A little mini-grid history (from an INENSUS perspective)

Speaker: 0:09

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.

Nico Peterschmidt: 0:35

Hello, this is Nico. I'm the CEO of Inensis. Today, I'm welcoming my dear friend, colleague and co-founder of Inensis, jakob Schmidreindahl. We are talking about the last 20 years of Solar mini-grids, the way we have experienced them. With this, I kindly invite all our listeners today to contribute with highlights from your experience of the Solar mini-grid history in our social media channels. Jakob, do you want to introduce yourself quickly?

Jakob Schmidt-Reindahl: 1:05

Yes, sure, hi, nico. Hello listeners, I'm Jakob, as Nico said, one of the three founders of Inensis and today I'm the Chief Strategy Officer of the company. I mainly take care of our major consulting projects. Some years back, I used to be the one who was traveling all the time, who lived in several African countries to set up our mini-grid companies in those countries, to implement projects, especially in Senegal and in Tanzania, but today I'm based near Berlin and right now I'm looking forward to our talk, nico.

Nico Peterschmidt: 1:38

Great Jakob. Do you remember what the mini-grid sector looked like in the early 2000s when we started?

Jakob Schmidt-Reindahl: 1:46

At that time, third generation mini-grids were just emerging. To maybe give a little context here, so-called first generation mini-grids refers to the decentralized energy supply systems that shape the early development and industrialization of most modern societies, back in late 19th and early 20th centuries. And then much later, from the 1980s to the early 2000s, we speak of the so-called second generation mini-grids, which are systems that were mainly powered by diesel generators or hydropower and which were used in rural areas, mainly in developing countries, and in most cases operated by cooperatives or small local private operators. And then, at the beginning of the 21st century, more and more renewable energy systems emerged.

Nico Peterschmidt: 2:35

At that time people were looking at the technology only, and conferences around mini-grid were all structures about research and development of new inverter technology. Three level versus five level inverters. How accurate is the sinus wave? How do you integrate solar with wind? How do you integrate wind with diesel? How do you manage your battery system? What battery aging do you foresee? How can you project the battery lifetime of let acid batteries?

Nico Peterschmidt: 3:12

At that time, of course, that was the focus and people believed that technology, when brought to Africa, would actually kind of heal the world right and everything would just work fine and people would be happy using electricity. And well, business models were not really a subject that anybody would be considering. And when I remember back to one of these conferences in 2005, where I introduced the concept of the micro power economy and I announced that private sector would probably have a role to play here, people shouted at me, they laughed at me and they told me a private sector, no, this is something for public sector. Public sector is there for electricity supply in Africa and the private sector will never play a role here. This is quite funny. At that time I didn't think it was funny because I felt a little bit depressed after that talk I had and the feedback that I got, but nowadays it's part of the history.

Jakob Schmidt-Reindahl: 4:20

Yeah, indeed.

Nico Peterschmidt: 4:22

But you wanted to talk about the micro power economy as such, right, what components it has, and so on.

Nico Peterschmidt: 4:28

So the micro power economy was a model that we developed in 2005, 2006. And in that model, we considered how private sector could actually take a role in electricity supply using hybrid power mini grids. At that time, solar technology was still very expensive. Therefore, our focus was on small wind turbines, let acid batteries with a little bit of solar, and we were thinking about how stakeholders could work together. What we saw from experience of well development cooperation, led exercises and experiments in South America, especially Asia, and so on, was that there were frequent conflicts between the community and the mini grid operator due to tariffs, due to unreliable supply, due to the distribution of decision making power, and that is what we thought should change, and that's why we came up with a stakeholder model where we tried to balance the decision making power between the local community, the national government and a private sector operator, and I think that was the first time when this kind of collaboration was really looked into in detail.

Jakob Schmidt-Reindahl: 5:54

Right. I think it's fair if we mentioned that we were influenced at that time by early ideas that Sandlerbop had developed. And we were building on that and we were doing exactly what you just described. We created a model where it was for us crucial to create a situation where the supply of electricity and the consumer, basically the community as such, would meet as equal partners at high level, basically, and would be able to negotiate the conditions of the services and everything around it.

Nico Peterschmidt: 6:30

Yeah, this is how we developed the split asset model where we said well, there are several partners. If one partner owns all the assets, then probably there will be an imbalance in decision making power and an imbalance in negotiation power. And we said, if we distribute the ownership of assets and, for example, let the local community own the distribution network while the private sector comes in with its technical expertise to operate the more complex generation part, that would probably support a good communication between the entities. That was one component.

Jakob Schmidt-Reindahl: 7:12

I remember it was part of our thinking back then already and it is still valid today in some cases as the underlying model that this split between what we then called fixed and movable assets. Exactly the fixed assets and the movable assets. That opened the door also for the option to fund the fixed assets, the distribution assets, as so-called public goods, assets that would anywhere remain in the community, even if, for instance, the operator would be replaced, and the generation assets to be funded with private capital.

Nico Peterschmidt: 7:44

Yeah, and that model was picked up years later by various donors, but it took a long time.

Nico Peterschmidt: 7:52

The second component of this micro power economy was a commercial component.

