IN DEPTH: Off-grid opportunities

Off-grid generation can help growing Asian economies accelerate the development of renewables, while expanding electricity access in isolated areas, Adnan Amin says.

The director-general of the International Renewable Energy Agency (Irena) was adressing the second International Off-Grid Renewable Energy Conference and Exhibition (IOREC) in Manila.

He said the time is ripe to pounce upon a “transformational opportunity” to provide power to the 1.5 billion people who lack electricity access by pairing resources such as PV and biomass with mini-grid technologies.

With solar, countries such as Indonesia, Malaysia and Thailand "have started but have not even begun to scratch the surface in terms of what’s possible”, Amin told Recharge on the sidelines of the IOREC, which was held in co-operation with the Asian Development Bank (ADB) and the Alliance for Rural Electrification (ARE).

From a business perspective, the development of decentralised, renewables-based mini-grid systems — typically paired with a diesel-powered generator for backup — may be more compelling than ever. Technology costs continue to fall, and in many rural communities the expansion of existing networks is too expensive to consider. Also, grid extensions often take too long to build to reduce energy poverty. 

“It offers a real alternative and feasible business proposition, which I think is a critical tipping point because a lot of the justification around renewable energy has been environmental or social. But now you have hard cash. And I think that’s a very important transition because it signals the ability to go to scale,” Amin said.

“It’s actually a business case that works today, so capital should flow where it makes money. And today you can make money in off-grid renewables.”

The IOREC facilitates exchanges between public and private stakeholders in the off-grid renewables sector, to expand electricity access in rural and semi-urban areas. But Irena, the ADB and the ARE say that new policies, subsidies, regulations and training programmes, as well as customised financing models and greater private-sector investment, will be needed to rapidly deploy off-grid renewables across the Asia-Pacific.

As the ARE — which has worked on hundreds of mini-grid projects throughout the world — notes, “regulation has to be an instrument favouring new projects, not a burden”, and is a prerequisite to investment. For example, governments of developing countries need to provide strict standards for power-purchase agreements to encourage banks and other private investors to work with state lenders to provide funding for projects.

Some proponents of off-grid systems say the lack of precise, widely accepted definitions for key technologies may not be helping efforts to bring lenders on board. And then there's the confusion over the definition of “mini-grid” and “micro-grid”.

“For mini-grids, there are a number of definitions circulating,” ARE secretary-general Marcus Wiemann acknowledged, noting that he has heard different parties describe them as ranging from 100kW-5MW. “What is ‘small hydro’? In China, it’s like a dam in the UK. If you have more or less an agreed level of what certain technologies and standards are — as well as the scope, and how many people you can provide with electricity — it will be easier to market it to [providers of finance].”

Commercial banks in many developing nations also tend to be reluctant to lend for off-grid projects due to a lack of familiarity with such projects, requiring developers to get creative about financing. Bangladesh, among the world’s largest developers of off-grid solar, introduced a rural electrification strategy with the World Bank a decade ago that brought the number of off-grid PV projects in the country from about 7,000 in 2002 to two million last year.

These projects have largely been funded through public-private partnerships. Companies such as the IOREC participant Rahimafrooz, a PV systems producer based in Dhaka, have shown that micro-credit can be extremely effective in helping rural customers cover initial installation costs. And such approaches can be copied in other developing countries throughout Asia.

“The rate of growth, once a business model has been established, is astounding. So we’re looking at best practices across the region, to see what works in what situation and to determine if we can replicate that in different settings,” Amin said.

The example of Bangladesh also suggests that conventional sources of public financing may not always be appropriate for rural mini-grids. Amin lamented that major multilateral lenders often focus on larger projects. Transaction costs are usually too high to be feasible, and the cumbersome documentation required by such lenders can delay development by up to four years.

“In that amount of time, the entire field changes in terms of the cost of technology, policies and regulations,” Amin said, noting the importance of identifying financial intermediaries that can package financing in a way that makes sense for off-grid entrepreneurs.

“It’s a very dynamic field, and the current system is not agile enough to service the needs of off-grid power producers.”

State subsidies for fossil fuels are another obstacle that must be addressed.

“By subsidising fossil fuels, you’re not allowing a level playing field to be created for the energy system,” Amin said. “If you’re going to have a competitive marketplace, let’s have a real competitive marketplace. And we think renewables are at a cost point now where they can compete.”

Irena, the ARE and the ADB are also concerned that shortages of the necessary skilled professionals could delay the deployment of mini-grids.

“Countries such as Japan can really add value in figuring out how to improve human capital,” Amin said. “How do we train entrepreneurs to understand what the opportunities are and so they can take advantage of them? And how do we build the basic technical skills that are needed to take advantage of the technological change that is coming?”

More than 650 million people throughout Asia lack access to electricity. Renewables will be key to resolving this problem, said ADB vice-president Wencai Zhang. But capital restraints alone mean that the region will not be able to expand conventional grid networks to significantly reduce energy poverty over the next decade.

The ADB, IRENA and ARE believe that modular renewables systems are the solution. And as many speakers at the conference noted, the development of off-grid systems is not an “either/or” proposition, given Asia's availability of land and abundant resource potential.

“And even with the technologies that we have today, mini-grid systems can be integrated into [existing grids],” Amin said. “The way we had exponential progress with a disruptive technology like mobile telephony, decentralised energy creates a similarly disruptive but also empowering effect. Decentralised energy is the ultimate democratisation of energy and development.”