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Clean energy journalism for a cooler tomorrow

Minigrids could bring power to half a billion people in Africa and Asia

Small solar-and-battery systems can reach communities without grid connections. Public-private partnerships are key to making it happen.
By William Brent

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(Smart Power India)

William Brent is chief marketing officer at Husk Power, a minigrid company in Asia and Africa, and an adviser to advocacy group Power for All, a member of the Mini-Grids Partnership. This guest essay represents the views of the author, not those of Canary Media.

Roughly 800 million rural poor people around the globe are still living without electricity. Up to 60 percent of them could be served through minigrids — rural power plants that use combinations of solar, biomass, hydropower, generators and batteries to provide power to communities that are not connected to centralized electrical grids. Over the past decade, private-sector developers have sprung up to fill this gap, helping to more than double the number of people served by minigrids from 5 million to 11 million between 2010 and 2019.

This progress is an encouraging sign for a clean-energy solution that the World Bank says has the potential to cost-effectively eradicate energy poverty for half a billion people, largely through making use of solar and battery hybrid systems that are rapidly falling in cost. Typical minigrids of this type can supply power to between 800 and 4,000 people with a combination of 50 to 100 kilowatts of solar PV combined with 100 to 500 kilowatt-hours of battery storage. At least 19,000 minigrids are operating around the world today, according to the World Bank.

Still, the 11 million people now served by minigrids represent just over 2% of the industry’s potential reach. To hit the World Bank goal of 210,000 minigrids by 2030 will require a doubling of existing minigrid capacity every two years.

That would be a significant step toward meeting the United Nations Sustainable Development Goal 7, which calls for affordable, reliable and modern energy for everyone by 2030.

The minigrid industry is nowhere near being on track to deliver that type of growth, and it still faces numerous regulatory, financing and business-model challenges to getting there. But the industry is developing and now includes a cohort of pure-play minigrid companies, as well as a few energy multinationals.

Scale on the horizon

While most [minigrid] developers are small-scale companies or [startups], some are beginning to reach scale,” according to the Renewables 2021 Global Status Report published by industry network REN21. In late 2020 Husk Power became the first company globally to install 100 community [minigrids], which also serve 5,000 business customers.”

Other minigrid and microgrid companies are also growing, among them Tata Power’s TP Renewable Microgrid, Engie Energy Access and PowerGen Renewable Energy. Scale is quickly becoming a reality in India and Nigeria, the two largest minigrid markets. Since reaching its 100-minigrid milestone last year, Husk has gone on to build more than 120 minigrids in India and plans 150 in Nigeria by 2023. Engie says it will have 300 minigrids in Nigeria by 2025, and PowerGen just announced plans to build 28 minigrids in Nigeria.

The Africa Minigrid Developers Association, a trade group with 28 member companies across 12 countries, says its members grew their number of connected customers from under 2,000 in 2016 to over 50,000 in 2019. Together, its members now serve more than 275,000 people, businesses and community facilities.

Catalytic finance to meet the challenge

Minigrid executives cite access to finance as a lingering barrier to scale. But more specifically, what’s missing is access to affordable long-term debt. That’s because minigrids are a type of infrastructure that requires loans to cover upfront costs, which are then paid back over years of operation.

Well-designed and well-managed minigrids are moneymaking propositions, particularly when compared to the cost of extending centralized grid service to remote communities. But the relative novelty of categorizing the minigrid opportunity as a central part of future energy systems, rather than a marginal solution, has been a barrier to expanding the field of willing commercial lenders, as has the uncertainty of the risks involved.

Concessional finance — capital deployed by foundations, social impact investors and donors with low interest rates or extended grace periods for payback — has played a vital role in de-risking commercial capital for minigrid development. Over time, the multiplier effect of this type of finance could prove to be transformative.

For example, the Universal Energy Facility, a financing tool backed by several impact investors and bilateral donors, aims to mobilize $500 million by 2023 to deliver about 2.3 million energy connections. The program is currently operating in Benin, Madagascar and Sierra Leone and plans to gradually expand. It provides much-needed concessional funding to improve the bankability and long-term viability of projects through results-based financing — a subsidy paid to minigrid developers once they’ve proven that forecasted targets for customer connections have been met. The Universal Energy Facility was created in direct response to a 2019 appeal by commercial investors with billions of dollars under management for the creation of an Africa-wide, results-based financing tool for minigrids; the investors asserted that such a tool would help unlock their capital.

