What are the best ways for governments to create an enabling investment climate for mini-grids?

Creating a dedicated REA to implement the country’s rural electrification strategy is often a critically important first step to promote mini-grid investment. The REA’s responsibilities typically include approving projects, building project developer capacity and designing and/or administering incentives. Establishing a dedicated REA almost always elevates the importance of rural electrification in the country’s energy policy. REAs can secure public resources to expand coverage, generally through a rural electrification or energy fund, as well as channel donor resources to mini-grid development.

Some REAs focus on off-grid electrification, while others promote both off-grid projects and grid expansion. Mali’s Agency for Domestic Energy and Rural Electrification (AMADER) and Tanzania’s Rural Energy Agency oversee both grid-based and off-grid electrification. Senegal’s Agency for Rural Electricity (ASER) and Nepal’s Alternative Energy Promotion Center (AEPC), on the other hand, are limited to off-grid solutions.

When REAs focus on off-grid electrification, mini-grid development can play a central role. On the other hand, REAs with mandates that include grid electrification can better protect mini-grids from uncoordinated expansion of the national grid into their service areas.

REAs have varying degrees of regulatory authority over mini-grids. While AMADER regulates systems generating less than 250 kW, ASER in Senegal does not have this authority. Instead, all mini-grid systems in Senegal must receive approval for their tariffs from the regulator. In Nigeria, South Africa and Tanzania, regulators have waived licensing and tariff reviews altogether for systems smaller than 100 kW.

Mini-grid regulations typically govern licensing, tariffs, reporting and guidelines for engagement if the area is connected with the grid. Light-handed regulations usually work best, as onerous reviews tend to discourage investment by increasing risk for investors. Tanzania’s electricity regulator, the Energy and Water Utilities Regulatory Authority (EWURA), for example, has created a comprehensive regulatory system for on-grid and off-grid small power producers (SPPs), including partial deregulation for systems smaller than 100 kW. This regulatory environment has facilitated significant investment in mini-grids.

Governments can provide financial and fiscal incentives to encourage mini-grid development and keep electricity tariffs affordable. Fiscal incentives include customs waivers and tax breaks for investors. Financial incentives include grants, low-interest loans and loan guarantees. Governments generally couple these incentives with technical support in the form of quality assurance and capacity building for installers and operators.

In recent years, governments have begun using public funds to mobilize private-sector and community investment in mini-grids, especially hybrid and renewable energy systems. The REAs in Mali and Tanzania, for example, provide financial incentives for mini-grid developers. In Mali since 2005, AMADER’s Rural Electrification Fund has awarded subsidies of up to $500,000 for projects proposed by private developers, non-governmental organizations (NGOs) and communities. Since 2016 Tanzania's Energy Development and Access Expansion Project, a World Bank program managed through Tanzania’s Rural Energy Agency, provides SPPs a performance-based incentive of $500 per new connection.

Historically, many national utilities have used isolated, diesel-powered mini-grids to supply un-electrified population centers such as remote regional market towns, islands and district headquarters. In countries with limited grid networks outside urban centers, many utilities still use this strategy.

For example, as of 2013, Niger’s national utility was operating 70 diesel-powered mini-grids. In the Philippines, the Small Power Utility Group (SPUG) within the National Power Corporation uses primarily diesel-powered mini-grids to generate and supply affordable power to remote island communities.

National utilities are generally poorly suited to operate mini-grids. Utilities almost always lose money operating mini-grids, even in cases where the government pays the capital costs.

In some countries, regulators require utilities to charge the same tariff for power supplied by mini-grids and the national grid, even though the costs are much higher for mini-grids. Many utilities rely on annual operational subsidies, often from levies on electricity bills of urban consumers. Given increasing pressure on utilities to cover costs through tariffs, utilities show little interest in investing in new isolated mini-grids.

