector Private sector (debt Private sector (debt
sector is nascent (small caps, limited liquidity, low debt share 0%) share 50%)
shares)
• Cost of capital is country- and mode-specific
• Potential future mainstream financing after the off-grid Public sector Private sector (debt Private sector (debt
electricity sector has matured (larger caps, more share 40%) share 75%)
liquidity, higher debt shares)
• Cost of capital is country- and mode-specific

In this case, the cost of capital also depends on the institutional

structure of the electricity sector4,26,27 and the local capital market Table 2 | Summary of electrification-mode assumptions used in
development with respect to electrification financing23,28–30. the model (Table 2 provides more detail)
Furthermore, there are differences in the cost of capital that pri- Parameter Capital costs Asset lifetime Capacity factor
vate investors demand depending on the electrification mode they (US$ kW−1) (years)
finance. MG investments are perceived as riskier, and therefore, the
cost of capital for MGs is typically higher than that of SASs20,23,30. Solar PV MG 2,950 20 Calculating by
(including model using solar
MGs are infrastructure-based systems, subject to risks faced by (low
batteries) resource availability
carbon) infrastructure investments in developing countries31. They
data
depend on governing structures at national26 and sub-national lev-
els and require long-term financing with long payback periods27,32,33. Hydro MG 3,000 30 0.5
MGs are also disproportionally exposed to ‘grid-like’ regulations on Solar PV SAS 4,470–9,620 15 Calculating by model
electricity tariffs, licensing requirements and property rights20,27. (including (depending on using solar resource
This typically deters (conservative) debt providers23, resulting in batteries) system capacity) availability data
close-to-zero debt financing in the MG sector34. In contrast, SASs
can be characterized as a product rather than an infrastructure
system, with a shorter payback period. As a result, the SAS sector Moreover, we see from Fig. 1 that accounting for mode-specific
has experienced non-negligible debt financing34 (Supplementary risks substantially increases the cost of capital in private sector
Table 2). Hence, they are less subject to governing structures at the finance scenarios (red/yellow parts). Accounting for mode-specific
(sub-)national level23,27. We use four financing scenarios shown in risks introduces a 5 percentage point (pp) cost of capital spread
Table 1 to characterize the financing structures of different electrifi- between MGs and SASs in the niche-financing scenario and a 2 pp
cation modes: (1) uniform represents the current assumptions used spread in the mainstream financing scenario. In the niche sce-
in the literature, (2) public sector financing represents a scenario nario (representing the status quo), the MG cost of capital ranges
where electrification is financed exclusively by the public sector, from 15.7% to 32.2%, while the SAS cost of capital ranges from
(3) the niche (status quo) and (4) mainstream scenarios translate the 9.8% to 26.0%.
different risk profiles between electrification modes described above
into different debt shares, following the finance literature that dem- Effects on least-cost electrification
onstrates an increase of debt shares with decreasing investment risk. In Fig. 2, we show the resulting least-cost electrification mixes for
Differentiating weighted average cost of capital (WACC) between newly connected populations (referred to as new connections)
electrification modes can have a substantial effect on the LCOE and the total investment required in each scenario and for two
and thus the technology selection of the model. The debt shares are grid-extension pathways. The extended-area grid pathway repre-
based on empirical financing data and expert interviews (Methods). sents an optimistic pathway where grid extension is included as
Furthermore, based on the finance literature, private sector finance an electrification mode option in addition to off-grid electrifica-
in the niche scenario demands an illiquidity premium and a small tion options by 2030. In this pathway, electrification through grid
cap premium, which disappear in the mainstream scenario as the extension is possible for already grid-electrified clusters (due to
sector matures (Methods). population increase within clusters) and for un-electrified clusters
Figure 1 presents our estimates of the cost of capital for these through extension of the grid from the un-electrified clusters to the
four financing scenarios. The estimates illustrate that compared main grid infrastructure (which can be the already existing infra-
with representative costs of capital (‘niche’ scenario), the uni- structure or the planned grid infrastructure based on government
form rate of 8% is consistently too low for private sector financed grid-deployment plans). This pathway remains unlikely as histori-
off-grid electrification and additionally omits substantial variance cally, many sub-Saharan African countries have run behind sched-
between countries. Country differences range from 2.6% to 18.5% ule to expand their grids. For example, countries like DRC35,36 and
in sub-Saharan Africa. Nigeria37, which combined are home to a quarter of sub-Saharan

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NATUrE EnErgy Articles
Sudan
Somalia
Mauritania
Guinea
Eritrea
Liberia
Niger
Sierra Leone
Burundi
Mozambique
Zimbabwe
Central African Republic
Malawi
Chad
South Sudan
Lesotho
Republic of the Congo
DRC
Ghana
Zambia
Gambia
Mali
Burkina Faso
Country

Equatorial Guinea
Togo
Cameroon
Guinea-Bissau
Sao Tome & Principe
Rwanda
Gabon
Tanzania
Uganda
Madagascar
Eswatini
Comoros
Angola
Kenya
Nigeria
Benin
Ethiopia
Senegal MG & SAS public-sector
financing
Côte d'Ivoire MG mainstream
financing (premium)
Namibia
SAS mainstream
South Africa financing (premium)
MG niche financing
Mauritius (additional premium)
Botswana SAS niche financing
(additional premium)

0 5 8 10 15 20 25 30 35
Cost of capital (%)

Fig. 1 | Cost of capital estimates for the different financing scenarios and for the different electrification modes. The differences between the countries
are based on the country default spreads (reflecting country-specific investment risk52), while the differences between the electrification modes are based
on variations in the debt share (Methods). The differences between the financing scenarios are based on different sources of capital and on different
maturities of the off-grid finance sector. The dotted line reflects the cost of capital for the uniform financing scenario.