Nico Peterschmidt: 7:58

What we saw is that mini grids were actually suffering from what today we call demand risk, but we anyway thought that maybe we can find a tariff model that generates revenues that mirror the cost structure, meaning variable costs are covered by variable income and fixed cost is covered by fixed income.

Nico Peterschmidt: 8:26

Unfortunately, most of the costs in the renewable energy mini grid is fixed costs Solar PV panels depreciation, battery depreciation, inverter depreciation, staff on site and so on. The variable cost was mainly the diesel fuel and we came up with this model of the electricity block sales, where a customer booked an electricity block that this customer was then obliged to purchase every week or every month, and this electricity block came with an energy content per week and a power limit, and with that we could actually match the cost structure with the revenue structure. The problem was that in African villages people don't always have the liquidity to pay for fixed costs. In Senegal, where we started that we will get to that later this was partly possible, but when we tried moving that to East Africa, for example, it didn't work at all.

Jakob Schmidt-Reindahl: 9:32

It's not well received. That was the second component. Right, and yeah, I mean you mentioned Senegal. That was our first country where we started our mini grid activities. At the time, we started an agreement with GIZ or they were called GTZ back then to launch a pilot project based on a public-private partnership in one village in Senegal and we set up a pilot hybrid system consisting of a 5 kilowatt wind turbine Was it 5 kilowatt peak solar and, I think, a 10 kilowatt diesel generator serving roughly 1000 people in that village.

Nico Peterschmidt: 10:07

Yeah, the famous example of Sine Musa. Up to one of the first private sector operated solar and wind mini grids in Western Africa or in Africa in general, I don't know.

Jakob Schmidt-Reindahl: 10:19

Right, and I moved to Senegal to set up our subsidiary there called Ennasa, together with a local partner and that village that you mentioned, sine Musa, up to. I had been there probably hundreds of times and nearly lived in that village for a long time.

Nico Peterschmidt: 10:34

Yeah, and it was always nice to go to that village and there were very friendly people in Sine Musa that cooked for us. I remember sitting on the ground with many people and all eating with small spoons from a big pan and the rice that they cooked always had a little bit of sand in there, but it was very tasty. Yeah, and very friendly people for sure.

Jakob Schmidt-Reindahl: 11:00

Lovely people exactly, and yeah, I mean, it was our first ever mini grid, so there were many things that we had to try out, that we had to experiment with, so we learned a lot during that time. But obviously also we needed the collaboration with the community to test out different metering technologies and, yeah, and to run our model for the first time. Also the tariff model that you described, which was in the beginning quite well received and it actually worked and it was considered as a general success at that time. Right, I mean, we took many people to the village ambassadors from several countries, politicians, the press, all kinds of visitors and that success helped us to set up a larger project where we were aiming at electrifying 30 villages in Senegal and actually had already mobilized more than 3 million euros, partly in the form of a grant roughly half of it and the other half in the form of mesonite financing from a European Development Bank.

Nico Peterschmidt: 12:02

Yeah, exactly. And coming back to the meters, that is actually the third component of the micro power economy business model. At that time Enensus developed its own smart meters, to so say. They were not that smart, they were still not interconnected really, but they communicated through smart cards and we could actually recharge the smart cards with the electricity blocks and so called extra electricity. If people wanted to use more electricity than what was in their blocks or surpass their power limits of the blocks, they could do so, but they needed to pay extra for that. And that was all done through the cards and we could retrieve some data through the cards and put that back into our system.

Nico Peterschmidt: 12:47

But after all we found some years later that it was not such a good idea to become a meter manufacturer just for a few hundred or a few thousand meters, while in China millions of meters were produced in a highly automated process at a very low cost, and therefore we gave up that meter manufacturing after having manufactured some thousand meters for some 3000 connections, like each meter combined three connections in one box to make sure that the cost per connection is reduced. Yeah, but that at least helped us understand how the metering business worked, what electronics were required, what programming and software was required to run the meters, and that software that we developed for the backup of that metering system later became the micro power manager. But let's go back to Senegal and talk about the policy there.

Jakob Schmidt-Reindahl: 13:49

Yes, I've already briefly gone into the larger project that followed the pilot, which looked very promising, and we were delighted to be amongst the first to ever were able to mobilize such a large amount of money for a private sector mini grid project.

Nico Peterschmidt: 14:02

Yeah, that was like 2008 when we established in ESO, right yeah. 2010, when we commissioned the first mini grid, and soon thereafter, 2011 or 2012 or so we actually started developing the larger project.

Jakob Schmidt-Reindahl: 14:18

Yeah, I think it was 2011 when we got both the grant award from the Dutch Dioen's Fund and then also signed the contract with a bank.

Jakob Schmidt-Reindahl: 14:27

Actually, we started with five additional mini grids, but we never got further than that Because we then ran into the problems that we only learned to fully understand once we were on the ground and operating the mini grids.

