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05.01.2017, Steven Hunt 

Mini-Grids: Towards a Scalable Model

I offer this as a working draft to the sector. I would very much welcome any feedback or comment on it, and hope that it may in some way be useful to others in developing their own thinking on these issues. With thanks, and none of any blame for any mistakes or oversights, to those who have commented on earlier drafts including Simon Kenny, Clare Boland-Ross, Randall (ESRES), Andrew Tipping, Bozhil Kondev, Jeff Felten, Phil Outram and Vivian Vendeirinho.

Mini-Grids powered by renewable energy or hybrids are increasingly recognised as having important potential to provide least-cost electricity supply to unserved settlements which are not viable for main grid connection, but densely enough packed to give Mini-Grids an advantage over a series of household solar systems. While such delivery is possible technically and innovation is moving globally, the roll out to date in developing countries has been slow. A key reason for this is that mini-grids are often considered in policy and practice as “similar to the main grid”. What this has meant in practice is that a series of grid policy frameworks and preconceptions, planning and interface issues have to some extent overlapped with the emerging mini-grids sector — with the net result of deterring of investment and slowing roll-out.

While in some respects grid frameworks are appropriate, in other dimensions the mini-grids sector can be considered more similar to the household solar sector or informal diesel networks in its off-grid character. It is proposed in this paper that the mini-grids sector cannot afford to let 1000 flowers bloom and hope that a scalable model will emerge from the market. It proposes instead that a scalable model will inherently be a public-private model, and so a more active engagement is needed in the definition of this model from both the public and the private sides. It goes further and proposes a framework for such a model, drawing on evidence for what has been working to date in a range of countries and companies, and proposes where the balance of evidence lies in terms of the approach to a range of the issues and uncertainties which have undermined progress to date.

 

Defining a Mini-Grid

The members of the SE4ALL Clean Energy Mini-Grids High Impact Opportunity have defined mini-grids as village, town or district scale electrical distribution networks either unconnected to, or able to operate autonomously from, the main electrical grid. This is recognised as being an inclusive definition which simply differentiates mini-grids from stand-alone household systems and main grid-extension approaches. Such a mini-grid must by definition serve multiple customers with some ground-based infrastructure linking these, unlike a household solar system. Such a mini-grid offers a service either physically isolated from the grid, or able to operate in the absence of grid power — thereby clearly being an operational entity in its own right, not only a branch of the grid.

Although the mini-grids HIO does not set any limits on the sizes of mini-grids beyond the definition above, experience indicates that there is value in a rough typology of mini-grids according to scale and other associated characteristics, given the extent of these differences, and also the policy and regulatory implications of the different types:

Green Mini-Grids Africa Business Case, 2014 — adapted from Africa Solar Designs, 2014.

The difference between Type 2 and Type 3 mini-grids is not clear cut, particularly the indicative figure of 100kW, and the differentiation may be tailored per country. The reason for distinguishing two types of isolated mini-grid however is to recognise that there is likely to be some threshold beneath which mini-grids operators and consumers should largely be left alone, for operational efficiency and low cost delivery on a “willing buyer, willing seller” basis — as we see in the household solar sector. But it also recognises that there is likely to be a threshold above which more structure and certainty is necessary for investors, and more explicit protections needed for consumers and the use of public money in any subsidy or incentive.

How to think about regulating Mini-Grids

The three typologies set out above provide an important starting point for the proposal made here, which builds on others before it,[1] about regulatory approaches to mini-grids:

Type 1 should be regulated in the same way to grid power distribution and Independent/Small Power Producer (IPP/SPP) projects

Type 3 Microgrids should generally have lighter regulation, more akin to household solar, allowing for a range of innovations bringing down price and reaching customers with essential energy services.

Type 2, as the intermediate scale, would often be a hybrid of these.

 

For a Type 1 mini-grid[2] it is highly likely that all relevant grid standards, service levels and regulations would have to be met. The service levels which customers should be receiving on such a grid should be as good as, or even better than, the main grid — since there is the possibility of autonomous generation if the grid goes down. Although all efforts should be made to ensure costs are kept down with low cost electrification approaches — grid norms (voltage, frequency, safety standards etc) should be implemented. In this respect there is no reason why the delivery cost will be any less than a grid extension project, and a similar level of subsidy on connection costs likely to be required if a regulated tariff is to be maintained.

