Mini-grid Business Models
Mini-grid business models vary by ownership, size and customer and there are different strategies used to make them a success, including demand management, promotion of productive end use, quality of electricity service, tariff design, revenue collection and end user finance.
There is currently no proven business model for mini-grid development in Africa.
The models vary according to the following:
- Ownership and management of the distribution and generation assets of the mini-grid (which may be done by public, private, or community entities or public private partnerships or other hybrid models);
- Size (varying from a few kilowatts to up to 10 megawatts) ; and
- Customers (which may include households, small businesses, large anchor clients or a mixture of all three).
Matching electricity demand with supply is important for the project economics of mini-grids, particularly solar mini-grids which generate only in daylight hours.
Demand management shifts demand to times of higher renewable resource availability (eg high solar irradiation) and away from times of lower availability.
For this to work, mini-grids need to identify customers that are flexible when they consume and actively manage their demand through tariff incentives, load scheduling and other techniques.
Promoting Income-Generating End Uses
Without productive, agricultural or commercial loads, mini-grids may not reach the critical mass of sales needed to cover their fixed costs.
Larger mini-grids, for example those greater than 1 MW, may also need a power purchase agreement (PPA) with a large anchor client such as a state utility or small industrial to make their project economics work.
PPAs are long-term off-take agreements which outline the rights and obligations of the seller and buyer of the electricity.
To be bankable, they should be executed with creditworthy off-takers, have sufficient tenor to enable repayment of the loan, and have an adequate and predictable revenue stream.
PPAs with state utilities often take a long time to get approved and may not be bankable without additional credit support from the host government or a development financing institution. PPAs with industrial clients can also be difficult because of the tough conditions imposed by the off-taker.
Quality of Electricity Service
Quality of electricity service may be defined in terms of ability to serve different types of user, availability (hours per day), and continuity (no blackouts).
The Sustainable Energy for All Global Tracking Framework has different tiers for quality of electricity service:
- Enreliable or non-existent electricity supply;
- Reliable but basic electricity services such as lighting during evening hours and phone charging;
- Electricity supply for a limited time for appliances of above 50W such as TVs and fans;
- Supply for appliances and productive uses above 200W;
- Near grid quality; and
- Grid quality electricity.
Tariffs for privately-owned mini-grids must cover all the costs of the mini-grid plus a margin. This includes:
- Fixed costs (ie capex and fixed management and operation costs); and
- Variable costs (costs of diesel fuel and biomass feedstock, maintenance and some variable operation costs).
Tariffs may include a fixed charge or capacity fee (which is independent of consumption) and an energy price (which is consumption-based) or just an energy price.
The level of tariff is set based on projected demand. This means if demand does not materialize as expected and there have been extreme cases where actual demand is less than half that projected the mini-grid operator will make a loss because tariffs cannot easily be increased without further reducing demand.
One of the challenges is to find the right balance between commercial viability and the ability and willingness of end users to pay.
The success in collecting revenues from end users depends on:
- Affordability of tariffs;
- Willingness of users to pay;
- Metering technology;
- Anti-theft measures;
- Staff responsible for the collection; and
- Type of tariff which can be adapted to local constraints.
Tariffs may be based on different criteria:
- Flat rate or service tariff;
- Paid in advance or after usage;
- Limited or unlimited power consumption for different customer groups;
- Demand managed or not;
- Set up with or without automatic load scheduling in case of over-demand;
- Paid in small increments or in larger weekly or monthly payments;
- Cash based or mobile-money based; and
- Collection by company staff or third party vendors.
The type of tariff also defines the metering technology which needs to be used, from simple load limiters for flat rate tariffs to sophisticated smart meters allowing demand-managed pre-payment of electricity.
Non-payment and theft can be minimised, for example by using prepayment tariffs and having regular security controls around the distribution grid.
It is also important to have checks-and-balances and monitor customer payments.
End User Finance
Demand for electricity can be stimulated by providing financial support to end users of the mini-grid
Users may require finance to cover the up-front costs of connections, indoor electric installations and purchases of electrical equipment.
This support may be provided directly by the developer or through third party financing institutions. It may also be subsidized through output-based aid, which links the payment of public funds to the delivery of connections.