Jakob Schmidt-Reindahl: 14:41

We basically realized that the frameworks that are required for private mini grid developers that want to attract proper financing for for scale up those frameworks were, for sure, not in Senegal at that time, and I would say probably nowhere in Africa at that time were really existing, meaning regulations did not consider mini grids with their special requirements. It wasn't possible really to get a license, it wasn't possible to get a proper tariff model approved, at least not the one that we had developed at that time and all that meant, after years of struggling and really trying, that that beautiful project that I described with more than 3 million budget wasn't stopped before it actually really could take off and the investors pulled out because there was never any tariffs approved and only one license for that village, sina Musa Abdu, which we got after four years of fighting for it. And that meant as a general lesson learned. Frameworks are not ready for what we wanted there, so we basically learned our lesson from that and started restructuring our activities.

Nico Peterschmidt: 15:47

Yeah, but what we have to admit is that we went into Senegal because they had some policy for mini grids arranged.

Jakob Schmidt-Reindahl: 15:56

It was called the Iriel Right, it means electrification, rural initiative, local, basically rural electrification by local initiatives, which meant that companies or NGOs or corporatives, any organization, could apply for individual mini grid projects that they would develop even single villages, with the Senegalese rural electrification agency and would be eligible for a certain, certain level of subsidization. At least on paper. That was the idea I mean, as you rightly said. I mean certain policies were developed around what I just described, but nobody ever thought about the regulatory frameworks that would be required to make it happen.

Jakob Schmidt-Reindahl: 16:39

We were basically the ones who kind of push the Senegalese government to take a decision on that, even though it took years, but at some point they did decide and they decided against the development of a market for private investors, investors. They decided to implement basically international uniform tariff and the time that meant there is no market for private operators and investors like us, as we were set up at that time and hence, yeah, as I said, our project Was stopped and we had to basically leave the country. From that time onwards, the sector in Senegal was mainly developed based on fully subsidized project which took place. I mean, there's hundreds of minigots in Senegal today, but they almost exclusively financed by donors and there's no proper, let's say long term concept for private operation in place which questions the whole sustainability. But those were our first experiences.

Nico Peterschmidt: 17:38

Yeah, not only donors is also a project very large one, by the way, above 100 million dollars, to roll out mini grids under a bilateral loan between the Senegalese government and the German government through the development bank KFW. And there is one entity, golf engineering, which was tasked to implement the mini grids, and most of the mini grids are now existing. So Senegal is one of the countries with a very dense distribution of mini grids across the country.

Jakob Schmidt-Reindahl: 18:12

So, as you said, several hundreds, probably approaching a thousand already exactly, but with a completely different setup than what we had in mind, and we learned our lesson from that. We realized, if we want to be successful with privately financed and privately operated mini grids and others to these companies, including us need better frameworks, and they would not come automatically. As we've learned, even when pushing for years as a developer on the ground, it did not really materialize. So we basically decided to partly restructure our business and become consultants, basically switch sides and work with international organizations to support governments in Africa. We also worked in some Asian countries to develop or to improve frameworks so that they are better tailored to the needs of the mini grids sector, especially if the objective is to bring in private companies, to bring in private investments. And that started around 2013, 14, right when we learned our lesson in Senegal and started working in many countries in Africa as consultants around that.

Nico Peterschmidt: 19:25

Yeah, this decision also was taken by us, following many negotiations with the Senegalese regulator, crs, and our experience was that when we recommended something, we had the impression that they actually did the opposite and we wondered why, and then, after all, we found out. Maybe they see us as a private sector entity that wants to rip off their population, because private sector, from their point of view, is always driven by profits, to the detriment and on the back of a rural population even and therefore they found themselves in a position where they thought they need to protect their own people from exploitation. This is probably an experience that they had from other sectors and in other sectors. Yeah, I completely agree that this may have even been the case many times and, going back to the times of colonization and these kind of things, of course, there's a long history of exploitation and probably they thought that they need to protect their people.

Jakob Schmidt-Reindahl: 20:42

Actually, nico, I would even say, yes, that's part of their job.

Jakob Schmidt-Reindahl: 20:46

Right, they have to protect the consumers, but they also have to protect the interests of private sector if they want the private sector to be successful.

Jakob Schmidt-Reindahl: 20:55

Since we were definitely pushing hard for much higher tariffs than the national grid tariff, that was indeed considered.

Jakob Schmidt-Reindahl: 21:02

Yes, if we were taking advantage of the people in the villages, somehow ripping them off maybe not to that extent, but still, as you described, they were struggling to understand why we would charge them so much more per kilowatt hour than the national utility, and we basically forced them to take a decision on that.

Jakob Schmidt-Reindahl: 21:20

And the outcome was that one could learn from that that the political aspects of the decision of what tariffs to be applied in in that case and rural settings probably applies to any, any setting, but that that is so highly sensitive because it can always be exploited easily politically. One can use it in political campaigns, and once there is I said that I quite high then the next elections, somebody can run against it and put pressure, which is something we we learned the hard way in, for instance, tanzania, but also in San, very long later on we might get to that. So early on we learned that this is a very political, highly sensitive subject and we did not succeed with our attempts to make people understand that there was a certain cost to the services we were providing at that time. That's how it was exactly.

