Dive into the fascinating realm of mini-grids and Rural Industrialization in this podcast episode with Brad Mattson of Husk Power and John Kidenda from PowerGen. Together, they embark on a journey to unravel the intricacies of the anchor load model and discuss the significance of productive users in a well-rounded electricity customer structure. Gain insights into how they master the art of risk diversification in this dynamic mini-grid sector.
Uncover strategies for electrifying larger villages with mini-grids swiftly and delve into the dialogue on what it takes to electrify smaller, less lucrative villages via mini-grids. Rural Industrialization emerges as one potent approach to powering up these smaller villages. The duo debates its profitability boost and broaches the crucial question: which stakeholder should spearhead rural industrialization in this multifaceted mini-grid electrification scenario?
Brad illustrates the transformative potential of Rural Industrialization on the rural economy and shows how Husk Power integrates both, electrification and industrialization into one business, while John articulates why PowerGen remains exclusively in the electricity domain, seeking collaboration for Rural Industrialization in their mini-grids.
Join us for a riveting exploration of the mini-grid sector and uncover the potential of rural industrialization to fortify mini-grid operational sustainability.
For an in-depth understanding of Rural Industrialization, read: KeyMaker Model fundamentals (afdb.org)
LinkedIn: https://www.linkedin.com/company/inensus-gmbh/mycompany/
Twitter: INENSUS (@INENSUSgmbh) / X (twitter.com)
Visit www.inensus.com for more info.
Dive into the fascinating realm of mini-grids and Rural Industrialization in this podcast episode with Brad Mattson of Husk Power and John Kidenda from PowerGen. Together, they embark on a journey to unravel the intricacies of the anchor load model and discuss the significance of productive users in a well-rounded electricity customer structure. Gain insights into how they master the art of risk diversification in this dynamic mini-grid sector.
Uncover strategies for electrifying larger villages with mini-grids swiftly and delve into the dialogue on what it takes to electrify smaller, less lucrative villages via mini-grids. Rural Industrialization emerges as one potent approach to powering up these smaller villages. The duo debates its profitability boost and broaches the crucial question: which stakeholder should spearhead rural industrialization in this multifaceted mini-grid electrification scenario?
Brad illustrates the transformative potential of Rural Industrialization on the rural economy and shows how Husk Power integrates both, electrification and industrialization into one business, while John articulates why PowerGen remains exclusively in the electricity domain, seeking collaboration for Rural Industrialization in their mini-grids.
Join us for a riveting exploration of the mini-grid sector and uncover the potential of rural industrialization to fortify mini-grid operational sustainability.
For an in-depth understanding of Rural Industrialization, read: KeyMaker Model fundamentals (afdb.org)
LinkedIn: https://www.linkedin.com/company/inensus-gmbh/mycompany/
Twitter: INENSUS (@INENSUSgmbh) / X (twitter.com)
Visit www.inensus.com for more info.
Solar mini-grids have turned from small pilots to an electrification wave. We were there when mini-grid regulation was established, when financial transactions were closed. We saw new technology thrive and companies fail. This is where we tell the stories. This is where we discuss the future the mini-grid business Powered by Inensis.
Speaker 2:Hello, my name is Nico. I'm the CEO of Inensis. Today, I'm welcoming guests representing two of the most successful solar mini-grid companies in the world. Welcome Brad Madsen from Husq Power and John Kidenda from PowerGen. Brad is co-founder, chairman and CSO of Husq Power Systems. Before committing his entrepreneurial solar and semiconductor expertise to Husq, he had founded tech companies in the US whose combined value rose to well above 2 billion US dollars. He was a partner in a venture capital company and was on the board of an incubator for social entrepreneurship which gave rise to such companies as Kiva, Kickstarter and Husq Power. Brad is on the advisory board of Shell New Energies and on the board of AMDA. He received various awards for his achievements.
Speaker 2:John is the chief of utility operations at PowerGen Renewable Energy. He manages PowerGen software team, the operations and maintenance team and the customers team. Before John has worked with Dalberg and other advisory firms. He holds a master's degree in public administration and international development from Harvard University's Kennedy School of Government. Thank you, Brad and John, for joining our session today. The subject of this episode is anchor loads, productive use and rural industrialization business model successes and failures. Some years back, people thought that the anchor customer model will solve all issues of mini grids, make revenues projectable, stabilize the mini grid business and finally, make it profitable. John, can you do me a favor and define the term anchor customer for our audience?
Speaker 3:Sure anchor customers are usually used to refer to a business model where mini grids, basic economics is underpinned by a single customer, usually something like a telco tower that provides a reliable source of demand and revenue that you can then build a grid around with more household type loads that are less predictable and typically lower revenue per customer.
Speaker 2:As you just said, the anchor load number one for mini grid companies is supposed to be the telecom tower. Are you supplying electricity to telecom towers, John?
Speaker 3:Yes, we are. We're supplying at least 16,000 RCA operations. We're going to be expanding that to a little over 60 over the course of the rest of this year. That's primarily where we are powering some towers.
Speaker 2:According to my experience, negotiations with telecom companies are very tough. Expectations of reliability are extremely high and electricity terrors are low. What is your experience?
Speaker 3:The same. I think it's quite well known that serving telco towers is really quite hard because they're quite demanding on the levels of service, but they're also very aggressive in negotiating with their suppliers. So you end up with very thin margins to deliver very high service level agreements typically.
Speaker 2:What other anchor customers do you see in Africa?
