Given the $37 billion (in cash, not opportunity cost) that the IFC estimates is spent annually on meeting basic household energy needs, there is certainly a market for better solutions.
Energy access remains a critical piece of the African development story. Some 600 million people in the region are still without access to modern forms of energy, relying instead on rudimentary fuels, such as charcoal and wood, for cooking; costly kerosene, candles and batteries for lighting; and spending significant and increasing amounts of time and money on charging devices such as cell phones.
However, given the $37 billion (in cash, not opportunity cost) that the International Finance Corporation (IFC) estimates is spent annually on meeting these basic household energy needs, there is certainly a market for better solutions.
The exciting news is that an ‘offgrid revolution’ of sorts is afoot, with East Africa at the forefront. Companies like Mobisol, M-KOPA, Off-grid Electric, Fenix Intl and BBoxx are already connecting thousands of homes each month using rooftop solar home systems (SHS).
However, to meet the full gamut of energy needs of this growing continent, a variety of technology solutions and business models must be brought to bear across Africa. This includes the expansion of mini-grids, particularly as a means of supporting productive uses of power and greater industrialisation across the continent. These too can be developed and operated by commercial enterprises.
While mini-grids per se are by no means a new solution, technology may have been a critical hindrance to the emergence of truly scalable business models. Once limited to small hydro sites developed on an ad hoc basis or isolated pilots using other forms of energy and operated by community groups, as with solar home systems the mini-grid context has also evolved. With advances in technology, including the advent of mobile payment platforms, coupled with the steep decline in costs of solar photovoltaic panels and other off-grid system components, and development of sophisticated geographical information systems (GIS) – to more accurately identify viable customer bases – we could be on the cusp of a major change to capture this market opportunity and help to close the energy access gap.
Reflection on mini-grids in the broader off-grid solution space
In 2012, the International Energy Agency (IEA) released a report on energy access, suggesting that at least one-third of the over 1 billion people without access to electricity would need to be served through mini-grids; the rationale was that the cost of full grid extension was simply too great, based on available funding from governments and international development partners. Other editorials followed, positing that decentralised power generation was a must if far-flung, remote places were ever to become electrified; these pieces largely championed improvements in quality of life of people who would receive power, but did not discuss the economic viability, let alone the business opportunity, for mini-grids.
In 2014, another article on the potential of mini-grids was released. The author wanted to make a case for the technology by sharing business models that were beginning to show promise in India. But, short of examples, the article diverged somewhat from the rural electrification challenge to highlight attempts to make islands 100% renewable energy based, such as the ventures by Richard Branson in Aruba; and moved further afield to talk about off-grid solutions in Alaska. Africa, home to half the global electrification gap – offered just one of four case studies, and centred on a largely donor-funded project in Senegal, serving barely 1,000 people. This is not, however, the approach to reach scale.
Jump forward two years later to today and things are looking very different indeed. With the central grid unlikely to reach the majority of the population in the medium-term, mini-grid distributed energy service companies (DESCOs) are seeing a potential market worth hundreds of millions of dollars that could also blossom into other revenue streams. Similar to what is happening in the SHS, mini-grids could capitalise upon their access to customers to offer additional products and services, from productive use machinery to education loans and insurance.
East Africa fast becoming a hub for innovation in DESCOs using a range of mini-grid technologies
Tanzania in particular is seeing a sharp increase in businesses jumping into the mini-grid space, primarily relying on solar energy and utilising mobile payments to collect revenues from household and business customers – both of which are ubiquitous in the country. One of the reasons is that, with support from the World Bank and other development partners, the country has been a leader in creating an enabling environment designed to attract mini-grids to the overall energy mix. As a result, there are dozens of mini-grid based DESCOs covering the trifecta of local players, international innovators and multi-national companies (MNCs), each of which brings specific competencies and comparative advantages in serving portions of the market.