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Articles NATUrE EnErgy
Extended-area extension pathway Existing-area extension pathway

SAS SAS SAS SAS

SAS SAS SAS SAS

15% 17% 23%

a 42% 44% 56% 35% b 54% 46%
58% 65% 55% 45%
MG 85% 83% MG 77%
MG MG MG MG MG
MG
100 100
10 11 13 12 10 11 15

14 14 7 10 36
80 80
New connections 2030 (%)

60 60 56 55 51

31
40 76 80 78 40
75

20 20
34 34 34 34

0 0
Uniform Public Niche Mainstream Uniform Public Niche Mainstream

c d
350 350

300 300 305 299

Total investment (2018 billions of US$)

300 300
43 45
244 64
250 228 228 232 250
149
49
200 42 44 48 200
23
50 47 33
150 150 212 210
190

100 100 111

172
136 136 151
50 50
45 45 45 45
0 0
Uniform Public Niche Mainstream Uniform Public Niche Mainstream

Grid extension MGs SASs

Fig. 2 | Results showing the newly connected populations and total investments between 2018 and 2030 based electrification mode for the defined
electrification pathways and financing scenario. a, Total new connections per electrification mode for the extended-area grid pathway (columns) and
ratio of MGs to SASs for each financing scenario (pies). b, Total new connections per electrification mode for the existing-area pathway (columns) and
ratio of MGs to SASs for each financing scenario (pies). c, Total investments needed to finance the extended-area grid pathway. d, Total investments
needed to finance the existing-area grid pathway. Values have been rounded to the nearest integer; the same operation is carried out for all numbers to
ensure consistency. Numbers in the bars show the percentage of new connections (a,b) and the total investment (c,d) for each electrification mode.

Africa’s un-electrified population1, have failed to reach their grid Energy Agency of US$21 billion per annum1. The total investment
infrastructure development plans to date. The existing-area grid cost is approximately 30% higher for the existing-area pathway.
pathway, therefore, represents the other extreme where current Third, the status quo (niche financing) departs from the uniform
grid infrastructure remains as is—grid extension is possible only or public scenario substantially, resulting in a higher share of SASs
for grid-electrified clusters and electrification of fully un-electrified and a lower share of MGs. The results depicted in column three of
clusters is entirely left to the off-grid electricity sector. Note that Fig. 2b,d show off-grid electrification shares of two-thirds, distrib-
both scenarios are extremes, with the reality likely lying somewhere uted almost equally among MGs and SASs (46–54%). Fourth, mov-
in between. ing from the niche to the mainstream scenario (compared with
We observe four high-level points for both electrification path- Table 1) results in electrification shares more similar to the uni-
ways across the different financing scenarios. First, the public sec- form scenario, albeit with higher SAS shares (plus 5 pp) and lower
tor scenario closely mirrors the uniform scenario concerning new MG shares (minus 5 pp). This result illustrates the large potential
connections and investment cost. This is because a uniform cost effect of mainstreaming off-grid electrification finance on selec-
of capital of 8% is close to the weighted average of the public cost tion of MG.
of finance for sub-Saharan African governments (compared with An analysis of the extended-area grid pathway, specifically
Fig. 1). Hence, using a uniform cost of capital produces reasonable (Fig. 2a), shows that in the niche-financing scenario, the share of
electrification mix estimates for sub-Saharan Africa overall if one MGs drops by 7 pp relative to the uniform scenario. MGs and SASs
assumes that the public sector finances all electrification. Second, have a smaller contribution to the total new connections, account-
the estimated total investment cost across scenarios (2018 US$) ing for 20% of the total new connections (compared with 24%
is approximately US$228 billion for the extended-area grid path- in the uniform scenario). Most connections switch from MGs to
way, which is equivalent to roughly US$19 billion per annum dur- grid extension in the extended-area grid pathway. This is mainly
ing 2018–2030, in line with past estimates from the International because high-density population clusters enable economies of scale