Governments and national utilities can promote financially sustainable mini-grids powered with renewable energy by:

• Including universal access as part of the terms of privatization of distribution companies.
• Requiring and incentivizing private concessionaires to include renewable energy mini-grids in their concessions, cross-subsidized from more profitable parts of the concession.
• Hybridizing diesel mini-grids with renewable energy to reduce operating costs in remote communities, such as Indonesia’s 1,000 Islands Renewable Energy for Electrification Program, implemented by the government-owned utility with support from KfW (the German Development Bank).
• Inviting private operators to bid to operate fossil fuel generators powering mini-grids at costs lower than the utility, such as SPUG in the Philippines.
• Inviting SPPs to invest in new renewable generation and hybridizing existing diesel generators to sell energy to the utility at a feed-in tariff lower than the utility’s cost of generation, such as Tanzania Electric Supply Company Limited (TANESCO) in Tanzania and SPUG in the Philippines.
• Gradually increasing tariffs for off-grid consumers as part of a subsidy graduation program, such as SPUG in the Philippines.

Many governments use grant programs to support community-owned mini-grid development. In Mali, Nepal and Senegal, for example, communities can receive grants through national off-grid electrification programs. Grants cover most of the capital costs while communities provide locally available construction materials, labor, land and cash as equity. Communities collect tariffs from users to cover operation and maintenance costs.

Governments can also support community-based mini-grid projects as part of poverty reduction efforts. The community-managed model builds social capital alongside access to electricity. Recognizing the value of this social capital, Afghanistan and Pakistan have included mini-grids as part of their national poverty reduction programs.

Community mini-grid managers also need training, capacity building and other support to operate mini-grids as sustainable enterprises that promote economic development. As Alternative Energy Promotion Center (AEPC) from Nepal demonstrates, managers of community-owned systems rarely operate mini-grids as enterprises. Managers limit hours of operation to save money and reduce generator wear. Government investment in subsidies for mini-grid programs is difficult to justify in these cases since returns are low. With support from donors and governments, community managers can improve a project’s economics by powering productive uses and using flexible tariffs to encourage productive use during off-peak hours.

The following table highlights key results of community-owned and managed mini-grid programs scaled up through public investment.

Grants and concessionary loans can encourage SPPs with innovative business models to use mini-grids to electrify rural communities. SPPs bring technical and operational capabilities essential to managing mini-grids, especially those powered by solar photovoltaic, hybrids or other sophisticated technologies.

Mali’s AMADER program and Senegal’s ASER program, for example, provide private developers with financing that covers up to 80 percent of a project’s costs. In Bangladesh, Infrastructure Development Company Limited provides half of its support as grants and half as soft loans. As a result, private developers can provide power at affordable rates to mini-grid consumers.

Donors have created innovative grant programs for SPPs. USAID’s Development Innovation Ventures, for example, has supported funding of 30 innovations in the energy sector, totaling $20 million, among them mini-grid developers Mera Gao Power, Power Hive, and Gram Power. This venture capital enabled the developers to expand their businesses to the point of profitability and attract additional commercial investment.

As part of Power Africa’s Beyond the Grid initiative, which aims to drive private investment in off-grid and small-scale renewable energy solutions, the U.S. African Development Foundation has provided grants to entrepreneurs through two rounds of the Off-Grid Energy Challenge in 2014 and 2016. The Off-Grid Energy Challenge provides direct funding for innovative solutions to increase access to reliable, affordable and sustainable power. As of 2016, the challenge had awarded more than 50 grants totaling $5 million to African energy entrepreneurs. Funded projects include solar home systems, solar and micro-hydro mini-grids, solar cold storage systems, biogas for refrigeration and pasteurization and selling solar products through a mobile platform. The last round of applicants was due in April 2017; no winners have been announced yet.

Combining public investment in distribution networks with private investment in power generation reduces the risk of a private company losing its investment if the main grid reaches its project site. Germany’s government-funded development organization Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), for example, has supported using public funds to build distribution networks for mini-grids. When governments pay for the fixed network assets, companies can focus their investments on generation, making projects financially viable at a tariff that consumers are willing to pay. In this model, tariffs only need to cover the cost of generation.

If the main grid reaches a mini-grid’s service area, the utility can take over the distribution network and the private developer can, in theory, transfer its energy generation assets to a new location. Nigeria’s Mini-Grid Regulations (approved in 2016) accommodate this split-asset model. Several state governments in the country have expressed interest in the approach.

The Financing module in this toolkit outlines major sources of grants and concessionary lending for mini-grids from international development agencies, private foundations and NGOs as well as developing country government programs. The Energy Access Practitioner Network is an excellent, up-to-date source of information about resources available from donors and private investors.

The following table highlights the pros and cons of different public investment models for mini-grid development. The Ownership module in this toolkit provides a more complete comparison of ownership models.