By contrast Type 3 mini-grids[3] should be more lightly regulated in terms of service level and tariffs in particular. What is typically happening in these systems is that a power service quality at a lower Tier in the SE4ALL Multi-Tier Framework is being delivered,[4] reaching consumers with essential energy services in a place where the grid will not reach in the near future because of low population densities and/or distance from the grid. Customers are often, but not always, charged on a Pay-as-you-Go for service (not by kWh) type basis, sometimes via mobile money, at prices below that of kerosene, phone charging or diesel generators, similar to that provided by household solar systems. Those firms who do want to innovate and deliver such services should be allowed to do so, and clear future grid planning can help guide them to the most useful areas. In the pursuit of affordable delivery costs to consumers such grids are often not, and should not be forced to be, main grid compatible — although some are and this is also welcome. However, it is relatively difficult to justify from a public interest perspective that such installations, especially if not established on a competitive and contractual basis, should receive protection or significant compensation if the grid arrives, and actually does offer consumers a better service at lower cost.

Type 2 Mini-Grids[5] can potentially have some of the characteristics of both, but there is more of a premium on future grid compatibility than Type 3. By definition a mini-grid of over 100kW, if it is not on an island, is serving a reasonable load cluster which over time may well be connected to the grid. In this context, regulation which anticipates the requirement for grid connection would make sense (i.e. grid compatible wiring and standards). For such mini-grids the payment of a subsidy can be seen as a public contribution to the mini-grid against the wires and poles — which on connection could revert to public/utility ownership depending on the exit/continuation approach taken.[6]

 

Planning and siting of mini-grids

There have long been calls for transparent and long term electrification plans to enable mini-grid planning, which would be extremely helpful to developers and communities alike. However, in practice these are often either very difficult to provide politically and/or inaccurate since electrification rates and budgets are not necessarily linear. A scalable model for mini-grid scale up cannot therefore entirely rely on such plans, and in any case orientation towards planning and siting should likely also vary with mini-grid type:

Type 1 Mini-Grids should have similar planning requirements to an IPP/SPP project. This is because Mini-Grids are likely to be sited in close proximity to the generating resources such as hydropower or biomass, and as such their site characteristics and ownership of the resource may be specific. Such developers will typically be considering the IPP project as the bigger part of their revenues, and since the households are likely in any case to be paying the grid tariff (see tariffs), there is a relatively reduced consumer protection consideration. In this context “sole-source” proposals are not necessarily problematic, if subsidy, service levels and pricing to consumers is grid standard.

Type 2 Mini-Grids require more consideration in planning since they will establish what could be monopolies at rates and service levels which could diverge from grid standard. Given the scale of the investment required and capital to be raised, developers and lenders will need a reasonable degree of certainty of revenues. This points to a more structured public-private approach for this type of mini-grid, where a survey is conducted identifying such towns and villages, bundling them into lots and then running an auction for 10 year concessions to supply to those places.[7] This would likely have subsidy integrated, however the auction process should reveal the best use of that subsidy, and the lowest tariff feasible for the community (or the tariff top-up required — similar to GetFIT — to bring the tariff down to grid levels if that is the policy position).

Type 3 mini-grids should generally be less regulated, and so also would expect less protection from grid planning. Realistic and transparent grid-electrification planning will definitely help guide their efforts to the places which make most sense. Investors in such firms are less interested in the site by site economics, but more in the overall revenues and growth in connections. In this respect payback times may be shorter and with more flexibility to move operating assets if needed. If concession/auction systems at the 100kW-1MW level work well and uncertainty still holds back Type 3, there could be an argument for subsequent rounds clustering Type 3 villages, but in the short run leaving delivery of such systems open to the market appears the most pragmatic approach. However, this does not mean Type 3 mini-grids should be entirely unregulated, and a proportionate interpretation of relevant regulations (eg on safety) may well be appropriate.[8]

 

Licensing

All mini-grid operators need to be able to demonstrate to their investors a clear license to operate, although the terms of these will likely vary between the three types:

For Type 1 Mini-Grids, firms need a license to sell power to the grid, as per an IPP, as well as a license to distribute electricity to consumers. These should be relatively straightforward and aligned with national policy and regulatory norms for such roles. In countries without the potential to offer a license to distribute, the mini-grids sector in Type 1 and Type 2 is very unlikely to emerge at all, while Type 3 will be heavily constrained.

For Type 2 Mini-Grids, the terms of the license should be linked to the Auction/Concession. This would have a clear (10 year is proposed) timeframe allowing the developer to raise financing and project revenues over a known period — with clear compensation or other clauses in the event this period is not honoured. Licenses would involve the meeting of some grid standards (eg on wiring and safety) however service level may be a potential variable, or tariff — depending on the availability of subsidy/incentive.

