Microgrids are key for electricity access

The number of people living without electricity reached 775 million last year – almost 10 percent of the world’s population – according to the International Energy Agency. More than a billion more have to rely on low-quality connections, often using expensive and dirty diesel generators as a back-up option. Progress on increasing electricity access has ground to a halt, as rising costs make the financial case for connecting rural communities in developing countries harder to justify.

Traditionally, providing electricity access has involved connecting homes and businesses to national electricity transmission and distribution networks. However, particularly in rural or remote areas where incomes are low, the cost of extending grid connections can be prohibitive.

“Connecting rural populations in Africa is expensive,” says Ash Sharma, head of Beyond the Grid Fund for Africa, a financing vehicle managed by the Nordic Environment Finance Corporation with funding from various development financing institutions and donor agencies. He believes that ‘microgrids’ – small-scale power grids that can function independently of national grid networks – are a more viable alternative in many areas. 

“Microgrids can offer a faster and more cost-effective route to electrification – up to half the cost of grid connection,” says Sharma, speaking to affiliate title Infrastructure Investor.

Microgrids often rely on electricity generated from solar sources, so can also be a good option for bringing clean and reliable power to remote islands. “The reality is that the grid is not available everywhere for people to connect to in Asia,” says Wymen Chan, head of Asia at SUSI Partners.

“There are 6,000 inhabited islands in Indonesia, and 2,000 inhabited islands in the Philippines that don’t have grid access,” says Chan. “These communities currently rely heavily on diesel gensets, which do not make sense today, neither from a cost nor a climate change perspective.”

Shaky economics

Deploying microgrids – or ‘minigrids’, which operate in a similar way to microgrids but typically serve a larger number of customers – may be more viable than extending grid access in many areas. According to the UN Development Programme (UNDP), minigrids will be the lowest-cost approach to bring energy to 265 million people by 2030.

But this does not mean that the financial case is straightforward. On the contrary, the IEA warns that installing minigrids became at least 20 percent more expensive in 2022, owing largely to the increased costs of components.

Increased costs are “definitely slowing the pace of deployment, at least in the short term”, says Sarvesh Suri, director for infrastructure and natural resources in Africa at the International Finance Corporation. “It is not only the cost of commodities, but also the cost of financing has gone up, and that is also going to slow down electrification.”

Even at the best of times, the economics of most electrification projects in Africa are “shaky at best”, warns Sharma. “All electrification – grid or distributed – needs public subsidy to some extent.” He adds that Beyond the Grid’s Fund for Africa, which provides funding to enable developers to scale up electricity access projects, “offers a cost-effective and competitive option for an efficient, transparent and fair approach to allocate that subsidy”.

Regulatory roadblocks

On the other hand, investors seeking to achieve a strong financial return may need to have a different focus, Chan says, noting that SUSI Partners is prioritising commercial offtakers over residential customers. “The impact of improving the sustainability and economic feasibility of commercial enterprises in these communities could result in better credit quality offtake and perhaps make residential microgrids a possibility in the future. 

“If we take a step back even further, we can try to achieve scale by first building larger minigrids in industrial parks and leverage the economies of scale to build microgrid systems in nearby communities with no grid access.”

Investors in microgrids will also have to navigate a complex range of regulatory and operational risks, depending on the jurisdiction. And they “would greatly benefit from more clarity” on the legal regime for minigrids and microgrids in Angola, for example, says Alberto Galhardo Simões, partner at law firm CMS Portugal, which last year advised sustainable energy developer Sun Africa on a $1.95 billion investment in minigrids and other projects in that country.

“Uncertainty as [to] the roles of different government departments and applicable licensing procedures are also risk factors to consider,” Galhardo Simões continues. “Clarity on these matters should be a priority and the granting of relevant licences and permits should be swifter to enable accelerated rural electrification.”

In spite of the challenges, Galhardo Simões says that following the Sun Africa investment, other developers are expressing interest in similar projects in Angola. Much greater levels of investment will certainly be needed in the coming years if the world is to have any hope of meeting electricity access targets.

Indeed, one of the UN’s Sustainable Development Goals is to ensure universal access to affordable and reliable electricity by 2030. On current trends, however, there is little chance of this goal being achieved. The IEA projects that there will still be 660 million people without electricity at the end of the decade, of whom 85 percent will be in sub-Saharan Africa.

Inflection point?

Chan says that more work is needed to make microgrids a financially attractive option for investors. “Economic feasibility is key, and the main factor for that is scale,” he says. “Scale in microgrid systems is almost a paradox in and of itself – but we need scale to achieve economies of scale especially in a period of continued inflationary pressure.”

On this point, Suri is optimistic. “Once a certain scale is achieved, once certain technological sophistication is achieved, it will help to drive the costs down to a point where the commercial investors will start to invest in this space in a much bigger way,” he says. “That is when we will see really an inflection point in terms of the amount of money that can flow into this space.

“With aggregation, and as companies start to scale up, these companies will start to step towards financial sustainability, and this will become a mainstream investment area.”

If the project economics for minigrids and microgrids can be improved, the potential gains for impact-orientated investors are considerable. The UNDP’s goal of connecting 265 million people in Africa with minigrids equates to a $65 billion investment opportunity, it says.

Realising the opportunity will require incentivising different types of investors, ranging from providers of concessional finance through to investors that are purely guided by returns, to support the deployment of minigrids and microgrids. “I can foresee significant growth,” says Sharma, “but falling well short of need unless financing and local development barriers can be overcome.”