Nico Peterschmidt: 22:14

And that is where we started working as consultants, because we felt that we need to sit on the other side of the table and make sure that Governments and regulators take proper decision with proper information and a good understanding of how the private sector things and how Minigrids can actually work, what tariffs they need, what framework they need and these kind of things. And then we got a first contract, using our track record, having operated mini grids in Senegal private sector mini grid, some of the first actually we got a first contract from GIZ in India and the interesting part was that this was originally not a policy design contract, but there was a coincidence that you P Nedda the Uttar Pradesh authority. They wanted to set up a policy about mini grids because at that time and Husq power, for example, had already started deploying their biomass based mini grids and they wanted to have some framework for that. And then we came in with our experience from Senegal and well, through GIZ, influenced a little bit the U P Nedda mini grid policy.

Nico Peterschmidt: 23:36

Unfortunately, they didn't pick up everything we said. Well, we didn't expect that, so to say, but I think it was the first time when governments were really thinking about private sector mini grids. The outcome of that with the, the grant that was only provided if an unprofitable tariff was accepted by the mini grid company. Of course, that was not a good outcome, but well, at least there was something that showed that government and private sector at some point could potentially work together to electrify the villages. Because up to that point in time, there was still the idea that mini-grid market should rather be unregulated and regulation would only create hurdles and obstacles to the private sector, and there was no understanding of supportive regulation, like regulation that secures investments or regulation that distributes negotiation power in a certain manner.

Jakob Schmidt-Reindahl: 24:46

And yeah, well, this policy in Uttar Pradesh actually changed that for the first time and then followed by our work in Nigeria, where we developed the first mini-grid specific regulations, together with the German company integration under the NESP, the Nigeria Energy Support Program, which we developed. I think we started working on it 2015 through 2017, about that time but it was published in 2017 by NERC, the Nigerian Electricity Reliatory Commission, and that was the big breakthrough. I would say right. I mean, that was the first time regulations were set up to really take care of the mini-grid market specifically.

Nico Peterschmidt: 25:33

Yeah, there were other attempts to prepare regulation for mini-grids. For example, in Tanzania, there were the SPP rules Small Power Producers Rules developed by the Tanzanian regulator, the government, with support from the World Bank. And these regulations, of course, also pointed into the right directions, but we thought that they, from a private investor's perspective, they were far from optimal. But these regulations, by the way, they attracted us to Tanzania and we thought, ok, now in Tanzania, this is the first market that has got a regulation for mini-grids, which were, of course, not influenced by us, by Inanzos, at that point in time. But, yeah, we started developing mini-grids in Tanzania, which, after all, turned into the foundation and the creation of the company Jomeme in 2014. But let's stick to Nigeria for some time before we talk about Jomeme.

Jakob Schmidt-Reindahl: 26:40

Right, the regulations that I mentioned. They changed a lot in the sector in general, but especially, of course, in Nigeria, I think maybe prior to that moment when they were established and published by the regulator. There were also other important steps that were taken with our support, and I think it was five companies that we supported developing their business models, choosing the pilot.

Nico Peterschmidt: 27:04

Yeah, many of them existing today, even right.

Jakob Schmidt-Reindahl: 27:06

Some are really successful today, but the first steps. We were lucky to be able to support them electrifying their first villages.

Nico Peterschmidt: 27:15

Maybe we can elaborate a little bit more on what the innovations of this regulation in Nigeria were that we developed together with the Nigerian Electricity Regulatory Commission in New York. There are some specific aspects that have not been available in mini-grids regulations before and that are, for example, the tariff regulation as such, like the tariff regulation following a ready-made tariff regulation tool. At that time we were asked to basically not develop a new tool but to develop new features for their national mito tool. Mito stands for multi-year tariff order. That was used for the general Nigerian electricity sector. So we looked into the mito tool and made adjustments. The mito tool was not very well suited to regulate mini-grids, but somehow we brought in some of the components that were required in certain sub-models of the mito tool very, very complex tool. So that was one thing, and then the other thing was the regulation text, and in the regulation text we have mainly introduced two innovations. Well, of course, the regular stuff, like how do the procedures work for license applications? What are the timelines? At that time we even entered timelines together with NERC, which were never kept, unfortunately, because reality is always different than the initial plans and the complexity of regulating mini-grids was also underestimated at that time by the regulator and, I have to admit, also by myself and my team.

Nico Peterschmidt: 29:05

But we introduced one aspect which is the first regulation for main grid encroachment to mini-grids, and at that time main grid encroachment was considered by the mini-grid sector One of the major risks. And in the Tanzanian SPP rules there was already a first approach by defining a small power producer, a small power distributor and the options that a mini-grid company could take to enter from an integrated SPP, SPD in an isolated mini-grid into a main grid, connected SPD or SPP. Like you purchase electricity from the main grid, you redistribute as an SPD or you generate electricity and sell to the main grid as an SPP. The problem was that under this regulation there was no rule of how this should after all be negotiated, and later we found that when actually the main grid encroached the mini-grid, the main grid operated and, as you could just say, hey guys, you can become SPP or SPD, but if you want to become an SPD or small power distributor, you have to purchase the electricity from our main grid for a tariff that is higher than your retail tariff. So you may not want to go for that. If you want to feed back into our main grid, you get a very little feed in tariff that we can determine, which will probably also not be interesting for you. And as a third option, you can sell us your distribution network of your mini-grid for $1 and you just take out your generation assets.

