Benchmarking Africa’s Minigrids

Over the last decade, leading authorities have repeatedly heralded minigrids as essential to providing electricity to approximately half of all unelectrified communities in Africa. Despite this, investment, political buy-in, and scale have remained elusive. The African Minigrid Developers Association’s (AMDA) and Economic Consulting Associates (ECA) have released a report titled “Benchmarking Africa’s Minigrids”, which presents an analysis of a one-of-a-kind dataset collected from nearly all established market leaders across Africa as well as a significant sample of smaller, newer companies that together represent the vast majority of private sector minigrid companies on the continent. The report provides the most comprehensive analysis on minigrid financing, economics, regulation, service quality, & impact available to date, and also offers key insights into the barriers facing the sector and what can be done to overcome them. REGlobal presents an extract from the report…

Key Findings

Overall, the African minigrid market is behaving predictably both as a nascent industry, with significant price reductions emerging as investments increase, and also as a rural electrification sector, in that public funding has proven an essential catalyst to bring in private investors and kickstart cost reductions through the scale-up process. Logic holds that continued public support will see continued scale-up and price reductions.

The data demonstrates a fundamental interconnection between concessional funding, private investment, political environments and deployment of connections. AMDA’s data illustrates how these different pieces of the enabling environment feed off one another to build the trust, confidence, and experience necessary to see increased delivery of energy access. These elements are so fundamentally intertwined that disruptions within the cycle can derail growth or even devolve into negative feedback loops.

AMDA’s data shows the sector is beginning an impressive scale-up phase. As donor funding steadily increased over the reporting period, connection numbers did as well; going from under 2,000 connections in 2016 to over 41,000 in 2019. These connections have provided over 250,000 people, businesses and community facilities with high quality, productive energy. To date, this growth has largely taken place in East African markets, where the sector got an earlier start.

The sector’s growth over 2014-2018 also coincided with a tremendous drop in costs, with the average price per connection falling from US$ 1,555 at the beginning of our reporting period to US$ 733 in 2018. Established developers have been able to reduce CAPEX pricing by 57% over the reporting period. Cost for new companies entering a market has reduced by 33% in the same period. Another interesting contrast between new and experienced developers is that in well-established markets, experienced firms were on average 41% less expensive than new developers in those same markets, again illustrating the logical evolution of sector as companies gain experience and scale.

Taken together, our data show that rural minigrid connections are often thousands of dollars cheaper than those of state-run utilities. With the primary concern of governments today being the higher kilowatt costs of minigrids, these enormous cost savings could easily be transferred into end-user subsidies or other cost reductions tools, and still save governments and donors billions visà-vis traditional grid expansion across the continent.

Our most alarming finding is that across the continent, regulatory compliance processes on average take more than one year per site. With the World Bank estimating that Africa requires 140,000 minigrids, regulation represents an enormous barrier to sector growth and to SDG 7. Neither will be achievable without the urgent development and adoption of more automated and bundled approval processes that allow for higher volumes of approvals at greatly increased speeds.

An unsurprising but confirmatory key finding is the challenge of low consumption. The average consumption per customer is only 6.1 kWh per month across the continent. Low consumption makes it difficult to ensure operational costs can be covered for residential consumers, let alone that a return on investment might be possible. Interestingly, the data does not show a correlation between higher average revenue per user and a higher level of consumption, utilisation rates or installed generation capacity. This is likely due to tariff pricing effects, as well as difficult operating environments where external factors and the demographic make-up of customers create large variabilities in revenue generation.

Recommendations for decision-makers

In summary, concessional funding is working to unlock private capital and catalyse investment that is allowing the sector to grow and reduce costs as it gains experience and scale. Support is urgently needed however to address the dual issues of low demand and complex regulatory environments. Only once these issues are mitigated will the sector be able to grow quickly enough to play the role it is being called on to play in ending energy poverty for good. With this in mind, AMDA has identified three key areas for decision-maker action based on the evidence presented in this report:

1. Public funding has been very successful at crowding-in other investors and more is needed. While these investments have already begun a scaling effect that is significantly lowering prices, because the sector is still in its early stages, broad, systemic public funding is still is needed to bring in private investment continentally and realize true economies of scale. Therefore large-scale, multi-country funding programs would be the most ideal tools to give investors and minigrid companies predictable, easy to understand pathways to invest and build across multiple geographies.

