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Geo-referenced approach to identify communities that can afford PV mini-grids

Electrification programmes incur two types of costs: up-front costs and O&M costs. After an initial period, the latter are borne by the programme beneficiaries. It follows that, if the programme beneficiaries cannot afford these costs, programme objectives will not be achieved. Because universal access to electricity targets the poorest areas in the world, it is imperative that O&M costs be low.

In light of the above, the analysis breaks down cost estimates into two components: up-front costs and O&M costs. It is assumed that the former will be borne by a public entity, such as a national government, an aid agency, or a development bank, and that the latter will be borne by beneficiaries of the electrification programme. It is worth noting that, most often, financial appraisals focus on up-front costs, because discount rates minimize the weight of O&M costs. They do so even if ignoring O&M costs likely results in a system that is underutilized at best. A large number of projects financed by independent power producers are in this situation.

Drawing on field data and conservative assumptions about the operating costs of a PV system, it is estimated that the O&M costs associated with PV minigrids represent one-tenth of the total costs of the system. For diesel-based minigrids, the estimate is that US$0.01 per kWh covers the initial capital cost, accounting for the commercial price and the average lifetime of the 4–15 kw diesel generators. O&M costs account for the rest. This cost component accounts for the diesel consumption associated with the production phase, including the price increase associated with transportation from the distribution hub to the consumption location. In the case of diesel-powered systems, O&M costs are much larger, relative to the cost of PV-based systems.

To assess affordability, the study estimates two parameters: the running costs of electricity and the level of electricity expenditure that households can afford. Estimates of the latter are calculated under the assumption that, provided that the same services are obtained and the overall available expenditure is not exceeded, the choice of fuel is inconsequential to households. This assumption ignores the substitution between energy and other goods purchased by households.

The study uses the phrase “low-hanging fruit” to describe communities that (a) are in areas in which PV constitutes a no-regret investment option, (b) are wealthier than the average in the country, and (c) include unelectrified populations, that is, potential new customers, representing a larger share of the total than the average in the country. Identifying such communities is useful because it provides information on the socioeconomic profiles of potential customers, an information that can be used to inform the design of an electrification project, with a view to raising its effectiveness.

At present, most national investment decisions on electrification are shortsighted. They often put too much weight on up-front costs, even if the magnitude of these costs may eventually render the investment futile. The findings reported here are directly relevant to governments in low-income countries as well as to development agencies and banks. Specifically, the methodology used, which is extensively documented in the methods section, could be used to inform the design of future electrification programmes, especially those targeting rural areas with low purchasing power.

Investing in PV minigrids in communities where the technology represents a no-regrets option could serve two purposes. First, these communities would be provided with affordable and sustainable electricity. Second, such an investment could help turn the tide on the investment-decision paradigms sketched above. Ultimately, the findings reported in this article suggest that investments in electrification led both by the public sector and by independent power producers will generate suboptimal results if they are framed around decision criteria that neglect O&M costs as well as health and environmental concerns. As more granular consumption data become available, this methodology can be used to study the issue of affordability at higher spatial resolutions.

 

Excerpt of: Mapping of affordability levels for photovoltaic-based electricity generation in the solar belt of sub-Saharan Africa, East Asia and South Asia (Scientific reports, 2021).

 

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