Speaker 1 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 Inensys.

Speaker 2 0:36

Hello, this is Nico. Welcome to this episode on interconnected mini-grids. Interconnected mini-grids are mini-grids that have a connection to the main grid but can work independently from the main grid when necessary. Interconnected mini-grids come with their own set of challenges and opportunities, which we are discussing today with Aaron Chang from PowerGen, one of the first interconnected mini-grid in Africa, and Chris Greeson, who had recently published a book about the subject.

Speaker 2 1:09

Aaron Chang is the CEO of PowerGen Renewable Energy. Powergen is a leading renewable energy company in sub-Saharan Africa and is currently serving more than 250,000 people with clean and reliable power. Chris Griesen is an independent consultant, helping governments and multilateral development agencies to develop regulatory frameworks and programs to scale up the deployment of mini-grids for energy access. Chris, you and I know each other for many years and have worked together in various assignments, together with Bernhard Tenbaum and Ashish Resta. Chris recently co-authored the Asmap book Mini-Grid Solutions for Underserved Customers, and he was also a lead co-author of Asmap's Mini-Grids for Half a Billion People handbook. Of course, you will find the download links for these books on the show notes. Aaron, as one of the first interconnected mini grid operators in Africa, what motivated you to develop an interconnected mini grid in Nigeria? What opportunities do you see in interconnected mini-grids?

Speaker 3 2:25

Thanks, nico, and it's an honor to be on the podcast with you and Chris, maybe just first to all, the listeners. I think both of you have played a huge and instrumental role in the sector for many, many years, probably more than a decade. It's really great to be on with both of you.

Speaker 4 2:38

What a pleasure to be on with both of you guys. Aaron, your pioneering work is really amazing and work that we're following closely. And, nico, I've been a frequent listener, in addition to a co-worker with you on a number of things, but a frequent listener of the podcast, and it's wonderful to be on this end of it.

Speaker 2 2:55

Thank you both All right. Coming back to the question, Aaron, what motivated you to develop an interconnected mini-grid?

Speaker 3 3:02

We've been looking at how to bring renewable energy solutions to work with the grid since 2015. So back then we were looking at sites in Kenya, which is not where the project you referred to is. Our first interconnected mini-grid and one of the first in the sector is in Nigeria. But we're looking at this concept of interconnected mini-grids or grid interconnected systems for a long time integrated utility concepts, because there is a lot of grid infrastructure across Sub-Saharan Africa, but typically the reliability, the power supply, the technical quality is a big challenge. So you have a lot of communities all across Sub-Saharan Africa that are either very close to a grid connection less than a kilometer away especially in a country like Kenya, where a lot of quote unquote off-grid communities are actually very close to a grid or in Nigeria, you have a lot of communities that have the grid and have grid network but have very poor hours of service maybe one, two, three hours, even only six hours a day or have not had any supply come through the lines for years.

Speaker 3 3:59

So we've been looking at this concept. How can you create this win-win, so to speak, between the off-grid and the on-grid sectors? How can we bring those together? We think it's a great opportunity where we can bring the renewable energy solutions to provide around-the-clock energy supply. But we can leverage the grid supply network to use existing infrastructure, existing poles and cables to slightly reduce the capex for us and to integrate with the grid where we can supplement our battery storage with two or three hours, five hours, 10 hours in better areas of grid supply. So ultimately we can bring down the overall cost of energy, we can be a credible off-ticket for the utility and we can provide reliable electricity for our customers Semi-urban or urban areas, in most cases right Interconnected mini-grids.

Urban Mini-Grid Demand and Opportunities

Speaker 2 4:41

So therefore I guess the capability of customers to pay more for electricity, to consume more the demand for energy, is probably higher than in isolated mini grids. You don't need to start from scratch, because people have the appliances. Their everyday living is already focused on using electricity services. They often use large televisions, microwaves, vacuum cleaners, all these kinds of things that a usual urban household would use, which you would not find in a newly electrified village in rural areas. Is that assumption correct? Did you find that in your first mini-grid in Nigeria?

Speaker 3 5:22

We have found that in our first mini-grid in Nigeria. But it really depends on your reference point, I think, the country, because, for example, in a market like the DRC or in a market like Chad, you have cities that are off-grid. You have complete cities of hundreds and thousands of millions of people that are off-grid, sure, but those people who are quote, unquote off-grid all use diesel generators and all have appliances and all have relatively good income levels.

