Q&A: Finance hurdles for mini grid projects in Africa

Solar PV mini-grids providing electricity for schools in Senegal. Photo by: Senegal Rural Electrification Agency / CC BY-NC-ND

NAIROBI — Building out mini grid systems could help to electrify rural populations in the developing world, but these projects can be a hard sell to investors.

According to the United Nations Industrial Development Organization, progress on this type of energy generation has been obstructed by insufficient in-country technical capacity to install, operate and maintain the systems, weak regulatory frameworks to attract project developers, and inadequate access to financing to bring these projects to scale.

Mini grids are small-scale energy generation units that supply electricity to a localized distribution grid. These projects can be independent or connected to the central grid, if it is available. Mini grids can be an important alternative to the grid or enhance central grid extensions, said UNIDO.

The Power Africa Transactions and Reforms Program has a team of technical advisers that work throughout the continent with project developers to structure their projects and link them with finance mechanisms, including grants, debt and equity. Devex spoke with Pepin Tchouate, a technical adviser for East Africa for PATRP, about the particular challenges mini grid project developers have in procuring funding in East Africa. Our conversation has been edited for length and clarity.

What sort of potential do mini grids hold for expanding electricity access across the continent?

Mini grids are a solution that allows us to generate electricity locally, for local use. It is cheaper, in reality, than grid extensions. It is cheaper than connecting the grid over hundreds, or dozens, of kilometers, just to supply electricity to a small community of a few hundred households.

What are some of the challenges in attracting finance to these types of projects?

The challenge is that when you have only a few households to connect and the investment is high, it’s difficult to recover. That’s why mini grid developers are also looking for grants and for subsidies, in order to bring down the costs of energy to a level that is affordable to customers.

The challenges we are seeing are that some project developers are not good in developing project proposals. Also, the bankability of the project. Bankability is the ability of a project to really sustain itself by its stream of revenue, selling electricity. It can be difficult for a project to demonstrate that by selling electricity, expenses will be recovered. Not only the investment, but also the additional expenses. If that is not clear, an investor will not be keen to provide funds for that project.

Is it more difficult for a mini grid project to prove bankability than other energy generation projects?

Yes, it’s a little bit more difficult for micro grid projects.  For normal independent power producer projects, for example, connected to the grid, the project developer signs a power purchase agreement with the utility. And the utility is paying for the electricity. This means one customer signs. This power purchase agreement is a bankable product. Mini grid developers have numerous customers, so it is difficult to predict the revenue stream. For most investors, it is still a risk. It should not be in reality, but they still consider it a risk. That makes life more difficult for a micro grid developer than a classic independent power producer.

If a company wants to build mini grids in a particular country, what I will do is provide them with the different regulations and policy rules that are in the country. Power Africa transaction advisers work with the governments in order to create an enabling environment for the private sector engagement in the different countries.

What are the risks and regulatory hurdles associated with these projects?  

In the region, the regulatory challenges, especially for mini grids, are the tariff issues. The question is whether private developers can apply the cost-reflective tariff.

We discuss these and other issues with the regulators, with the ministries of energy, in order to help them to understand that it’s not always cheaper, but we have to look at it from the perspective of whether it is cheaper for the household to connect to a mini grid, rather than using other sources of energy. This is how we try to address the risk linked to the regulation aspect. But investment risk is being taken over by the project developers.

Is Power Africa helping to facilitate these projects getting broader financing, after initial investments?

It is in our competence to connect developers with finance. We have the Power Africa Toolbox, which is a set of financing opportunities. Every time project developers contact us, we share with them this toolbox and give them advice, depending on their project. Most of the time the investors have specific requirements. We help project developers figure out how to go through the investment. We say to them, we think A, B, C, or D could likely be interested in your project.

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About the author

  • Headshot sarajerving

    Sara Jerving

    Sara Jerving is Devex's East Africa Correspondent based in Nairobi. She is a reporter and producer, whose work has appeared in The Wall Street Journal, the Los Angeles Times, Vice News, Bloomberg Businessweek, The Nation magazine, among others. Sara holds a master's degree in business and economic reporting from Columbia University Graduate School of Journalism where she was a Lorana Sullivan fellow.