Even more game-changing, The Rockefeller Foundation and Ikea Foundation recently joined forces, each pledging $500 million for a new fund that aims to empower 1 billion people with distributed renewable energy” such as minigrids. The new entity, expected to launch later this year, will seek to leverage the initial $1 billion to attract an additional $10 billion. It has already secured commitments from the International Finance Corporation and the U.S. International Development Finance Corporation.

The much-anticipated influx of dollars and euros into minigrids, which earn revenue in local currency, has exposed a challenge, however: the risk that exchange-rate volatility devalues the revenue needed to pay back those investments. That’s an unacceptable level of exposure for both developers and investors, and has put undue pressure on minigrid developers to act as their own banks and use on-book financing for debt repayment, rather than building more projects.

The African Development Bank has since 2018 stressed the importance of local currency finance to remedy the situation, but that has only happened in isolated pockets, and not to the degree needed. Efforts are underway to change that. For example, a new Green 4 Access First Loss Facility managed by GreenMax Capital Group is raising an initial $50 million, expecting that it will leverage around $900 million in lending from domestic commercial banks, also called local financial institutions. 

Workers installing a solar array for a minigrid. (Husk Power)

Acknowledging the limitations of the public sector

One of the main reasons why the World Bank and other international development agencies have identified private minigrid developers as critical players in ending energy poverty is the dismal performance of national power grids. In some parts of the world, state-owned utilities are burdened with debt and unable or unwilling to meet mandates to serve customers with reliable and high-quality power. A majority of state-owned power utilities in sub-Saharan Africa — 35 out of 37, according to the World Bank — consistently lose money. In India, utilities that have been repeatedly bailed out continue to hemorrhage money while providing unreliable and poor-quality service, especially to rural customers.

Nigeria, the country with the largest unelectrified population in Africa, has recognized the role of the private sector in addressing the energy-access gap. The government has launched an ambitious program, the Nigeria Electrification Project, that envisions 10,000 minigrid sites and relies heavily on private minigrid developers and a World Bank loan of $350 million.

The government has to leverage private-sector commitment to make [minigrids] commercially viable,” said Ahmad Salihijo Ahmad, managing director of Nigeria’s Rural Electrification Agency. The government does not have enough resources to cater…[to] all unserved and underserved Nigerians. The private sector ensures that these projects remain sustainable.”

Nigeria is also experimenting with distribution franchising, most notably with a Shell Foundation spinoff named Konexa, which is working with local governments to privatize the distribution network, including plans for minigrid deployments.

Similarly, the national distribution company in Uganda, Umeme, recently partnered with a smaller developer, Equatorial Power, to launch the country’s first privately owned minigrid that will be interconnected with the national grid. Development finance institutions such as the World Bank are increasingly looking at interconnected undergrid” minigrids as a major opportunity for scaling energy access more quickly and affordably.

We have to seek [integration] with the national utilities,” said Equatorial CEO Riccardo Ridolfi. The interaction between the off-grid systems and soon-to-be-integrated systems with the expansion of the utility is not only natural but hugely beneficial.”

Government support for private minigrids is not uniform, however. New draft regulations in Kenya require that 30% of a project’s planned connections be completed before a minigrid license can be issued, raising concerns that investors would have to commit financing without having certainty that the project will be licensed, a highly unlikely scenario.

Rate and permitting challenges

Industry leaders also cite regulatory compliance challenges and unrealistic expectations about the rates to be paid by minigrid users as key external barriers.

Right now, every minigrid has to go through a licensing process that is modeled after larger, nonrenewable independent power producer projects. It’s not [a] radically different [process] to get a license for a 50-megawatt coal plant and a 50-kilowatt minigrid,” said Jessica Stephens, CEO of the Africa Mini-Grid Developers Association. What this means in practice is a minigrid developer that is installing a hundred 50-kilowatt minigrids will spend exponentially more time and money to get through regulatory compliance than larger nonrenewable systems.”

