Mini-grids have had their fair share of hype in recent years, so a measure of skepticism is warranted, especially when you consider the multiple challenges that have prevented them from scaling: access to affordable capital, uncertain policies, unpredictable consumption patterns, complex community dynamics, currency risk, high transaction costs for investors, etc. In the words of Frank Bergh, vice president at Sigora International: “A start-up utility is still a jumbo shrimp.”
For the sector to go mainstream, what’s needed for scale can be boiled down to one word: standardization. It’s a boring word, but let’s face it, the energy sector is a subsidized infrastructure business that provides a public good. Access to power can enable many amazing things, but the business of making, moving and selling electrons itself is not particularly sexy. To get to sexy (i.e. reaping the dividends of access to electricity such as improved health and education, greater gender equality, access to clean water or powering enterprise), mini-grids must first scale, and that means sector-building through standardization.
Standardization is needed in (at least) the following 5 areas and, as we explore in the September 2017 newsletter, each one of them is currently being addressed to varying degrees. If it all plays out accordingly, 2018 is shaping up to be a year where the pieces fall into place for scale to start to occur, and for mini-grids to take a central place in the race to end electricity poverty for 1 billion people. “The future of rural electrification is at a tipping point,” says Vivian Vendeirinho, managing director of RVE.SOL and Alliance of Rural Electrification board member. "The private sector can drive the needed change if perceived positively by governments.” Which segues nicely to our list of 5 focus areas:
Messaging and Data: what is a mini-grid? Depending on where you go, you still get different answers. In India, a micro-grid is smaller than a mini-grid, which is different from many other countries, where micro-grids are much larger, often captive systems. Then there are also nano-grids or pico-grids. Some developers refer to themselves as a micro-utility or just a private utility. Yet others suggest “standalone rural electrification grids”. Whatever you call yourself, a sector is only going to scale if it is clearly defined. What are we? What level and type of service do we provide? If the sector isn’t consistent, financial and policy support won’t be either. Just as important, if not more so, is a huge void in useful data, whether it be market size, location of current grids or performance data (see our new infographic). “We need a whole lot more focus on the messaging,” says PowerGen CEO Sam Slaughter, a founding member of the new Africa Mini-grid Developer Association (see our interview with him for more on AMDA). He adds: “There is a lack of information in our sector around what is the current situation on the ground.”
Subsidy Parity: “Public finance is going to be necessary for the long term. Mini-grids are not just about productive use, but about access, which is a public service,” said Xavier Vallve, director of Trama TecnoAmbiental. It’s relatively simple for regulators to figure out how to create parity between subsidies for capital expenditures (CAPEX) made by private developers to build mini-grids, and CAPEX subsidies for the centralized grid. In India for example, mini-grids have been receiving a 30% CAPEX subsidy. How to do the same for operational expenses (OPEX, or the ongoing cost of running a business) is another question altogether. As Slaughter stresses in our interview: "We're not seeking new subsidies, but to benefit from subsidies that public utilities already benefit from. We want to convince large donors and the governments they support that it is in their interest to subsidize not only the public utilities, which they currently do to a pretty extreme degree, but make that funding similarly available to private utilities to create a more multi-polar power landscape."
Technology: Today, every mini-grid developer starts from scratch and builds its own design. While customization will inevitably be needed in some cases such as bigger systems, there is huge room for reducing costs through establishing global technology standards and standardizing system configurations. “The smaller the system, the more it makes sense to standardize, which results in high profit increases for systems between 50 kWp and 2000 kWp. For mini-grid systems, this increase would be even more dramatic,” says Martin Baart, CEO of ecoligo. Already, such initiatives as the Rockefeller Foundation-funded research on “Utility in a Box” is driving down CAPEX considerably. And even if there is ultimately no one-size fits all technology solution, there is “much more opportunity for technology standardization than is being exploited in the market today”, says Alexia Kelly, CEO of the Microgrid Investment Accelerator (MIA).
Policy: Countries like India and Nigeria, together home to about 40% of the roughly 1 billion people globally without electricity, are stepping up with national mini-grid policies (see a more detailed look here in our September newsletter), as are some sub-national governments, helping to end doubt around tariffs, grid extension and oversight. The mini-grid sector, through collective action and pro-active engagement with regulators and policy-makers, must work to get other countries do the same. “Policy, regulatory and enabling environment are critical and will continue to be,” says MIA’s Kelly.
Finance: Finally, the lack of the above 4 standardizations has left commercial capital almost completely on the sidelines. But exciting developments (discussed in our newsletter here) are taking place that offer a uniform platform to standardize projects for investors, developers and vendors. And important new vehicles like MIA are emerging to prime the pump for bigger ticket investments.
Learn more in the newsletter, and if you have thoughts please share them with us at email@example.com