Speaker 3:I haven't really spent a lot of time looking at that, mainly because we don't really deploy the anchor customer model at the PowerGen. Typically when I hear anchor customer it's a telco, but I've heard, for instance, some talk around cooling systems being another anchor load. I can't speak to any particular projects that we have seen that successfully deployed, but I've seen a lot of conversation around that, Brad?
Speaker 2:I understand that you're not going into the direction of anchor loads at all. Can you tell me why?
Speaker 4:We've really never looked at the anchor load as a successful business model. What is John alluding to is, when you have a customer like that, they have too much negotiating power in terms of the tariffs. The mini-grid margin business is already a very tight margin. You really need to have some degree of profitability and you can't afford to give the negotiating power to other entities. We really don't look to a single customer ever for any significant part of our load and rather don't even use the term anchor at all. In fact, I would say more. We look at a basket of customers that give us a sustainable load. We basically simulate what you get with an anchor, but with a basket of customers that diversifies our risk and allows us to have decent margins.
Speaker 2:Sounds good. John, I understand that you electrified workers' barracks of tea farms. Do you consider those anchor customers?
Speaker 3:Not really because they're really primarily household-type customers, not very high-consuming. Our model in Kenya is a bit different, where all our grids in Kenya are built on private estates. At the end of the day, both the households and the overarching customers are one entity, the owner of the TST. In that sense you do have some of the elements of a good anchor customer, but it's really not the same thing as the typical model, because it would be kind of like considering everybody who's connected to a grid as an anchor customer.
Speaker 2:Brad and John. Given that anchor customers are difficult to find, difficult to work with and probably less reliable than initially expected, role will anchor customers play in future mini-grid business models? What do you think?
Speaker 3:Well, as is power gen.
Speaker 3:We've, similar to what Brad mentioned, chosen not to go anchor customer route as in any way in our model for expansion.
Speaker 3:It's not part of our strategy going forward Because of some of the challenges that have been mentioned. I think, perhaps to the extent, that something that fills the gap that anchor customers were supposed to step in exists. It's probably something like a more sophisticated approach to a basket of customers that make your grid economics work. Like Brad mentioned, internally at Power Gen, we are very focused on identifying a 20% segment of our grid that typically drives 80% of the energy consumption and revenue. This is a phenomenon that we've seen organically emerge across the various countries that we've operated in as the way in which a successful mini-grid typically is organized, and so going forward, being more deliberate about ensuring that we identify that pattern in a prospective mini-grid and identify specifically who is going to constitute this small 20% creates an economic base for a place that we want to deploy. A mini-grid is perhaps how we will apply some of the principles of anchor customers on our grid without actually having an anchor customer.
Speaker 4:I agree with what John said, and maybe the future on mini-grid deployment is we probably should quit talking about anchor customers and talk about most sustainable customer base. And while anchors aren't important, customers are critically important and we have a very high customer focus and it's really that, yeah, they have a role, they are a customer, but just a customer, and it's really important to focus on customers. But I think we could, in the future, maybe not need to use the term anchor customer anymore.
Speaker 3:Yeah, and perhaps just to clarify for us, as I mentioned, we have 16 towers on our grid. Sincerely on, we don't consider them anchor customers, but we are happy that they are on our grid. They help add revenue to the grid, they help diversify the profile of the load that we serve. But whether those towers were on those grids or not, we would have built those mini-grids.
Speaker 2:All right. That brings us now to the next term that is regularly used as a magic word for mini-grid business models, which is the productive user, and there is a little bit of a similar hope around productive use in mini grids, like it was some years back for the anchor customer, brett. What is your understanding of the term productive user and what are examples for typical productive users in mini grids?
Speaker 4:Yeah, it ties to another thing we use in this industry is energy access. Energy access usually is applying to homes. You know, like give access to homes, and what the application typically is is recharging cell phones and providing light for the home and so forth. A lot of times these needs are met by solar home systems, but this is not productive uses. Usually, typically in the home you're dealing with comfort and, you know, improvement of well-being, maybe some health benefits because you can eliminate kerosene, but it doesn't necessarily improve their livelihoods or provide jobs or increase the income.
Speaker 4:So the way we've looked at productive uses is that these are uses of energy that end up improving the let's say, the economic activity within a community. So they either allow them to make more money by increasing like, if it's a shop owner, increasing revenue, or it creates jobs in the area, or, in so many cases it is used to eliminate diesel generators. So basically going from a carbon kind of local energy economy to a renewable energy economy. So these are all productive outcomes in terms of either livelihoods or, you know, carbon. From that point of view, I would consider that also a productive use.
Speaker 2:Sounds like you're rather thinking in terms of development trajectories rather than the acquisition of individual users. Is that right?
Speaker 4:I think when you look at it in a bigger picture, post-anker loads. I applaud the productive use movement. I think if we really want to alleviate energy poverty, this is the way we do it. We have to stimulate economic activity and I think that's done through these productive uses. But that I think that's a narrow definition.
Speaker 4:I think what we're really doing is doing economic development in the rural setting. You know so a lot of times economic development in countries is limited to cities and everyone moves to the cities because where the jobs are. And I think it's really important that this economic development have a more rural context and I think that's what, when you take the big basket of productive uses and you think about it in a larger context, it really is rural economic development. I think sometimes Niko used the term industrial development and I think this is really true. This is what it leads to and I think that is the real goal we have at us. Power is really developing, pushing that agenda quite aggressively, Because I think that actually increases the livelihood incomes, makes lives better in these communities.
Speaker 2:Yeah, we'll get to what we call rural industrialization later. Let's stick to the productive user for some time. Brett, how do you identify productive use potential before a village is electrified? Because well before you come, usually there is not much. There is it?