This approach constrains project permitting. In Nigeria, of about 375 minigrid projects in the pipeline, only around 60 have signed agreements to receive performance-based grants under the Nigeria Electrification Project, according to development bank officials.

Stephens pointed to Sierra Leone as a potentially more efficient model for the sector. That country’s national government provides contractually based concessions under a public-private partnership from which regulators carve out territories for minigrid developers. Using this approach, Sierra Leone has commissioned 94 minigrid sites in the last two years, leading the continent in its rate of deployment.

More broadly, the Africa Minigrid Developers Association has called for centralized technical assistance to support national regulators, allowing them to bundle projects and streamline regulatory compliance, feasibility studies and approvals. It also recommends the use of insurance tools in case minigrid customers aren’t able to use as much power as expected — if a drought crimps the amount of electricity used for farming, for example — or to mitigate the risk of political instability that could impact operations.

As for electricity rates, private minigrid developers charge more per customer than do state utilities, largely because building and maintaining electric infrastructure is more expensive per customer in rural areas than in dense urban environments. Heavily subsidized state-owned utilities can use revenue from urban customers to essentially subsidize rural customers and charge them lower rates — even if it means losing money on a per-customer basis. Minigrid developers, by contrast, are expected by governments to operate without such cross-subsidization.

In addition to results-based financing, other mechanisms to help level the playing field for minigrids would include feed-in tariffs, tax breaks and ongoing operational subsidies.

Packaging these support mechanisms could result in greater scale for minigrids, driving down the rates they charge and making electricity more accessible and affordable for rural customers, which is the ultimate goal. As Stephens put it, The real question is, will governments move beyond the entrenched interests of traditional energy systems and national utilities? And will donors take seriously the need to subsidize power for the poorest, most vulnerable, hardest-to-reach constituents?” 

An irrigation pump powered by a minigrid. (Smart Power India)

Aggregate it and they will come

Leading minigrid companies have started to achieve scale because they have driven down their internal costs through innovations in technologies, business models and operations, while increasing demand by building local entrepreneurial capacity and offering end-user finance. Nonprofit research organization RMI expects the cost of minigrid power to decline 60% by 2030 to $0.22 per kilowatt-hour. (Canary Media is an independent affiliate of RMI.) Some minigrid developers are predicting even steeper declines in costs.

Based on the unit economics we’re seeing, we actually think those declines can and will happen much earlier than 2030,” said Husk Power CEO Manoj Sinha. We have a clear path to reaching $0.22/kWh by 2025 and to go sub-$0.20/kWh by 2030. When that happens, minigrids will be competitive with the national grid and become one of the main tools for electrification of emerging economies in Asia and Africa.”

Growing the market for minigrids beyond just electricity sales is another key to increasing scale and driving down costs. That new demand could come from powering agricultural irrigation, providing processing and cold storage, energizing small businesses or cottage industries, or serving emerging needs such as electric vehicles or clean cooking. Business models that bundle minigrid-supplied power alongside services that use that power, such as irrigation or refrigeration, would cut the upfront cost barriers for communities eager to adopt them.

Expanding the number and scale of on-the-ground minigrid developers will also be vital to absorb the capital from investors seeking to meet the pressing need for rural electrification. More than one senior development finance executive has stated privately that billions of dollars could be made available for minigrid development but there aren’t yet enough investment-worthy companies in the space to absorb the capital.

But for this scale-up to take place, we must move beyond the current ad hoc approach of providing grants and approving projects one site at a time. We need a new paradigm based on speed, scale and fiscal reality.

The existing power grid has been called the most complex machine ever built, but for too many people, that machine has never worked to meet their needs. Now that the technology exists in minigrids to provide clean power to those left unserved by the last century’s infrastructure, it’s imperative to take aggressive steps to scale and leave no one behind.

Editor’s note: Read a companion article by freelance contributor Olubunmi Olajide on how aggregating minigrids can improve their financing prospects. 

William Brent is chief marketing officer at Husk Power, a minigrid company in Asia and Africa, and an adviser to Power for All, a member of the Mini-Grids Partnership.