Speaker 3 5:44

So the comparison of off-grid and on-grid really depends on the country demographics. Traditionally the off-grid communities are associated with the rural and low income, which is true in a lot of markets but not necessarily in all. But what you are saying is true at our site in Nigeria. So we have found that demand is extremely high. People have been craving electricity.

Speaker 3 6:05

This particular site had grid infrastructure but did not have grid supply for 10 years before we came. So at some point the main utility because they're unable to service, because they lacked a grid supply to service that community, because they weren't having the proper ATC and C loss levels average technical commercial collection loss levels to make that community worthwhile, and because they have much bigger issues in tier one areas industrial areas, prime residential areas, big cities they basically cut off supply to this county capital. It's a local government authority capital in Nigeria, which is basically a county capital. So this community was craving power for a long time. I think a lot of people do have their appliances, like you said, and we've actually seen that demand at this community is about 10 times the average of the demand of rural mini-grids, as measured by AMDA a couple of years ago.

Speaker 2 6:51

Wow, wow. That's finally an interesting business case, isn't it?

Speaker 4 6:57

I have a question to add actually to that so because these are often in peri-urban or urban areas.

Speaker 4 7:03

is it also the case that demand might just grow a lot more quickly than even you expect? We talked with developers of the Mokuloki grid and it was also an interconnected mini-grid or the plan was for it to be and initially it was a town of 250 people and then, as soon as this was up and running, it quickly grew to 400 people. And because you're in a peri-urban or urban area, as soon as there's a reliable electricity supply, people really flock to the communities because they want to live there.

Speaker 3 7:32

Yeah, and I think that that site was done by Nio Tropical in Nigeria and, to their credit, I think they were the very very first ones in Nigeria, so big credit to them. We've seen similar as well. We initially anticipated about 2,000 customers. We now have an additional 1,000 customers who want to connect to the grid, and our demand that we're seeing today is about two times what we had forecasted. It's two times what we had thought we would get, which itself was already much higher than the traditional rule of mini-grids. So, yeah, the demand is immense and it's actually created a challenge for us because our power system wasn't sized for that and so we need to do a phase two expansion. But it's a different type of challenge than maybe some of the traditional mini grid challenges. It's a good challenge, good challenge to have.

Speaker 2 8:13

Probably completely different type of business model, right, where, in isolated mini grids, you continuously try to increase the demand with measures that are completely out of range of what you should do as an electricity supplier, and now you're finally entering into a space where demand is more than you can actually supply, right, and the challenge is to increase the generation distribution capacity, atc losses, to keep them under control, and these kind of things. The different worlds, so to say.

Speaker 3 8:47

Absolutely To build on your point, which is that it's a different type of challenge. It doesn't need the productive use focus and it doesn't need us to stimulate that demand. I think what it shows actually is it shows that, of the priorities in the sector to make mini grids bankable, in my view productive use is an important pillar, but it's not the number one or number two priority to make the sector bankable and to make this work. Now, productive use are a really good story. They're a part of what we do. Productive use is a very, very broad definition and I think it gets used differently by different donors and organizations in the sector.

Speaker 3 9:24

But what I'd say is that unit economics of being able to reach communities like this, which are extremely vibrant and also lack energy access or have unreliable energy access, is much, much better than trying to make productive use work at a very, very small scale.

Speaker 3 9:39

And so productive use will have a role to play, and we can still help our customers in Toto with productive use appliances with, you know, maze milling, water pumping, et cetera, et cetera. Okay, but when we as developers can go to these communities where immediately, just from the get go, without doing anything else, without having to set up a sales and marketing arm to sell motors, electric motors, and figure out yogurt factories and things like that. When we can go in and write, plug and play, demand is 10 times higher. The economics are just going to be much better. And that's a much better unit economic model than I think. Trying to make productive use work at all the rural sites, again, that's not to say productive use is not a rule, it's a pillar. But just to kind of put that out there, to me it's not a top three priority for the sector.

Speaker 2 10:21

Yeah, and you even have a word for that, right. You call it metro grids, if I understand correctly. How many of these potential metro grids do you see out there?

Speaker 3 10:31

Oh man, too many Way more than we can connect. And if you take Nigeria again, toto itself is one LGA capital. It's one capital of the local government authority and there's I don't know thousands of LGAs in Nigeria and most of them outside of Abuja and Lagos. All have this issue. And even when you go to Lagos and you go to Abuja and you go to the biggest cities in Nigeria, you still have blackouts all the time. So you still have places where you're only getting six hours, 12 hours of supply from the grid and so the opportunity not just Nigeria. Then you go look at the rest of the market across the Saharan Africa. You've got thousands and thousands of potential metric.