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NATUrE EnErgy
Uniform financing
a b
Extended-area grid
pathway
c d
Existing-area grid
pathway
Grid extension
MGs
SASs
Water bodies
Countries with no data
0 500 1,000 km
Fig. 3 | Map of sub-Saharan Africa comparing financing scenarios for the defined electrification pathways. a, Uniform scenario extended-area grid
pathway. b, Niche-financing scenario extended-area grid pathway. c, Uniform scenario existing-area pathway. d, Niche financing scenario existing-area
pathway.
for grid extension. We also observe that the investment cost for the
extended-area grid pathway (Fig. 2c) increases by 7% or US$16 bil-
lion due to the increased need for grid infrastructure compared
with the uniform scenario. Increased grid infrastructure requires
high up-front investments, which increase the total investment cost.
The results from the existing-area pathway (Fig. 2b,d) show
the importance of accounting for representative cost of capital
values when analysing private sector financed off-grid electrifica-
tion modes even more clearly. MGs and SASs contribute to 67%
of new connections in the existing-area pathway for the uniform
and public scenarios (Fig. 2b). In these scenarios, a larger portion
of off-grid electricity connections would be directed towards MGs
compared with SASs. In the niche scenario, MGs show a substantial
decline contributing to 46% of the newly connected off-grid elec-
trification modes compared with the uniform scenario where they
account for 85%. Note that the observed grid investment costs in
the existing-area grid pathway are the result of grid densification,
that is, population densities in clusters already connected to the grid
increase, which necessitates investment in the existing grid infra-
structure to satisfy demand.
In the mainstream scenario, the total new MG connections
contribute to 77% of the total new off-grid connections in the
existing-area grid pathway (Fig. 2b). We also see in the existing-area
pathway that maturity of the sector can help foster deployment of
MGs, which account for 51% of the total electrification mix in 2030
for the mainstream financing scenario. This is relatively similar
to the public sector financing scenario (55%). However, the total
investment cost for the mainstream financing scenario is the lowest
across financing scenarios at only US$299 billion. This is mainly
because the share of MGs is lower compared with the public and
uniform scenario. Therefore, the distribution grid-infrastructure
costs (which increase the up-front investment cost for MGs) are
Nature EnerGy | VOL 7 | July 2022 | 631–641 | www.nature.com/natureenergy
Articles
Niche financing
reduced. Further, the share of SASs for these scenarios is not high
enough that it would increase total investment costs as can be seen
for the niche scenario.
Geographical effects
Figure 3 provides a granular view on the geographic location of new
connections by electrification mode. The map shows the total new
connections in 2030 for the uniform and niche-financing scenarios
and both grid-extension pathways. We observe the largest changes
in the share of MGs between scenarios in North Africa, West Africa
and Madagascar for the extended-area grid pathway (Fig. 3a,b). In
the existing-area grid pathway, large changes are observed in West
Africa and Central and Southern Africa (Fig. 3c,d). The largest
declines in the share of MGs for the extended-area grid pathway
range between 24 pp and 42 pp for Sudan, Madagascar, Burkina Faso
and Chad. For the existing-area grid pathway, MG share decreases
are much larger, ranging between 44 pp and 58 pp in Mauritania,
Eswatini, Senegal, Lesotho and Chad.
Further, the assessment of the total investment needed to reach
100% electrification reveals large country differences in the invest-
ment per household between countries (Table 3). We focus on a
single scenario (niche, status quo) because we see little variation
in the total investment costs across the financing scenarios for the
electrification pathways (compared with Fig. 2c,d).
Table 3 shows that the required investment per household for
most countries ranges between US$1,000 and US$1,850, with South
Sudan having the highest per household investment cost. Three
countries feature investment needs lower than US$1,000 per house-
hold. To set these numbers in context, about 40% of the sub-Saharan
African population lived below the World Bank’s US$1.90 per day
extreme poverty line in 201838. These numbers also stress the large
variance between countries. Importantly, designing policies such as
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MG or SAS zones and incentives based on the (wrong) uniform cost