Nico Peterschmidt: 30:52

So, after all these SPP, spd was a nice technical concept, but we understood that it's not about the technical, like the technicalities of who sells to whom, but it's about the commercial negotiation power. And that is what we changed for the first time in the Nigerian NERC 2016 mini-grid regulations by making the compensation to the mini-grid in case of the main grid arriving mandatory, and this compensation was not only covering the remaining value of the mini-grid assets, but also a compensation for the development of demand, for the development of the system and so on, which is reflected by a 12 month revenue. So the main grid company would need to pay to the mini-grid company the value of the assets following depreciation and on top 12 months of the revenue of the mini-grid company. That was quite a lot for a main grid company coming in, and that's why the main grid company is encouraged to negotiate other options, which we then called interconnected mini-grids, which is basically a term summarizing SPP and SPD type of technical interconnection options.

Jakob Schmidt-Reindahl: 32:21

It was a lot of technical details now and maybe not everybody is able to follow that in all detail, but what it actually means is that we were for the first time, able to cover one of the largest risks that investors consider a main hurdle for them to go into the market, and that was now sorted with what you just described.

Nico Peterschmidt: 32:38

And there was an idea of using the concept of interconnected mini-grids as a solution to those distribution networks that are not powered by the distribution companies properly, and that mini-grid companies could pick up and power and operate and supply reliable electricity to customers.

Nico Peterschmidt: 32:59

And the idea was that, of course, in mini-grid companies, tariffs are higher than in the main grid, but if the community, like in that under supplied area, committed to paying higher tariffs, they could actually get reliable electricity. So there was a tripartite agreement between the mini-grid company, the rural community that was trading better supply versus higher tariffs, and the disco, the main grid distribution company that was also generating some cash flow through leasing out, for example, the existing distribution network to the mini-grid company. We thought when we came up with that idea, we thought okay, that will go through the roof because you can get into large communities with thousands and tens of thousands of customers and this will create the economies of scale that the mini-grid sector is looking for. But it didn't happen until recently and only now, like this concept was developed in 2015, 2016, it came into the regulation that was then passed in 2017 and came into force, and only now 2022, 2023, we're seeing first interconnected mini-grids going online and actually making use of that regulation.

Jakob Schmidt-Reindahl: 34:23

That took quite some time. With the development of these regulations, we were able to pave the way for what is going on right now in Nigeria, where we probably have one of the, if not the most lively market, with plenty of domestic mini-grid developers, also international ones, and a lot of donor money flowing into the country. How much are we talking? In total? Half a billion.

Nico Peterschmidt: 34:49

In Nigeria we are exceeding the half a billion level. 550 million is under NEP. There are other programs by the United Nations and NUSP and all the other donors that are existing there. So I guess we're approaching, well, not the billion, but somewhere in between half a billion and one billion.

Jakob Schmidt-Reindahl: 35:08

Right, yeah, and we're really happy to see that right. That was really what we wanted to create when we were part of the team working on the frameworks, and it's good to see the results of that.

Nico Peterschmidt: 35:20

Yeah, definitely. It was also good that we finally then also were invited to contribute to the structuring of the NEP, which was the World Bank and AFTB's large RBF funding program, which we've also briefly discussed in our last episode. We were especially tasked to structure the technical requirements and even there I think we brought in some new aspects. Before and tenders, usually the technology was described and now under the NEP we changed the perspective a little bit and we said let's not ask for certain technology, let's be more technology neutral. Let us rather ask for a certain performance of the overall system, quality of supply, certain type of power, like voltage level, reliability, amount of energy per type of customer and these kind of things, and then gave some very, very basic safety related minimum technical standards for the equipment, for example talking about lightning protection, talking about flooding and protection from that and these kind of things. And I think that was also something quite new for that point in time, which also reflects the work that Andrew has done at that time. Right. So for someone's, one of the biggest availability systems.

Jakob Schmidt-Reindahl: 36:53

It's a really, really, really safe to say yes to the system. Moving on from Nigeria to another example of the consulting work that we were doing in those years to Sierra Leone, where we started in 2016 were contracted by you know.

Nico Peterschmidt: 37:08

Yeah, that was interesting that I got a call at some point by one of the UNO stuff and that person told me hey, nico, I heard about your experience from Nigeria and Senegal and so on.

Nico Peterschmidt: 37:21

And we're doing something here in Sierra Leone.

Nico Peterschmidt: 37:24

We're supposed to electrify health centers in the rural areas following the Ebola crisis in Sierra Leone, but we don't have a clue on how we can actually make them work in the long run and our experience shows that if you set up something and hand it over to the hospitals, it will die after a few years.

Nico Peterschmidt: 37:47

Do you have an idea? Yeah, I may have an idea, and they were coming up with these like can we have some solar kiosks or these kind of things? They said, yeah, you need to bring in the private sector, and if the private sector has an interest in keeping the system running, then the private sector will actually perform and make sure that the system delivers. And that is how this idea of turning this project, which was a relatively small project initially, into a mini grid project, where the mini grid company was supposed to not only electrify a community with certain grant funding, but also connect the health center in that community and that health center receives electricity, a certain amount of electricity per month for free, but the mini grid company can of course, build for electricity sold to the community, and I believe that this is probably one of the most reliable and successful and sustainable ways of electrifying health centers that has ever been proven on the ground. What do you think about that, jacob?