Speaker 2 11:11

Interesting, interesting.

Speaker 4 11:13

I went to Nigeria for the first time a couple months ago and was surprised to learn, first of all, that Nigeria's population is about 200 million people but their reliable generation is only about four gigawatts. And if you compare that to the United States, which has about 350 million people, so less than twice the population, but we've got 1,200 gigawatts, so one 400th the power generation, that's reliable and less than half the population. So it speaks to just the huge demand and of course that's reliable in less than half the population. So it speaks to just the huge demand and of course that's met. It's not that people are completely going without, but they're burning a lot of gasoline, they're burning a lot of diesel in individually owned generators and those are estimated to be well over 20 gigawatts of individual generators.

Speaker 2 12:01

Yeah, In fact, inensos was involved in developing the concept of interconnected mini-grids in 2015, 2014, 2015,. And put that into NERC's mini-grid regulation 2016 under a contract with the Nigerian Energy Support Program. But at that point we thought, ok, well, when we put that into regulation and when it becomes effective, then this will go through the roof, because it is a win-win-win situation. It's a win for the community because they finally get better electricity supply, even if the tariffs are a little bit higher. Most of the communities would appreciate that. It's a win for the distribution companies, the discos. It's a win for the distribution companies, the discos.

Speaker 2 12:50

One has to know that in Nigeria the electricity market is liberalized and these discos are private sector companies. These discos should benefit from actually selling electricity to the mini grid company whenever it's available at a good price and they still make a margin. And on top, they can get some cash flow for the infrastructure that they possess and that is existing, which at the moment is just running idle, which is definitely not cost covering. So they could make a good business out of this and finally, win, win, win. The third win is for the mini grid company that, as we just heard, aaron, would find an excellent place for an investment with excellent electricity demand and growth potential. But it didn't happen. It took five years, even more, six, seven years for the first interconnected mini-grid to actually come up interconnected mini-grid to actually come up, and it even required a lot of technical assistance from NUSP, from REA, rocky Mountain Institute, until finally the first interconnected mini-grids have come online. Why has it not happened for such a long time?

Speaker 3 13:58

I think you've summarized the win-win-win very well and you summarized one of the challenges in the sector very well, which is, I think, the pace of deployment. There's a number of reasons, I would say, and it will vary by country. So maybe just to take Nigeria for the time being and talk through that, one of the biggest challenges is, I think, familiarity with the concept and so with the interconnected mini grid concept you have to work with the main utility. In Nigeria there's 11 discos and so getting the utility counterpart comfortable with that concept and comfortable with the risk, the financial win-win that you're bringing to the disco or the utility, is something that's taken a long time in Nigeria.

Speaker 3 14:37

But I would say and maybe just to give a few more shout-outs on this podcast, I mean big credit to EJ, who is now at Rocky Mountain Institute as a managing director, who was the CFO at ADC at the time, and her team, which includes Barka, who was at the REA for some time almost a day and a few others who were really forward thinking and progressive about this concept and about bringing in distributed renewables to actually help and supplement the grid and supplement the utility.

Speaker 3 15:02

And so without those forward thinkers and without people like you guys who have helped set up the regulations, we probably wouldn't be here, but I think, as a result of a lot of that hard groundwork done by innovators, right now the DISCOs are really opening up to this concept. So you may have seen in the news recently, but I think last week or two weeks ago, kedco, which is Kano Electricity Distribution Company based up in the northern part of Nigeria, awarded 41 sites to 31 companies, of which PowerGen is lucky enough and grateful to be one, and so you're seeing more and more discos actually take this approach, where they're using distributed renewable energy companies to help them provide better energy access to these different areas and increase their revenue in those areas as well. I think it's an adoption challenge. There's other challenges around financing, which is a different topic. That's probably our biggest sectoral challenge overall, but I think adoption and understanding from the main utility counterpart has been the biggest issue in Nigeria.

Speaker 2 15:51

All right, chris, do you want to summarize for our audience what the difference is between an interconnected mini-grid and an isolated mini-grid from a regulatory and administrative process perspective?