of capital assumption may result in higher cost (LCOE) for the end Table 3 | Comparison of investment costs for different sub-
consumer. Table 4 shows the average LCOE (US cents kWh−1) per Saharan African countries for the existing-area grid pathway in
country for optimal (least cost) electrification in the existing-area the niche-financing scenario
grid-extension pathway, assuming the niche (status quo) finance Country Average Total investment Total
scenario. This is contrasted with the average LCOE, assuming the investment per electrification investment
electrification approach chosen under a uniform assumption but per electrified mode (% of total (billions of
actually financed with more representative niche (status quo) con- household investment) US$)
ditions (Methods). Electrification models based on uniform cost of (US$)
capital assumptions increase the LCOE on average by about 20%
Grid MG SAS
in all of sub-Saharan Africa, with a range from 9% to 55% across
all countries. South Sudan 1,853 1 44 55 4.60
Rwanda 1,776 9 31 60 3.83
Explaining country variation Chad 1,765 3 21 76 6.41
Finally, we aim to provide a better understanding of the mechanisms
behind the shown variations between countries by zooming in on Burundi 1,761 5 64 31 6.50
specific countries. Here we deep dive into DRC, Ethiopia, Nigeria Eswatini 1,730 22 3 74 0.44
and Zimbabwe. We choose these countries based on two character- Mozambique 1,699 8 15 76 13.96
istics: first, we focus on countries with a high relevance in achiev-
Guinea 1,682 8 55 36 3.56
ing 100% electrification in sub-Saharan Africa; second, we focus on
countries with a large variation in factors that explain the cost dif- Madagascar 1,657 5 59 36 11.87
ference between electrification modes. These countries have some Central African 1,650 5 57 38 1.45
of the highest un-electrified populations (approximately 227 mil- Republic
lion in 201939) and are therefore crucial in the path to electrification Zimbabwe 1,629 9 3 88 5.77
for sub-Saharan Africa. Further, the difference in the cost of capital
DRC 1,624 5 78 17 36.53
relative to the uniform rate together with the variance in popula-
tion density across clusters are key factors driving mode-specific Malawi 1,591 10 32 58 9.59
cost differences. As demonstrated above, an increase in the cost of Lesotho 1,584 14 16 70 0.98
capital compared with the uniform rate generally leads to lower MG Zambia 1,562 12 4 84 5.60
shares because of their capital intensity. In high-density population
Niger 1,538 9 52 39 7.28
clusters, this effect is mitigated because distribution infrastructure
costs for MGs are lower. Supplementary Table 1 shows that the Uganda 1,490 17 23 60 21.17
selected countries feature variation in the cost of capital (high for Mauritania 1,472 10 22 68 0.95
DRC and Zimbabwe; low for Ethiopia and Nigeria) and cluster den- Burkina Faso 1,457 14 15 71 6.76
sities (high for DRC and Nigeria; low for Ethiopia and Zimbabwe).
We limit the analysis to the existing-area grid pathway and we omit Sudan 1,407 9 36 54 7.75
the public sector scenario, as the changes in electrification mixes Eritrea 1,389 9 45 46 1.17
were minimal for these countries relative to the uniform scenario. Ethiopia 1,379 21 12 68 26.43
Figure 4 (top row) shows that the share of MG decreases for all Somalia 1,378 10 64 26 3.64
countries when electrification mode-specific cost of capital values
are applied because the MG cost of capital is above the uniform rate Gambia 1,361 15 27 58 0.35
for all countries. Yet, the effect differs substantially between coun- Senegal 1,361 14 6 80 2.07
tries (Zimbabwe: 42 pp decline; Ethiopia: 33 pp decline; Nigeria: Benin 1,357 19 42 39 4.31
16 pp decline; DRC: 10 pp decline). Given the high cost of capital
Republic of the 1,352 19 67 14 1.39
and the low population density of Zimbabwe (above), the larg- Congo
est effect was expected. In Ethiopia, the effect is still remarkable
because the low population densities counter a comparatively lower Liberia 1,338 26 35 39 1.49
cost of capital. Conversely, the high population-density clusters Tanzania 1,331 17 14 69 19.84
in DRC and Nigeria reduce the effect of the cost of capital on the Togo 1,323 27 31 43 2.42
share of MGs. This is because high-density clusters lead to econo-
Nigeria 1,306 17 51 32 48.08
mies of scale in the distribution infrastructure (a large contributor
to up-front investment cost for MGs), reducing the effect of the cost Equatorial Guinea 1,300 27 49 24 0.24
of capital on the LCOE and making MGs a more competitive elec- Guinea-Bissau 1,254 23 14 63 0.46
trification mode. Namibia 1,217 17 1 82 0.72
The competing effects between cost of capital and population
Cameroon 1,214 21 35 44 6.93
density on the LCOE are also visible in the LCOE violin plots (bot-
tom row of Fig. 4), which show the distribution of MG and SAS Angola 1,201 16 37 47 6.39
LCOE across clusters to be electrified for the different financing Kenya 1,191 32 17 51 12.32
scenarios. Firstly, we observe a wider distribution for MGs com- Ghana 1,024 37 19 44 4.14
pared with SASs, which is due to the distribution infrastructure
South Africa 990 43 2 55 6.82
costs which vary for MGs based on the geographic distribution of
connections but do not factor in SAS LCOEs. Within MG plots, Botswana 906 43 3 54 0.67
high LCOE values change more across financing scenarios com- Gabon 891 59 17 24 0.17
pared with low LCOE values due to population-cluster densities. Total sub-Saharan 305
Lower population-cluster densities incur higher capital costs for Africa
distribution infrastructure which makes them more sensitive to the