Speaker 4:No, actually in many cases there is. I'll give you an example we go into a village and they all have a shop and they're making furniture in the shop, but they're using hand sauce. But so there is some economic activity. They're building, let's say, furniture, a table or chairs, but they're doing it with the manual labor. So we identified this as a productive use of energy, because then you could help them acquire a table saw or a circular saw or such tools. That could significantly improve. And we have cases where their economic activity or their revenue doubles, triples or even quadruples in a year, because they go from making two pieces of furniture a month to like eight pieces of furniture a month through use of energy. So the use was there, it was just not industrialized, it was not automated, and I think that that's the advantage we bring when you have reliable electricity.
Speaker 2:That sounds good. Does that mean when you bring electricity, things develop automatically? Or how do you incentivize business people in mini grids to become productive users?
Speaker 4:There's two cases. In many cases they have already taken the step to try to do it and they're using with diesel generators. So in that case we're eliminating a diesel generator in a place with a lower cost, cleaner form of energy. And in some cases they haven't and we really need to help them a little bit. And in the former case they already have the tools. But in the case where they don't have the tools, we may help them through financing or some other mechanisms. If they don't have the capacity to buy this equipment, we can help them buy the equipment. So it is a little bit of a bigger picture when you look at this. You can't just provide the electricity. Oftentimes they need help getting going. But it's really kind of mostly financial assistance. It doesn't take much urging. When they see they can increase their incomes, they're usually very eager. So there isn't much pushing required. It's more enabling through the availability of finance.
Speaker 2:Are you selecting the machines and appliances together with your customers, or are you delivering these to them?
Speaker 4:Yes, 25% of our business is supplying various energy-efficient devices. You know whether they be equipment, appliance tools, a variety of things. It ends up being a decent part of our revenue.
Speaker 2:I see, john. Well, over the last decade various trials around training and education of local business people in good business practice, accounting, profitability calculation and so on have been conducted in mini grids. I guess your company has probably also taken part in some of these activities or NGO offers. My experience from these trials is that well, if you invest 100K or 100,000 US dollars into training, you may increase the annual revenue for a local business person by, say, $10,000 per year and the revenue of the electric utility by, say, $1,000 per year. This means that training and education on that level of local business people will never be a task that a mini grid company will pick up without significant subsidies. What is your take on this?
Speaker 3:I agree that that's the case. Economics just don't make sense for mini grid to take that type of training on as part of their cost base. So I guess that then we use the question who should do the training? Or should the training be done? I think, maybe stepping back a bit.
Speaker 3:I'm a firm believer that the challenge of solving energy access on the continent, whether that's for private individuals or businesses, is so large that there is no one solution that's going to address it. It's incorrect and also harmful. The zero sum thinking that sometimes pervades in the space, where people want you to decide whether it's going to be the main grid or off-grid solutions, or mini grids or solar home systems that are going to be the quote unquote solution to electrification on the continent. I think all these solutions are going to be necessary. That being the case, the question then becomes in what situation is the particular solution that us, as Parjain, are offering the best solution for electrification For us? We think that larger towns and villages and even peri-urban areas are where our solution really shines, because we can make a very clear case that it is the least cost solution to solving this problem. We can engage with communities where there is already a substantial amount of economic activity and, as a result, have less need for creating business activity from scratch, which would require the kind of intense training and hand-holding that you're mentioning.
Speaker 3:I think even the work of creating the alliances with non-profit partners to provide that training is enough of a resource drain for us as a business that I'm very reticent to engage, because we've tried that before and ended up having one or two people on the team almost spending 80% of their time managing those relationships.
Speaker 3:I much prefer a situation where I move into a community there's already a vibrant economic activity and what we're trying to do is not create that economic activity but accelerate it by giving them more reliable access to power, lower cost power compared to the diesel generators that they're providing, a simpler power to connect to. They don't have to send people to buy diesel from the next town over to fuel the generators. That sort of accelerator function is very necessary, in my view, if we are going to actually solve the problem by creating the type of economic activity that makes these communities vibrant places where people want to stay and move to rather than move away from, and it's also simpler. That's how I think about this question of how much business or economic training needs to happen. How much does it cost and who should pay for it?
Speaker 2:John, what is a town? How do you define a town that is large enough for you to electrify, like in terms of number of people or in terms of revenue made by a certain industry or a certain sector or so?
Speaker 3:Yeah. So right now, as Parjan, you really wouldn't consider connecting a community where we would have less than 1,000 connections in one grid. And it is very different from our history. We've sort of evolved to this place as the best place for us to deliver value. It doesn't mean it's the right model for every grid or many grid player, but for us, where we think that we've found a sweet spot, where we can deliver power at a reasonable cost and do so profitably, is by not connecting sub 1,000 household communities. So when I joined Parjan over five years ago, we were connecting villages of 50 households. The most recent grid that we brought online in Sierra Leone is over 3,000 households.
Speaker 3:How you structure yourself as a business to serve those two markets is very different, which is why sometimes also, it's quite stressful to have conversations around the idea of the mini-grid sector, because it's not a very well-defined asset class, and we've spoken about this in Amdahl and other spaces.
Speaker 3:And then what does it mean to say you build mini-grids, when somebody who builds something that powers 50 households being lumped in with somebody who's building something that powers 5,000 households? So I think we probably in the same vein of retiring the anchor customer label, I think we need to become more precise about what we are speaking about when we're speaking about building the kinds of assets that we're building. Then you can have better conversations around. Okay, what is needed for 1,000, 2,000, 3,000 households your community to be electrified, versus what is needed for a 5,100 household community to be electrified? I'm very sure that if you're building a grid for 100 households, you're going to need that $100,000 in training to build economic activity to support that grid and there should be robust solutions to provide that. But if you're building a grid for a 1,000, 2,000, 3,000 household community in Africa, then there's probably enough going on there already that those resources could be better directed into other use.