Speaker 4 16:12

Sure, yeah, and maybe also build on what Aaron was saying a little bit. When we started on what would become the mini-grid solutions for underserved customers book in 2021, we had started to hear word of some of these interconnected mini-grids, but there just weren't really that many examples, and so we broadened the book to also include under-grid mini-grids, but there just weren't really that many examples, and so we broadened the book to also include under-grid mini-grids, which are not connected with the utility power, but they're often running across the street or under the utility power but providing electricity service, similarly to customers that don't have reliable service from the main utility. But it seems like it's going from a market that really had very few examples in 2021 when we started to something that's really booming, as Aaron mentioned. In a lot of ways, I think the regulatory aspects are still being worked out country by country, but in general, I think we can say that, first of all, they share all the regulatory requirements that regular isolated mini-grids have, which is like what are the allowed retail tariffs to charge customers, what are the requirements for a license, what's the license duration, what's the quality of service, of electrical service that needs to be provided to customers, and then, in addition, there's all these issues that come with the interface between the utility and the mini-grid.

Speaker 4 17:27

So if the mini-grid is using the incumbent utility's wires and poles to distribute electricity, how does the utility get compensated for that? What if the developer needs to invest to improve the quality of those poles and wires Because that's often an issue in Nigeria of those poles and wires, because that's often an issue in Nigeria. Many of the utilities are insolvent and so they haven't had the resources to invest in poles and wires and keeping things up to the quality that's needed to deliver quality electricity. The question is about what would be the electrical thresholds, like the frequency or voltage deviations that would require disconnection if these mini-grids were synchronized with the main grid. What's the tariff for electricity if it's being purchased at wholesale from the incumbent utility by the mini-grid developer, and can the mini-grid sell electricity back to the utility? That's not something we're seeing a lot of now, but tariff levels for that.

Speaker 4 18:30

And then questions about what would happen if and when a distribution utility takes back the subconcession from the developer, and I guess similarly, the administrative aspects are also more complicated because they're involving the utility as well as customers, and in Nigeria, as I mentioned, many of these distribution utilities are insolvent, and so steps are taken to avoid having the money that customers pay pass through these insolvent utilities and rather be collected by the mini-grid or some kind of third party that can then pay the mini-grid developer and payments, if they're called for, are paid to the distribution utility.

Speaker 3 19:06

So one really interesting future state of this is that bilateral exchange between the distributed renewable energy resource and the grid. And I think that's what's really exciting about this as well is we're building future-proof infrastructure that in the long term similar to residential solar in the US or the way renewable energy might work in other markets is actually you have a bidirectional flow of energy between the solar battery system that's distributed in the main grid, so we can be buying power from the utility today, which is what we do, but in the future we can also be selling power back and we can be providing additional generation supply when needed on the main grid. And then you can even think about dynamic pricing and demand optimization and there's just lots of really cool things I think you can do in the long run, and we're building a lot of that future proof infrastructure for Africa today.

Speaker 2 19:56

That's true, but what I hear from you now is that you're not doing that yet, right? So you're not feeding back into the main grid. Why is that?

Speaker 3 20:03

That's right. So today we're monodirectional because the demand is in the community, and so we're utilizing the grid to reduce the battery supply and the battery sizing that we need. So for us, it's all about how can we get the lowest levelized cost of energy or the lowest LCOE possible, and providing grid supply as part of the base load instead of using batteries helps reduce the tariff. The other component of that is that at the moment, it's very difficult to work with some of the utilities as offtakers because of their credit risk profile. So it's much better that we collect the money from the consumers and we're buying power from the utilities, as opposed to vice versa.

Global Potential for Interconnected Mini-Grids

Speaker 2 20:40

I see, okay, interesting. Good, aaron. How easy or difficult is it to develop an interconnected mini-grid system? Think of the valuation of the existing infrastructure or coming to an agreement with a disco, like. I could imagine that there are some hurdles that need to be overcome.

Speaker 3 20:58

It's challenging, especially because the first one was one of the early interconnected mini-grids in the sector and the first one under the REA program, under the Nigerian Electrification Project. So it's a big education and learning curve. Oftentimes utilities are also large bureaucratic organizations and also on the regulatory side. There's been some amazing work done by both of you and many others in the sector, but it is still. The implementation of the regulation is still often new for the regulator themselves. So those, I'd say, are the biggest hurdles Raising. Financing in the sector is also very difficult and has been a big challenge, I think, for many of our peers and ourselves in this sector. So it's not easy. I think the hardest parts are past us and I think the sector is really opening up in a big way. You've got DISCOs looking at working with private developers and you've got utilities in other markets looking at working private developers in a much, much bigger scale than before. So the learning curve has kind of passed and I think it'll get a lot faster and easier now. But it's not easy. It's not easy.

Speaker 4 21:52

And it seems in my understanding that there's a couple of utilities in Nigeria in particular that have really been pioneers on this AADC, the Abuja Electricity Distribution Company, in particular, and also shout out to.

