Mini-grid Policy Toolkit

Introduction

Africa has progressed in building its energy infrastructure. However, a large part of the population has no access to energy. The World Bank estimates, that some 550 million people in Africa live without access to electricity. Extension of national grids is only viable to a certain extend considereing geography and technology. Minigrids, isolated networks, have become a viable alternative to advancing national grids – thanks to recent technological developments. Thus, mini-grids can contribute significantly to meeting the growing energy needs. Yet, only very few such mini grids have been deployed in Africa so far. The EUEI-PDF, with Alliance for Rural Electrification (ARE) and REN 21published the Mini-grid Policy Toolkit to provide guidance on how African policy-makers can develop a sustainable mini-grid policy. Such policy should aim at fostering electricity access as well as economic activity based on secure and ideally clean electricity over the long-term

The EUEI-PDF, with Alliance for Rural Electrification (ARE) and REN 21published the Mini-grid Policy Toolkit to provide guidance on how African policy-makers can develop a sustainable mini-grid policy. Such policy should aim at fostering electricity access as well as economic activity based on secure and ideally clean electricity over the long-term.

Problem

The electrification of rural and remote areas is a key component for their economic development. The supply with electric energy is crucial for agricultural production as machines used in production as well as in processing (electric dryers) are electric-driven. The conventional way to make electric energy accessible for underdeveloped regions is to extend existing grids. As many state budgets for electrification are small and extending grids is very expensive, this method has got some limitations.

Solution

File:Solar Panel2.jpg

A solar panel, necessary component of a pico-PV-System, © GIZ

One alternative is to construct mini-grids in areas outside the reach of central grids. These mini–grids generate electricity on a small scale, usually 10 KW to 10 MW. That is enough to supply a certain amount of consumers with electric energy independently from the national electricity grids. Another way is to build stand-alone systems operating with solar energy on small scale. These tools are called Pico-PV Systems and work with usually one or two solar panels feeding some electric devices. Important for the successful implementation of these mini-grids are the right policies. Examples for significant improvements in electric supply triggered by the building of mini-grids are known from Senegal, Mali, Tanzania and Kenya.

Mini-grid technologies have shown a sufficient track record. Operated with renewable energy technologies mini-grids can provide electricity at a lower cost than fossil fuel-based power generation in many cases. The International Energy Agency (IEA) anticipates that more than 50% of the rural population currently without energy access are best supplied with electricity via mini-grids.

Good Policy

The correct policy for mini-grids depends upon their operation model. There are mainly four different models, i.e. operation by utilities, private companies, community-based organizations or a combination of these. Choosing from these models depends again upon national, social and political circumstances and on the dimensions of the mini–grid. As nowadays the public budgets are shrinking, governments try to establish private funding of mini–grid –systems. Major barriers for the usage of mini – grid – systems depend upon socio-economic, political and financial issues. Through designing suitable tariff structures as well as the right subsidy-systems, policy makers can support the successful covering of operation, management and maintenance costs. Furthermore, trough the promotion of a proper framework, politicians can help projects to find private investors who will give them the capital they need to start their business.

Mini-grid Policy Toolkit

The correct policy for mini-grids depends upon their operation model. There are mainly four different operator models, i.e. operation by - utilities, - private companies, - community-based organizations - or a combination of these. Choosing from these models depends again upon national, social and political circumstances and on the dimension and structureof the mini–grids. As nowadays the public budgets are shrinking, governments try to establish private funding of mini–grid –systems. Major barriers for the usage of mini – grid – systems depend upon socio-economic, political and financial issues. Through designing suitable tariff structures as well as the right subsidy-systems, policy makers can support the successful covering of operation, management and maintenance costs. Furthermore, through the promotion of a proper framework, politicians can help projects to find private investors who will give them the capital they need to start their business. Economic Aspects / Mini-grid Economics The costs related with mini-grid revenues can be divided into investment costs, costs for operation, management and maintenance, - investment costs: i.e. purchasing the generation and distribution assets, as well as investment in project development project implementation and project financing (incl. interest). Methods of financing include electricity revenues, as well as subsidies (where necessary and appropriate). Revenues thus depend on: - electricity demand, - affordability of connections, - tariffs for households,businesses and public institutions. This makes is more challenging to collect sufficient revenue in rural areas than in urban areas (lower demand and lower ability to pay). Often, the margins of return of mini-grid systems are rather low. Therefore, it can be challenging to even cover the initial investment. These factors lead to the perception by private investors that mini-girds are high-risk and low-return investments. However, private capital is crucial against the background of limited public funds. Policy and regulation for Mini-grids To minimise the concomic risks of mini-girds policy makers can step in, by establishing a suitable policy and regulatory framework, including - appropriate tariff structures that reflect the mini-grid operators’ cost structure, - adequate financial support, - well-designed process for obtaining and holding permits, licences and concessions - well-designed subsidy schemes

In the short and medium run, mini-grid-systems cannot only be financed through private investors, but they need public subsidies as well. The quality of their design decides whether rural electrification projects will be successful or not. It is not an easy task to find the correct way of subsidizing mini-grids or to manage the public investment or to attract private co-financiers for long term and efficient operation of mini-grid-systems. The mini-grid policy toolkit advises public personnel and offers them information with which they can make good decisions.

Mini-grids and Agriculture

Mini-grids can represent a very effective alternative to fossil fuels when using energy for the production of edibles. Lacking access to energy services can slow down the adoption of modern production techniques which ends up in lagging food production and small economic growth. The tight linkage between fossil fuel and the production of food results in a linkage between the fuel price and the price of food. Therefore, the pricing of food becomes somewhat unpredictable. Camco Advisory Services in Cooperation with the Powering Agriculture Initative installed pilot mini-grid projects in some 50 communities in Benin Tanzania. These pilot projects, rolled out in the next 3 years, are based on biomass-exploitation and supply mutliple households with energy, independently from fossil fuels.

In the short and medium run, mini-grid-systems cannot only be financed through private investors, but they need public subsidies as well. The quality of subsidy schemes decides whether rural electrification projects will be successful or not. It is not an easy task to find the correct way of subsidizing mini-grids, nor to manage the public investment or to attract private co-financiers for long term and efficient operation of mini-grid-systems. The mini-grid policy toolkit advises public personnel and offers them information with which they can make good decisions. To design mini-grid policies and regulations some major decisions have to be taken, e.g. - whether to include mini-grids in rural electrification at all, - which general approach to adopt (centralised vs. decentralised), - how to finance it up front (government vs. private), - how to set tariffs (cross-subsidised vs. cost-covering tariffs).

Mini Grids and Agriculture

Mini-grids can represent a very effective alternative to fossil fuels when using energy for the production of edibles. Lacking access to energy services can slow down the adoption of modern production techniques which ends up in lagging food production and small economic growth. The tight linkage between fossil fuel and the production of food results in a linkage between the fuel price and the price of food. Therefore, the pricing of food becomes somewhat unpredictable. Camco Advisory Services in Cooperation with the Powering Agriculture Initative installed pilot mini-grid projects in some 50 communities in Benin Tanzania. These pilot projects, rolled out in the next 3 years, are based on biomass-exploitation

Further Information

• Grid portal on energypedia
• Camco Advisory Services: http://www.camcocleanenergy.com/case-studies/powering-agriculture-tanzanian-bio-mass-mini-grid-project-case-study
• Winner Project from Camco Advisory Services on poweringag.org: http://poweringag.org/2013-winners/camco

Reference

• Mini-grid Policy Toolkit