Local players such as Rift Valley Energy and Andoya have a deep understanding of, and access to, hydropower resources and are comfortable selling the bulk of the electricity they generate to the national utility, Tanesco, while the remainder goes to household customers in the vicinity of their sites. International innovators such as Devergy and Redavia build on strong technical backgrounds and nimble organisations to deliver flexible, proprietary technology solutions—in this case small, modular, DC-based ‘swarm’ electrification for villages of 3-4 dozen households, and containerised solar farms for light industrial customers, respectively. Other mainly Kenya-based players offering kW-scale systems, notably Powerhive and PowerGen, are increasingly looking at the Tanzanian market for expansion opportunities. Finally, MNCs from the European utility space have taken a step into the mini-grid DESCO space. E.ON Off-grid Solution’s Rafiki Power and Engie’s Power Corner are frontier ventures aimed to test the relevance of their strengths in R&D, customer service and procurement in the enticing African market.
The entrance of this third group of larger utility players into the nascent mini-grid market is particularly interesting. While MNCs need to leverage strategic and operational partnerships with local and other specialised smaller companies in order to deliver on specific parts of their value chain, they could be an important part of mini-grid scale-up for two reasons. Firstly, they typically have the ability (given deeper pockets, stronger logistics and back-office functions) to roll out systems rapidly, thus aggregating multiple sites together into one financing package allowing for larger ticket sizes – in the tens of millions of dollars. Secondly, MNCs (along with other larger domestic or regionally focused corporates) would be able to utilise their balance sheet to access this finance.
Issues for all market players to resolve
Many DESCOs are quickly realising that mini-grids are commercially viable provided that a number of critical ecosystem conditions and operating parameters are in place. Chief among them is that the number of connections per site, and the average return per connection, should collectively allow companies to achieve their return on investment in around 4-6 years in order to attract the most investment capital. To achieve this goal, mini-grid DESCOs are beginning to understand that there isn’t a ‘single’ off-grid market, and one-size solutions do not fit all customers. They must carefully segment the market to identify where it makes most sense for mini-grids to be installed, and serve it using a range of appropriate business models that leverage technology advances to costeffectively reach customers.
This might mean using 7kW PV systems in poorer rural areas with limited demand, while installing 100kW biomass options in areas with greater consumption and night-time needs. At the same time, however, companies are looking to the government and development partners to ensure an appropriate enabling environment that allows them to make a profit on their investment, and to grow. This might mean fiscal incentives to put mini-grids on an equal footing with the subsidised grid, while also providing clarity as to where the grid will be extended in the medium term.
Earlier this year, the IFC completed a benchmarking exercise that sought to put numbers behind what is typically a space full of anecdotes, undertaking a detailed review of some two dozen mini-grid DESCOs to better understand their operational and financial performance. Some key findings were:
- Mini-grid DESCOs are trending towards solar-hybrid systems and smart metering technologies.
Falling capital costs have increased the popularity of solar technologies. This, combined with increasing consumer demand for 24-hour power, has led many operators to adopt solar-hybrid solutions to reduce the high power storage requirements of pure solar grids. Further, DESCOs are moving towards innovative smart metering technologies to increase operational efficiency, better predict demand, and improve load management. Smart meters also facilitate modular grid designs, allowing DESCOs to maintain grid capacities in better alignment with demand.
- Mini-grid DESCO growth is driven by targeted site selection and demand forecasting.
The most rigorous companies carefully identify sites and forecast demand by estimating willingness to pay, economic activity, and growth potential of productive uses. Motivated by these advances, most DESCOs predict they will double their number of grids in the next year.
- Grid extension presents the highest risk to growth, with offtake risk a secondary concern.
Lack of clear regulation around national grid expansion increases the difficulty of site identification and discourages investment, especially from local financing institutions. Site assessment techniques have resulted in high rates of initial sign-up, with ongoing off-take risk surprisingly low. Interestingly, competitive alternatives, such as diesel generators and solar home systems, are not seen as a meaningful threat to growth, with most mini-grids providing more consistent, higher wattage power at lower costs.
- Mini-grid DESCOs prefer buildown operate models, service bundles, and pre-pay systems.
Operators currently employ, or indicated a move toward, build-own operate business models, citing a desire for increased control across the value chain. These DESCOs have converged on service bundles and utility models as the preferred method of sale for residential and large-commercial customers, respectively. All firms serving residential customers use pre-pay systems, employing mobile-money where available, as this is seen as a key factor in getting to scale.
- Overall company breakeven times generally range between five and seven years.
Within that range, there are few predictive characteristics due to the wide range of grid design and operational factors that influence commercial viability. However, some DESCOs are developing smaller, modular systems to reduce payback time. While larger, higher capacity grids have the potential to be more profitable over their lifetimes, investors would need to employ more patient capital structures to finance the higher upfront costs and longer payback periods.