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NATUrE EnErgy Articles
cost of capital. In DRC, the average LCOE increases by 86% (72%
in Ethiopia, 73% in Nigeria and 100% in Zimbabwe) in the niche Table 4 | Average LCOE for the niche finance scenario compared
scenario relative to the uniform scenario. Zimbabwe’s change is with uniform financing scenario (existing-area grid-extension
highest because it has many low population-density clusters, which pathway), assuming niche-financing conditions
makes distribution infrastructure expensive. Further, Zimbabwe Country (a) Mean LCOE (b) Mean LCOE Additional
has a high cost of capital for MGs. These effects are similar, albeit (US cents kWh−1) (US cents kWh−1) cost (LCOE)
somewhat smaller for SASs because they do not have distribution Choice of Choice of of (b) over
infrastructure. Hence, the cost of capital is especially crucial for low electrification electrification (a) in %
population-density clusters. The same mechanisms are also visible mode: based on mode: based on
in the mainstream scenario; however, the changes in the share of niche scenario uniform scenario
MGs is smaller than for the niche-financing scenario.
Chad 60.6 93.8 55
Discussion and policy implications South Sudan 51.7 73.8 43
Our analysis shows that accounting for country- and mode-specific Burkina Faso 48.6 68.9 42
cost of capital changes the choice of cost-optimal electrifica- Mozambique 57.6 80.8 40
tion modes substantially. It can therefore prevent selection of
Malawi 53.7 69.8 30
less cost-efficient electrification modes, evident in models using
generic and uniform assumptions. Future electrification models Zimbabwe 49.3 61.7 25
should therefore appropriately consider the institutional struc- Zambia 47.3 57.6 22
tures and financing conditions in the context of the analysis and Namibia 33.2 40.5 22
apply region- and electrification mode-specific cost of capital val-
ues. This is crucial for high-risk, low population-density contexts Botswana 32.5 39.2 21
where infrastructure-based electrification modes compete with Madagascar 45.0 54.1 20
product-based ones. Uganda 45.4 54.2 19
On the basis of the cost of capital estimates in the niche (sta-
South Africa 42.0 50.0 19
tus quo) financing scenario, our results show that SASs may have
a much larger role in electrifying the continent than previously Rwanda 50.5 59.9 19
observed in models which assume uniform financing conditions. Gabon 53.7 63.2 18
Further, our comparison of average LCOEs for the niche and uni- Kenya 41.7 48.8 17
form financing scenario (assuming niche-financing conditions;
Ethiopia 41.4 48.3 16
Table 4) also indicates that failure to account for niche-financing
conditions can result in a 20% increase in the average LCOE. In real- Tanzania 43.5 50.5 16
ity, governments that deploy technologies using models that assume Eswatini 49.7 57.4 16
uniform financing, risk slowing down electrification implementa- Ghana 51.4 59.4 16
tion given the higher costs of electrification and paucity of electri-
Benin 45.2 51.9 15
fication funding in off-grid electricity sector currently34,40. Hence,
governments that aim at efficient/least-cost electrification pathways Cameroon 45.5 52.1 14
should consider a bigger role for SAS in their electrification plans. Angola 41.7 47.5 14
Further, we observe that the cost of capital for private sector Togo 48.2 54.9 14
financed off-grid electrification modes (at niche-financing condi-
Nigeria 43.4 49.3 14
tions (status quo)), remains relatively high (Fig. 1) compared with
government financed off-grid modes (public financing conditions). Somalia 50.1 56.8 13
Recognizing that funds for scaling private sector off-grid electrifi- DRC 50.0 56.5 13
cation modes remain scarce40,41, policymakers intending to attract Senegal 40.0 45.2 13
large-scale, low-cost private sector capital need to focus on fostering
maturity of the off-grid sector. Assuming mainstream financing con- Liberia 60.2 68.0 13
ditions as a potential best-case target, we suggest two complementary Eritrea 48.1 54.2 13
levers to help mainstream off-grid assets for investors: de-risking and Republic of the 54.8 61.7 13
scaling. First, financial de-risking measures—for example, through Congo
guarantees or concessional debt—would help make both MGs and Mauritania 49.9 56.2 12
SASs cheaper23,42 by bringing down the cost of capital. Established
institutions in electricity-sector finance, such as national develop- Guinea-Bissau 43.9 49.4 12
ment banks or international financial institutions (for example, Niger 47.8 53.7 12
World Bank or African Development Bank)43, can consider develop- Guinea 52.9 59.3 12
ing these options for scaling off-grid electrification options.
Central African 48.7 54.6 12
Second, the nascence of private off-grid electrification compa- Republic
nies and finance results in increased cost of capital through a small
cap premium (Methods). Scaling up electrification companies can Sudan 51.8 57.8 12
thus be a complementary lever to decrease the cost of capital of pri- Burundi 54.5 60.5 11
vate sector-financed electrification. Research has shown that diverse Equatorial Guinea 54.3 60.1 11
off-grid portfolios can substantially reduce the overall risk due to
Lesotho 46.6 51.5 10
portfolio effects25. While some off-grid companies have recently
been taken over by large incumbent energy utilities (most promi- Gambia 44.2 48.4 9
nently the French company ENGIE)44, several hurdles for com- Total sub-Saharan 46.8 56.3 20
pany growth exist. Beyond access to capital (first point), technical Africa
standards for off-grid solutions differ between countries, requiring

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Articles NATUrE EnErgy

a DRC b Ethiopia c Nigeria d Zimbabwe

100 3 5 5
13 8
15 21
22
New connections 2030 (%)

31
48 46
54 51
43 73
80 36 38
78
50 70
10 45
29
3
42 42 42 41 41 41
25 25 25
17 17 17
0
Uniform Niche Mainstream Uniform Niche Mainstream Uniform Niche Mainstream Uniform Niche Mainstream

e f g h
1.50 1.50 1.50 1.50

1.25 1.25 1.25 1.25

LCOE (US cents kWh−1)

1.00 1.00 1.00 1.00

0.75 0.75 0.75 0.75

0.50 0.50 0.50 0.50

0.25 0.25 0.25 0.25

0 0 0 0
Uniform Niche Mainstream Uniform Niche Mainstream Uniform Niche Mainstream Uniform Niche Mainstream

Grid extension MGs SASs

Fig. 4 | a–h, Proportion of new connections for clusters to be electrified in 2030 in DRC (a), Ethiopia (b), Nigeria (c) and Zimbabwe (d), and the distribution
of LCOE for clusters to be electrified in 2030 in DRC (e), Ethiopia (f), Nigeria (g) and Zimbabwe (h). For this analysis, 5% of the outliers are neglected. The
colours on both types of plot correspond to the electrification mode. The numbers on the stacked bar plots (a–d) represent the percentage of total new
connections in 2030 by electrification mode.

