What ownership models are used for mini-grids?

Short Answer

Mini-grid ownership varies from project to project. Three principal actors—governments/utilities, private entrepreneurs and local communities—can own, install, manage, operate and/or maintain mini-grid systems. In some cases, two or more actors share ownership. Local institutional arrangements and regulations often determine who can own the system. The four most common mini-grid ownership models are community-based, private-sector, utility-based and hybrid.

Further Explanation of Key Points

Community-based Model

Under community-based models, local communities own, manage, operate and maintain mini-grids. These communities usually receive external help with financing, design and installation. Often, the developer or another outside organization provides technical capacity building, and a public entity or donor provides grants or other financial assistance. Once the mini-grid is installed, the community assumes responsibility for tariff collection and operations and maintenance. Community electricity cooperatives and other local organizations often play this role.

Community-based ownership models are common in developing countries where private companies and utilities lack the capacity or incentive to electrify remote communities. In remote rural areas, where tariffs won’t cover investment costs, community-based ownership may be the only option.

Community-based ownership is more likely to succeed alongside programs that promote productive uses of energy. By creating or growing enterprises, community members can increase their incomes. Over time, customer demand and ability to pay increase, making the mini-grid more financially sustainable.

Local communities in countries around the world own and operate mini-grids. In India, the West Bengal Renewable Energy Development Agency (WBREDA) creates local cooperatives and beneficiary committees to serve as its partners in mini-grid development. As of 2016, communities own and operate more than 23 mini-grids throughout West Bengal. In Indonesia, the government-led Green PNPM program involved local villagers in operating and maintaining micro-hydro projects.

Private-sector Model

In the private-sector model, a private investor pays to construct, operate and maintain the mini-grid. Funding often comes from private equity and commercial loans.

Private entrepreneurs typically get involved in countries where the government supports mini-grid energy development. Private-sector models are most common in countries with supportive policies and simple licensing procedures where investors can access credit, financing and subsidies and where bilateral donors and/or non-governmental agencies provide technical assistance. Government incentives in a supportive environment include concessions and output-based subsidies.

In Tanzania, for example, the government is working to attract private investment in mini-grids by creating a framework of policy, regulatory, legal and financial support instruments for the private sector. This framework has achieved cost-reflective tariffs and increased the amount of capital provided by local banks.

Regulations governing mini-grids influence which ownership models will work. In countries that have regulations, private actors must follow rules governing technology, taxes, quality assurance and other aspects of mini-grid development. Meeting regulations can be expensive. If a government designs regulations poorly or fails to enforce them, high transaction costs might deter entrepreneurs from participating in mini-grid markets.

In countries without regulations for mini-grids, the lack of transaction costs can make projects financially viable. In Cambodia, for example, effective deregulation has created a successful environment for private mini-grid operators.

On the other hand, the absence of regulations can cost investors more if private companies must navigate informal regulations. In Somalia, where the sector is largely unregulated and private companies set tariffs, the price that consumers pay for power is often very high. Deregulated environments also increase the risk of negative impacts on the environment, health and safety.

Involving the private sector in mini-grid development can be challenging since small-scale, remote projects are not usually profitable. Creative approaches, however, can make mini-grid investment financially attractive. In particular, private companies have used the anchor load approach, community clustering approach and private-private partnerships to implement successful projects.

Anchor Load Approach (Anchor-business-community Model)

In the anchor load approach, the developer secures a commercial client with predictable, guaranteed energy demand to supplement demand in the beneficiary community. A mini-grid operator might sell the bulk of the electricity to a telecommunications tower or factory, for example, and sell the remaining energy to residences. By diversifying sources of revenue, an anchor customer can make an otherwise risky project financially viable. Investors can forecast and plan more effectively. Involving a reliable commercial client can provide economic justification for supplying power to poorer households.

The anchor load approach runs the risk, however, of prioritizing anchor customer needs over community energy needs. Projects can also fail if the anchor customer goes out of business and stops purchasing power from the system. With careful planning, though, the anchor load approach can result in successful mini-grid projects. Decentralized Energy Systems of India (DESI Power) and Haiti Earthspark both used the anchor-load approach to develop viable mini-grid projects.

Community Clustering Approach

The community clustering approach groups villages with similar needs for a shared mini-grid project. The mini-grids serving these communities may not necessarily be connected to each other, but by clustering the villages, the developer can use a single management structure. This is less expensive than managing each village’s project separately. Clustering communities may also facilitate financing, since funding is more readily available for larger projects.

In India, for example, the Chattisgarh Renewable Energy Development Agency uses a cluster approach to operate and maintain successful mini-grid projects in remote areas.

Private-private Partnerships

Multiple private companies can also work together on a mini-grid project. One actor may generate the power while the other distributes it. Sharing project activities protects assets in the event of one party’s bankruptcy. Many small power producers in Tanzania use this approach.