Jakob Schmidt-Reindahl: 39:02

Yes, absolutely. That was how we got started in Sierra Leone and, based on those ideas, the renewable energy project, the REP, was set up and, together with UNOPS, we helped design the entire project, funded by. By DFID at that time FCDO funded by DFID, now called FCDO, exactly, with a total budget of, I think, roughly 40 million dollars, and it was yeah, by the way, one of the largest mini grid programs in the world at that time, right right after Nigeria.

Jakob Schmidt-Reindahl: 39:39

Exactly and targeting roughly 100 villages. And another new concept that we brought in, which was so new at that time that I remember presenting, showing PowerPoint slides and presenting the ideas around it. I remember those strange looks that we were getting, like what you're talking about? Attracting private investors to such a market? No way, but still, you know, the donor started becoming interested in this and said let's give it a try, let's see if these guys can pull it off. And yeah, we were part of the project for several years. We helped design it, we helped implemented, we helped running tenders and selecting three international mini grid developers which in the end succeeded, all under the guidance of UNOPS, and not only securing these contracts with the government, which obviously had large amounts of grants in the form of distribution assets, for instance, in those projects as part of it, but also attracted private investment. I think, nico, do you remember? I think in the range of 13 million dollars in total private investment probably in that range, which was a great success.

Nico Peterschmidt: 40:56

Right, because it was one of the first really project related financing streams coming into the mini grid sector. Before that, most of the findings was rather corporate finance into startups, but now, finally, we're seeing some project finance coming in and, of course, this also gave some of the companies that were winning, like PowerGen and Winge and Energy City, a big push, which partly the largest projects that they had, and, of course, they generated a lot of experience through that. Now we're talking about the year 2017 or so 2018.

Jakob Schmidt-Reindahl: 41:35

Yes, and also not to forget, another very important part of our support that we were giving was also the development of regulations, and in that case I would say we were able to build on what we had done in Nigeria and to now further developed and tailor these specific minute regulations to a different setup, to a much smaller country, with definitely some similarities but also some large differences in the way the political system works and the market looks and the tariffs are calculated and so on. And that was a very crucial part of the entire setup, and I remember sitting in meetings with the developers saying that the fact that these regulations were in place was the key component that made them participate in these 10 days and that made them go out and mobilize these large amounts of private investments and so on, so forth.

Nico Peterschmidt: 42:26

Yeah, and not only mini grid regulations, but also environmental regulations and so on. We did in Sierra Leone.

Jakob Schmidt-Reindahl: 42:32

Right, and maybe we can now go back to Tanzania, as you already started earlier when you mentioned that back in 2014, we started the company Jo Memme with several partners Our friend from terror projects, from Austria, but also the local university, sandor Gastein University of Tanzania, based in Mwanza and we set up Jo Memme in Mwanza and I think you and I, niko, we we both spent a lot of time in that place and traveling to all kinds of villages far away on small islands in Lake Victoria and set up a company that is today one of the largest mini grid operators, right? Do you have the numbers in terms of connections?

Nico Peterschmidt: 43:13

has a little bit more than 10,000 connections established in 23 mini grids on islands in Lake Victoria and along the shores of Lake Tanganyika. Well, I wouldn't say that Jo Memme nowadays is one of the largest.

Jakob Schmidt-Reindahl: 43:29

at that time, like 2018 or so, it was probably one of the largest, but nowadays they are larger ones right, jo Memme was not only another project for us where we were able to generate or collect more valuable experience and insights from the work of developing mini grid projects and operating the mini grids, but it was also a basis for us to further develop the concept of mini grids to what we call now the fourth generation mini grids. Do you want to briefly go into what that means?

Nico Peterschmidt: 44:02

Yeah, the understanding was that if a mini grid company makes use of the latest technology available on the market meaning digitization, mobile money, retrieving data from your systems, retrieving data from your customers, automatic communication through SMS and mobile phones with your customers, ticketing system, feedback from your local staff all digitized and all recorded on a database which is accessible and where you can retrieve all the data at any time, where you can follow up processes and these kind of things, which makes mini grid operation relatively straightforward. If mini grid companies do all of that, they can put their mini grids on so called autopilot that's what we call it Like. There's relatively little effort involved in operating these mini grids at that point in time. This allows the companies to look beyond the pure business of electricity generation, distribution and sales, and as soon as many good companies do that, they will identify a wealth of opportunities in their mini grids where, having specific expertise on sites, having access to funding, having access to finance, having a professional management in the background, having electricity on site and having the good relationships with the communities, they can do a lot of things. And what we then identified on the islands in Lake Victoria was that most of our electricity customers had something to do with fishing. The men were fishermen and women were somehow involved in maybe cleaning the fish and so on. The problem was that most of the fishermen were fishing Nile perch, and the Nile perch was heavily overfished. But at the same time the prey of the Nile perch grew in population. That was Tilapia.