costly technology adjustments27. International organizations can
consider incentivizing the adoption of a harmonized international
standard such as the World Bank’s Lighting Global Quality Standard
(in the case of SASs)45.
Regarding the limitations of our analysis, first, it is worth not-
ing that our approach does not capture the variance of risks within
countries, which can be high in sub-Saharan Africa18,46. Future
research should uncover within-country variance to provide even
more granular electrification policy advice. Second, the model tar-
gets 100% tier 3 electrification irrespective of demand or ability to
pay. In reality, however, most private sector investors will simply not
invest in assets electrifying the lowest-income customer segments
without government incentive. Hence, the aggregate numbers may
be overly optimistic concerning the ability to attract capital. We note
however, that to reach universal electrification by 2030, additional
subsidies for low-income households would likely be required.
Given the likely correlation of institutional quality and household
income, SASs may be even more suited to electrify low-income
regions because this electrification mode is less reliant on gover-
nance structures20. Future research should include demand analyses
and the effect of targeted demand subsidies in optimal electrifica-
tion planning. Moreover, companies may adapt their business mod-
els to different demand environments and size systems accordingly.
These business model choices (for example, sale, lease-to-own,
pay-as-you-go) may have an influence on the ability of a company
to raise capital and on its cost of capital. In addition, the sizing
of the system, in turn (for example, choice of electrification tier)
influences the electrification mode choice with lower tiers favour-
ing SASs and higher tiers favouring MGs or grid extension. Future
research could look into these questions in comparative company
case studies. Third, and related to this, our results have also shown
vast differences in per household investment costs across coun-
tries (Table 3) and vast LCOE differences within countries (Fig. 4).
This variance could be investigated in future research, particularly
with the notion of trade-offs in 100% electrification targets in mind
as the opportunity cost of ‘going the last mile’ may be large given
competing investment needs in other sectors such as agriculture,
education or healthcare47.
Methods
This study intends to determine the influence of the cost of capital on least-cost
geospatial electrification-model outcomes. We defined four financing scenarios
and estimated country- and mode-specific cost of capital values for each scenario.
We then applied the estimated cost of capital values to OnSSET, an open source
integrated electrification model7 (Supplementary information).
Estimation of cost of capital. Countries and electrification modes differ in the
extent to which they can tap into debt finance (which is cheaper than equity
because equity bears the first losses48), the cost of the debt (interest rates) and the
cost of equity (or expected return on equity) for the remainder of the investment.
Therefore the amount of debt that investors can access as part of their financing,
the cost of debt and the cost of equity need to be quantified to determine the cost
of capital. The basic expression of this overall cost of capital is the WACC19. For
this analysis, we follow a standard notation (equation (1)) and estimate the cost of
equity, the cost of debt and the debt share separately49.
(
E
) (
D
)
WACC = × Ke,i + × Kd,i (1)
V V
Ke,i and Kd,i are the cost of equity and the cost of debt, respectively, for investments
in a specific country i. E, D and V denote total equity, debt and capital; the debt
share equals DV . For simplification, this ‘vanilla WACC’ does not account for the
country-specific tax rate due to the uncertainty about which entities would be liable
to pay tax, especially for grid extension. We demonstrate in a sensitivity analysis
for a representative set of clusters that the effect of including tax on the LCOE is
comparably small (Supplementary Fig. 1).
A higher debt share indicates lower investment risk because it translates in less
equity being able to cover first losses49. We use this relationship and implement
electrification mode-specific risk premiums by applying mode-specific debt shares
for MGs and SASs. For SASs, we use debt shares from the ten largest off-grid
electrification companies in developing countries by disclosed financing between