Speaker 2:I fully agree, john, that it's much easier to electrify larger towns than smaller villages with mini grids, especially because the electricity demand of the village increases not linearly but close to exponentially with the size of the town. And after all, you're then not selling, say, 5 kWh a month to 1 household in a small village, but you're probably selling I don't know 500 kWh a month to a residential household with an air conditioner, and that is a completely different deal, a completely different business case.
Speaker 3:What I have come to understand over the past five or so years that have been thinking about this is that there is very little in the power sector that we work in that is normally distributed.
Speaker 3:There's very little that grows on a linear scale. Pretty much everything that matters is on a power scale. Everything that matters is like log distributed. So I said before that all our grids that have been successful have had this Pareto distribution of demand where there's a 20% that drives the economics of the grid and then there's a long tail of 80%. But that doesn't just manifest at the grid level, manifest at the portfolio level. So if you look at our portfolio as a whole, you will not find that all this average distribution of the top 20% of our grids in our portfolio have a disproportionate impact on our consumption and energy. So everything sort of has this huge distribution and as a result you have to think about what that means for how different the 50 household community is from a 5000 household. It's not just that linear change from 50 to 5000. It's even more extreme than that.
Speaker 2:Right Brett, what is the smallest village or town size that you would work with?
Speaker 4:Yeah, I'd say we have a little bit different strategy, so it'd be smaller than what John mentioned, although I agree with the thought process entirely of them. I'm doing some work, in fact, of looking at these groupings and I think the baskets I put these in as one is there's certain commercially viable minigrids. Now these will be the larger ones that John's referring to. That there's a lot of discussion about. We need subsidies and a lot of things in terms of donor community engagement with the, with the minigrid world, and trying to stimulate demand and everything else, and this is really applying to other markets. But there's a certain number and the number may be huge. Like 20,000 minigrids in Africa could be built right today without a lot of work, because their communities are robust enough, there's enough economic activity that you could just convert them from diesel or basically they have the income necessary to create the demand. You need to be minigrid. So it's only maybe 10% of the minigrids, but that's still like 20,000. There's a lot of minigrids that need to be built. Yeah, I mean, today we could get on with it if the government would just get out of the way in many cases and let us do the work.
Speaker 4:There's another section. I think that we go into it has a little bit more, which we call the bridge markets, and the third one, just to complete it, would be the ones that really require permanent subsidies. The communities are so small that you can't really operate a minigrid profitably in this. Unfortunately, that might be as much as 60% of the minigrids of the 160,000 that are mentioned constantly. It's a pretty big number. There is deserved attention on policies and regulatory and the concern about tariffs and subsidies and so forth is real because that's a large number.
Speaker 4:But still, I'd say Huston dives more into the middle market we call bridge, which maybe currently aren't great but with some work in the community there's enough economic activity there that you could really run a very profitable minigrid and so we delve a little bit more into that. We have a smaller number of connections, smaller number of customers and still run them profitably. But I think we go a little bit more into this rural economic development activity of working with either the agricultural sector we're working on, you know, e-mobility. We do clean water provisions. We have a lot of different interventions in the community. We put in 1,000 solar water pumps for irrigation. So we do a lot of work in various areas that help develop the demand in those communities, and so we can work in transition markets or bridge markets, where in a few years they're very vibrant. But in the beginning you have to push a little bit.
Speaker 2:When a client asks me well, how can I introduce productive use to my minigrids, then usually my answer is you need a lot of standardization. Don't do step-by-step, one-by-one solutions. Don't offer too much engineering. Offer a standardized package. Deliver the machine, the appliance, yourself, then you can be sure that it works on your minigrid, and then offer some financing in terms of a deferred payment scheme or so, brett, how much standardization is in your business?
Speaker 4:I'd say we're still developing that. I would agree with the concept. We have a certain in our customer base. It's similar to what John said about 80% of our revenue comes to 20% of our customers, you know, and in that context we have different kind of relationships. For example, if we're working with banks, they have a different need. If we're working with shops retail clothing shops they have a different need. A welder supply, a mill.
Speaker 4:So I'd say we don't have one size fits all because they're very different productive uses. But I'd say within that there's a template that you begin to form and we're actually kind of standardizing those. Now it seems to me, even amongst communities, even diversity we work both in India and in Africa, depending on geographical regions, the needs are very similar, whether it be a pharmacy or whether it be whatever shop we're working with. I wouldn't say we're standardized. We kind of work with them and try what to fulfill the need they have, but it doesn't involve too much customization. You know we're moving towards a standard offering in most of those cases but a lot of times it's not a very complicated thing, like we go into a shop and say, if we add a fan in some lights, your revenue is going to increase 20%.
Speaker 2:All right To close this productive use subject. I would like to hear from each of you just one sentence or two summarizing what you think what the future of productive use in mini grids is.
Speaker 3:Sure, I think it's absolutely key. As Brett said, what I want to do is provide the type of electricity that enables community to generate enough basically GDP growth to exit from being places where people are moving away from and economic activity is declining, places where people are moving to and economic activity is increasing. And that really means productive uses are the centerpiece of our electrification strategy. If you can provide the kind of electricity that people can produce things with, then maybe that's the good opportunity to define what a productive use appliance is, because for some people you know, it's a machine like a milling machine that takes a cultural producer in a sort of like a rural industry where it produces something out of it. But for me, I simply define it as a productive use, as anybody who's using our power to make something that they're going to sell. So that could be a miller, but it could also be a barber, it could be somebody who runs a video hall where people can come and watch television and listen to music.
