Mini-grid business models can potentially reach economies of scale, reduce transaction costs and diversify risks through financial and operational bundling, according to a new report by the National Renewable Energy Laboratory (NREL) and Energy 4 Impact.
The report, which is the latest in a series of studies in support of the Power Africa’s Beyond the Grid Programme, looks at how bundling can help micro-grids reach an investment size and diversify risk to make them attractive to more financiers.
Micro-grids are expected to play a critical role in providing electricity access to the roughly 600 million people in sub-Saharan Africa who currently lack electricity. Private investment in the micro-grid sector will be necessary for the sector to scale, but it has been slow to take off in sub-Saharan Africa because of the high level of risk relative to reward and the relatively high transaction costs as compared to larger grid-tied projects. Micro-grids are also subject to policy and regulatory risk, a lack of proven business models, and uncertainty about demand and the ability and willingness of customers to pay.
The report argues that bundling or aggregation of micro-grids is one potential solution to these challenges and examines different areas of operational bundling to improve the viability of micro-grid developers and their projects. These areas include design and engineering; installation and commissioning; operations and maintenance; customer agreements; standardised productive use offerings; and performance monitoring and reporting.
The report also considers different forms of financial bundling that can increase access to capital through pooled funds, appliance financing schemes, portfolio guarantees, export credit finance and crowdfunding.
Taken together, the report argues, operational and financial bundling have the potential to accelerate private investment and facilitate access to lower-cost capital for micro-grid developers and their owners.