Speaker 4 22:05

RMI again that they've had embedded advisors in these utilities that are helping them think through these issues and really cultivate this kind of win-win-win mindset and realize that there's revenue opportunities for these utilities in this business model can help take customers off of their books that they're unable to serve and get revenues by leasing those lines to the mini-grid developers and have happier customers.

Speaker 4 22:32

And then I guess, also in Nigeria there's the change in the Band-Aid tariffs, the tariffs for the customers that get the 20 to 24 hours of electricity. So if they can calve off some of their customers they know they can't serve, then they can focus their attention on the ones that they can't serve and get those up to those levels of reliability and then collect higher tariffs.

Speaker 2 22:52

Exactly, chris. We have talked about Nigeria as a market for now. Nigeria, as we already said, is a liberalized market. There are other liberalized markets in the world, but there are also national utilities. Where do you think this Nigerian concept of interconnected mini-grids may find new applications in the world? Not only in Africa, but maybe also in Asia or South America? Do you see any great opportunities which mini-grid companies should look at?

Speaker 4 23:20

Yeah, and I think it's not just a Nigerian concept.

Speaker 4 23:24

I was recently in Thailand and visited an interconnected mini-grid there that's operated by the Provincial Electricity Authority, which is the country's distribution national utility, and they had built a 2.6 megawatt hour mini grid that's powering a town, or able to power a town that's near the Malaysian border that has a weak 33 kV distribution line that serves it, or even where I live.

Speaker 4 23:50

I live on a small island in the United States. We're served by a cooperative utility. A few years ago, in 2018, built a 500 kilowatt two megawatt hour solar mini grid. That actually they did as a community solar project where members the co-op can buy shares in it. So we own some shares in it and the electricity from those shares offsets our consumption, directly offsets our bill, and I think neither Thailand nor the Orcas Power and Light Company in Washington state was really paying attention to the interconnected mini grid scene in Nigeria. I think this is just a thing whose time has come. Really, I really see huge markets anywhere that people want more reliable electricity, and that can be anywhere, from the case in Nigeria, where you know they're literally getting just hours a week on their utility connection, or in markets like you know, california they're building a lot of solar mini grids because of the fire danger that's been happening that's associated with utility lines.

Speaker 4 24:56

In many cases, california utilities are having to do load shedding to avoid their liability for fires that they've been starting, and so these mini-grids are providing local power that's really going to be able to take off really everywhere, especially as these relentless cost declines and solar panels and batteries continue.

Speaker 2 25:19

And what you're saying is that it's almost independent on the national electricity system. So to say, whether it's liberalized or a national utility, it could work everywhere. As you said, in Thailand it has been a national utility, right.

Speaker 4 25:36

That's a really good question. I feel like it's kind of like where forward thinking thinkers are is where you're going to see these things happening first. And so in Nigeria you've got a lot of vibrant companies like PowerGen, like Nio, Tropical Tech, like Daystar, that already had kind of built a bunch of expertise on serving mini-grids for rural energy access generally off-grid mini-grids and now have this opportunity, or noticing this opportunity, to do these interconnected ones. I think in Thailand, you know, the Provincial Electricity Authority has engineering teams that are also interested in watching the technology and they have the resources to be able to do this. But I think it's where the innovators lie, which is generally going to be where there's scrappy private sector companies that are doing this, but not exclusively. I mean, I think there are cases where you've got national utilities or co-ops that are forward thinking and progressive and activist on this and they're able to reap some of the early benefits of this.

Speaker 2 26:36

Okay, chris, let's talk about India briefly, because they have similar issues. They have distribution networks that are not being operated properly, people are not receiving electricity reliably, but they found a different solution there, right?

Speaker 4 26:50

Yeah, and that was something that we, as I mentioned in our book when we started looking at this. We were initially going to do just interconnected mini-grids and then broadened it to be mini-grids for underserved customers, and two of the main case studies that we looked at were in India. The other three were in Nigeria, and the two case studies, husk Power and Tata Renewable Microgrids were both building undergrid mini-grids, and I think in part, this is a consequence of the Indian regulatory regime, where mini-grids that are below a certain size threshold, that also don't have any interaction with the utility, have a lot less licensing requirements, and so these developers just said well, we know there's customers that really want reliable electricity. We know that these incumbent distribution companies are really not providing it. We see a market there. We don't want to deal with these utilities because they're a headache. We also would rather avoid having to go through the regulatory process.

