Despite a crystal-clear value proposition, sustainability and scale for the minigrid industry have been elusive. The key reason is lack of a business model that is sustainable and replicable. Without a successful business model, it is very difficult, maybe impossible, to attract the necessary capital to scale.
Lack of a Working Business Model
The industry needs a business model that is profitable, not just at the minigrid site level itself, but which also provides enough margin to cover administrative overhead. It is this viable business model that will unlock the $127 billion in capital which the industry needs to scale. The three major components to achieving a working business model — cost, service, and demand — have been broken out separately to bring more detail to the solutions needed.
- Costs are too high: Unlike the grid, which is heavily subsidized and does not charge cost-reflective tariffs, minigrid developers receive little, or at best inconsistent, operational subsidy. In addition, at this stage of the industry’s development, minigrid developers are typically too small to achieve significant economies of scale. As a result, costs remain high and minigrid energy is not affordable for many people living below the poverty line unless subsidized like the main grid.
- Service must be better than the grid: Not all minigrid developers achieve the needed uptime, customer service response times and quality of power (3 phase AC with good voltage and frequency control) to meet customer needs. National grids often provide poor-quality power. Minigrids must meet the quality needs to both justify the cost and meet the demands of productive use loads.
- Demand is too low: Minigrid developers must put considerable effort into generating demand. However, many companies continue to act like traditional utilities and focus only on generation. Lack of sufficient demand has led to many unprofitable minigrid companies, which makes it impossible for them to scale.
Inability to Scale Fast Enough
Once the above business model challenges are met, the work is not done. The rate of deployment must also increase 10 times. As many as 200,000 newly built minigrids are required by 2030 to end energy poverty. Today there are 20,000.
With the industry building less than 1,000 minigrids per year it will take well over a century to reach the 2030 goal. With a forecast of more than 100 years versus an SDG target of 8 years, the industry needs at least 10 companies building minigrids at 10 times the current pace to meet the need.
Subsidies for Scale vs. Subsidies for Cost
Most often we hear the case for subsidization revolving around off-setting costs (subsidies are discussed in more detail later). Clearly it is more expensive to electrify the hard-to-reach communities which live off-grid. But whereas cost subsidies make sense in many cases, an even stronger case might be made for incentives to drive scale. If the world wants to see an order of magnitude increase in deployment rate, it might make sense to provide a subsidy that is higher than just the amount needed to marginally reduce the cost (i.e. a higher than market rate return), and thereby incentivize even more rapid scaling. This technique was used very successfully in Germany to promote a world-leading rate of solar deployment. By offering a lucrative FiT (feed-in-tariff), the private market brought all the technology, capital and resources needed to build clean renewable energy at an incredible pace.
Conclusions
Scale and sustainability are paramount — and possible — for industry viability: Scale and sustainable business models are the two pillars of industry success and are only possible if private sector developers address challenges around cost, demand and quality. Scale and sustainability lead to market maturity, and ultimately to achieving Sustainable Development Goal 7 (SDG7) — access to modern, clean, affordable, reliable energy for all. LCOE is the industry’s north star: On the question of cost, the industry must align itself around Levelized Cost of Energy (LCOE). The current standard, Cost Per Connection, does not conform to standard energy industry practices and invites market distortion. Pegging industry development to LCOE will ensure that scale is possible and that tariffs are the most affordable they can be for unelectrified communities.
Demand is at the crux of sustainability, economic growth and social impact: As ability to pay for energy is a major issue, developers need to drive productive uses which enhance the value of energy. More value means more ability to pay and higher Average Revenue Per User (ARPU). So, driving demand is not only essential for sustainability but leads to robust economic and social impacts. The industry must be hyper focused on ARPU and the quantitative measure of demand, Capacity Utilization Factor (CUF).
Scale may be the most daunting challenge: The local scale needed for developers to achieve profitability is very small compared to what is needed to achieve universal energy access. In fact, 10 companies with 10X the current maximum rate of deployment are needed to achieve SDG7.
Many market types co-exist in any country: The tendency for governments, funders and companies to view the minigrid market at the country level must shift to match the reality at ground level, as different market types (commercially viable, bridge and concessionary) are present in all countries. These markets will require different strategies and probably different business models. This has major implications not only on developers but on national policy and regulations.
Excerpt of: Scaling Solar Hybrid Minigrids: An Industry Roadmap (Husk Power Systems 2022)