What are the sources of capital for mini-grid projects?

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Short Answer

Mini-grid projects require capital (funds or physical assets). Different types and amounts of capital are available for three key project stages: prefeasibility and feasibility studies, construction and commissioning and operations.

Some donors and lenders provide capital for prefeasibility and feasibility studies. Before launching a mini-grid project, developers need to conduct prefeasibility studies to determine whether the project is viable. If the project is deemed viable, developers conduct feasibility studies to assess different options in generation technologies, service levels, tariffs and other aspects of the proposed project.

Some project developers use their own funds to conduct prefeasibility and feasibility studies. Developers without internal funds can seek capital from a range of sources, including individual angel investors, international aid organizations/donors, rural electrification agencies (REAs) and early-stage investment institutions such as Persistent Energy Partners and InfraCo Africa.

Considerably larger amounts of capital are needed for construction and commissioning. Mini-grid project developers may draw on a mixture of financing, including grants, equity and debt.

Types of Financing
Money awarded that does not need to be repaid. Grantmakers usually provide funds to achieve specific social, environmental and other development objectives. Common sources of grants are government agencies, international donors, private foundations and non-profit development organizations.
Funds given in return for partial ownership of the company. Sources of equity include impact investors, angel investors, venture capital, investment firms and multilateral or bilateral clean energy funds.
Money borrowed by an organization to be repaid over time with interest. Commercial banks are the most common source of debt, including both loans and lines of credit. Other sources include international donors and private foundations. The World Bank and other development institutions use clean energy funds to provide commercial banks with lines of credit for loans to mini-grid projects.
Mezzanine Finance
Funds provided as a loan that the lender can convert to equity if the borrower does not repay. Mezzanine finance is a hybrid of debt and equity financing.

Further Explanation of Key Points

Capital for Prefeasibility/Feasibility Stages

As the project moves from the prefeasibility stage to construction and operations, risk decreases and capital needs increase. During each stage of the project, developers need different types of funding. Even project developers who have secured grants may need to borrow money to complete a project.

The first phase in a project's life cycle is prefeasibility. Capital expenditures at this stage are fairly low, as activities are focused on study and analysis of the project. The prefeasibility phase asks whether the project is viable from an economic, technical, legal, resource and financial standpoint. At this stage, where the project's risk is the highest, funding typically comes from the project developers themselves, sometimes with funds or technical support from donor-funded programs, grants or angel investors.

If a project is deemed viable at the prefeasibility stage, the next stage is the feasibility study, which answers questions about how much the project will cost and the likely financial returns on the investment. The feasibility study includes a business plan, detailed system design and financial model outlining which portions of the project will be financed by equity, grants and debt. This stage of the project also addresses permitting and licensing, which can be time-consuming if the mini-grid project is among the first built in a country or region.

The feasibility study is crucial; mistakes in the business plan or financial model can lead to substantial cost overruns later or jeopardize the viability of the project.

Project developers often fund their own feasibility studies. Early-stage investors and government entities such as REAs may provide grants to cover a portion of the cost of feasibility studies, engineering studies and environmental impact assessments.

Capital for Construction and Commissioning

Once the feasibility study phase is complete, mini-grid project developers seek out either private or public financing sources to back the project. The overwhelming majority of capital needed in a mini-grid project is for construction, including purchase of any land, equipment and materials. Equally important is the cost of qualified personnel who can build and install the project correctly and test it properly.

Once funding is secured, project developers typically commission an engineering, procurement and construction (EPC) contractor to execute the work. EPC contractors specialize in quantifying materials needed such as cables, solar panels, wind turbines, thermal generator equipment, switch gears, transformers and steel or wood utility poles; procuring and transporting the required materials; and installing them correctly and in the right sequence.

The construction phase of mini-grid development is most prone to cost overruns and management challenges. Any unanticipated factors can change the project timeline and total cost. Poor communication, resettlement issues, adverse weather, local unrest or supply chain trouble are elements that can impact the mini-grid project cost.

Capital for Operations

Once a project has reached the point of commissioning, it enters the operations stage. At this point, the project is largely funded through its own cash flows (such as retail tariffs). Developers might seek funds to expand the mini-grid, but most sources of funding are in place. The developer begins to make scheduled loan repayments to banks and other lenders. Equity investors receive returns (in the form of dividends) when the project begins to earn a profit.

If the mini-grid sells electricity to the main grid, developers may want to design two-tiered tariffs (if permitted by the utility and local regulations). Two-tiered tariffs are an arrangement offered to small power producers (SPPs) whereby the payment for the first 8–10 years is higher than the subsequent tariff in the last 10–15 years. This arrangement can be useful to SPP developers, because the higher upfront project revenue stream better matches the project’s debt service requirements over time.

Investment Process

Equity investors decide whether to invest in a project or mini-grid company based on the business plan, management team’s track record, size of the market and the costs and risks and benefits of the project. Potential equity investors include private equity funds and impact investors with a mandate to achieve social and environmental benefits alongside financial returns. Multilateral development banks also design, finance and operate facilities that provide equity. Facilities designed to promote clean energy will often accept lower financial returns than a private investor would.