Speaker 3:And why I think that's important is that person is making a very particular calculus that is different from a household customer. The household customer is asking themselves if I spend my limited wallet to purchase kilowatt hours from this company, will it improve my quality of life? Will I feel better, will I be cooler at night? Will I be able to see better in my house? That's one question which is very important. The person who is purchasing my power to make something that they're going to sell is doing a very different calculus. He or she is asking themselves if I purchase kilowatt hours from this person, will I be able to produce something that I can sell to somebody else for more money and in cost? And that's what value creation is. And so, if I can enable that for someone, that's a very powerful engine for economic growth. And so that's why I say I should maybe define productive uses more broadly than others would, and that's why I also say that that is, for me, the centerpiece of what we want to achieve as a great operator.
Speaker 2:Brad, what is the future of productive use and mini grids for you?
Speaker 4:Everything John said.
Speaker 2:All right, let's leave it at that.
Speaker 4:Basically, it's huge. I think it leads into your next topic, rural industrialization. Productive use is just the tip of the iceberg. When you really do it right, you have to get into the rural industrialization and I believe the majority of the effort in the sector needs to be focused on this. In doing an analysis on the mini grid ecosystem, there's a hole there where this is not identified as as critical as the donor community, the regulatory environment, the investors, the suppliers, the mini grid developers themselves these are all parts of the ecosystem. This one hasn't been identified in more strongly enough as a critical part of the ecosystem where we really bring in third parties to do this, where you can have people do it or you teach how to be done by developers. It just needs more focus. It's huge.
Speaker 2:Brad, you already started talking about this earlier. I understand that Husk is really doing a lot in what we call rural industrialization agro-processing, e-mobility, purified drinking water, cold storage as a service, and so on. Do you want to talk a little bit more about this and explain to us what you actually do and how you do it?
Speaker 4:I think it started out. We started out a little bit like PowerGen in this case, where we were just providing electricity, assuming just provide it, then you're done If people need it. It would be easy. We learned 10 years ago that this wasn't going to work and we started getting more involved in how to utilize energy as opposed to just how to produce energy. And now maybe 60 to 70% of our effort is in this second thing, and it involves all the sectors you're talking about.
Speaker 4:It turns out energy is pervasive. You use it for transportation, you use it to produce food, you'd use it to create products. So we became involved in a variety of these and continue to, and in fact in some cases we find that we mentioned earlier you'd sometimes need to finance the building of these appliances. We've gone a step further. Oftentimes we don't find an entrepreneur doing it and the work needs to be done. So we have what we call Husk-owned enterprises, where we'll do the purified drinking water ourselves, and there's advantage here.
Speaker 4:So if you're a mini-grid operator, john may appreciate this. If you're a customer, you can control your load. It's really an advantage when you're trying to do time of day usage and basically we use the electrons when no one else wants them and it really allows us to get higher, basically, capacity utilization factor and basically being our own customers is very helpful for balancing the grid. So we get pretty far into it. Not only do we support entrepreneurs in the community that are doing mobility or clean water or agro-processing, we also oftentimes do it ourselves if there's a hole there and we actually honestly have the capital. So in many cases our customers don't have the capital and we do, so we could be the capital provider and it gives us an income. Can you imagine? You know diversifying income is important in this business. We have another flow of income which is not just using the electricity but actually providing the good services that the electricity creates, and we do that ourselves. So, yes, we do. We are pretty deep into that ecosystem.
Speaker 2:Sounds great. We actually came up with a very similar idea sometime back and some of our listeners may know that Enensos has also invested into various mini-grid companies. One of them is Jumema. We do that to run experiments and whatever works best, we basically sell through the consultancy arm In Jumema.
Speaker 2:We tried a rural industrialization model around Tilapia and we started off collecting Tilapia, producing eyes, putting it on eyes and selling it to Dar es Salaam, because we found that 80% of the Tilapia that was consumed in Dar es Salaam was imported from China, while the fish was available in Lake Victoria, just a few kilometers north, and somehow the fish didn't get to the largest city of the country. So we said let's fill that gap and then we tried delivering on eyes and it didn't work. It didn't work because the fish lost weight, it lost water during transport. Then we came up with the idea of cleaning and deep freezing the fish in our mini-grids on site and that was the solution. And suddenly the margin jumped up to 20%, in some cases even 25 or 30%. That was good business for a certain period of time and after all the margin from that Tilapia sales, not considering the overheads, was higher than the revenue from electricity sales. It can be a very nice diversification, as you said, brad, for a mini-grid company.
Speaker 2:We have then looked into various other value chains and, john, we also looked into one value chain together when we were working as a consultant to UNOPS in Sierra Leone, where you have a large number of mini-grids and you have sites with significant number of palm trees that could produce palm oil through pressing on site.
Speaker 2:That would reduce the transport cost because at the moment the palm fruit is being delivered from these far, far inland sites 500 kilometers or even more by trucks to the press wages in Freetown at the coast. If you press on sites, you can significantly reduce the transport costs and therefore increase the margin. And this is what we calculated together and we came up with a concept and your colleague at that time told me well, this is a nice concept which may work, but we as a company cannot do it ourselves. We are a micro utility or a utility company. We need somebody else to pick this up. But, as Brad just said, I believe also that the mini-grid company is in the unique position to have the administrative power, the management power on site. You can control electricity, you can make sure that your electricity to your facility is reliable. You can actually manage the logistics, because you had sorted out the logistics for your mini-grid components already. So why were you not interested at that point in time?
