Changing Minds about Working in the Most Difficult Situations
- MIGA is partnering with a solar power innovator and an investment firm in a groundbreaking business arrangement that will support Somalia’s re-electrification.
- The solar plant is expected to displace over a million liters of diesel fuel and avoid greenhouse gas emissions of 2,800 tons of CO2e each year of operation.
- The innovative business model demonstrates what technology, investment, and MIGA guarantees – coupled with local government support – can accomplish in a highly challenging environment and shows the potential for private sector investment in fragile and conflict-affected contexts.
Some countries are just too challenging for the private sector to do business in. They’re too fragile or too affected by conflict to attract the foreign investment they need to grow and develop.
At least, that’s the conventional wisdom.
But that wisdom is now being put to the test by an electrification project in Somalia involving two private sector firms that are willing to operate in the types of highly challenging situations that many firms continue to avoid. And their partnership with the Multilateral Investment Guarantee Agency (MIGA) is making it possible.
Electricity – so important to development, health, and welfare in emerging markets – is scarce in Somalia, with less than half of residents able to access it. Those lucky enough to do so can buy power from small energy service providers that rely on hazardous and polluting diesel generators.
Electricity is also enormously– often prohibitively – expensive in the Horn of Africa nation, primarily because it lacks both a national power grid and a power purchase framework. The price of one kilowatt-hour of electricity, enough to keep a 100-watt light bulb on for 10 hours, can cost the equivalent of $1, more than five times the global average.
With public sector finance extremely limited for new power plants, private sector investment is critical if electricity is to again become broadly available and affordable in Somalia.
An Innovative Business Model
So, in its first-ever project in Somalia, MIGA is partnering with Kube Energy and CrossBoundary Energy to make that happen.
Based in Norway, Kube Energy is a renewable energy company dedicated to bringing clean, affordable, and reliable energy to fragile and hard-to-reach areas. And CrossBoundary Energy is Sub-Saharan Africa’s first investment platform for commercial and industrial solar.
The project, which will be implemented through a Kube subsidiary called Kube Energy Somalia, will develop a solar hybrid power plant with a capacity of approximately 2.8 megawatts, which will be located in Baidoa, Somalia.
While the necessary technology and investment are available for such a project, until recently the fragile and conflict-affected context of Somalia was perceived as too risky for the project to proceed.
Somalia is not unique. Up to two-thirds of the world’s extreme poor will live in conflict-affected situations by 2030, according to the World Bank. Yet private investments in fragile and conflict-affected contexts have not grown fast enough to meet World Bank targets, in part because insecurity, lack of infrastructure, weak governance, and lack of access to finance and land often deter private investors and constrain the pipeline of bankable projects in these countries.
That’s where MIGA comes in. In January it issued a guarantee of $5.67 million to cover Kube Energy and CrossBoundary Energy’s investment for a period of up to 15 years against risks that the project would be expropriated by the government or damaged or destroyed by war or civil disturbance.
MIGA’s risk exposure under the guarantee will be shared with the IDA Private Sector Window and the Renewable Energy Catalyst Trust Fund (RECTF) via a first loss facility that will assist in spreading the risk and expanding MIGA’s reach in fragile contexts. The RECTF is a multi-donor trust fund managed by MIGA that was set up in 2022 through the support of the Norwegian Agency for Development Cooperation (Norad) and the government of Japan. This transaction is the second MIGA-guaranteed project to benefit from RECTF support.
The MIGA guarantee was a prerequisite for the investors’ participation in the solar plant, and its issuance instilled the investor confidence necessary for the project to proceed.
“The DNA of Kube is to work in fragile and conflict-affected areas,” said Mads Hansen, CEO of Kube Energy. “And we’ve been very fortunate to work with MIGA on addressing the political risks involved with this project.”
Baidoa is an important regional trading hub located along a key trade corridor to the seaport of Mogadishu, with a growing population of people displaced due to conflict and drought. While at first the hybrid solar plant will serve a limited number of off-takers, including the United Nations peacekeeping operation and other international organizations and local government offices, the intention is for it to eventually form part of Baidoa’s permanent energy infrastructure and increase access to clean and affordable power for local government. If a power purchase agreement can be arranged and additional investment made in the plant, it has the potential to eventually serve local consumers and businesses, too.
The project will benefit Baidoa’s residents in other ways, as most of the workforce will be recruited locally for the plant’s construction, operations, and maintenance, which will create local technical capacity and an ecosystem around renewable energy. And ownership of the plant will be transferred to local authorities after 15 years of commercial operations.
“In countries emerging from conflict where access to resources is limited, exploring ways in which we can leave a ‘positive legacy’ through energy infrastructure investments is imperative,” said UN Under-Secretary-General for Operational Support Atul Khare, “but we are only a small piece of the puzzle, and we are very grateful to MIGA for providing the necessary support to enable this project.”
Finally, the new solar plant will lead to significant greenhouse gas emissions savings by displacing highly polluting diesel generators, improving the quality of the environment in a region severely affected by climate change. The UN arrangement with Kube Energy will enable its Somalia operation to transition the Baidoa site to 80 percent renewable energy use by 2030, displacing an estimated fuel usage of approximately 1 million liters per year and resulting in avoided greenhouse gas emissions of approximately 2,800 tons of CO2e per year.
“Kube Energy is part of a new generation of impact-minded and pioneering companies that are taking the lead in closing the clean energy access gap in some of the hardest-to-reach locations,” says Jessica Stiefler, a senior MIGA underwriter on the project. “MIGA is very proud to be supporting the scale-up of Kube Energy’s innovative business model.”
Because of its many potential benefits, the solar plant enjoys strong support from both the Somali Federal Government and the Government of the South West State, a federal member state of Somalia.
Perhaps most important, the project will demonstrate that even in the most challenging environments, the right combination of renewable energy technology, support from local government, and MIGA’s ability to overcome barriers to private sector investment can produce exciting results, including turning the lights back on in what was once a dim situation.
For more on Kube Energy Somalia, go here.