Around 80% of people without power live in rural areas. In many cases grid extension is often highly costly and unlikely to happen – even in the medium- to long-term. In these scenarios, mini-grids could provide an ideal intermediary solution, especially for small towns or large villages where enough electricity can be generated to power household use, as well as local businesses.

Mini grids provide centralised electricity generation at local level using the village's distribution network. When used in conjunction with renewable or hybrid systems, they can increase access to electricity, without undermining environmental factors.

Challenges facing mini grids

But implementing sustainable hybrid mini-grids involves complex technical, financial and organisational issues, particularly in developing nations. Such projects need to address the end users' actual needs; build capacity; incorporate staff training; take into account tariffs and subsidies; and even put in place institutional frameworks.

One major potential barrier revolves around the appeal of the ‘100% diesel’ option. Although installed all over the world, diesel-fuelled mini-grids are likely to be more expensive on a lifetime basis than hybrid ones, and they are also less autonomous – as fuel availability cannot be assured. A well maintained and managed system can run for over 25 years, and becomes a much more attractive solution than traditional diesel gensets.

To overcome the lure of the short-term, and ensure the sustainability of the system, the provision of electricity must be guaranteed over the life time of the system. Operation, Maintenance and Management (OM&M) must therefore be ensured, and potential bottlenecks (such as financial for example) overcome.

This is where the private sector comes into the equation. Companies need to play a much more visible role in investing in, implementing, and operating hybrid systems – if investment is ever to be scaled up. This means that issues of profitability, often taboo in the sector of rural electrification, need to be discussed.

Can mini grids be financially viable?

A recent study by the Alliance for Rural Electrification (which focuses on promoting and developing small scale renewable energy solutions for rural electrification in developing countries) suggests that two factors in particular are vital to ensure the participation of the private sector – appropriate tariff setting, and their combination with subsidies.

A sustainable rural electrification tariff must at least cover the system's running and replacement costs (break-even tariff), even though the opportunity for profit is key to attracting private operators (financially-viable tariffs). Tariffs must also maintain the balance between commercial viability, and consumers' ability and willingness to pay.

In order to respect and help these different conditions, subsidies can be useful. They can support the investment; the connection; the operation; and/or the output.

Investment subsidies are a good solution if they go along with a good tariff structure (covering OM&M), whereas Output Based Aid schemes, if adequately planned, are powerful instruments to leverage private investments (and also ensure OM&M). The theory is that subsidised investments and business development should lead to lower costs – through enhanced learning curves and economies of scale – to a point where subsidies become unnecessary. Hence, subsidies should always integrate a phasing-out process, and be self-eliminating.

Apart from this, other forms of support can (and should) also be offered to project developers so that they can attract private sector involvement, for example:

• Tax credits;
• Low import duties;
• Site surveys;
• Market studies;
• Capacity-building; and
• Favourable regulation.

A winning business model

The development of sustainable business models is essential to the success and scaling up of projects. Based on local social and economic conditions, and depending on the driver of the project, they usually fit into one of the following categories:

• Community;
• Private, or
• Utility.

It is also possible to combine two or more models.

The Community based model relies on a self-sustained social organisation, where a community organises itself to operate and maintain the system.

In such scenarios the community has to be involved as much as possible. Capacities are needed to support the constitution of a social structure supervising the implementation and a project's OM&M.

Tariffs have to be determined in advance (and integrate running and replacement costs), and in many cases will have a “flat-fees” structure with price categories adapted to different users.

The community based model has proven to be successful, and has additional positive impacts on the community itself in terms of self governance and ‘local buy-in’ to the electrification system. Of course, it is also very complex to set up, but can offer a viable alternative in cases where the private sector is absent or simply uninterested.

Another business approach is based on a private operator whose participation is only realistic if a project is profitable. A private sector model can take different forms depending on the ownership of the system and the mini grid, the type of contracts and the type of subsidies.

The principal advantage is that it usually provides electricity more efficiently than any other model. The often large capacities of private companies can effectively match the needs and markets of developing countries, thus making it the business approach with the most potential.

However, to be developed extensively in rural areas this model requires significant training, both on technical and business issues.

The utility-based model is another option which has been widely used around the world. Utilities generally have more experience, financial resources and the technical capabilities to carry out rural electrification projects. They can build economies of scale, and use their central position to take advantage of financing options.

But if this model is to be successful, it also has to follow a business-oriented approach. Because of their capacities and experience, utilities are expected to play a major role throughout the lifetime of the project. Partnering with the private sector and community-based organisations also allows them to avoid the barriers linked with their centralised management structure and size.

A hybrid model tries to combine different approaches – benefiting from the advantages of each of the models while minimising the shortcomings. Such models can be quite diverse, tending to adopt the different types of OM&M contracts discussed earlier, while combining different ownership structures. For example, a utility or a private company may implement and own a renewable energy mini grid power system; a community based organisation may manage it on a daily basis; while a private company provides the technical back up and management advice.

In the end, experience shows that there are success factors common to all approaches. But at every point in the project chain certain things are necessary, not least capacity building, and training on technical, business, financing, and institutional aspects of project and programme development. And this must also include every stakeholder.

The undeniable conclusion is that renewable energy hybrid mini grid systems are a central part of the solution in providing electricity to the world's poor. They are a win-win solution, benefiting communities, public bodies, local economic activities, not to mention the companies that take the plunge and invest in different areas.

About:

Simon Rolland is Secretary General of the Alliance for Rural Electrification.

Renewable Energy Focus, May/June 2011.