Seeking the Right Business Model for Sub-Saharan Africa’s $11B Mini-grid Opportunity

Work is underway by a new Rockefeller Foundation-backed lab to test mini-grid business models for Sub-Saharan Africa, where the technology could cost-effectively serve 100 million people, representing an $11 billion opportunity.

In all, about 600 million people in the area do not have electricity, a problem being tackled by the Mini-Grid Innovation Lab, a new partnership between The Rockefeller Foundation and CrossBoundary Group.

The lab’s analysis compared private mini-grids — the term used for microgrids in Africa — to main grids and solar homes. It found that mini–grids in remote areas are more cost-effective than the main grid for villages with more than 400 people per square kilometer.

“Mini-grids make more sense under certain population densities,” said Lucy Shaw, global coordinator for CrossBoundary, which aims to find capital to aid developing economies. “It depends on how far away they are from the existing grid infrastructure. The further away you go from existing grids, and the smaller the city size, the higher the cost to extend the main grid.”

Extending the main grid is least expensive for people who already live close to the grid, such as in urban areas, she said. Mini-grids are less expensive for those who live so far from the main grid that its extension becomes more expensive than installing generation and storage.

But mini-grids must be located in areas that are densely populated enough to pay for the fixed costs. An analysis by the lab found that 400 people per square kilometer is the tipping point that makes mini-grids cost-effective.

About 100 million people in Sub-Saharan Africa meet the criteria for cost-effective mini-grids, Shaw said. Most of them would use solar, with diesel backup.

Solar home systems are economical for those who don’t fit the mini-grid or main-grid scenarios.

Given that there’s a potential to serve 100 million people cost-effectively with private mini-grids, the challenge now is to create innovative business models for mini-grid companies, said Shaw. Part of the problem is that the costs of operating mini-grids are high, and sometimes the people in the region don’t consume enough power to pay for those costs, said Shaw.

Join us in Chicago May 7-9 for “Microgrid 2018: Markets and Models for the Greater Good”

In one pilot project, funded by the Rockefeller Foundation, the lab is providing financing for appliances. “We provide cash for mini-grid companies to sell appliances at more than 10 sites. Our hypothesis is that people can’t afford to buy appliances, but their power consumption would go up if they had them. Is it worth the extra revenue you get from using more power?”

The lab provides capital for the mini-grid companies to buy the appliances. The companies in turn sell the appliances to customers on credit.

In the pilot project underway right now, customers are excited about getting the appliances, Shaw said.

Another business model is for the mini-grid companies to sell related services, such as Wi-fi or water pumping.

The Mini-Grid Innovation Lab is also trying to understand how mini-grid operators should interact with the main grid, said Shaw.

“In India and Cambodia, we have had examples of interactions with the main grid. Cambodia had successful main-grid integration. But in Sub-Sahara Africa, mini-grids operate in isolation,” said Shaw.

The energy sector in the region seems to want to work toward a distributed grid with some solar and backup power provided by mini-grids, she noted. “This is a more reliable model than main grids going down for long periods of time.”

In the pilot projects, the size of the mini-grids varies, depending on the market. In East Africa, mini-grids have as few as 60 connections, with each connection being a house with five people.

In Nigeria, on the other hand, mini-grids could have as many as 2,000 connections. The lab is working with 25 existing mini-grids in Kenya and Tanzania, and are aware of at least 10 more.

Mini-grid systems more reliable than grid

When CrossBoundary announced the formation of the lab, it released data showing that mini-grids are more reliable than main grids. They’re down 2 percent of the time compared to 53 percent downtime for main grids.

Building mini-grids for 100 million people in Sub-Saharan Africa would require an $11 billion investment, according to CrossBoundary.

Rural areas served by the main grid are subsidized by consumers in urban areas, which makes the costs of main grids in rural areas look less expensive than they really are, she said. That makes it challenging to convince policymakers that mini-grids are more cost-effective.

Track news about mini-grids in Africa. Subscribe to the free Microgrid Knowledge newsletter.