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NATUrE EnErgy
2010 and 201834 (Supplementary Table 2). As of 2018, SASs had raised more
than US$1.1 billion with overall more than 50% debt. For MGs, we estimated
debt shares using expert interviews (Supplementary Table 3) together with grey
literature. Our analysis confirmed that MG companies in sub-Saharan Africa
are predominantly financed through grants and equity, and in some rare cases
through concessional loans. Close to no financing is currently sourced from
commercial debt.
The cost of debt represents the interest rate on debt (for example, corporate
bonds or loans). Data on the cost of debt for off-grid electrification companies is
not publicly available. In such cases, the literature approximates the cost of debt
(Kd,i) by starting from the risk-free rate (rf ) and adding a markup that represents
the additional risk to the risk-free rate. Here the markup consists of two parts.
First, the default spread to reflect country risk (CRpi) and, second, a corporate
bond premium (Dp) to account for the fact that corporate bonds have higher risks
and higher yields than government bonds50 because they can default more easily,
which investors seek compensation for50. The cost of debt is therefore given by:
Kd,i = rf + CRpi + Dp (2)
For the cost of debt calculation, rf is based on the five-year US treasury bond
yield in 201951 and the CRpi represents each country’s default spread52. The data
were averaged over a period of five years (2015–2019), which is the longest period
for which data are available for most of the countries. Further, this period also
excludes effects from the financial crisis. The Dp value is set to 1.2% based on a
literature estimate50.
The cost of equity reflects an investor’s expected returns for investing in a
company. It was calculated using equation (3):
Ke,i = rf + ERpi + Ip + SCp (3)
where ERpi is the equity risk premium, which varies by country (i) and accounts
for the return that investors require as compensation for the risk they are taking on
an investment in a publicly listed company in this particular country. In addition,
companies in the off-grid electricity sector are still nascent. Investors, therefore,
cannot easily liquidate their assets53. To reflect this, we add an illiquidity premium
(Ip) to the equity risk premium. Finally, off-grid electricity companies are also still
relatively small and so often have higher risk and higher returns compared with
companies with large market capitalization54. This is because investors in small
companies encounter higher search and monitoring costs, less transparency and a
poorer track record55. We reflect this with a small cap premium (SCp).
We average data on equity risk premium52 over five years, too (2015–2019). The
illiquidity premium (3.6%) was determined by calculating the average markup on
the cost of equity due to illiquidity across three different studies56–58, and the small
market-cap premium is set to 3.8% based on a literature estimate55.
We are aware of the fact that our approach of assuming additive risk premia
and drawing on literature estimates partly from regions outside of sub-Saharan
Africa is only a first approximation of country- and mode-specific cost of capital.
Given the scarcity of financial data, however, we consider the approach appropriate
for the purpose of our study as it reasonably well approximates the differences
between countries, modes and financing scenarios.
As a further reality test and validation, we triangulated the resulting cost of
capital values using estimates from the literature for developing countries, where
available (Kenya23, Malawi59 and Cambodia60), and through interviews with experts
working in electrification finance, which confirmed that our results are reasonable
approximations (Supplementary Table 5).
Definition of financing scenarios. We defined three financing scenarios (in
addition to the uniform scenario) with the intention of depicting possible financing
options to reach 100% electrification in sub-Saharan Africa. Table 1 in the main
text illustrates the breakdown for each component and each financing scenario
(Supplementary Table 4 provides an illustration of calculations for all scenarios).
For the public sector financing scenario, the public sector is the investor in all
electrification modes. We assume that all investment is financed by increasing
sovereign debt and define the corresponding cost of capital as the sum of a risk-free
rate rf and the country-specific additional risk.
For the niche-financing scenario, the investor in grid extension is the public sector
and so the public cost of capital (above) is applied. Off-grid electrification is financed
by the private sector. In this case, the cost of debt is equal to equation (2) and the
cost of equity is equal to equation (3). The average debt share of the ten largest SAS
companies is 50% (Supplementary Table 2), while the debt share for MG is 0%.
For the mainstream financing scenario, grid extension is still financed by the
public sector and remains unchanged. Off-grid electrification is financed by the
private sector, however, it is now assumed to be mature. We therefore amend
the cost of equity for MGs and SASs by removing the illiquidity premium and
the small market-cap premium from equation (3). Further, as financial markets
mature, debt shares tend to increase. We reflect this by assuming that all MG and
SAS investments can attract the debt levels that current market leaders are able to
attract. In this case, we use the debt shares of the market leaders among the ten
largest off-grid companies34 (75% for SASs) and 40% for MGs based on interviews
with experts in the off-grid electricity sector.
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Articles
Application in electrification model. The integrated geospatial electrification
model OnSSET7 was used for the electrification planning analysis. Detailed
documentation and data can be accessed on the Global Electrification
Platform7,11,22. OnSSET is a optimization energy-modelling tool which uses
population-density data and geospatial properties for un-electrified clusters (at
a resolution of 100 × 100 m), together with techno-economic data to size energy
systems. The objective of the model is to meet total electricity demand for clusters
to be electrified in a target year by calculating the LCOE for different electrification
modes: grid extension, MG and SAS. The electrification mode with the lowest
LCOE is then selected as the final electrification option for that particular cluster.
In the model, the options for electrification through MGs include diesel-powered
systems, solar PV plus batteries, hydro-power or wind power. SASs are powered
using diesel generators or solar PV plus batteries.
OnSSET uses the LCOE formula shown in equation (4) for each cluster:
∑n Im +O&Mm +Fm −Sm
m=1 (1+r)m
LCOE = ∑n Em
(4)
m=1 (1+r)m
lm is the investment cost for an electrification mode in year m, O&Mm are
the operation and maintenance costs, Fm are fuel costs, Sm is the salvage value
(the value of the energy system at the end of its useful life), Em is the electricity
generated, r the discount rate and n is the lifetime of the electrification mode in
years. For grid extension, the LCOE equals the sum of the average national grid
LCOE (based on an estimated country generation capacity mix for 2030) and the
added LCOE of transmission and distribution infrastructure. The LCOE for MGs
and SASs account for the generation capacity costs, distribution infrastructure
costs (in the case of MGs), O&M costs and the fuel costs of the energy systems.
OnSSET has been used for analysis by the World Bank11 and the International
Energy Agency1. While there are possible geospatial electrification modelling
alternatives to OnSSET—Reference Electrification Model (REM)9, IMAGE-TIMER
model61, or the Network planner62—OnSSET is chosen because the code is open
source, it uses publicly available data and it provides renewable energy technology