2. Low consumption is a systemic problem that requires coordination and collaboration among all stakeholders. Because of this systemic challenge, bankability will remain elusive until a systemic, long-term collaborative response from minigrid companies, the donor community and national governments is deployed at scale. While not based on the evidence presented in this report, experience shows that ideally, a broad-scale demand-growth program would likely need be a combination of micro-finance (for appliance purchases), micro-entrepreneurship training (ensuring appliances and small businesses are increasing incomes) and agricultural extension work (minigrid sites and customers will remain largely agrarian for some time). Right now, systemic efforts to address this core sectoral issue do not exist, and helping fill this gap will be a key area of AMDA’s work moving forward.

3. Minigrid regulations must be made more appropriate to the projects they are regulating. 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. Digitizing processes as much as possible, while making use of smart- and remotemonitoring technologies will go a long way in allowing regulators to reduce up-front application burdens, as well as allow approvals to move in batches rather than one-by-one.

Introduction

Minigrids are standalone energy systems that offer grid-quality electricity for an entire community, its businesses and even small-scale industry. Since the prices of components and technological advancements in renewable energy systems have dramatically improved over recent years, minigrids are more and more being seen as a core solution to the energy needs of rural and remote communities around the world.

With over 600 million Africans still living without access to electricity, minigrids are particularly recognized as the most appropriate technology for around half of this energy-poor population. Indeed, the World Bank has estimated that over 140,000 minigrids are needed in Africa alone to solve this problem. However, because the sector is relatively new and the customer base for these minigrids represents poor, rural and often vulnerable and marginalized groups, there are both government sensitivities and investor scepticism around wholesale support of this technology from their respective viewpoints.

One of the reasons for this is that there is very little robust data available on the sector due to its small scale and due to the remoteness of their operations. Governments and investors genuinely do not have good understandings of the sector, its performance or its ability to deliver at scale. This report represents a major milestone in closing this information gap, permanently.

In 2019, after more than a year of efforts to collaboratively create a robust data collection and sharing methodology, AMDA partnered with Odyssey Energy Solutions and Economic Consulting Associates (ECA) to respectively collect and analyse a significant dataset collected from AMDA members across the continent. What has resulted is this report. The first of its kind, this report offers insights never before seen into the performance of minigrid companies across Africa, as well as key insights into the barriers the sector is facing and how we can work together to overcome them.

The data presented here cover up to a 10-year period in some cases. We focus on important metrics such as installed and operating costs, financing, revenue per user, quality of service and various other key sector indicators.

Results show that installation costs have decreased rapidly over the period to far below the average of staterun utility connection costs, and the number of new sites and connections have grown radically since 2016. Our analysis indicates that much of this gain can be attributed to funding coming into the sector and the steps taken by governments to create conducive regulatory frameworks for minigrid developers.

The data also shows, however, that much more work is needed on both of the funding and regulatory fronts before we see the scale and cost reductions needed to bring minigrids into the mainstream.

An unsurprising but confirmatory key finding is the challenge of low consumption. Moving forward, it will be fundamental for developers, donors and national governments to work together to enable and encourage customers to increase productive energy use that can bring economic benefits to rural communities. This will in turn ensure a financially viable operating environment for minigrid companies.

Sector Growth

Electricity Access and Growth of Energy Services

The analysis in this section shows that the minigrid sector is on the cusp of commercial scale. By 2019, more than 200,000 people and over 40,000 households, health facilities, schools and businesses were electrified by the developers represented in this study. We estimate that developers represented in this report account for approximately 35% of operational, non-utility-owned renewable energy minigrids across all of Africa and 60% of Solar PV and Hybrid Solar PV minigrids in the countries represented in this study. NGOs, government utilities, and captive power minigrids make up the vast majority of remaining minigrids.