Some investors may find equity investment too risky but may still be interested in providing mezzanine finance. Mezzanine finance resides somewhere between debt and equity on the risk/return profile. It is generally debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in full and on time. Mezzanine finance lenders are paid before equity investors, but after debt funders.

Before they are willing to lend, commercial banks generally require that mini-grid project developers secure commitments from equity investors (or equity and mezzanine finance) equivalent to 30–40 percent of the project cost (with variations depending on the amount of risk perceived by banks). Considering their large capital cost, mini-grid projects often require loans that have long tenors and low interest rates. In many cases these are difficult to obtain due to the perception of risk associated with such projects. Development banks such as the World Bank have worked to offset risk for commercial lenders by providing line of credit to commercial banks, with funds earmarked for long-term renewable energy project loans.

Once project developers secure debt and equity from project investors, the project has reached financial close. Project close is defined as the execution of loan agreements between a developer and a bank or financial institution. Upon first disbursement of funds by investors, the project moves to into the construction stage.

Putting it Into Practice

Checklist for Projects Seeking Investors

To obtain debt or equity financing and many grants, developers will likely need to demonstrate that their projects have the following:

  • A strong local team with the skills and expertise required for the project
  • Community support
  • Access to land for electricity generation and distribution
  • Documented access to the renewable energy resource (such as hydropower water rights or reliable supply of agro-waste for biomass combustion)
  • A strong business plan
  • Strategic partners (optional, but strongly encouraged to have international partners that bring expertise, technology and ability to navigate regulatory/licensing requirements and/or financing)
  • Regulatory approvals
  • Authorized concession for service area
  • Clarity about who will purchase electricity, in what quantities and at what prices. If selling to the utility or other large customer, an interconnection agreement and a power purchase agreement (PPA) are required.
  • Insurance covering various stages of project development and operations
  • Plan for training and capacity building plans to train staff and management
  • Logistical arrangements (such as transporting equipment, fuel and staff and providing housing for local staff)
  • Support to cover any engineering, procurement and construction needs, including operations, maintenance and equipment-replacement costs
  • Social and environmental impact assessment, if required
  • Preliminary plan for project expansion or replication

It is easy to underestimate the time and costs required to complete a mini-grid project. Larger projects may require many visits to the capital city to acquire or follow up on permits. It is important to plan for potential delays at all stages, including permitting, financing, construction and commissioning.

It is important to consider ways to mitigate risk. For example, if the project sells electricity directly to retail customers, examine prepaid meters to help address payment issues. If the project intends to sell electricity to the national utility, consider insurance or treasury/government guarantees to mitigate the risk of non-payment or delayed payment.

Equity Investors in Mini-Grids

The following companies and organizations have an interest or a track record of investing in mini-grids in developing countries. (The presence of any company on this list does not reflect endorsement by USAID or its affiliates.)

Relevant Case Studies

Adaptive Solar PV Mini-Grids in Tanzania. Devergy, an energy services company in Tanzania, is providing rural villagers with access to electricity using PV-powered mini-grids with smart payment and monitoring technologies. This project, funded by equity, shows how the modular nature of mini-grids allows just-in-time expansion, with pre-paid meters reducing risk of nonpayment.

Hydropower in Tanzania’s Rural Highlands. The Mwenga Hydro Generation and Rural Electrification Project in Tanzania’s Iringa region provides electricity to more than 2,200 households in 17 villages, a local tea and coffee factory and the national grid. The Rift Valley Corporation installed the 4-MW facility in 2012 with funding from the Africa Caribbean Pacific-European Union Energy Facility and Rural Energy Agency. This case study illustrates the separation of wires and generation business and pre-payment meters to reduce risk of nonpayment. The project is funded by a mixture of grant, equity and debt financing.


Frankfurt School – United Nations Environment Collaborating Centre for Climate and Sustainable Energy Finance (2015). Renewable Energy in Hybrid Mini Grids and Isolated Grids: Economic Benefits and Business Cases.
This study considers renewable energy hybridization of existing diesel mini-grids following two different financial approaches: government-led investment with operation by the utility and a privatized approach with investment and operation by the private sector following a PPA. The analysis draws from seven mini-grid case studies spanning a variety of grid sizes, number and type of customers, diesel costs and isolation levels.

International Finance Corporation (2012). From Gap to Opportunity: Business Models for Scaling Up Energy Access.
Each year, the poor spend $37 billion on poor-quality energy solutions to meet their lighting and cooking needs. This study focuses on companies that build and operate mini-grids and household-level devices, and is primarily concerned with helping these enterprises scale up to reach a greater share of this untapped market. Starting on page 135, there is a section on financing that addresses options, challenges, and financial facilities appropriate for mini-grids.

Last updated: February 14, 2018

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