2 ideas to supercharge the minigrid industry & jumpstart #SDG7

How can the minigrid industry ensure universal electrification with modern levels of energy, while also helping to ensure that the hardest to reach communities (i.e. the rural communities that are unlikely to be served on a purely commercial basis) are not left behind? These are the two questions I've been thinking about recently and here are two ideas that might help.

"Service-Reflective Tariffs"

Governments, power utilities and their donors continue to be trapped in a mindset that only looks at the cost of electricity. They speak about "cost-reflective tariffs", even though state-run utilities in Sub-Saharan Africa and South Asia (where rural energy poverty remains a massive challenge) have tariffs that are heavily subsidized, and are therefore very much NOT cost-reflective. Government and donor bailouts for these utilities persist despite them being perpetually loss-making. 

The playing field has shifted in the past 5 years, however, and decentralized solar solutions like privately owned and operated minigrids can now connect and serve rural communities much more effectively than the central grid. But what is still lost on governments and donors is that minigrid companies are not utilities in the traditional sense. Yes, like utilities they connect homes and businesses (using much less capital), supply electricity (much more reliably) and collect payment. But that's where the similarity ends, and where this idea begins. 

Minigrids offer much more -- including appliance sales and financing and energy services like e-mobility, agro-processing, cold chain and clean drinking water. In other words, minigrids provide the things that will drive rural economic growth and job creation, not just access to electricity. The value minigrid customers get from a kWh is orders of magnitude greater than what they get from state-run utilities. 

Yet the minigrid industry is often politicized for charging cost-reflective (and higher) tariffs than the artificially low tariffs from subsidized state utilities (itself a flawed apples to oranges comparison). But what if utilities and minigrids were evaluated by a framework built around "service-reflective tariffs" instead of cost-reflective tariffs? By flipping the perspective from cost to service, the true value to governments and their constituents would be accurately reflected. If that happened, governments would rethink how they plan future energy systems and how they allocate state support. They would have to answer the questions: Which solution should I support? The legacy solution -- main grid -- that loses me huge amounts of money and provides poor, low-value service? Or, the newer solution -- minigrid -- that saves me scarce public funds by mobilizing private capital while providing highly reliable, high-value service? The answer is clear.

"Productivity-Based Financing"

If the above shift (while clearly defining metrics for "service-reflective") is embedded in the halls of political power, and in government policy and regulation as well, then there is also a need to rethink how subsidies are currently administered by governments and their donors to minigrid companies. To date, national programs like the one in Nigeria have applied a one-size-fits-all Results-Based Financing (RBF) model, with a uniform dollar amount per verified connection. But as outlined in the first minigrid industry roadmap published last year (see below chart), every country has different types of rural and peri-urban communities where minigrids can be deployed. Some communities have enough economic activity to be subsidy-free, some need subsidy for a few years to get to commercial viability and others will likely need subsidy for the long-term. 

Yet should all of them receive the same level of subsidy?

No. A sliding scale that rewards companies with a higher subsidy for going into more marginal communities would actually make much more sense, and also help ensure that the minigrid industry is not only serving the easier to reach communities that already have higher levels of economic activity.

But to do so would mean basing subsidy not on results at the per connection level, but on productivity at the minigrid level. The goal of minigrids is to increase economic activity, or stimulate what is often referred to as "productive use" of energy. "Productivity-based financing" would tie the level of subsidy to the percentage of electricity used for productive use at the project level. For example, let's say a minigrid developer forecasts that Community X will have 20% of its electricity consumption coming from productive use on day 1 of operation, it would get a lower subsidy since there is a clear path to site viability. While Company Y forecasts only 5% of its electricity consumption on day 1, and would get a higher subsidy that would give it the runway needed to create additional demand and become more viable over time.

Such a framework would avoid unnecessary bureaucracy by simplifying program metrics and management, and suit all countries whatever their mix of market types.

At least that's the idea.