options, which are representative of the current off-grid electrification landscape in
sub-Saharan Africa.
We modified the source code to implement country- and electrification
mode-specific costs-of-capital values (referred to in the model as the discount
rate). For this analysis, a cluster in the model refers to an area of land occupied by
households, while the cluster density refers to the population within a particular
cluster divided by the area of the cluster. The cluster density is one criterion
used in the selection of countries for the deep dive analysis (Supplementary
Table 1). The extended-area grid pathway was implemented by running the
model as is implemented on the Global Electrification Platform11. For the
existing-area pathway, we adjusted a model parameter to prevent extension of
the existing-area network. For this analysis, OnSSET calculates the LCOE for
different electrification modes in two target years—2025 (50% of the population
electrified) and 2030 (100% of the population electrified). We omit fossil
fuel-powered options from this analysis for three reasons: firstly, a review of
literature34,41,63,64 and discussions with off-grid electricity sector experts showed
that current business models for most off-grid companies deploy renewable
energy technology due to the remoteness of the rural regions and the associated
high cost of transporting fuel to meet energy requirements. SASs (used to power
households) are now exclusively powered by solar PV plus batteries. Secondly,
analyses comparing renewables to fossil fuel-powered options have already been
extensively studied in literature6,7,23,65,66. Thirdly, our analysis aims to explore the
viability of low-carbon technology options in the move towards meeting the
SDGs. While all energy options would make it possible to meet SDG 7 (energy),
the inclusion of fossil fuel-powered options would mean that SDG 13 (climate
action) may not be reached. This is because the model outcomes would largely
support deployment of diesel-powered systems over renewables because of the
higher capital cost of renewables. The assumptions for the different electrification
options are illustrated in Table 2.
The end-year target demand per household is based on the World Bank’s
multi-tier framework67. The multi-tier framework provides a standardized measure
for household electricity demand using a spectrum of tiers ranging from 1 to 5.
Each tier represents a set of energy services based on defined energy attributes
resulting in a total amount of energy measured in kWh per household67. The target
demand tier is set to tier 3 for both urban and rural areas across all countries.
This is because detailed electricity-demand forecasts at the household level are
unavailable for all countries in sub-Saharan Africa. Tier 3 level energy services
offer a minimum of approximately 365 kWh annually per household67,68. While
in practice, newly connected households tend to consume tier 1 and 2 level
services69,70—these tiers do not typically support productive loads such as water
pumps and refrigerators68,71—our analysis intends to allow for this possibility.
Further, regions electrified through grid extension experience variations in energy
services, for example, grid reliability37, and so are not bound by demand tiers.
Nevertheless, despite this assumption, we would expect to see the same effect of the
cost of capital across the different tiers; the main factor that would influence the
outcome would be the population-cluster density. Increasing the tier would favour
grid extension or MGs given more clusters will have higher energy requirements.
639
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This would reduce the LCOE, while lower tiers would favour SASs with exception
of very high population-density clusters.
We use country data and technology-specific modelling assumptions provided
by the World Bank’s global electrification platform11 (Supplementary Table 7
provides model techno-economic inputs for grid extension, and Supplementary
Table 8 provides techno-economic input parameters for off-grid modes). For the
LCOE calculation in Table 4, the following assumptions are made. First, the mean
is based on the average LCOEs for clusters where there is a difference between
the LCOE at niche (status quo) financing conditions for uniform electrification
outcomes and the niche-financing conditions for niche (status quo) electrification
outcomes. Second, we carry out the estimation using only new connections in 2030
and only for clusters where there is at least one new connection. This is because
88% of total new connections after 2018 occur in 2030 (only 12% in 2025 to reach
the 50% electrification target). Further, an analysis of the electrified clusters in
2025 (12% of the total) shows that 96% (uniform financing scenario) and 97%
(niche (status quo) financing scenario) of these (almost 12%) retain the same
electrification-mode choice in 2030. Third, the analysis is carried out for fully
un-electrified sites in 2018. We therefore exclude grid-electrified sites because the
LCOE remains unchanged because the model assumes an estimated LCOE for
already grid-electrified clusters (in 2018).
Data availability
Country-level geospatial input data for the time period (2018–2030) is from the
World Bank’s Global Electrification Platform11, which is, to our knowledge, the
most complete and open source data for sub-Saharan African countries. The data
have also been uploaded on an online public repository72. For this analysis, we use
country input files that were generated by the Global Electrification Platform that
can be accessed for each country on the platform website11. The data define physical
properties of individual population clusters and are required to determine the
electricity consumption by households in 2030. Scenario input data can also be found
in Supplementary Table 9. The maps (Fig. 3) are plotted using cluster shape file data
that is also available on the World Bank’s Global Electrification Platform11. The base
layers used to plot the map include water bodies73 and administrative boundaries74.
Code availability
The modified OnSSET model used for this analysis can be accessed through the
GitHub public repository (https://bit.ly/3jlre4G).
Received: 28 June 2021; Accepted: 3 May 2022;
Published online: 9 June 2022
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Acknowledgements
We thank interviewees and technical experts who provided valuable feedback on
empirical values used in the analysis and participants at the Sustainable Energy
Transitions Initiative (SETI) virtual workshop 2020, the Centre of Economic Research
at ETH Zurich (CER-ETH) PhD Seminar, the Swiss Association of Energy Economics
(SAEE) workshop and EPG group members who provided feedback on earlier drafts
of the paper. This project has received funding from the Engineering for Development
(E4D) Doctoral Scholarship Programme, which is funded by the Sawiris Foundation for
Social Development and the Swiss Agency for Development and Cooperation (C.A.),
and from the European Union’s Horizon 2020 research (B.S.) and innovation programme
(B.S.), European Research Council (ERC) (grant agreement number 948220, project
GREENFIN) (B.S.).
Author contributions
T.S.S., B.S. and C.A. secured project funding; C.A., T.S.S., B.S., F.E. and N.J.W. designed
the research; C.A., F.E. and B.S. coordinated the data research; C.A. carried out the
modelling analysis; C.A., F.E., B.S. and T.S.S. conducted interviews; and C.A., F.E., T.S.S.,
B.S. and N.J.W. wrote the paper.
Competing interests
The authors declare no competing interests.
Additional information
Supplementary information The online version contains supplementary material
available at https://doi.org/10.1038/s41560-022-01041-6.
Correspondence and requests for materials should be addressed to
Churchill Agutu, Florian Egli, Tobias S. Schmidt or Bjarne Steffen.
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