Speaker 3:Yeah, I think the basic reason is the most important thing to choose as a business is not what to do, but what not to do Right, because attention and focus and resources are always, if you're building a growing business, a scarce resource. And so I think that the decision not to pursue that was not a statement about whether I was thinking that it wouldn't be a profitable thing to do, but we had to ask ourselves the question okay, given our limited human resource, if we chose to do this thing with the resources that we have, what would we be choosing not to do with those resources? Or maybe put another way, if we chose not to do this thing, build this oil pressing business within our Sierra Leone business unit, what would we do with those resources otherwise? And I think we came to the conclusion that the resources that we have in country, limited as they are, were better used trying to more effectively run the power utility that we are building in Sierra Leone, which is now the second largest utility after the national utility in Sierra Leone. And even if it was going to be a profitable business to run, we would have to change the structure of the business unit significantly in order to run it. The number of people in the business unit, the types of capital that belonged to the business unit, the types of people who would run the logistics as well as the factory, and that is a cost in terms of focus that didn't make sense for us and it still does not make sense for us as a business.
Speaker 3:It doesn't mean that it's a bad business, and I think that's why it's interesting to talk to people like Brad, because, as I've said before, the one thing that really annoys me about how we often talk about this problem is everybody wants a silver bullet, everybody wants a single solution to the problem, and I am fundamentally against that idea.
Speaker 3:I think there are going to be multiple solutions. There are going to be multiple business models that are necessary to address this, and I am excited when I hear Ennets is pursuing a fresh freezing and a husk working to build husk-owned businesses and deploying that as a solution. The diversity of solutions is really, really important and I think what we have decided is what our example is going to be is the guys who sell electricity, and that means that the choices that we make about what types of communities we connect will need to align with that strategy, the choices that we make about the size of our operations in terms of headcount in each business unit will have to align with that strategy, and if we make choices about headcount that are designed for a power utility and then attach a business that is a palm oil pressing and distribution business into that, then we are setting up that business unit for failure, and so I think the short answer is choosing not to pursue potentially profitable business lines is part of just strategic coherence and focus, and that's really what drove that decision.
Speaker 2:That is well understood, John, and nobody will actually challenge your business expertise and everybody takes his own decisions. But still let me ask Brett. John just said the main reason why he would not go into a rural industrialization business is that adding this additional business into his main business would interfere with the structure of his existing business and would require significant additional staff. What is your experience here?
Speaker 4:I think that's true. Actually, I kind of look at it a little bit differently when you look at customized solutions. Would we have a customized mini-grid for every installation? Absolutely not. That's a formula for disaster. I would apply the same rules to, kind of, our rural industrialization policy.
Speaker 4:So if it's a one-off business you can only do in one community. We've all learned first time you tried. As you said, nico, first time you tried it didn't work. Then you have to do it again. We've had less experience on the second hit. Usually it's a third or fourth iteration before you get the business order right. So you guys were very effective if you had the second try and you got it right. The learning curve is significant and you can't go in and think, okay, I know how to do this business the oil pressling or this or water or any of them. They take work. So we really pick the ones that we feel are common amongst all communities.
Speaker 4:Our plan is to build a thousand mini-grids over the next few years and basically you want to have that. Whatever we do would be applicable to 80% of them. So that's why you look at all these communities have mobility needs. So you could look at e-mobilities pretty safe, they all need drinking water, they all need mobility. So if you work out the solution, there's a chance you can replicate it with a standardized method and it doesn't add as much. Now you have that.
Speaker 4:First time you try to do it, it costs. It's like doing R&D. You have to figure out, okay, what's the business model for water, what's the business model for e-mobility. But once you figure those out, if you really have a platform where you can deploy that to a thousand sites, it's a pretty good business, and so I think we're really looking at standardizing our approach and picking ones that need it.
Speaker 4:People eat food everywhere, people drink water everywhere, people need transportation everywhere. You can look at the baskets energy-supported businesses that we can play in intelligently, and it's a pretty big opportunity. That's why I think we're diving in rather than shying away, because some of these are just huge opportunities. As you mentioned, you can make more money off the Tilapia business than you might make off supplying the electricity to the Tilapia business. So therefore, why leave that laying there? So, in any case, we want to grab it. We want to grab it as long as we can bring the expertise, but we're fully aware that the learning curve is not small, so you cannot underestimate the work it is to figure out how to do that business smartly.
Speaker 2:I fully agree, and any type of crop that you want to deal with, that you want to trade, that you want to process, brings its own challenge. Any type of new activity brings its own challenge. Yeah, as a consultant, this is the exciting part of my work. When I look into a new value chain for a new mini-grid company, you can say, hey, now, here, let me do the calculation, let me do the organization, let me do the research for this specific crop, for this specific product that you want to export from your village into the urban centers. Yes, that is what excites me about this rural industrialization stuff. So when I talk to mini-grid companies throughout Africa and Asia, most of the CEOs actually say the same as John, as you just said Let us focus, let us stay focused.
Speaker 2:Mini-grids are complex enough. It's not easy to run. Generate, distribute, sell electricity, monitor customers, communicate with customers, do all these regulatory things and so on, comply with all the requirements, go for capital acquisition and everything that's related. I probably just touched 50% of what you do, of what we all do. I can fully understand that, but I'm also arguing a little bit like Brad is doing, like there is an opportunity out there. Why are we not grabbing this, and this is now what we think we should tackle in the next stage of mini-grid business development.