Speaker 4 27:52

Let's just build these things out, and so they have built over 600 collectively, or at least had when we were typing up the pages of the book, which was kind of 2022, 2023-ish, probably considerably more. Toptie, I think, has a target of 10,000 of these microgrids and HuskPower has a similar target, and Husk, because they're building at scale. Husk, in particular, has really driven the cost down, where they're able to deliver electricity to these customers at less now than 25 cents a kilowatt hour on a levelized cost of energy.

Speaker 2 28:28

Yeah, undergrid mini-grid means that you basically build parallel infrastructure to the existing distribution network. Right, you have two parallel distribution networks connecting to the same customer. One is the national grid and the other one is the mini-grid. Isn't that a waste of money, after all?

Speaker 4 28:47

It is inefficient. It's not the way you would design it from the beginning. And, like you're saying, yeah, at an individual household level, people are making a choice like oh, the national grid is on, they sell electricity a little bit cheaper, we'll use that, and then grid is off, let's switch over and then so they have two meters and two sets of wiring within their house or a transfer switch. Not the way that you would do it if you're designing it from the ground up, but it's an arrangement that has ended up being built out in India because of the particularities of the situation.

Speaker 2 29:18

Yeah, aaron, we just said that interconnected mini-grids can be quite profitable because demand is high. Demand growth may be high. Distribution network infrastructure may be existing already. Do interconnected mini-grids require grant funding?

Speaker 3 29:35

So that to me, the question on grant funding really depends on what tariff you want to charge, what tariff you want to set. True, and I think this is a really important evolution the sector hopefully makes and actually I've heard a lot more developers speak in this way in the last couple of years which is really promising. I think, as a sector, we should be coming together and setting the tariff as an input. What's the tariff we all think is the right tariff? We agree on that across donors, governments, key stakeholders, communities, and then from there we work into the percentage of grant that's required to achieve that tariff.

Speaker 3 30:08

I think one of the big challenges that the mini-grid sector has faced over the last decade is that the tariff has too often been an output. People say the tariff is cost reflective. Go calculate your capex and whatever your tariff is, you go charge that, and then the grant is set arbitrarily in a room by donors to be this level, because that feels right and we don't want to oversubsidize or undersubsidize. So we chose this number and often it's backed by some research and then go set the tariff for whatever results. But then what happens then is politicians, governments, communities are often discontent with the tariff, and so I think what's much better is we agree on the tariff, then we calculate the grant required to achieve it.

Speaker 3 30:46

We would like to hit a lower tariff than we are today. Just to be very open, we're in the 30 to 35 cent range on a US dollar basis. We'd Just to be very open we're in the 30 to 35 cent range on a US dollar basis. We'd like to be lower than that. We'd like to be probably more in the 20 to 25 cent range, if not lower than that, because that's ultimately long-term. What governments?

Speaker 3 31:01

want to see in terms of the cost of energy to their customers.

Speaker 2 31:04

So where-? And that requires some grants, yeah sure.

Speaker 3 31:07

And that's where I I think grants play a role in this space.

Speaker 4 31:09

I'm curious to ask you, aaron, does it also depend on your customer, like I would imagine there'd be, like large C&I customers like mines, or large breweries that might be part of a mini-grid that really you'd be able to, because of economies of scale, drive down costs and would be less likely to need grant funding, whereas on the other end of the spectrum, mini-grids that are serving rural customers would. How does that fit into your idea of kind of like agreeing on a tariff.

Speaker 3 31:38

Yeah, I guess we'd have to look at the overall. Blended tariff is one way to look at it, from thinking about how do you calculate the grant to get to your average tariff. But we do have segmented tariffs. We do do daytime, nighttime tariffs at a number of our sites and we do at times have a different business tariff or an HD or high demand or maximum demand type tariff for our customers. So we do do that because that's what makes the most economical sense at times and that's what also makes the most sense with the customer. How to do that in the most accurate financial model or economic theory way when you apply the grant. I think there's a number of different ways that you could do it, but the simplest way is just to look at the weighted average tariff. You could look at applying the grant in different ways, the different segments of the communities, but it might get a bit complicated that way.

Speaker 4 32:25

In Nigeria. Under the new DERIS program, there will be $100 million in World Bank IDA funding for interconnected mini-grids using a minimum subsidy tender approach, and the minimum subsidy tender is a competitive reverse auction where projects that are pre-selected by the REA, by the Rural Energy Agency applications bid, rea by the Rural Energy Agency applications bid and whoever has a technically feasible sound project and also proposes the least amount of subsidy wins. And so I think it'll be interesting to see if other countries adopt similar programs for interconnected mini-grids, which will further, I think, hasten their deployment.