Nico Peterschmidt: 46:04

And we found that in Dar es Salaam they loved Tilapia but somehow they couldn't get the Tilapia from the lake to Dar es Salaam and that's why 80% of the Tilapia consumed in Dar es Salaam and I'm talking about tons of Tilapia per day was imported from fish farms in China, deep frozen in 20 foot or 40 foot containers. And that didn't make sense to us. And they said well, some 100 kilometers north of Dar es Salaam there's the lake. There is an abundance of Tilapia in the lake. Why doesn't this fish find its way to the largest city of the country?

Nico Peterschmidt: 46:45

And we started exporting fish from there, collecting fish from the fishermen, encouraging them to not go Nile perch fishing but go Tilapia fishing, which is a different type of fishing, and sell the fish to us. We offered them a constant price, buffered all price fluctuations in the market, and then put them on ice and delivered to Dar es Salaam we found well, ice was not such a good idea. So it took me some months on site and I spent a lot of time on site myself to sort this out. And after some time I came up with the idea of cleaning and deep freezing the fish on site and that helped reducing the water loss during transport and finally helped us generate quite an attractive margin of some 20% plus.

Nico Peterschmidt: 47:31

And we actually could operate that business with the existing expertise we had on site. We had electricity, we had, as I said, logistics expertise, we knew how to bring stuff from the island to the mainland and back, we had staff on site and we could handle money. We had set up the mobile money collection system, we could also handle cash, we had a recording system and so on. That would not have been possible if we hadn't had the mini grid on site. So now coming back to the definition of fourth generation mini grids, if mini grid companies understand that they can reduce the complexity of the generation, distribution of supply business through digitization and implement that digitization and make room for additional opportunities, they can do, for example, rural industrialization that is what we've done with the fish in the rural islands in Lake Victoria and generate an attractive additional revenue with an attractive additional margin and finally, potentially make the business profitable.

Jakob Schmidt-Reindahl: 48:34

Right, and what you're describing is a model that we call the keymaker model, which is one of several models that are part of the fourth generation mini grid models. It's not the only one. There are other companies that try slightly different setups but to a certain extent still pointing in the same direction that you described. The keymaker model can be applied and we have applied it in various countries already as a tool to calculate the economic potential of these kind of business models, which can be, for instance, based on a cooperation between the mini grid operator and a local processing firm that could come in now and make use of that potential. And with the help of the keymaker model, we can analyze which kind of business model can be implemented in which village. And it enables infrastructure investors to cooperate with processing companies within the framework of something we can call an off grid C&I plus approach. Would you agree?

Nico Peterschmidt: 49:27

Yeah, but I would like to quickly talk about the keymaker model and explain.

Nico Peterschmidt: 49:32

This is as you said.

Nico Peterschmidt: 49:33

It's basically a set of equations that has been developed by myself and one of our staff a junior professor from a German university who is in energy mathematics, and we together did the analysis and came up with the equations of how to decide if a certain product from a rural community is worth being processed on site, and through the processing, the volume and the weight of the product, the cost is reduced to an extent where the product can be sold to an urban off-taker under profitable conditions. And of course, the increase of quality by early preservation through processing on sites also plays a role here. So after all, following the keymaker model, have an excellent quality product at a good price, because prices in rural areas are usually lower than in prairie, urban or urban areas, and then if the transport cost is reduced through local processes and reducing the volume and weight to be transported, then you can actually make a good business and the equations around that that is the keymaker model that is then leading into a rural industrialization scheme like the fish business or other businesses that we have tried.

Jakob Schmidt-Reindahl: 50:52

For instance, since 2021 in Uganda, where we set up the company Volterra that uses a block farming approach with vanilla and chili, just to mention another example that we have set up right Exactly.

Nico Peterschmidt: 51:05

People told me that fish in Tanzania were so easy and it must have worked. And people told me well, you would never succeed in an agricultural volume chain. And I said let us take up that challenge and create a new company. And then we created Volterra as a joint venture with the company Gome Gardens in Uganda. Gome Gardens is an agricultural company bringing in the agricultural expertise and we bring in the minigrid expertise and the rural industrialization expertise.

Jakob Schmidt-Reindahl: 51:35

Right, and all this is part of our constant effort to find solutions to the main problems that minigrid operators face in order to become profitable with their business, and part of that is also a new concept to overcome the demand risk that you've mentioned already earlier, and do you want to explain a bit to what extent we've used artificial intelligence and stochastic optimization so that this risk can be mitigated?

Nico Peterschmidt: 52:03

Yeah Well, the demand risk I think that is what most of the minigrid companies understood over the last 10 years is the largest risk for a minigrid company. There are others for an exchange risk and main grid connection risk and political risk and so on. But the demand risk is really inherent in renewable energy, minigrids mainly based on solar or wind, and most of the minigrids out there today and the largest potential for minigrid scale up is, of course, solar minigrids and most of our minigrids that the NENSO set up over the last 15 years are solar minigrids, sometimes with a little wind component, sometimes with a little diesel component and in the latest setup, without any additional diesel contribution. The idea is to avoid diesel generation in total, because diesel brings problems. Diesel is the usual traditional mitigation strategy to minimize demand risk. If your size your solar system to basically cover the base load, together with your batteries, and whenever there is a peak you switch on your diesel generator, that's the classic approach. But the problem is that diesel generators in rural areas, the maintenance of that, the transport of fuel, the transport of oil, the oil exchange, the environmental aspects of storing diesel fuel and oil and these kind of things All of that creates a lot of cost, and if you account for all these costs, you will usually find out that diesel generators are not a good option. And on top comes the diesel fuel price fluctuation, and this fluctuation at some points in time actually renders diesel operation completely unprofitable. So after all, we believe that, also for climate change reasons and these kind of things, we need to put the diesel aside and come to 100% renewable mini grids.

