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Mini-Grids Feature: The link between mini-grids and productive growth

Stephen Nash is an energy economist and transaction advisor and is the founder of Kuungana Advisory. The following article represents his personal views and not those of the United Nations Foundation.  

 

The economic viability of mini-grid projects is often very sensitive to the demand assumptions made when developing a project. It is largely for this reason that securing an anchor load can be so critical to many mini-grid business cases. Normally we think about those anchor loads as existing sources of demand; a telecoms mast, for example. But in many of the countries where mini-grid projects are being considered there is significant latent demand, i.e. demand that would quickly crystallise if only a reliable and affordable energy access solution was at hand.

This is a classic chicken/egg problem: the demand is not visible without the energy access solution, and the mini-grid project is not viable without the demand being visible. This article briefly explores whether there are potential solutions to this challenge, for example through better coordination from public sector actors, and whether the economics for such coordination stack up.

The economics: is there a business case for coordination?

We can explore the economics for a hypothetical settlement with no electricity access and to better understand the interaction of energy access economics with productive growth opportunities in that settlement. Our imaginary settlement is 20km from the main grid and has 2,000 inhabitants.

The analysis explores two scenarios: one where only the domestic load requirement is considered; the other where 200 kW of daytime commercial load is added. This commercial load might not be ‘visible’ without a good understanding of the economic opportunities in our settlement.

It is assumed in the analysis below that up-front investment in a mini-grid would include building a future-proof distribution infrastructure able to accommodate Tier 5 energy access requirements under the SEforALL Multi-Tier Tracking Framework (MTF). This cost is then absorbed into the regulated asset base of the utility once the main grid arrives. Clearly, this would not be the case for all types of mini-grid development.

The figure below presents the outputs of some of this analysis. It shows how annual household energy spend (bottom panel) and the unit cost of electricity (top panel) evolve as the average annual household energy consumption increases. As households ascend the energy ladder their annual spend on energy increases, but the unit cost of that energy decreases. The figure illustrates the benefits from economies of scale both when a mini-grid is established (compared to SHS costs) and when the main grid is connected to the settlement.

The figure presents analysis for our hypothetical settlement with no commercial load (orange line) and with 200 kW of daytime commercial load (red line). Note that the costs shown include an assumed annuitised connection cost for the grid-based technologies, which is assumed to be recovered from consumers over a few years. It is important that these costs are considered, as they have a significant impact on the effective cost of electricity for households with low energy consumption. However, the exact way in which these costs crystalise for the consumer will vary by commercial model and by the regulatory regime in place.

With no commercial load in the settlement, the figure suggests that SHS are likely to be the most economically efficient means by which to provide access to electricity. The business case for a mini-grid could become attractive once the average household demand for electricity in this settlement of 2,000 exceeds ~70-80 kWh p.a. However, it seems unlikely that many households would be able to afford to pay for this level of access without more local employment options. This could be a vicious circle from which it is hard for the settlement to escape.

Hence the importance of productive growth. In the second scenario (the red line), a mini-grid business case can be supported from an early stage, and the economics for extending the grid and integrating the mini-grid with the main electricity system could make sense once average household demand reaches ~180-190 kWh p.a. For this scenario to work, mini-grid developers would clearly require well-defined and fair regulation to be in place to govern the integration of mini-grid assets into the main grid.

Households will join the mini-grid in their own time, once their load requirement reaches a level that justifies the cost of joining the mini-grid. In this scenario, not only is it possible to improve the energy infrastructure to support productive growth; this also has the knock-on impact of accelerating household access to lower cost electricity. A virtuous circle.

Of course, the outputs from the analysis will vary greatly from one country and context to another. The assumptions used could all be debated, and many alternative scenarios could be analysed.

The case for coordination

However, the analysis illustrates the potential for a virtuous circle between economic growth and poverty alleviation. Neither energy access nor the commercial enterprise is responsible for all these benefits. The analysis highlights the importance of planning, so that opportunities for this link can be identified. Some of the geo-spatial planning tools and data analytics methodologies now available can help with this. But electricity master plans could also highlight zones where the benefits from mini-grids might be greatest. Governments could consider establishing incentives for commercial enterprises acting as an anchor to infrastructure development.

If we get the regulation right, and can identify opportunities where communities can benefit from this virtuous circle, it should be possible to use new energy access technologies to accelerate the progress up the energy ladder of the >1bn of the world’s population with no access to electricity.

With an increasing number of innovative options for extending energy access, it is important for policy-makers, planners, and developers to use robust economic analysis in comparing the relative merits of different energy access solutions. It is also important for policy-makers to ensure that the right tools and regulatory frameworks are in place to ensure that opportunities for growth are not missed.