Speaker 3 33:10

If I might put out something slightly controversial as well. So in the Nigerian Electrification Project, which is the first big World Bank Nigerian government project launched in, I think, 2017, 2018, there was a minimum subsidy tender component to it and there's also a rolling kind of more organic performance-based grants where companies brought sites and they brought projects and actually to this date, I don't think any of the minimum subsidy tender funds have been signed or even dispersed, and so there's a huge challenge in this sector where tenders are set up and they take five years, 10 years, for anything to happen. So I think we have to be careful as a sector, because a lot of the tenders that have come through have had many, many administrative and bureaucratic issues for one and the MST in the original program is an example of that because nothing's happened for five years, six years. The second thing is, I think we have to be very careful about this reverse auction concept. The idea is to put pressure on the price and the tariff to get the lowest possible bid, and I think that works in a mature market for a known, standardized or commoditized piece of infrastructure product. So if you're building an airport and there's only one airport that's going to be built and the engineering design is pretty known. The type of materials to be used is pretty known. I think that makes sense because you're trying to drive down something that's already standardized.

Speaker 3 34:25

But the reality with mini-grids is that there's a huge learning curve that we're all going through right now as a sector. Most of the mini-grids to date haven't been bankable, so the pressure should not actually be on to reduce the tariff, because that's only going to put more pressure on the financial sustainability of mini-grids. I actually think the focus should instead be on figuring out the right level of grant to get to the tariff that's required that we all agree on. To actually focus on economic sustainability. We actually need mini-grids to be highly profitable. Right now, most mini-grids and many of the mini-grid companies have unfortunately suffered major financial crises. A lot of our peers are no longer around. We actually need the financial returns to be highly, highly profitable. That's what will encourage and get the sector to grow at scale.

Speaker 4 35:04

And then in five years.

Speaker 2 35:05

We can then look at reverse auction type programs that drive down the tariff first and adjust the grant accordingly. I think that is, chris. That is what we are actually recommending for quite some time now for the last whatever seven, eight years or so and only now governments and regulators and REAS are starting to listen to this kind of recommendation, because so far tariffs have always been very sensitive and even REAS, they didn't want to touch it because they said, well, as soon as we propose a tariff, then we overrule the regulator or we put ourselves out to public controversial discussion about why are people in rural areas paying more than people in urban areas? Why does REA want to increase the tariff? Can't the government act in a different manner to support the people in our country better? That is the discussion they want to avoid. But now, finally, I think an understanding is developing that the tariff is the basis for a grant level calculation and therefore we are currently undergoing these kinds of exercises.

Speaker 2 36:26

Aaron, mini-grids are long-term investments, right, usually you need 20, 30, 40, 50 years, like very long, like 10 is usually not enough, 15 is usually not enough. Now, in interconnected mini grids, when I talked to distribution companies last they said well, we could give you access to our infrastructure and to parts of our license area, but we won't definitely go beyond 10 years. But 10 years is usually not enough to install generation assets, upgrade distribution infrastructure. You cannot pay off all of that investment within 10 years. How did you go about this? Like, did you convince about this? Did you convince AEDC to go for a longer term commitment?

Speaker 3 37:17

You're right, 10 years is not long enough, but, yes, we are doing 20-year commitments both with the existing site and our future go-forward sites that we're in discussions with. This goes on currently, so it is longer term commitments. Behind the question is, maybe why would the utility do that? Why would they see you this area?

Speaker 3 37:34

And the reality is because most of the utilities on the continent, unfortunately, are all failing. There's only, I believe, two, based on a World Bank report a few years ago, although my information would be outdated, but I believe there's only two utilities on the continent that are actually profitable One in the island countries and I think you do, mami in Uganda. The average ATC and C loss of national utilities across sub-Saharan Africa, I believe, is 35 or 40%. So national utilities everywhere around the continent are really, really struggling. When you go to Lagos and Abuja, as mentioned earlier, you can go to the fanciest areas and your hotel will still be running on generator.

Speaker 3 38:06

So these utilities don't even have enough financial resources, let alone generation supply, technical resources, to provide 24-7 quality electricity to their prime customers in the largest industrial areas, in the fanciest hotels, in the business districts. They can't even fix those areas and so why would they cede it to us? Because we actually provide them with incremental revenue. So we take an area that's zero revenue or actually loss-making at times. We do all the collections, we do prepaid, smart metering, mobile money payments, significantly reduce ATCNC losses and actually pay the utility for power that they're supplying to us. So in a lot of ways it's the win-win-win. You're talking about Nico at the start. But if anything, it's absolutely necessary for utilities from a financial perspective, and that's what, more and more in.