Nico Peterschmidt: 54:06

And with 100% renewable mini grids the demand risk is maximum, because you set up a system and if either the demand of the community doesn't develop as projected, you have huge surplus electricity, or if you have seasons rainy seasons and off rainy seasons then the generation system doesn't generate the same amount of electricity per day or so throughout the year. And then there are times of the year when there is simply a lack of electricity but you don't want to switch off the system at that time. So therefore you oversize your generation system to make sure that even during those periods you can supply electricity to your community reliably. So now that means that you have a lot of surplus electricity in your mini grid and that surplus electricity is not sold to anybody. It's not generating any revenue, but still the costs of the depreciation of the assets and these kind of things of the maintenance of the assets occurs.

Nico Peterschmidt: 55:10

Therefore, we thought that what could you use this additional energy for? And we came across crypto mining, because crypto mining can consume electricity quite flexibly and whenever you consume the electricity, you also generate some revenue from your mining services you offer to the blockchain network, and we tried this in Uganda for the first time. And then we said, okay, well, we also need to develop some controller for that, because if you just switch on the miners at that point in time when there is surplus electricity available, it doesn't make sense commercially. The capex for the miners is simply too high and the runtime of the miners is too low and we cannot amortize the miners in a reasonable period of time. That's why we said okay.

Nico Peterschmidt: 56:02

With the emergence of LFP lithium ion batteries that have longer cycle lives and that have pretty low capex and therefore pretty low cycling cost, we can relatively easily also run the miners for a longer period of time using the energy from the batteries at night, when we know that these energy will not be required to supply the village community and if we know that the next day the sun will shine.

Nico Peterschmidt: 56:33

And we said, okay, well, how would a controller need to look like that actually can perform this control task? And we developed a machine learning algorithm that projects the weather patterns for the coming 48 hours, using weather projections from the internet and optimizing them for the specific site of the mini grid and doing the same for the demand. And those two time series go into a deterministic optimization tool. And this deterministic optimization tool then calculates when to switch on and switch off the miners, so that when you know that tomorrow the sun will shine and you don't need the energy from the battery tonight and the batteries will be charged tomorrow anyway then you can simply switch on the miners to consume that electricity during nighttime, and that optimizes the runtime of the miners. And this is something that we are still testing in our system in Uganda and we're hoping to have the first product of that controller available early next year.

Jakob Schmidt-Reindahl: 57:41

So, apart from these kind of solutions that help me with companies directly in proving their business models and improving their operations and their overall economic performance, they are also latest developments that we can maybe very briefly discuss in terms of how we can make sure that procurement concepts, funding schemes, are set up, that they don't necessarily lead to cherry picking, that companies only go for the largest and most economic, viable sites but also include smaller sites into their portfolios. Part of that, on the one hand, I would say, is the way these organizations that are running these tenders, that are setting up these funding schemes, are incentivizing the selection of the sites, but also the way, a new way of calculating tariffs, which should always be done in close collaboration with the regulator, for instance, the consideration of price elasticity, of demand. Do you want to briefly go into those concepts?

Nico Peterschmidt: 58:41

Yeah, price elasticity of demand and economies of scale. We have a specific episode on that, same as the concept of involving the regulator more closely into grant determination.

Jakob Schmidt-Reindahl: 58:58

And those are really latest findings and latest developments in the sector. So, looking back at those past 20 years and 18 plus years of the existence of our company, there's plenty of things that have taken place. We've come a long way. We've achieved a lot of things, but if we look at the need out there, if we look at the potentials that are still waiting for us and others to explore them, there's so much to do for us. Yeah, I look forward to the next 20 years that we can tackle this together. Nico.

Nico Peterschmidt: 59:27

Yeah, definitely, and Jacob, we have skipped so many parts of our own history, like our involvement in S-Map World Bank, being part-time employees there, supporting the development of large funding schemes like the Adelaide in Ethiopia. We've not talked about our engagement in Mozambique.

Nico Peterschmidt: 59:49

We've not talked about Burundi. We've not talked about our collaboration with United Nations in UNHCR, electrification of refugee camps and especially the base camps of those. So there are many more things that Enensos did over the last 20 years, but I think this was a nice run through the main stages of how we see the mini-grid sector has evolved over this relatively long period of time.

Jakob Schmidt-Reindahl: 1:00:18

And our small contributions to that.

Nico Peterschmidt: 1:00:20

Exactly. Thanks a lot, jacob, this was fun.

Jakob Schmidt-Reindahl: 1:00:24

Thanks, nico, that was great. Bye-bye, bye.

Speaker: 1:00:28

This episode of the mini-grid business has been brought to you by Enensos, your one-stop shop for sustainable mini-grids. For more information on how to make mini-grids work, visit our website, enensoscom, or contact us through the links in the show notes. The mini-grid business powered by Enensos.