Switching on the incentives for mini-grids

11 December, 2014

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By Helena Lim

Earlier this month Hong Kong lit up its Christmas decorations once more, putting on a show of red and green LEDs that called on consumers to snap a photo and head to their closest retailer. But whilst Hong Kong bathes in excessive light pollution I am reminded that there are still 1.3 billion worldwide who do not have access to electricity and who will be spending the next 365 days in darkness. According to the IEA, 95% of those without electricity live in developing countries in Asia and in Sub-Saharan Africa, the irony being that many resource-rich countries continue to be energy-poor. In the ten leading hydrocarbon-producing countries in Sub-Saharan Africa, 2/3 people still do not have access to electricity.

Research shows that supplying electricity to villages, even in small amounts, can make a significant contribution to improving their human development index (HDI) score, a development indictor that measures life expectancy, years of schooling and gross national income per capita. One approach that has been gaining momentum is the deployment of decentralised micro- or mini-grids – electricity distribution systems which use local hydropower, solar or biomass generators and are not connected to a national power grid. These grids are particularly important for communities in remote locations where terrain is difficult and accessibility low, making the extension of the national grid too costly.

Mini-grids provide communities with an opportunity to move up the energy ladder, away from hazardous energy sources such as kerosene and wood and towards more cost-efficient, safe, environmentally-friendly and virtually inexhaustible renewable energy sources. A mini-grid that is adequately managed and maintained can deliver more than just lighting. It can support small village industries such as mills, irrigation pumps and machinery for carpentry, boosting rural economic development in a way that creates a virtuous cycle out of poverty.

Husk Power Systems is an Indian company which uses diesel generators fitted with biomass gasifiers to turn rice husks into electrical power. Using cheap bamboo poles to distribute electricity in locations where rice is a staple crop, Husk has provided power to around 600 families. Their system of customers paying door-to-door collectors upfront for electricity is now profitable.

The technology is also becoming more robust and affordable. Prices of solar cells have fallen such that the cost per kilowatt is half of what is was a decade ago. Energy storage is improving fast and small-scale energy businesses in developing countries, built from the ground up with limited means, are thriving.

The technology is accessible and the benefits immense. So why are mini-grids not being deployed more widely?

Firstly, rolling out off-grid mini-grids at scale requires strong government support and policy frameworks that endorse rural electrification. Husk Power Systems, for example, relied on a government subsidy to help cover its early construction costs. While a number of governments, such as China, Brazil and Spain, are supporting renewable energy through tax relief and non-tax incentives, such measures also need to be extended to countries where energy poverty is significant but import duties on clean-energy products remain high. Ethiopia imposes 100% duty on imports of solar products and Malawi charges 47.5% tax on LED lighting systems.

A second bottleneck is financing. It is nearly impossible to involve traditional private sector investment in these kinds of ventures because of the small scale of the projects and their relatively unattractive risk-reward ratio. This is regrettable given the staggering amount of money being invested into traditional energy projects worldwide. According to Open Aid Data, Official Development Assistance (ODA) – official financing administered for the promotion of economic development in developing countries – to the Energy sector in tiny Bhutan was a jaw-dropping US$ 46 billion, 24 times its GDP. In Nepal, ODA for energy amounted to over US$ 697 million, 60% of which was granted towards large-scale hydro-electric power plants. By contrast, the 18kWh solar mini-grid set up in the Nepalese village of Dubung delivers electricity to 150 households and 2-3 village industries with a set-up cost of just US$130,000. Just 1% of Nepal’s ODA could pay for over 5,300 Dubung-style systems and electrify over 800,000 households. The improved sense of security and prospects for entrepreneurship such widespread energy access would create are vast.

These problems make it all the more necessary to create a suitable policy framework to successfully mobilise financing from international partners. An off-grid electrification fund, for example, can mobilise grants and/or soft loans for electrification projects in the long term and run relatively independently from yearly governmental budgets. Governments should also develop legal frameworks to encourage private sector investors to get involved, especially those looking to create a social and environmental impact as well as generate financial returns. The widespread implementation of mini-grids using renewable energies is slowly changing the global energy landscape and can usher in an alternative, if not an end, to fossil fuels whilst delivering on a fundamental human right for communities at the base of the pyramid.