United Nations has called on
businesses, governments, and
civil society to achieve Sustainable
Energy for All by 2030
Interview with Wim Jonker Klunne, Lead Coordinator of EEP Africa
The Energy and Environment Partnership (EEP) supports early stage grant and catalytic financing for clean energy projects and business models, including for mini-grids. Can you tell us about the mini-grid projects EEP has funded so far and provide some highlights from the portfolio?
EEP Africa provides early stage and catalytic financing and other forms of support to a diversified portfolio of clean energy projects, with a particular focus on reaching poor and underserved groups. Projects are selected through competitive calls for proposals that look for strong concept innovation, development impact and sustainable business models. In addition to funding, project developers receive capacity building training and business development support. They also have the opportunity to participate in EEP knowledge exchange and investor forums.
Since our inception in 2010 we have supported over 200 innovative projects in southern and east Africa. Out of these, 43 projects feature mini grids in one way or another, ranging from feasibility studies to pilot, demonstration and scale up projects. Most of our mini grid projects have been in eastern Africa, with an emphasis on Tanzania with 17 projects.
EEP recently launched a report on ‘“Opportunities and Challenges in the Mini-Grid Sector in Africa’’. Can you discuss some of the report’s topline messages?
The main message from our report is that the sector has been able to advance substantially in recent years, but despite improved economics, mini-grids still struggle to receive the financial and regulatory support needed to scale.
We used the findings of the report to call on governments to include mini-grids as part of national electrification plans, establish clear permitting and licensing processes to reduce costs for mini-grids developers, and embrace public and donor capital such as results-based financing and low-interest loan facilities to mobilize capital and spur mini-grid development.
The report talks about a majority of funded projects employing business models targeting customers with productive use of energy (PUE) to increase demand and to establish a stable base of revenue. Can you talk about the business models and some of the salient features you may have seen for PUE?
In our portfolio we have seen a wide spread of business models applied. The most successful businesses have heavily embarked on technical solutions for payment of energy services with smart metering and mobile payments, often combined with substantial IT infrastructures. However, we also found that it is extremely difficult, if not impossible, to run a profitable business by supplying households only. Their low energy demand does make cost recovery very difficult and investment in the required infrastructure difficult. Fluctuating household income does impact on the ability to pay and hence on the financial viability of the mini grid.
However, if customers are increasing their energy demand by starting productive uses, a stronger case can be made for mini grids. The demand for energy will increase and at the same time it will also increase ability to pay due to earnings from the productive uses.
Ideally you would look for a combination of larg(er) industrial scale offtakes that can serve as an anchor client, complemented by a large number of productive use clients that might use smaller amounts of energy, but can really promote local economic development.
You talk about the ABC strategy as one of the options for a financial sustainable mini-grid? Can you tell us what that is and expand on that?
The most successful business model in use by mini-grid project developers is the ABC strategy: first Anchor client, then Business clients, and then domestic Consumers.
The anchor client is often an agro-processing facility and should have a predictable electricity load profile and, ideally, be willing to adjust its demand profile to match supply. Such a client significantly reduces distribution grid costs.
The secondary business clients should also have revenue sources that provide sustainable demand and encourage local economic growth. The energy developer may choose to foster business opportunities by also selling energy efficient appliances and machines to local entrepreneurs.
Domestic consumers are important for spreading rural electrification but are generally not able to significantly contribute to profitability. Project viability should not be dependent on domestic customers except in densely populated locations.
Since each project, location, and community can vary significantly, what are some best practices for strengthening relationships with locals and ensuring their needs remain the biggest drivers of each project? Are there any good practices that you may have seen emerging from the projects?
Regarding community engagement our findings are that you cannot start too early with that. A key success factor is to recruit and train a dedicated local team for mini-grid operations and maintenance, including sales and marketing. Investments in training are needed to fill knowledge gaps in technical issues, cost and payment structures, and ethical behaviour.
We also found that job opportunities have more development impact when they are targeted at women and youth.
Based on EEP’s work so far, what have you seen to be the biggest challenges in terms of promoting and implementing mini-grid projects?
The availability of infrastructure financing and conducive regulatory environments are the main ‘make-or-break’ contributors to mini-grid bankability and certainly need to be looked into. It has proven to be difficult to get mini grids to operate sustainably if they have to rely on customer sales only. We therefore advocate for additional revenue streams for mini grid developers that monetise the social service they provide, reflecting the reality that most mini grids are normally compared with subsidized national grids, charging tariffs that are not cost reflective and certainly not sustainable for mini grid developers.