Since 2017, the minigrid sector has experienced a tremendous increase in both the number of connections and installed capacity. While growth rates have slowed, the minigrid sector was able to see a 95% increase in the number of connections between 2019 and 2021. Our data shows that minigrids, as of December 2021, supply over 78,000 connections with a total installed capacity of 7,000 kW.
The quality of service has remained a top priority in the sector, with most sites experiencing virtually no outages. The continued upward trend in service quality provides a stark contrast to the intermittent service provided by national grid operators in several of the countries in which members operate.
Licensing remains a substantial hurdle for developers with projects often taking more than a year for approval – regulatory frameworks are not structured for a decentralised market and require complex regulatory oversight for every 100kW of installed capacity. Given the enormous possibility for expansion, addressing the regulatory bottlenecks is essential to fulfil the sector’s potential.
Consumption and revenues are on the rise and the data suggests that increases in both will continue the longer customers have access to a stable power supply. As the sector scales and we see developers operating more sites in smaller geographic locations, we expect economies of scale and operating efficiencies to bring both CAPEX and OPEX figures down even lower. With increased scale and OPEX efficiencies and the current consumptions and revenue growth trends, the sector is coming closer to financial viability.
The sector’s track record is impressive, including a proven ability to innovate and expand across geographies and products, reducing costs while increasing service quality. With increased support from governments and development partners focused on climate, resilience and universal electrification, the minigrid sector certainly has the potential to rapidly accelerate growth, but this growth is contingent and public funding can be used to catalyse private sector finance.
Recommendation for decision makers
Minigrids provide governments and donors the opportunity to build the grid of the future, a bidirectional network built with smart, renewable technology that helps grow communities and economies. Growth in minigrid consumption and revenue provides positive signals for the long-term health of the industry as well as broader rural economic growth. The market opportunity is enormous, with more than half a billion potential customers and a mature market that could generate more than $5 billion in revenue annually. However, in order for this potential to become a reality, there needs to be a massive increase in capital flowing into the sector in conjunction with an evolution in regulation and grant structures that are designed to support decentralised and bi-directional grids.
With this in mind, AMDA has identified three key areas for decision-maker action based on the evidence presented in this report:
- It is evident that providing access to concessional funding for minigrids, be it through grants, subsidies, or concessional loans, is one of the most important actions that governments and donors can take to improve commercial investment and increase the rate of electrification in rural and weak grid communities in sub-Saharan Africa. This funding would have multiple impacts: it would scale procurement and reduce CAPEX & OPEX costs, de-risk projects, close the viability gap and support the reduction in consumer pricing.
Donors, governments and developers need to urgently come together to reach a mutual understanding as to why critical capital is not flowing, unblock any barriers and adapt existing funding programs to support scale.
- Minigrid regulations need to be adapted to reflect the decentralised nature of the industry. Current regulations are largely based on regulator experiences approving and monitoring small numbers of large energy projects, and must urgently be re-designed to do the inverse – approve hundreds or thousands of small projects over a short period of time. Portfolio or regional licenses, streamlined and digitised processes, smart and remote monitoring technologies, regulatory offices that are staffed to approve hundreds or thousands of minigrids a year and concessions — these must all be under consideration. These changes would go a long way in improving regulatory approval timelines and reducing the costs associated with regulatory compliance, thereby having a positive effect on the rate at which people are connected and the decline in the cost of the power they receive.
- The sector needs a unified energy ecosystem. The line between minigrids and the grid is blurring. Besides the well-understood role for off-grid communities, in weak grid areas minigrids are increasingly supporting entire towns or are integrated with the grid as lastmile distribution franchisees. Funding of and planning for electrification needs to happen more holistically. Currently, on-grid and off-grid planning is frequently siloed, creating competition between the two electrification modalities when they are often complementary. Competition within government ministries and donor institutions to promote one modality over the other, irrespective of costs and service, not only benefits no one, it directly harms rural communities and their ability to exit out of poverty. Decisions on how subsidies flow and how customers get connected need to be made on the basis of the ability to pay for and maintain the infrastructure, CAPEX costs, customer tariffs, and the quality and stability of power supply.
If donors and development finance institutions (DFIs) continue to pour billions into traditional utilities without mechanisms to ensure improved service, while under-funding minigrids, the grid will remain unstable and minigrid power will be more expensive. We need the best of both worlds and that will only be possible if planning for and funding of electrification is done collaboratively.
Excerpt of: Benchmarking Africa’s Minigrids Report 2022 (Africa Minigrid Developers Association. AMDA, 2022)