If mini-grids are integrated with the centralized grid, who will finance the necessary upgrades to the main grid?

Short Answer

Mini-grids play a unique role in providing power to small communities with limited needs. But by nature of their limited size and scale, mini-grids are less efficient than larger grids. In remote areas, mini-grids are often a final power solution. However, in peri-urban areas or small towns that grow in economic importance, mini-grids are an interim solution that lasts until the day the national utility can extend the national grid out to them. In these cases, there are important technical, financial and legal considerations that must be addressed so that the mini-grid can be integrated into the national grid, to allow local communities to benefit from the greater economies of scale that come from using the larger system.

In most countries that allow the interconnection of privately owned mini-grids to the central/national grid, the project developer pays for necessary upgrades to the network to accommodate the distributed energy generator. These upgrades include building new lines and upgrading substations (including transformers). The new equipment typically becomes the property of the utility, even if the project developer pays for it. Developers must also pay for interconnection equipment (relays, breakers and associated equipment) on the developer’s premises.

In some cases, rural electrification agencies (REAs) or donors fund the construction of new medium-voltage distribution lines to connect a renewable energy generator to the main grid, together with new customer hookups for villages along the path.

In cases where multiple renewable energy generators might connect to the same feeder or substation, developers may need to determine how to allocate the cost of upgrades to the feeder or substation among multiple generators.

Further Explanation of Key Points

Utility vs. Project Developer Funding of Upgrades

Once a mini-grid has connected with the main grid and is selling electricity, it is commonly referred to as a small power producers (SPP) or grid-connected distributed generator. Utilities typically require an SPP developer to pay for the cost of upgrading the utility network to accommodate their project. This encourages project developers to consider interconnection and upgrade costs during project planning. Developers have clear incentives to pursue projects that have low interconnection costs because of their proximity to existing power lines or substations. Given that the cost varies greatly, utilities are reluctant to agree to upgrade transmission and distribution for interconnection regardless of the project’s location. Regulators should ensure that utilities do not require excessive upgrades.

It is up to the utility that owns the main grid and the mini-grid project developer to come to an agreement on how to interconnect. Typically, once the mini-grid is integrated into the national grid, the utility takes on responsibility for operation and maintenance of all grid assets. Mini-grid owners who prefer to retain control over grid assets must agree on different terms with the utility to agree upon and plan for operation and maintenance concerns.

A breakdown of cost categories for interconnection upgrades, including who pays and who controls the asset (as observed in Africa and Asia), is shown in the following table.

Cost Allocation of Interconnection Equipment Generally Observed in Developing Countries
Equipment Purpose Paid By Cost Sharing Built By
Transformer, switchgear and distribution line to the point of interconnection (POI) Once upgraded, permit the power produced by the SPP to flow through the utility’s grid SPP None SPP
Protection equipment Protects the grid from adverse effects of the SPP and vice-versa SPP None SPP
Energy meter and metering equipment at the point of supply Invoicing SPP None Utility
Line upstream of the POI to a designated point on the grid Deliver power from the POI to the grid SPP May be possible with another SPP Utility (SPP may be allowed to build)
Lines and equipment further upstream of the designated point in the grid Enhance capacity of the lines and other equipment to deliver the output of the SPP to the grid SPP May be possible with another SPP, a customer or the utility Utility (SPP may be allowed to build)
Source: World Bank (2014). From the Bottom Up: How Small Power Producers and Mini-Grids Can Deliver Electrification and Renewable Energy in Africa..

Assistance by REA or a Donor

Sometimes, a country’s REA provides funds or subsidies for grid upgrades to accommodate interconnection. For example, in Tanzania, a small hydropower project needed a new section of medium-voltage distribution line to connect to the main grid. Tanzania’s Rural Energy Agency helped fund the construction of the line as well as new customer connections for villages along the path. Tanzania’s Rural Energy Agency provided performance-based grants of $500 per new household connection. Another project in Tanzania needed a 50 km distribution line to connect a 10-MW hydropower project to the grid. Tanzania’s Rural Energy Agency funded the extension of the national grid to an army base near the hydropower project and then transferred the asset to the national utility. This reduced the distance of the transmission line the developer had to finance.

Cost Sharing if Multiple Developers Benefit from Upgrades

In some cases, upgrades and new distribution lines may benefit multiple SPP developers. Those who build first often feel it is unfair for a later SPP to get a “free ride” on assets the former had to purchase. Therefore, new SPPs who wish to connect during a specified period of time (for example, within five years of the first interconnection) are sometimes required to reimburse the SPP(s) or customer(s) who initially paid for interconnection. Successful implementation of such a reimbursement system requires that the utility maintain accurate records. The utility must also have procedures in place whereby new SPPs are charged a proportional share of the initial capital cost to reimburse the first SPP.

Sri Lanka has established a reimbursement arrangement for SPPs that pay for upgrades that benefit other SPPs. After the first SPP builds a distribution line, each SPP (up to nine) that applies for interconnection within five years pays 10 percent of the first customer’s shallow interconnection cost.

Putting it Into Practice

Estimating and Funding Interconnection Costs

Estimating the cost of an interconnection may require an engineering study by the utility or a qualified consultant. The study determines whether the existing substations can accommodate the current flow injected at the proposed interconnection point and how the project will affect the flows of current in the event of faults. A good engineering study also identifies equipment or upgrades that may be necessary and estimates the cost for the equipment, installation and commissioning.

Project developers can identify ways to share estimated interconnection costs with other organizations, such as donors, governments, SPPs and other organizations. Developers should explore opportunities to electrify villages between the SPP and the main grid, gathering information on the number of potential customers. Project developers can use this information to discuss cost sharing with government electrification agencies and foreign donors.

Mini-grid developers can also work with other SPPs who might want to share a connection. Developers can negotiate a cost-sharing arrangement directly with the other power producer or involve the energy regulator in the discussion. If the project must begin before negotiations have concluded, developers will need to record distribution-system costs for possible partial reimbursement.

Relevant Case Studies

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 ACP-EU Energy Facility and Rural Energy Agency. This project built a 50-km line to interconnect the mini-grid to the main grid.

Resources

MIT University (2016) MINIGRIDS (India): Current Challenges and Future Strategies.
This report examines several integrations of mini-grids, focused primarily on projects in India.

Rockefeller Foundation (2017). Beyond Off-grid: Integrating Mini-grids with India’s Evolving Electricity System.
This report profiles the innovative approaches taken in India to interconnect mini-grids while also trying to preserve their autonomy for instances in which the national grid experiences trouble.

Last updated: February 13, 2018

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