Our data show that in 2017, connection rates began to increase rapidly, showing impressive year-on-year growth. The rapid growth in the last three years overlaps precisely with the timelines of various policy/regulatory changes and donor programs that, particularly in East Africa, began exploring how to support the sector more robustly. Our data reassuringly shows that, like any other sector in any other market, good policy and the right incentives foster growth that lowers costs and improves service.

In what follows, the numbers of connections are correlated to single accounts tied to unique electricity meters. While occasionally a household and business connection may be combined into one, for the most part, behind every connection there is a household, facility or business that now has access to electricity for their lighting, social, heating, and productive needs.

Total installed kW and number of sites

Alongside increasing connection numbers, the installed generation capacity of developers has also increased over ten times from January 2013 to June 2019, from 203 kilowatts (kW) to just under 2,500kW of solar PV capacity. At the same time, the number of new sites has been increasing rapidly, with over 81 sites commissioned in 2019. The total installed capacity for minigrids across the continent is projected to grow in direct proportion to the concessional funding available, as this funding is essential in enabling growth.

Conclusion

Over the past three years, we have seen an exponential increase in the number of minigrid connections across the continent, and the sector is now beginning to move from its infancy to scale. As it undergoes this transition, it is essential that donors, governments, investors and other stakeholders continue to support its growth.

Between 2015 and 2018, the cost per connection reduced from over US$2,000 to US$733, far below the cost to connect to national utility grid in most countries. With further growth and experience, we can expect further reductions in both CAPEX per connection and per installed kW, as well as continued operational cost reductions. These lower costs combined with the high levels service quality in rural and remote areas make minigrids the ideal rural electrification collaborator for achieving universal electrification. But data and evidence on how much reduction is possible and how it can be achieved remain elusive.

It is evident that providing access to funding for minigrids, be it through grants or subsidised loans, is one of the most important actions governments and donors can take to speed up the rate of electrification in rural communities in sub-Saharan Africa. The increase in funding, particularly in East Africa, over recent years has led to, on average, a 181% increase in connections each year.

While regulators across the continent have made substantial efforts to reduce the time required for developers to comply with all minigrid related regulation, it still takes over one year for most developers to get through all approval processes. This is significantly slowing efforts universalize access and must be a major focus of reform and technical assistance moving forward.

Key drivers of growth in revenue per user are high utilization rates and larger system sizes. We can extrapolate from this that larger sites have more robust economic activity and are therefore better consumers of electricity. While it is too early to see trends in consumption patterns from the data, it is clear that consumption is nearly universally low and there is considerable work required to improve the utilization of energy.

One of the biggest questions for the minigrid sector to tackle is how to increase economic vitality in smaller communities. Case studies and best practices publications on productive uses have yet to convince developers, investors, governments and donor institutions to develop more systemic ways to ramp this work up. Demand stimulation has therefore been something investors and companies have found difficult to price into their projects and staffing costs, and remains a major technical assistance requirement for the sector.

On this note, it is fundamental that we begin building training, productive asset finance and local business support into minigrid business models in a way that builds investor trust to the level that they begin investing into these efforts as well. Hence there is an urgent need to create systemic support for productive use work. This will serve not only to help grow the load, but also will develop data and evidence to show what works, and help rural communities improve their lives and livelihoods at the same time.

Next steps

The report presents an overview of the true costs of minigrid development and some of the main issues facing minigrid companies in sub-Saharan Africa. This is a major contribution to knowledge about the sector, but remains only an incomplete snapshot into its current state, and must be followed up by regular and expanded data collection exercises that foster collaboration on sectoral challenges.

AMDA will continue to improve upon this first benchmarking study and aims to publish regular updates to ensure decision makers have access to the most up to date information on the sector. In addition, AMDA believes more extensive action-oriented research is urgently needed in a number of areas, including on:

1. Implicit and explicit national utility subsidies,

2. Cost and service comparisons between different electrification options,

3. Monitoring and guidance on regulatory improvements and best practices, and

4. Productive use success in growing economic development.

AMDA looks forward to building partnerships to explore new research opportunities on these and other areas of import to the energy access space. It is AMDA’s firm belief that expanding the evidence base is an essential part in the creation of nuanced solutions to the structural challenges facing Africa’s energy access challenge today.

The full report can be accessed by clicking here