For Type 3 Mini-Grids, the license should generally be issued at the level of the developer, not site by site. Although developers should register sites as delivered, they should have a license to operate at the level of the firm, to do as many sites as they are able. The key point here is that although such developers have a substantial degree of regulatory freedom to operate, they should be clearly licensed at the firm level, and not in a regulatory vacuum as often currently the case, undermining investment. Environmental approvals etc should be provided also at the firm level for the mini-grid installation type, not required for each site (provided that the systems are standardised and considered low environmental risk).

 

Tariffs and subsidy/incentive approach

The overarching principle of relevance to tariffs is that to be sustainable, they need to recognise the full costs of delivery, and either reflect these costs directly in the tariff over an agreed period, or have a portion of those costs met through other means i.e. subsidies or incentives. There are important principles around equity of access to energy, meanwhile there are countervailing considerations in terms of the practical costs of delivery to remote and dispersed populations. Generally subsidies should act in as progressive a manner as possible in terms of benefiting poorer consumers, while also being efficient in terms of achieving public good objectives and leveraging private investment. As far as possible subsidies should have the character of “incentives”, i.e. to leverage private sector action and the more results at agreed quality levels are achieved, the more incentives are claimable.

Type 1 Mini-Grids should generally be expected to charge grid tariffs, which will imply a similar subsidy as other rural electrification. The fact that there is a grid link makes it very difficult to argue that a higher cost-reflective tariff should be applied. Further to do so would create a monopoly situation outside of any concession or auction process (unless the IPP/SPP site itself is tendered). On the assumption that delivery costs would otherwise imply a high tariff, it would be expected that the general rural electrification subsidy or incentive would be applied to bring the tariff down to the grid level. If the grid tariff itself is substantially below delivery cost and not topped up from wider taxation, cross-subsidy or other sources, then this is in any case an unsustainable situation likely to undermine energy sector development more widely.

Type 2 Mini-Grids, isolated from the grid, would have the tariff — and any necessary viability gap subsidy/incentive — set in the concession/auction process. Given the circumstances, it would not be unexpected for a cost-reflective tariff to be higher than the main grid. If a policy decision is made that the tariff is to be the grid tariff, then the competition would be to identify the lowest level of subsidy needed to close the viability gap. If a higher tariff is allowed, then it can be expected that any available subsidy will stretch to more villages. Either way, an auction can reassure authorities that the lowest achievable cost is being charged (and/or the best use of subsidy made), while a 10 year concession (potentially coupled with low cost loan financing and guarantees [9]) keeps loan costs and risk premiums down (which also reflects through into tariffs). Where public services such as schools and clinics are part of the mini-grid, there can be a strong sustainability advantage to payments (e.g. a “unitary charge”) being made for services throughout the lifetime of the scheme as an “anchor customer”, rather than up front. This helps incentivise ongoing delivery and maintenance of the service over time.

Type 3 Mini-Grids may be charging on a payment-for-service basis, and in this case should not be held to any particular kWh tariff. As noted above, the basis for sale should be “willing buyer, willing seller” i.e. set on a market basis, with developers making a value proposition which has to beat existing kerosene, diesel generators and household solar etc. This does not mean that no subsidy or incentive is appropriate, since typically the costs of reaching these smaller villages is even higher per household than for Type 2 mini-grids, given volumes are smaller and distances often larger. Typically incentives should be provided at the level of the firm, in terms of the numbers of households reached with a given service level, ideally considering the ongoing provision of the service over time, not only up-front. Even if the system is not future grid compatible, there may still be an argument for subsidy effectively reflecting the opportunity cost of the years of electrification offered to the consumers in advance of grid arrival.[10]

 

Grid Interconnection

The approach to Grid interconnection is very specific to each type of mini-grid:

For Type 1 Mini-Grids the grid is already essentially connected to the system, so there should be no issues around grid arrival. The only exception to this could be if a utility extended an additional line to the community and tried to bypass the mini-utility. This eventuality should be covered and avoided in the rural electrification distribution license of the firm.

For Type 2 Mini-Grids the conditions around grid interconnection should be very clearly stated in the terms of the concession license. Since the duration of that concession is central to the ability of the developer to finance the project and price the power etc, and the public through the concession contract and any subsidy has a stake in the project, the terms around this should be very clear. Any change (e.g .the grid arriving earlier than expected, or the mini-grid operator not providing the agreed service level) should trigger compensation terms. While there are a number of “possible” outcomes which can be considered “when the big grid connects to the little grid”[11], the outcome should be clear and agreed in advance. Since the initial subsidy can be considered to cover the wires and poles, there should not be a complaint over these assets being turned over to the utility if needed, while generation assets can be relocated and then any remaining compensation paid at agreed rates based on years of interrupted operation.

