4 keys to unlock cheap micro-grid finance

Distributed renewable micro-grids are widely recognized for their potential to bring electricity to hundreds of millions of Sub-Saharan Africans. These village-scale assets range in size from a few hundred watts to hundreds of kilowatts, serving dozens to thousands of customers. Through the aggregation of electricity demand, they can supply electricity at an affordable rate to both household customers and productive users.

To enable the rapid and massive development of these solutions, private capital and long-term project financing must be mobilized. For example, a 75-kW micro-grid to serve 1,000 customers may require an initial investment of up to 1.0 million USD. Tanzania alone represents a 1.8 billion USD investment opportunity, with 1.8 million households “beyond the reach of a national grid” in areas of medium to high levels of density. 

However, investors and lenders perceive micro-grid projects as risky, due to high capital intensity and lack of creditworthy long-term power purchase agreements. Due to these risks, lenders and investors require a high cost of financing. 

To improve lender confidence and increase project financial attractiveness, micro-grid developers should reduce the risks of non-steady cash flows through four short-term actionable strategies:

  • Track revenue collection rate and system downtime. Those are key performance indicators of operational management strength and are essential to avoid non-expected costs hindering expected cash flows. Adopting mobile money and prepaid smart meters, planning regular maintenance or ensuring that most frequent system issues can be dealt with within limited time can reduce those risks while improving customer satisfaction.
  • Support energy demand by educating productive customers and supporting access to affordable appliances, for instance by providing financing solutions to customers on lights, TV, radios, etc. Low adoption from productive users and low demand from households are the two major causes for under-usage of electricity generated. 
  • Monitor the balance between households and productive users, both in terms of number of connections and of energy consumed. As a rule of thumb, a portfolio can be considered balanced when households represent 45 to 60% of the micro-grid energy demand and 85 to 95% of connections. Relying only on productive users could be challenging, as these activities may be limited and prone to change based on the season and economic trends. On the other hand, relying only on households will not maximize asset utilization and requires more storage, as households tend to consume mostly at night. Hence, the customer portfolio should balance household evening consumption and the high utilization of productive users. 
  • Adopt a price structure that makes cash flows more resilient to reduced energy consumption. For instance, combining a monthly fixed fee and a unit-based top-up enables project developers to secure part of their revenues regardless of energy consumption, whereas customers can control their energy bill with the unit-based top-up. 

Financing solutions should embrace micro-grid revenue growth pattern, so as to leave project developers with some treasury to support financing customer connection cost and appliances. Indeed, micro-grid maximum cash flows manifest only once a significant number of customers are connected and progressively climb up the energy ladder.

This article is the result of the collaboration between ENEA and Millennium Microgrid. Millennium Microgrid was one of the granted organizations of ENEA’s Energy access Call for project 2018 as part of its pro-bono program.

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