Speaker 2:We're currently working with a company in Nigeria called Konini, and Konini is currently being prepared or we're preparing that company to provide so-called rural industrialization services, and that means that they go into the villages, they invest into the processing units. They need to work very closely with a mini-grid company to maybe even share data, where it's permissible, to better understand the dynamics on the ground. Who to work with, who is reliable? Who is a reliable payer can also be a reliable vendor and then collect goods, process on site, do the logistics, sell it wholesale to a large off-taker and then basically share hands with the mini-grid company in not organizing, managing this business, but maybe sharing staff on site. So that part of that person who is on site anyway will be paid by Konini, another part will be paid by the mini-grid company and, after all, also sharing the margin, of course, with a mini-grid company.
Speaker 2:That is a concept that we're currently developing, where we probably have a plot on the land of the mini-grid company in the village, where then the mini-grid operator who needs to protect assets anyway may also then protect the generation facility where we get electricity in a reliable manner, like these kind of things we're currently thinking about. We're currently developing and we're talking to some first companies in Nigeria and the initial feedback that we get is positive. I can say what do you think about that concept? Is that something that may be picked up by the mini-grid sector? May this be exported to other countries, maybe even.
Speaker 3:It's definitely. It's a service that's needed. I think there's another company out of Uganda that is trying to maybe take a different tack with productive use, basically productive use as a service for grid providers. But I think the question really of whether it ends up being valued at is how the resource after allocation happens between the rural industrialization of the service business and the mini-grid. And as long as we can find an effective way of providing those responsibilities and the resulting produce margin, that there are results, then I don't see why it wouldn't succeed.
Speaker 3:Again, I think the proof of the pudding is in the eating. When you're mapping out how great a business it could be, the particularities of implementing it are very hard to visualize, and so trying it out is going to be key. Then the other thing that I would just say is Brad's point about scalability. They're also going to have to find a way to focus on the industrial processes that they can photocopy across a large number of sites, because it will also make it easier for us to work with them. We want to learn with them on our first site, for instance, and then just copy paste across our sites. We don't want to go through 40 different learning processes at 40 different sites in order to implement our business. I think that's my thought on that.
Speaker 4:Yeah, nico, I would add a little bit context to that. To me this is an issue of the sector's maturity or lack of maturity. I grew up in two industries one, the semiconductor industry and then the solar industry, and I can tell you it's insane when the industry starts where you have companies like IBM making not just computers they made the chips that go into computers. They made the silicon wafer that went into making the chips. They made the equipment that went into making the silicon wafers that made the chips. I mean, in the beginning you have to do everything. It's just insane. And then, as the industry achieves scale, you see bifurcation, you think split up, and now you have indicated specific people that just do every single element of the value chain. But that gets there after, honestly, after decades. And this mini-grid industry is one of the most immature industry of the ones I've worked with. The other ones are quite mature now, they're huge, but I feel like I've gone back four years. It turns out it's at the very beginning and if you want something done, sometimes you have to just do it yourself. But the issue of whether the third party we're ready for that is an issue of scale. Are there enough mini-grid customers or enough developers that they can sell their services to? Are there enough sites? Is I mentioned, we're doing a scale ourselves. We want to do a thousand mini-grids, so then you're creating your own scale to deploy these solutions. It's not ever too early, I mean.
Speaker 4:I think it's good to get started. We need third party suppliers for these services. Husk is doing it internally. The majority of developers you mentioned don't want to do it and therefore there's a huge vacuum there.
Speaker 4:There's an absolute need for a group to step in and learn these best practices on how to deploy productive uses, how the ecosystems in each one work, where the stopping points are, because there's little gotchas everywhere and you have to identify those and know how to eliminate them in order for the business to proceed. So all that wisdom needs to be applied. Resolve the problems you get from the learnings you gain. So I think, absolute need I endorse it, support it. Are we mature enough for that to occur? Because there's inefficiencies too, as you mentioned, internally. We love being our own customer. We really understand our customer. So I think there's a lot of benefits to doing internally, but it's a lot of work and one size doesn't fit all here. I think we're going to need, as John said, lots of different solutions, lots of different business models. So I support it and let's push to make it work.
Speaker 2:Absolutely true. We need to think broad, allow for all the solutions to be tried, to be tested, and then we need to see what works. I see another avenue for rural industrialization with mini grids coming up right now, and that is a very interesting development in industrialized countries where the so-called supply chain acts are being implemented. Germany has just recently implemented such an act, france has such an act already, the UK has such an act. I understand that the United States are also looking into these kinds of things.
Speaker 2:The supply chain acts say that any importer of goods from a third party country, like from Africa, from Asia, from anywhere, must make sure that the origin of this product is verified and that along the supply chain up to the importing into the industrialized country, no human rights violations occur and no environmental harm occurs. So to actually prove that, you need data. You need data from rural areas. That is where mini grids can help, because data is only where there is digital technology. Digital technology requires power, electricity, so to say. And now, if these products come from rural areas and they are processed in rural areas, you need to, as a mini grid company, as a Koneini kind of company, monitor all your processes, record all your collections, record whom you paid how much money to like, what local farmer you paid how much money to anyway, and that is the data that you need to also make sure and prove that your supply chain is absolutely clean.
Speaker 2:I think that is an opportunity, that is a door opener which I'm trying to follow up on, and this may be an opportunity for rural industrialization and also another potential revenue stream. That's at least what I see. Okay, now to close our discussion. Considering all we know about anchor customers, productive users and rural industrialization, how will mini grid companies earn revenue in the future? Does doing everything at once overstretch the mini grid company's capacities? What do you think, john?