For Type 3 Mini-Grids which have not been developed under a concession, the argument for protection from grid arrival is less clear. Since no licenses specific to a site are held and on the assumption that when the grid arrives it will be charging consumers a much lower price per kWh if customers can afford to connect, then there is a limited moral case for holding off the grid or compensating the firm. This is particularly true if a subsidy or incentive to the firm has helped pay for some years of electrification, the infrastructure is not grid compatible and there was no competition for service to that village. In general, as the regulatory and licensing approach for Type 3 strengthens (e.g. introducing auctions), so should the protections to the developer — and vice versa.

 

Customer Protections

It is important to bear in mind that consumer protections may not always be implemented in a given country, and that in fact the grid as it stands in many developing countries does not meet “grid standards”. However, it is important to consider the implications of a range of regulatory approaches to consumer protections, and ensure that these are just as, or more, robust as those prevailing today:

For Type 1 mini-grids customer protections should be as for main grid consumers and set out in distribution licenses, including recourse to a complaints and dispute resolution service etc. Customers should not to a large extent be able to tell the difference between the supplier being a mini-grid firm or not, although firms should be aspiring to increasingly excellent customer service. Given the ability to operate the mini-grid autonomously of the main grid if that goes down, the mini-grid should seek to offer a service better than a main grid if that is unreliable.

For Type 2 mini-grids customer protections should be incorporated into the concession licenses. These should include all relevant terms around the service levels expected etc, with any penalties, compensation and dispute resolution mechanisms etc included.

For Type 3 mini-grids customer protections could be included in codes of practice agreed by firms in their general license, and a complaints mechanism to the regulator. In a willing-buyer, willing-seller scenario there is more flexibility in the range of service levels offered, since there is also limited protection for the provider of services they should be considered alongside other potential providers of household solar systems, kerosene and diesel generators. That said, it is important to retain some kind of recourse for consumers, and for good practices to be pursued by Type 3 operators, particularly when receiving public incentives.

 

Conclusion

Although remaining flexible to interpretation in many aspects of the details — the core of the proposal here is that the approach to mini-grids needs to be split between three broad types of Mini-Grid, each meeting a different market need and having different characteristics. If such an approach is followed in a public-private partnership framework then this could provide clarity on some of the key barriers and uncertainties which have stalled progress to date for developers and investors. This clarity could lay the foundations for a more rapid scale-up of the contribution of mini-grids to rural electrification, efficient use of rural electrification funds in a context where it is clearer what is being “bought”, and provide appropriate protection to both investors as well as rural consumers.

The following table summarises the proposed framework which it is hoped could offer the basis for a Scalable Model for accelerated mini-grid electrification, alongside and complementary to grid expansion and household solar system delivery.

 

Summary Framework Model Proposal for Mini-Grids Scale-up

[1] Notably From the Bottom Up: How Small Power Producers and Mini-Grids Can Deliver Electrification and Renewable Energy in Africa (Tenenbaum, Greacen, Siyambalapitiya, and Knuckles) and the EUEI PDF Mini-Grids Policy Toolkit. This paper was also strongly informed by the series of discussions at the World Bank ESMAP-organised Mini-Grids Action Learning Event in Nairobi in May 2016.

[2] The 4MW Mwenga Hydro in Tanzania run by Rift Valley Energy would be an example here

[3] Devergy, SteamaCo, Meshpower and Mera Gau would be examples of Type 3 mini-grids

[4] World Bank/SE4ALL, 2015. Beyond Connections: Energy Access Redefined

[5] Inensus-Jumeme or the Titimane Mozambique project by JFS-EDM-EDP-UNEP would be an example of a Type 2 Mini-Grid

[6] This proposal draws on the Inensus Micropower Economy framework

[7] GIZ in Nigeria have been running a process similar to this which should be watched with interest. The Scaling Solar Auction in Zambia also provides important lessons.

[8] It has been noted in feedback on drafts of this paper that in India for example practically all of the mini-grids opportunities are expected to be in the Type 3 <100kW range. It is unlikely that a completely unregulated approach to mini-grids will be the right approach for consumers, or developers and investors, if the sector is to scale. In cases such as this the threshold between Type 1 and 2 may be substantially below 100kW.

[9] For example as provided by IFC in Scaling-Solar’s auction package on grid.

[10] See forthcoming Power for All paper on the Opportunity Cost of lack of energy access

[11] Tenenbaum et al, 2015. From the Bottom Up : How Small Power Producers and Mini-Grids Can Deliver Electrification and Renewable Energy in Africa

 

Steven Hunt is Energy Innovation Advisor at DFID.

  

Source: https://medium.com/@stevenahunt/mini-grids-towards-a-scalable-model-7fc28eafa043#.kpcxr8c15

 

 

 

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