Over the past decade there has been a consistent and notable upward trend in mini-grid installations globally. Installations are over six times higher compared with 2018. This growth, particularly notable in sub-Saharan Africa, underscores the increasing recognition of mini-grids as a feasible solution for electrification in remote areas.
The State of the Global Mini-Grids Market Report 2024 (Link zum Download auf SC-Seite) serves as a comprehensive resource aiming to drive investment and inform decision-making in the sector. Utilising a bottom-up methodology, it provides up-to-date insights and forward-looking strategies for the sector’s sustainable scale-up, synthesising inputs from stakeholder interviews and extensive desk-based research.
Here are some excerpts from Outlook for Business Models and Environment:
Enabling Environment Outlook
Integrated energy planning
The sector is expected to gradually move away from the co-existence of the three modes of electrification (on-grid, mini-grids and standalone systems) in silos towards an integrated framework for energy planning. An example of this approach is the Integrated Distribution Framework (IDF), which advocates that an “entity” (comprising one or more actors, such as the existing distribution company in partnership with the private sector) should be held responsible for distribution in a given area (under a contract like a concession) and ensure universal coverage. Under this model, “integration” becomes a multi-faceted concept, which includes integration of the three modes of electrification, all types of end customers, and the public and private sectors in the distribution sector.
Regulatory approaches that acknowledge the need for recovering costs in a de-risked way
We anticipate a shift of focus from the traditional approach to cost recovery, via tariffs based on cost-of-service assessments for individual projects, towards a more comprehensive and flexible way of recovering costs in a de-risked way. An example of this approach is implementing automatic tariff adjustments to account for large changes in costs that are outside the mini-grid operators’ control, such as inflation and currency fluctuations. Similarly, regulations should increasingly acknowledge the need for scale as a key factor of mini-grid viability, for instance by allowing portfolio applications for licences and tariffs and adopting fit-for-purpose technical standards adapted to the scale of the project.
Standardisation in regulatory approaches and tools
Given the need for a speedy scale up of the sector, we can anticipate the standardisation of certain regulatory aspects, such as tariff-setting methodologies based on the principle of cost recovery or grid arrival arrangements. Given the maturity of certain approaches and the lessons learnt so far, the sector can comfortably claim to have established blueprints that can be adjusted to market and project conditions. A good example is the work of the African Forum of Utility Regulators (AFUR) in collaboration with the Africa Minigrid Developers Association (AMDA) on developing a standardised mini-grid tariff tool. In light of the establishment of the African School of Regulation, harmonisation can be expected to increase through close engagement with development partners, regulators, ministries of energy and the private sector, with the aim of establishing a consensus across the sector on core regulatory aspects.
More comprehensive approaches to asset valuation in case of grid arrival
Mini-grid asset valuation methodologies are gradually evolving. Grid arrival is one of the key sources of uncertainty for mini-grid developers and investors. Without guaranteed compensation, these private investments are less secure, leading to reluctance from private investors to engage in the sector. Moreover, the absence of a clear and enforceable compensation mechanism can discourage long-term investment and innovation, further stalling the growth and development of mini-grids.
To address this, an increasing number of countries are adopting regulations that specify the entitlement to compensation for the mini-grid assets in case the distribution company arrives earlier than agreed to or expected, including Nigeria and Sierra Leone. However, as yet no African mini-grids have received compensation under any of these rules. Indeed, most distribution companies and rural electrification agencies in sub-Saharan Africa do not have the money to buy out isolated mini-grids, while donor funding for main grid utilities is typically dedicated to new distribution facilities, with only limited or no funding allocated to mini-grid asset takeover and compensation. As the sector matures, we expect to see examples of such grid arrival arrangements in practice, and the establishment of innovative approaches to asset valuation that encourages private sector involvement in the mini-grid sector.
Interconnected mini-grids
Greater attention is being paid to the issue of the quality of service received by end users, as opposed simply to nominal energy access. Access statistics are based on electrical connections and do not capture those customers that are “electrified” but received very poor, or sometimes no, service. Thus, published electricity access rates often paint a rosy picture of the electrification landscape that is far from complete. Interconnected minigrids are set to play a key role in filling this gap, as already highlighted in Nigeria, where poor quality of service, including lack of reliability and wide variations in voltage and frequency, is a critical issue. The Rural Electrification Agency, with new funding from the World Bank, has initiated the Nigeria Electrification Project to create interconnected minigrids (to Nigeria’s privately owned distribution companies), as well as the Nigerian Energy Support Programme, which is providing grants and technical assistance to Nigerian developers that propose to build interconnected mini-grids.
Business Model Outlook
A need for innovative business models to reach the last mile
Given the major cost savings that can be achieved through economies of scale, many developers are seeking to electrify larger sites with 5,000 plus connections. However, this approach leads to cherry-picking the most commercially viable sites, where the electricity gap can be most easily closed, leaving less viable sites behind. This presents a challenge for subsidy policy, as to ensure efficiency it is important to determine appropriate subsidy levels based on commercial attractiveness.
One innovative approach to electrifying the last mile is mesh grids, which are set to gain traction in areas with low population densities. The reduced distribution costs resulting from the close proximity of houses and the expedited deployment rate (due to the absence of land acquisition requirements) represent a largely untapped opportunity for the private sector. By organically connecting households, this approach offers a replicable and scalable method for reaching last-mile customers in sparsely populated regions, thereby allowing significant savings on capital expenditure costs.
A more proactive approach to PUE
PUE continues to be a key aspect of mini-grid development. However, its focus is expected to expand, requiring developers to take on a more proactive role in increasing customer loads and thus mini-grid revenues. As regards business models, this would be reflected in the shift from the traditional energy supply model towards the business acceleration model and supplier-offtake model. For instance, Husk Power provides education, training and business development for customers who operate MSMEs, while it is also experimenting with forming and operating its own enterprises using the mini-grid electricity. The dual benefit of PUE— sustaining mini-grid profitability and empowering communities—continues to be a powerful narrative in the evolution of the mini-grid sector.
Excerpt of: “State of the Global Mini-Grids Market Report 2024”, Mini-Grids Partnership, 2024