The emerging minigrid sector is varied, slow-growing, mired in challenges — and may need a mindset shift to prosper, a new report from the International Finance Corp. has found.
Players across the sector will need to think of their projects as long-term infrastructure investment in order for minigrid systems to reach their potential, providing many people, particularly in remote areas, with access to electricity. Investors and developers should consider how to move from small projects to getting thousands, or tens of thousands, connected, the authors told Devex.
The report published Monday looks at about 20 minigrid distributed energy services companies in seven countries in an effort to assess the state of the industry, identify key trends and barriers, as well as possible solutions to help the sector scale and access finance.
“There are not a lot of experiences with commercial minigrids,” said Daniel Shepherd, the regional lead for the IFC’s Energy & Resource Efficiency Advisory team in Africa and one of the co-authors of the report. “A lot of learning needs to happen.”
The report outlines key challenges facing the sector: operational costs, site selection and up-front costs. Shepherd and co-author Pepukaye Bardouille, a senior operations officer on the IFC’s Energy & Resource Efficiency Advisory team, urge the sector to rethink its project finance and timeline.
Investors need to reframe how they view off-grid projects and treat them more like infrastructure investments, which require longer term capital or concessional financing, rather than comparing them to home-level solar or pay-as-you-go systems, Shepherd said.
The report argues that minigrid developers need to see themselves as distributed energy services companies, or DESCOs, rather than the developers of individual projects. At the moment, there are few replicable, scalable models for the sector. Firms have focused extensively on the technology rather than finding a business model and type of generation to best serve local communities, Bardouille said.
“We believe offgrid companies should be able to design solutions that make sense for market,” she said. “[Companies] shouldn’t go in with a technology looking for a market. If that is all you do, you will have a hard time maximizing the population you could serve and the market you could capture.”
Shepherd urged governments and utility companies not to view minigrid developers as competition. If all sides share their efforts to map grids and plans for future growth, minigrid companies can choose to work in areas where there isn’t a grid planned, ensuring they will have a market going forward.
In a young industry, the private sector is unlikely to be able to finance and develop large-scale minigrids alone, the report concludes. Projects will need some form of concessional financing, which Bardouille said should be used to help offset some of the upfront infrastructure costs, rather than in the form of subsidies for service.
“We think there is a need to develop, overtime, clear metrics investors can utilize to decide whether they want to provide financing for minigrids,” Shepherd said.
While the report is meant to help the industry as a whole — and a follow-up report is planned for later this year to track progress — it will also help the IFC.
The IFC has a project in the minigrid sector in Tanzania, but the report was a way for the organization to gain a better, sharper understanding of the industry, Shepherd said. That will help them better evaluate future deals, including an investment they are considering at the moment.
The research will also help the IFC determine the role it might play in helping to spur industry growth. For example, the IFC will be thinking more “about a public-private solutions space both in terms of financing but also in terms of delivery,” Bardouille said. Shepherd added that there will likely be announcements on that front in the next six months.
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