IN DEPTH: The micro-grid solution
Imagine you were building a business with healthy profits and nearly unlimited growth potential. Now imagine dedicating your working life to improving the lives of some of the world’s poorest people. Now imagine doing both at the same time.
It may sound like a pipe dream, but entrepreneurs around the world are doing just that — by providing remote villages with round-the-clock electricity through PV-based micro-grids.
The energy generated can make a huge difference to people’s lives — helping to pump water out of the ground, allowing children to study after dark, increasing safety through improved streetlighting and raising food hygiene standards through refrigeration. In short, it gives poor people a better chance in life.
These micro-grid systems — which comprise solar panels installed across a community and backed up with battery systems or biomass or diesel generators — are increasingly becoming a more compelling business opportunity as the cost of PV technology continues to fall (while grid extensions to rural villages remain prohibitively expensive).
“[Micro-grids] offer 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,” Adnan Amin, director-general of the International Renewable Energy Association (Irena), tells Recharge.
“And I think that’s a very important transition because it signals the ability to go to scale. 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.”
He says the time is ripe to pounce upon a “transformational opportunity” to provide power to the 1.5 billion people throughout the world who lack electricity.
Countries such as Indonesia, Malaysia and Thailand “have started, but have not even begun to scratch the surface in terms of what’s possible”, he argues.
In Bangladesh alone, the number of off-grid PV systems has grown from about 7,000 in 2002 to two million last year, thanks to a national rural electrification strategy in conjunction with the World Bank.
According to Irena, the Asian Development Bank (ADB) and international non-profit organisation Alliance for Rural Electrification (ARE), a range of measures are needed across the Asia-Pacific region in order for off-grid renewables to be rapidly deployed: new government policies, subsidies, regulations and training programmes — as well as customised financing models and greater private-sector investment.
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 set strict standards for power-purchase agreements to encourage banks and other private investors to work with state-backed 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 acknowledges, noting that he has heard different parties describe them as projects ranging from 100kW-5MW.
“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].”
The example of Bangladesh suggests that conventional sources of public financing may not always be appropriate for rural mini-grids. Amin laments 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 says, 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.”
However, companies such as Rahimafrooz have shown that micro-credit can be extremely effective in helping rural customers cover initial installation costs. 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 technologies, requiring developers to get creative about financing.
The micro-credit approach can be copied in other developing countries throughout Asia.
“The rate of growth, once a business model has been established, is astounding,” says Amin.
“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.
Irena, the ARE and the ADB are also concerned that shortages of skilled professionals could delay the deployment of mini-grids.
“How do we train entrepreneurs to understand what the opportunities are and so they can take advantage of them?” asks Amin. “And how do we build the basic technical skills that are needed to take advantage of the technological change that is coming?”
But despite all the potential obstacles in the past, Amin is optimistic that off-grid renewables-based systems will take off.
“The way we had exponential progress with a disruptive technology like mobile telephony, decentralised energy creates a similarly disruptive but also empowering effect,” he says. “Decentralised energy is the ultimate democratisation of energy and development.”