Initial work was presented at an event in June in Dar es Salaam, which gathered some 40 operators and investors from the East African region and beyond. Top of mind for these companies was how to manage for when the grid comes into the area and how they can be assured of appropriate compensation. Is there to be an expectation of the tariff being shifted to that which the national grid uses, even though it itself does not typically cover operating costs of off-grid players? What mechanisms can be established to allow for recovery of investment in the event of grid encroachment?
The benchmarking work was a first step to identify best practices and approaches as a means of providing discipline to the business models and eventually leading to increased investment in the space. Moreover, such benchmarking can be a useful driver for helping companies to refine their operational value chains, which is a necessary condition for mini-grid DESCOs to take off. But on its own, benchmarking is of course insufficient to move this emerging market to the next level – there are several other critical pieces of the puzzle that have been further exposed as part of this exercise.
Mastering market identification is a crucial aspect, as it is recognised that there are millions without access to energy, but where does it make sense to install mini-grids versus use stand-alone technology solutions or even grid extension? How to ensure quality of service and satisfy customer expectations through the use of technical standards and specifications? It is also recognised that information asymmetry is affecting the rollout of energy access solutions. Finally, and in no way inconsequential, is the issue of financing – how to ensure the right blend of commercial and concessional capital to move the market? These areas need to be tackled through a collective and collaborative approach – and are at the core of the IFC’s work to accelerate the development of the mini-grid segment in Tanzania.
This is also the framework behind broader IFC thinking on the energy access challenge across Africa.
It is clear that countries in Africa will need a combination of on- and off-grid solutions for the foreseeable future. That said, we have to be careful not to be dogmatic about technology, particularly since there is an undeniable area of convergence between some SHS players moving up the spectrum to 200Wp systems, and mini-grid DESCOs which provide similar average installed capacity per household. Moreover, many of the pioneer companies in the SHS and mini-grid segments are starting to “go West and South” into new parts of the African market. As these parts of the region are accessed, we may see innovation in terms of the solution choices that both types of DESCOs – SHS and mini-grid – offer.
On the enabling environment front, we are seeing interesting developments on the ground. For instance, the government of Rwanda is providing clear policy support vis-àvis the place of SHS and mini-grids in the country’s short-term electrification plan. The governments of Kenya and Sierra Leone have both indicated that mini-grids are part of their national electrification strategy. And the Nigerian Electricity Regulatory Commission (NERC) has recently stated that electricity distribution companies may now use mini-grids as a bridge technology to accelerate electrification activities. [Ed’s note: refer to the Africa Roundup Map on page 14] Similarly, the Tanzanian government, through its Electrification Prospectus, identified and articulated the role that mini-grids has in narrowing the energy access gap in the country, and is planning to support the sector with connection fee subsidies to cover part of the distribution network costs. Moreover, with IFC support, there is now a mini-grids portal for Tanzania that is a one-stop shop for information about the permitting and licensing process, among other aspects (http:// www.minigrids.go.tz/).
Across the sub Saharan Africa region, in addition to pure market approaches, well-designed public private partnerships (PPPs) may be an important part of the scale-up solution. This is particularly true if larger mini-grid systems, which require higher investment and longer payback periods – therefore implying greater risk for developers – are to become more prevalent.
What is quite clear is that more effort and determination is needed to capture the market and close the energy access gap in Africa. Mini-grids offer one possible solution. But to become a true success story, collective and collaborative action is needed across the public and private sectors, together with development partners. At the IFC, we remain committed to advancing private sector solutions for energy access by working across the three areas of strengthening business model fundamentals, developing innovative financing approaches, and selectively addressing broader sectoral issues.
ABOUT THE AUTHORS
Pepukaye Bardouille is a senior operations officer with the IFC, part of the World Bank Group. As part of the Energy & Resource Efficiency
Advisory team, her work is focused on energy access, helping to scale-up commercially viable business models to extend electricity and clean fuels to the base of the pyramid.
Daniel Shepherd is the regional lead for IFC’s Energy & Resource Efficiency Advisory Services in Africa. His expertise includes energy efficiency, renewable energy, energy access, and broader energy and climate change engagements, with a particular emphasis on finance.