Mini-grid Operation Models

Overview

Mini-grids in different settings are owned and managed by different actors for covering the upfront cost as well as the on-going operation and maintenance cost of the system. In general, the mini-grid operation models can be distinguished into four types: utility model, private model, community model and public-private model. This article briefly explains each model.

Utility Model

Under the model, a large or medium-sized state-owned or private utility company is responsible for the installation and operation of the mini-grids. The involved utility operates the mini-grid in the same way as the main grid. The private utilities companies are mostly subsidized by the government and it is the most common model for rural electrification in developing countries.

Example: Tsumkwe mini-grid in Namibia, a PV-hybrid mini-grid with a capacity of 202 kW and supplies power to 3000 residents as well as 35 commercial and public-service customers.

Private Model

Under this model, a private company is responsible for installation, operation and maintenance of the mini-grids. They generate electricity and sell it directly to the connected customers. These private companies are mostly small or medium in size and unlike the utility model, do not operate the main grid.

The private companies generate their investment capital from various sources like grants, commercial or concessional loans and equity to run the mini-grids. 

Example: Powerhive in Kisii and Nyamira, Kenya operates four PV mini-grids and supply electricity to over 1500 customers in Kenya. 

Community Model

In this model, the community owns as well as operates the mini-grid, however the design as well as installation is often done by a third party, contracted by the community or on its behalf by a non-governmental organization (NGO) or development agency.  The investment capital generally comes from grants, supplemented by a cash or in-kind contribution from the community.  

Example: Four hydropower mini-grids in Kenya at Thima,Kathamba, Tungu Kabiri and Kipin

Public-private Model

This approach combines different aspects of the models described above, in order to maximise effectiveness and efficiency. Hybrid business models are very diverse and may involve different entities owning and operating different parts of the system.

Example: In Senegal, the government owns the mini-grid and a private company is awarded a 15-year concession to operate and maintain it.  this approach has been followed by 18 mini-grids powered by solar PV and diesel generators in Senegal. These mini-grids supply electricity to over 38,000 households,  88 schools and 88 clinics as well as business and public buildings. 

Comparison Between Different Models

Each model have their own advantages and disadvantages:

Model	Advantages	Disadvantages
Community	Improves operation and maintenance by increasing sense of ownership in the community the system is most likely to fit in with the community's requirement this model empowers the local people Reduces bureaucratic levels hence is more efficient.	Communities may lack the technical and business skills required for running mini-grids which might lead to higher costs from outsourcing these services. The governance of the mini-grids need to be clear and well managed. There can be delay in community decision making due to conflicting social interests
Private	There is great efficiency. Companies may have the capacity to offer better operation and management services. companies have an incentive to promote financial sustainability of the mini-grids  when they are driven by market dynamics rather than government subsidies May be able to deal better with political interference.	In most cases there is lack of support for covering upfront financial cost There is often a difficulty in finding an experienced company to run the scheme leaving smaller companies with less capacity to run them.
Utility	Utilities have experience in electricity generation, distribution as well as carrying out administrative processes. There is a better legal system. Their capacity gives them the advantage of having better access to spare parts and maintenance.	They are usually market driven so they may not prioritize decentralized systems in rural areas. Quite often they are inefficient and bankrupt. Political agenda governs them.
Hybrid	This combines the advantages of all the above systems such as the technical capacity of a utility with the financial capability of a private entity.	The difference in management for each entity can increase the transaction costs for the scheme. Strong framework is required to balance the interest of each involved parties and establish the interface between them.

Case Study (Mini-grids in India)

The mini-grid situation in India has been rapidly evolving, which might drive India much faster towards the path of universal energy access, thus by deploying different business models around the country, which will be discussed through the following.

Mini-grid Ownership and Operational Models in India

The ownership and operational models of the mini-grids around Inida vary in form and application, as they could either be community-based models or private mini-grids, through which the companies play different roles in the different stages of the mini-grid projects.

Community-based mini-grid models in India, such as: Village Entry Committees (VEC) or Rural Electricity Cooperatives (REC) are found to be most publicly supported, plus the fact that community-based mini-grids are found to be highly effective when local communities participate as active stakeholders.

On the other hand, when it comes for private projects, there exist different business models, which are decided by the steps of the project in which the original business decides to be invovled. The two main business models in this case are: Build-Own-Operate models and Build-Operate-Transfer models; the eariler are the most common as they allow for control along the value chain, in addition to that, the difficulty of finding off-takers to own or operate the plant, while the later is the least common model for the exact same reason.

Models of Mitigating Financial Challenges of the Mini-grids

One of the most challenging issues for mini-grid operators is revenue collection, which pushed businesses to devote resources and explore new ways to secure stable revenue streams.

One sucessful financial model for mini-frid operators is Business-to-Business (B2B), and Business-to-Customer (B2C), as mini-grids sell to both businesses and customers, while commercial customers such as: telecom towers, ATMs, and petrol pumps oftenly buy power on contract basis.

Another method is where companies collect payments from custmers with field collection agents, consequently, the collected payment might get as high as 50% of the mini-grid company's costs, while other companies might mitigate the payment collection differently; for one example, they use the group-payment-collection model, through which the filed agent joins a group meeting where everyone pays all together, in addition to the mobile-payment systems and pay-as-you-go systems.

Further Mini-grid Challenges

Other than the revenue-collection challenge, mini-grids have to face a rough competition with the rising of micro-grids, which are based on vRE technologies, on different fronts, such as: regulatory frameworks, tariffs and grid-connection.

The vRE-based micro-grids with biomass and other local resources expand the market options for investors and regulators, shifting the focus away from the mini-grids. Adding to that, the ability of such renwable sources to be deployed hybridly with diesel, plus the advantages of higher storage capacity and lower equipment cost, they are becoming a preferable choice in many markets .

Consequently, that forces energy and IT sectors to invest more innovative effort for improving the market potential for mini-grid models, yet that cannot be properly achived without governments creating and providing the suitable regulatory framework for them to do so.

As a result of this ongoing market competition, new players come to join the scene in the form of new business models, which also involve private sectors and small power producers . These new players or new business models have the ability replace or partly substitute the previously mentioned diesel plants with solar PV, thus helping to reduce the amount of wasted load, backing-up cost and noticably reducing emissions, hence providing a new whole level of advantage to the mini-grids, therefore forcing the regulatory actors to accept such activities within the established framework of regulations . 

Further Information

• See all articles on Mini-grid
• Smart Village: Business models for mini-grids