Speaker 3:I don't think there'll be one. They will earn revenue in multiple ways and different mini grid companies will have different approaches. If you're asking about how PowerGen will earn revenue in the future by selling a lot of electricity, All right, john.
Speaker 2:One last question to you before I have one last question for Brad. Every now and then there are rumors about PowerGen exiting the mini grid business and rather focusing on C&I solar, for example. That is obviously more profitable. Can you tell our audience what your company's plans are in this regard?
Speaker 3:Yeah, I mean I don't know what is precipitating the rumors, but I think the simple answer is no, we're not exiting. How we see our business structure going forward is really driven by two pillars what we call grids and C&I. Both of them are going to be part of the business, but I think you'll notice that I said grids rather than mini grids, because I think we're trying to sort of help create language that better specifies what exactly we are trying to build. And so we are definitely going to be electrifying households, electrifying the businesses and communities, and continuing to build the types of infrastructure that we are known for, which is town and village size, mini grid, so to speak. We are constantly going to be moving in the direction of larger and larger single installments, and that is a core part of our growth strategy. That is not going to go away.
Speaker 3:We are simultaneously going to be building a C&I practice and accelerating that, but even there, I think the principle of generating revenue through electricity sales is also affecting our strategy there. So we are, for instance, moving away from what has been actually a meaningful part of the business, where we build C&I infrastructure and sell it to our customer to run. Going forward, we are very focused on owning that infrastructure and selling the electricity that is generated from those assets. So even there, on the C&I side of things, the business is very, very focused on the sale of kilowatts. So here's your question no, power chain is not exiting, building mini grids. We are going to continue to both grow the grid side of the business and the C&I side of the business and in both of those parts of the business the focus is going to be generating revenue through electricity sales other than sale of assets or the sale of other products that enabled by the profession of electricity.
Speaker 2:Thank you, John. That was very insightful and thanks for your commitment to the mini grid sector.
Speaker 3:I said, it's a fun sector to be part of.
Speaker 2:I think we all agree, Brett Husq Power is expanding in the mini grid sector heavily. Do you want to tell us about your targets?
Speaker 4:I think I mentioned. Probably the largest target is we're pushing very hard. We're doing a major financing right now and we're pushing to. The next step will be over 1,000 mini grids and in fact we plan on implementing that and as we get close we'll be planning for an IPO. So we really have a very aggressive plan, rolling up the scale to a point where it really looks to the world hey, this is a potential scalable. It's proven because it has a scale, scalable solution to the problem and I think that will be a very marketable entity when we get to that point. So we're doing that.
Speaker 4:But I'd also say we're embracing what John's mentioning. Right now, c&i is 50% of our revenue. So then we're also moving towards that from being an EPC business which is majority of it is now as EPC over to PPA contracts and again enhancing electricity sales through that mechanism. So we're aggressively pushing that and we think that's actually very good, because all the attention now on the climate is really you want to get rid of as many diesel generators as possible and what you find when you're doing the C&I work is typically you're not providing new source of electricity, you're providing renewable source of electricity, you're replacing an old one which is dirty, so it's getting the clean, reliable factor. We absolutely embrace that and we'll continue.
Speaker 4:I think we're doing a little bit more as mentioned earlier in both of these ventures as pursuing the rural component of it. So we're not really scaling up towards the cities. We're staying in smaller communities where we think there's a sweet spot, not quite the largest grids where they're very commercially valuable at this point at least if they're one. Well, the national utilities don't do them very well but we could do a pretty good job. But we're pushing into these other transitions markets where, with a little bit of work on the rural industrialization question, they become very viable markets as well. So we think that's kind of the sweet spot in which we're kind of pushing that market. But yeah, overall huge goal is just get to significant scale where we can say, hey, this works at scale, and that scale for us is at least 1000 mini grids.
Speaker 2:All right. Thank you, Brett. Joan Brett, that has been an amazing session. I really enjoyed it. Thanks a lot to both of you and I hope to be able to welcome you again in another session soon. Good Thank you.
Speaker 3:Bye now.
Speaker 5:Hello, my name is Andrea Cabanero, mini grid expert at Inansus and specialized in identifying and implementing rural industrialization opportunities across the mini grid sector. Tackling global energy poverty requires addressing the profitability challenge of mini grid operations. Three key business models have been piloted the anchor based, productive use of electricity, or PUE, promotion, and rural industrialization. Diversifying the customer base is crucial to avoid over reliance on a single customer. In the anchor model, pue promotion is vital and utilizing mini grid capacities for agro processing presents an untapped opportunity. Tailoring a combination of these models to different village typologies is the key, as there is no one size fits all solution.
Speaker 5:Rural industrialization as a service, combining agro processing with mini grid operations, holds promise for profitability across all village sizes, including the market gap. The market gap comprises smaller sized villages generally not prioritized by mini grid companies, highlighting the need for innovative solutions to achieve profitability of mini grid operations. Inansus has been piloting various approaches to rural industrialization over the last five years. Now we're offering an all inclusive solution empowering mini grid operators to unlock the potential of agro processing businesses as a service. For more information about rural industrialization, refer to the KeyMirko model fundamentals paper published by the African Development Bank Green Mini Grid Help Desk.
Speaker 1:This episode of the mini grid business has been brought to you by Inansus, your one stop shop for sustainable mini grids. For more information on how to make mini grids work, visit our website, inansuscom, or contact us through the links in the show notes. The mini grid business powered by Inansus.