Utility-based Model

Traditional state-owned utilities can also own mini-grids. Utilities, in this case, operate mini-grids in much the same way as the national grid, but on a smaller scale. In some utility-based models, the utility contracts with local energy service companies to manage parts of the project.

Utility-based mini-grid projects often use subsidies to keep tariffs affordable in remote communities. The utility charges mini-grid consumers a tariff equal to that paid by customers serviced through the national grid, even though costs are higher for rural mini-grid customers. In this system of cross-subsidization, national grid customers subsidize the cost of electricity for mini-grid customers.

Tanzania’s national utility, the Tanzania Electric Supply Company Limited (TANESCO), implements a successful utility-owned mini-grid project that uses cross-subsidization and contracts with local energy service companies. In the Njombe region, TANESCO owns, operates and manages an 820 kW micro-hydro plant connected to the national grid. TANESCO charges a uniform tariff throughout the country to subsidize mini-grid operations. In some cases, the utility develops and owns the mini-grid while an energy service company manages local billing and collections. In Kenya, where the utility-based ownership model is common, the Rural Electrification Authority develops mini-grid sites throughout the country. Kenya Power, the national utility, then manages, operates and maintains the mini-grids.

The utility-owned model works best when a government supports mini-grid development as part of its national electrification strategy. India’s Rural Electrification Policy, for example, defines where utilities should use distributed generation such as mini-grids instead of grid extension to fulfill rural electrification objectives. In countries without a mini-grid strategy, traditional national utilities tend to prioritize grid extension.

Hybrid Ownership Model

In a hybrid ownership model, some combination of the three principal actors—local communities, private entrepreneurs and utilities—collaborate to implement and manage mini-grid projects. The organizations form joint ventures and/or use contracts to share ownership.

Involving multiple actors leverages the individual strengths of each partner. Project developers often use hybrid approaches when one stakeholder lacks specific capacity or expertise. In this way, hybrid models reduce the need for capacity building. For example, if a community partners with a private technology firm that will run the system, the community won’t need training in operations and maintenance.

A hybrid model can be difficult to set up since it involves multiple actors. In appropriate contexts, though, hybrid ownership can be an effective approach. One common hybrid model is for a utility to build and own a mini-grid that is then managed by a community-based organization, with technical maintenance provided by a private company.

The West Bengal Renewable Energy Development Agency (WBREDA) in India provides a good example of a partnership between a government agency and local communities. A state agency implements mini-grid projects and local cooperatives manage them. The Monte Trigo Solar PV mini-grid in Cape Verde also uses a partnership between public and private entities. In this project, the local private water utility works with other local entities and the municipality to operate and maintain the mini-grid.

In another hybrid model, a private investor generates and sells power to the national utility for distribution to consumers through an established power purchase agreement. In Tanzania, for example, two private companies share ownership of the Hydro and Rural Electrification Project. Mwenga Hydro, Ltd. generates the power and sells it wholesale to the Rural Power Development Company, which distributes the electricity.

A national utility can also generate and sell power to local utilities at wholesale prices for onward distribution to consumers. In this hybrid model, the distribution business is separate from the generation business, and different actors can generate and distribute energy locally. For example, a private company might generate electricity and sell it to a community cooperative that owns or operates the distribution system. In Tanzania, TANESCO and TANWAT provide energy through a power purchasing agreement. Under this agreement, TANWAT generates power while TANESCO transmits and distributes power to end consumers.

Relevant Case Studies

Biomass Gasification in India. DESI Power, a nonprofit organization, is helping communities harness electricity for economic activities. Working closely with local communities, DESI Power installs biomass gasification mini-grid systems and promotes productive uses of energy.

Island Mini-Grids in West Bengal. WBREDA, a government agency in India, created local cooperatives as its partners in mini-grid development. Using a range of different ownership models, WBREDA has developed 23 mini-grids serving 10,000 customers throughout West Bengal.

Hydropower in Tanzania's Rural Highlands. In the Mwenga Hydro Generation and Rural Electrification Project, located in Tanzania’s Iringa region, two private companies share ownership of a hydropower mini-grid that supplies electricity to more than 2,200 households in 17 villages, a local tea and coffee factory and the national grid.

Resources

Alliance for Rural Electrification (2011). Hybrid Mini-Grids for Rural Electrification: Lessons Learned.
This comprehensive summary describes the lessons learned from projects implemented by members of the Alliance for Rural Electrification. The report addresses the key technical, financial, organizational and institutional issues relevant to developing sustainable, replicable mini-grid implementation models.

Global Village Energy Partnership International (2011). Policy Briefing: The History of Mini-Grid Development in Developing Countries.
This history provides an overview of the opportunities and challenges in mini-grid development in developing countries. The discussion includes many different mini-grid ownership models.

Last updated: February 13, 2018

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