Mini-grids, employing renewable energy sources like off-grid solar, have great potential for helping the world achieve Sustainable Development Goal 7 (SDG7 - Affordable and Clean Energy for all) by 2030 in a cost-effective manner.
As per a recent industry report (surveying around 30 countries across Asia and Africa) , the mini-grid market has grown from 60 solar/solar hybrid projects installed globally in 2010 to 2,099 in 2020.
This insight article explains the basics of hybrid mini-grids, various PPP/ operator models for this sector, market review and ongoing challenges for further development of hybrid mini-grids as an effective tool to provide electricity access to remote locations & improve electrification rates across Asia and Africa.
What are hybrid mini-grids?
Mini-grids are defined as one or more local generation units supplying electricity to domestic, commercial or institutional consumers via a local distribution grid. Mini-grids can either be unconnected with the national grid or connected, in which case they have the option of operating in isolation at times when the national grid is not operational.
Hybridization is defined as the addition of a renewable energy source such as wind, solar, run-of-river hydro or biomass power, to an existing diesel powered mini-grid. Hybrid mini-grids that integrate solar PV and other distributed energy resources/ DER(s) can complement and compete with main grid extensions in terms of the cost of electricity and the speed of deployment.
The figure provides an overview architecture of diesel mini-grids vis-à-vis hybrid mini-grids.
Source: State of Global Mini-grids Market Report 2020, BNEF
Benefits of hybrid mini-grid
· Enabler of socioeconomic development - Through the provision of basic electricity services for households such as extended hours for small businesses, benefits for education and health as well as greater security.
· Facilitator for the delivery of public services - Through the electrification of social institutions.
· Enabler of rural industrial development - Through enabling households to establish micro home enterprises and by providing existing SMEs the possibility to switch to a cheaper and cleaner form of energy.
· Environment benefits - Through the use of renewable energy which reduces carbon emissions.
Typical Stakeholder structure
A close coordination between key stakeholders – government, private sector and user community – is essential for mini-grid development project.
The figure below describes a typical structure for a mini-grid project.
Source: YOG INFRA analysis
Mini-grid operator models
There may be multiple models (with or without private sector participation) for operating mini-grids, as shown in the figure below. However, recent success and scalability has come from some sort of private sector participation in some of the roles mentioned below.
Source: YOG INFRA analysis
Market overview
The fastest growing segment of the global mini-grids market is that of solar hybrid mini-grids. While 32% of already installed mini-grids are diesel/heavy fuel oil (HFO) or hydro systems, PV is the generation technology most predominantly used for mini-grids being installed today.
As per a recent industry report which surveyed around 30 countries across Asia and Africa, the mini-grid market has grown from 60 solar/solar hybrid projects installed globally in 2010 to 2,099 in 2020 in these countries.
In Asia, India leads with 1,792 mini-grids, followed by 1,061 in Indonesia and 326 in the Philippines.
The mini-grids installed in the last five (5) years have tended to incorporate PV and battery storage with diesel generators as backup (i.e., solar hybrid mini-grids) due to below mentioned reasons:
· Solar modules/ technology costs have fallen.
· Further, control technologies to integrate multiple distributed energy resources (DERs) and optimize their operation have advanced.
· PV is also modular and relatively easy to install in remote areas.
Due to the above, solar hybrid mini-grids are the most dominant form of modern mini-grids installed today, and many mini-grid programs are led by governments that are eager to promote them.
As the solar hybrid mini-grid market has evolved, large and international corporates have also participated in different modes to support the development of such mini-grids.
· Some companies have been acquiring companies that offer battery storage systems, uninterrupted power supply (UPS) and control software technologies.
· Others have partnered with mini-grid developers or invested in them.
· Examples include major utilities and oil companies such as EDF, Enel, ENGIE, Iberdrola, Shell and Tokyo Electric.
Diesel vs Solar PV Hybrid Mini-grids
The table below shows the various cost components for a 100% diesel mini-grid compared to a solar PV- diesel hybrid mini-grid configuration.
Energy storage i.e., battery, provides stabilization in a hybrid mini-grid.
· It ensures stability of voltage and frequency in the mini-grid by absorbing or supplying power to maintain a balance between instantaneous power production and consumption.
· It also stores energy from the solar-PV array during the day to deliver to loads at night.
Typical range of CAPEX breakup for a solar PV-diesel hybrid mini-grid
Source: Public Information, YOG INFRA Analysis
*The above values are provided for a 3.9 MWp hybrid mini-grid. (Solar PV capacity = 3.9 MWp, Battery pack = 20 MWh)
Key Challenges
The mini-grid market is yet to achieve a tipping point at which it can expand without subsidized support. Some of the key challenges are listed below:
Need for regulations to protect mini-grid asset cash flows.
· Few governments in countries that need sustained investment in rural electrification provide regulations that protect mini-grid owners explicitly. For example, many governments lack regulations that protect isolated mini-grids if the main grid arrives. Without such regulations, the state may expropriate mini-grid assets with minimal compensation, or they may become stranded.
· In an ideal policy and regulatory scenario, mini-grid owners would have reassurances that, should grid arrival occur, a range of options would be available to them, such as receiving compensation and operating alongside the main grid (e.g., Nigeria).
Government Agency's Institutional Capacity.
· Projects get stuck in long and complex procurement and tariff negotiation processes.
· Negotiations between governments and developers over tariff terms are often challenging with customer protections and investor returns perceived to be at odds. The result is that such discussions can takes months or, in the worst cases, years to complete.
Customer’s ability to pay.
· Rural mini-grid operators sell electricity to customers that often have little income and limited ability to pay.
· Mini-grid developers are increasingly looking for sites where ‘productive-use’ customers or anchor customers are present, and they innovate business models to stimulate those customers to use more electricity.
Availability of commercial finance.
· Besides the factors already mentioned above, bankability of mini-grid projects is limited due to small project sizes.
· Majority of rural mini-grids range from just 10 to 100kW. Commercial banks tend to favor larger deals that allow them to amortize transaction-related costs over larger volumes of capital.
· In 2019, there was a transaction to finance a portfolio of mini-grids with a total capacity of 1MW in Tanzania. A portfolio approach would be beneficial to make financing attractive for commercial project finance investors, and to distribute risks.
Conclusion
Hybrid mini-grids are an effective tool to provide electricity access to remote locations & improve electrification rates across Asia and Africa. Further, as evident from the recent market trends, many private players have expressed interest to participate in such projects (including as developers). Continued government emphasis and support from Development Finance Institutions (DFIs) is needed in short to medium term to alleviate some of the challenges in order for the mini-grid sector to scale up and attract private capital in a significant manner.
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