Can Microgrids Power Africa?Chief Executive Officer of Africa Minigrid Developers Association Energy Access Finance Advisor of Africa Minigrid Developers Association
Despite huge strides over the years, about 600 million Africans still lack electricity, with at least 110 million of the unelectrified living in close proximity to the grid. African governments have traditionally relied on centralized grid expansion efforts to improve access, but a large part of this problem is due to the small, remote nature of the hundreds of thousands of communities, which increases the cost barrier for electrification strategies to overcome.
How Do You Reach Hundreds of Thousands of Remote Communities?
As such, decentralized renewable energy utilities such as standalone solar home systems and minigrids can provide alternative cost options to Africa’s electrification problem.
Community minigrids typically serve rural communities where the national grid is unlikely to arrive in the near future. They are difficult to get to and even more difficult to observe over long periods of time. It’s no wonder, then, that they have struggled to find traction in national governments and investment circles.
140,000 Minigrids Needed
The World Bank estimates that over 140,000 community-scale minigrids will be needed to bring universal electrification to Africa, but very little is known about the sector even within energy circles. There is, however, a reason the World Bank and others see minigrids as essential to Africa’s future: Despite being small and remote, they can complement national electrification efforts by providing quality service in areas deemed uneconomical for a national utility’s infrastructure investment.
AMDA’s benchmarking report is the first to provide the data and evidence to allow big investors to think seriously about putting big money into the sector.
Overall, the report shows a significant drop in installed costs per system — over 60% between 2014-2019. This trend exemplifies the improvement in technology costs that gets passed down the minigrid value chain, as well as the interplay of global demand and supply forces that have made renewable energy technologies more mainstream.
Getting Closer to Break Even
On average, experienced developers in well-established markets were 41% less expensive than new developers in those same markets. These cost observations are encouraging to both donors and investors. For donors, there’s potential to realize more impact as the minigrid business model becomes more efficient. For current first-mover investors, there’s huge upside potential in the form of commercial reward for the risk undertaken as companies scale.
On the other hand, operational and maintenance (O&M) costs range from $2.50 to $6.00 per customer per month. When this is compared to the average revenue per user (ARPU) in markets, we see that a typical project is just about at the break-even point. For instance Tanzania, Kenya and Nigeria posted an ARPU of $4.58, $2.96, and $4.83, respectively.
While the numbers show a clear potential for scale in the minigrid business, more developer support is needed with respect to demand growth.
Need for Demand Support
While the numbers show a clear potential for scale, more developer support is needed with respect to demand growth.
Why help companies grow demand? Shouldn’t their product be good enough to do that on its own? Not when your customers are some of the poorest people in the world. The real magic lies in how you grow demand.
Minigrid businesses often have a focus on helping their customers increase their household or business income, making both their customers better off, while making the minigrid better off. The result is their customers have more income to spend on products that consume energy, or the energy used is actually from an appliance that is increasing their income, such as a grain mill for a farmer, a freezer in a shop or an electric saw for a carpenter.
Regulation Needs Updating
Lastly, our report shows that unsurprisingly, governments play an important role in the success or failure of the sector. Energy is regulated, as it should be. But energy regulations are a vestige of the early days of the sector, which saw small numbers of huge projects needing regulation.
Right now, it takes over one year, on average, for a single minigrid project to be approved in Africa. And with a 140,000 minigrids needed to electrify Africa, you can do the math. We need to see digitized, bundled approval procedures that approve multiple sites simultaneously.
In summary, the study has outlined three key and conclusive areas of evidence around the importance of public funding, demand growth and appropriate regulation:
- Public support works: Nevertheless, slow disbursement of funds remains a key bottleneck, getting committed funding to companies quickly will help them raise more private capital and lower their costs to customers faster and further. We also see a clear opportunity for cross-subsidization from donors and African governments to the sector, so as to lower the energy cost to rural citizens. All national utilities in Africa benefit from state and donor subsidies, whereas minigrids do to a much lesser extent. If these could be distributed more evenly, minigrid companies could dramatically lower costs to their customers.
- Support for demand growth is needed: While the revenue/O&M cost balance is expected to improve over time as companies learn and grow, the need for sector-wide support on demand growth cannot be overemphasized. And the need goes beyond minigrids. Indeed it is not minigrids that have a demand problem — it is rural energy providers in general. National utilities across Africa are predominantly loss-making, and there is an enormous opportunity for them to collaborate with AMDA members to learn how to grow demand together, lowering the need for subsidy and increasing rural incomes at the same time.
- Regulation is key: The current regulatory environments in many markets is at best unclear or at worst nonexistent. This increases the perception of risk to would be minigrid investors, consequently raising the cost of investment capital. Moreover, in countries where the regulatory environment does exist, such processes are not optimized to fit within the framework of small decentralized utilities. For instance, a 50 kW minigrid project may be required to undergo the same lengthy licensing, environmental, tariff or similar regulatory hurdles as a large 50 MW project.