Despite the wide-ranging enthusiasm surrounding the deployment of mini-grids to accelerate access to electricity, there is a challenge looming that few banks, investors, multilateral agencies, and NGOs active in the sector seem to be taking seriously: bottom-up demand erosion caused by the rise of stand-alone solar PV systems.
In situations where self-supply options are either too expensive to be used around the clock, such as generators, or where access to capital is scarce, mini-grid operators benefit from a quasi-monopoly on electricity supply. It is this monopoly that enabled jurisdictions like the Philippines, for instance, to develop hundreds of mini-grids across its islands in the 1990s and 2000s: cost-effective alternatives for households and businesses simply did not exist, nor did the business models to deliver them.
However, recent changes in the off-grid sector, driven in large part by the rise of lease-to-own solar systems (also “pay-as-you-go” or PAYGO solar) are making this monopoly status less secure.
Such stand-alone solar systems, typically equipped with a battery and a few basic appliances, have revolutionized the off-grid sector, bringing electricity to customers and to regions that would otherwise have had to wait years, if not decades, before gaining access. In exchange for a small down-payment, the solar systems can be repaid over a period of 6 months to a few years, after which ownership transfers to the household or business.
Although the off-grid sector has been able to largely ignore this trend in recent years, the growing availability of stand-alone solar systems risks undermining the economics of mini-grid sites across the continent.
Many of the mini-grids being developed throughout sub-Saharan Africa are being designed to collect higher tariffs from commercial and agricultural clients than from households. The idea is that collecting somewhat higher tariffs from these customers can help keep the tariffs for households more in-line with the (often highly subsidized) national electricity tariffs.
If the tariffs being charged for commercial and institutional clients climb too high, mini-grid customers are likely to explore their options: they can either move elsewhere (e.g. to the city, or another village), or they can sign their own contracts with PAYGO operators rather than remaining dependent on the mini-grid. Put simply, the value proposition offered by mini-grids has to exceed that of stand-alone solar systems if mini-grids are to scale.
And although some mini-grid regulations seek to guarantee territorial exclusivity for operators, this exclusivity is likely to prove increasingly difficult, if not impossible, to enforce in practice.
To make matters worse for the mini-grid sector, the leading PAYGO solar companies are currently perceived by many to be more bankable: research conducted for SEforAll shows that actual financing flows to PAYGO solar companies currently far outstrip the financing provided to mini-grid operators.
PAYGO operators also have the advantage of being less reliant on policy and regulatory conditions than mini-grids, and face fewer licensing and permitting requirements, making them more nimble in the field.
And while many have argued that mini-grids are necessary to power heavy-duty appliances and productive uses like motors, and agricultural equipment, improvements in solar PV and storage technologies are starting to test this view, as the adoption of stand-alone systems by the agricultural and mining sectors throughout Africa increasingly show. In fact, pathbreaking work recently conducted by the Access to Energy Institute, A2EI, shows that stand-alone solar systems are starting to be tailored specifically to supply these larger productive uses.
What makes this dynamic particularly challenging for mini-grid operators is that mini-grids all-but-require the revenues provided by these “productive use” clients in order to be commercially viable.
In short, mini-grid defection could rapidly emerge as a major challenge for the sector in the years ahead. And while erecting barriers based on territorial exclusivity for mini-grid operators may seem like a workable solution in the short term, as is being mooted in Ethiopia, it is almost certain to fail in the long-term.
Taking a step back, it is possible that mini-grids find ways to be economic in the face of such defection, and that they learn to co-exist alongside a growing, even flourishing, stand-alone solar market; one way in which mini-grid operators could encourage such an outcome is by developing protocols that allow stand-alone solar systems to join their ecosystem, linking many individual solar systems into a broader, multi-nodal mini-grid. But the challenges and complexities inherent in trying to establish this kind of ecosystem should not be underestimated.
In the absence of clear solutions, this situation could become heated in the coming years, not only within individual villages, but also between the various companies, donors, investors, and lenders active in the sector.
Toby D. Couture is Director of E3 Analytics, a renewable energy consultancy based in Berlin who works in both on-grid and off-grid renewables throughout Africa and Asia.