The link between mini-grids and productive growth
Previously, I’ve published a short report including analysis of the economics of mini-grids, illustrating how the relative merits of Solar Home Systems (SHS), mini-grids, and grid extensions evolve with distance from the grid.
New geo-spatial data tools, such as the Open Source Spatial Electrification Tool (OnSSET), allow for more detailed modelling of these economics, to inform exactly where different electrification solutions are most appropriate. This blog explores the economics for a hypothetical settlement with no electricity access and aims to understand the interaction of energy access economics with productive growth opportunities in that settlement. Our imaginary settlement is 20km from the main grid and has 2,000 inhabitants.
The analysis explores two scenarios: one where only the domestic load requirement is considered; the other where 200 kW of daytime commercial load is added. It is assumed in the analysis that up-front investment in a mini-grid would include building a future-proof distribution infrastructure able to accommodate Tier 5 energy access requirements under the SE4ALL Multi-Tier Tracking Framework (MTF). This cost is then absorbed into the regulated asset base of the utility once the main grid arrives.
The figure below presents the outputs of some of this analysis. It shows how annual household energy spend (bottom panel) and the unit cost of electricity (top panel) evolve as the average annual household energy consumption increases. As households ascend the energy ladder their annual spend on energy increases, but the unit cost of that energy decreases. The figure illustrates the benefits from economies of scale both when a mini-grid is established (compared to SHS costs) and when the main grid is connected to the settlement.
The figure presents analysis for our hypothetical settlement with no commercial load (orange line) and with 200 kW of daytime commercial load (red line). Note that the costs shown include an assumed annuitised connection cost for the grid-based technologies, which is assumed to be recovered from consumers over a few years. It is important that these costs are considered, as they have a significant impact on the effective cost of electricity for households with low energy consumption.
With no commercial load in the settlement, the figure suggests that SHS are likely to be the most economically efficient means by which to provide access to electricity. The business case for a mini-grid could become attractive once the average household demand for electricity in this settlement of 2,000 exceeds ~70-80 kWh p.a. However, it seems unlikely that many households would be able to afford to pay for this level of access without more local employment options.
Hence the importance of productive growth. In the second scenario, a mini-grid business case can be supported from an early stage, and the economics for extending the grid and integrating the mini-grid with the main electricity system could make sense once average household demand reaches ~180-190 kWh p.a. Mini-grid developers would require well-defined and fair regulation to be in place for the integration of mini-grid assets into the main grid.
Households will join the mini-grid in their own time, once their load requirement reaches a level that justifies the cost of joining the mini-grid. In this scenario, not only is it possible to improve the energy infrastructure to support productive growth; this also has the knock-on impact of accelerating household access to lower cost electricity.
Of course, the outputs from the analysis will vary greatly from one country and context to another. The assumptions used could all be debated, and many alternative scenarios could be analysed.
However, the analysis illustrates the potential for a virtuous circle between economic growth and poverty alleviation. Neither energy access nor the commercial enterprise is responsible for all these benefits. The analysis highlights the importance of planning (and use of some of the geo-spatial tools mentioned earlier), so that opportunities for this link can be identified. Electricity master plans could highlight zones where the benefits from mini-grids might be greatest, and governments could consider establishing incentives for commercial enterprises acting as an anchor to infrastructure development.
If we get the regulation right, and can identify opportunities where communities can benefit from this virtuous circle, it should be possible to use new energy access technologies to accelerate the progress up the energy ladder of the >1bn of the world’s population with no access to electricity.
With an increasing number of innovative options for extending energy access, it is important for policy makers, planners, and developers to use robust economic analysis in comparing the relative merits of different energy access solutions.