Speaker 2 38:55

After all, utilities DISCOs couldn't do that on their own, because if they start with one area, they would have to do it all over, all over their distribution network, and they are somehow bound to certain regulations that don't allow them to implement this themselves themselves. Compared to what we have heard from Thailand, for example, where a utility just said, ok, well, let's install this type of technology in parts of our distribution network. In Nigeria, that would not be possible, because that was another discussion I had with a disco in Nigeria where they said, yeah, well, but why would we let these greenhorns take over our infrastructure and the best clients? Why would we do that? Why wouldn't we just do it ourselves? And I say well, because you can't. It's legally not possible, but these mini-grid companies they can. Well, of course, law could be changed. Do you think changing law would be an option? Would discos then pick it up themselves, aaron, or do you think that they would still count on private sector mini-grid companies?

Speaker 3 40:04

I think there's some technical operational challenges as well here, which is that the mini-grid sector has developed a small level of expertise in mobile money payments and prepaid smart metering, because that's what's needed to do really remote rural sites. Everything has to be prepaid. You can't be collecting cash. You got to do it through mobile payments and so we have zero collection losses.

Speaker 3 40:23

Most of the discos in Nigeria although there has been a big metering push in the last four years and there have been a lot more meters installed, but most of the discos in Nigeria still to this date are doing door-to-door estimated billing for the vast majority of our customers.

Speaker 3 40:37

And if you go to Nigeria and you spend time walking around with one of these technicians, you will go door to door and they will have these printouts and initially the printout is based essentially just on the size of the house, how wealthy they think it is. But you go door to door and this person owes 4,000 Naira and this person owes 8,000 Naira, and so it's really not the level of, I think, modern utility standards is not really quite there yet and the transformation required at these behemoths just takes time and again they really don't have the ability to focus on these areas they really should. From a financial and pure rational interest perspective, they need to focus really just on their capital cities, on the prime residential areas, on the prime industrial areas. There's already enough work to do there. On the prime residential areas and the prime industrial areas there's already enough work to do there.

Speaker 2 41:20

What role did the regulator NERC play in developing this interconnected mini-grid?

Speaker 3 41:27

I think they've played an important role, although not as active. In some ways, I think probably you both have worked a lot more closely with them. It's pioneered the space for us in a lot of ways. But I would say NERC has done their job by allowing and enforcing regulation and allowing it to prosper. But NERC at the moment and they could be in the future, but at the moment they're not necessarily driving the innovation, but they're allowing the innovation to occur, which is really important.

Future Opportunities in Interconnected Mini-Grids

Speaker 2 41:53

I see, well, that is basically their role, right? They set the rules and then they wait for the rules to basically unfold their power. All right, chris, do you still see optimization potential in regulation in Nigeria and beyond potentially?

Speaker 4 42:10

It seems to me that, based on what Aaron says and what I've observed in speaking with other interconnected mini-grid developers in Nigeria, which is pioneering this in more of a liberalized context, that the regulations themselves don't seem to be a big problem. The one thing that mini-grid developers had been mentioning to us was there's a one megawatt threshold above which there's a full licensing requirement, and many of the mini-grid developers were coming up, especially in these interconnected mini-grids, were coming up on this one megawatt threshold. And it's an interesting situation because sometimes it was even like you started out with like a 300 kilowatt mini-grid, but the demand grew much more than you expected, like Aaron said, and then all of a sudden you're pushing over a megawatt. So what is it? As soon as you pass that threshold, do you suddenly have to be part of a whole new regulatory regime? But on the other hand, you can kind of understand how Newark would feel like oh, beyond a certain size, you're looking at medium voltage and there's technical issues that come up with the larger scale. So that's the one thing that I'd heard the mini grid developers talking about and, interestingly enough, in the World Bank's project appraisal document for the DARS program, there's a condition in there that says the World Bank is basically saying we're going to hold back $50 million of the $750 million package in less than until NERC makes this change and raises that one megawatt to a five megawatt threshold. And we raised that with NERC and they said you know, we know that's on the books. And they said we feel you know, from a regulatory perspective it's appropriate to provide more regulatory scrutiny at this one megawatt threshold. Again, it wasn't a huge bottleneck in the development of these projects.

Speaker 4 44:09

From what I could tell, the issue of mini grids and their interface with the grid has been part of other regulations and regulations that you and I have both worked on.

Speaker 4 44:20

It was initially part of the Tanzanian regulations, then the Ethiopian regulations that you and I worked on and Myanmar regulations, but that was.

Speaker 4 44:29

It was interesting. It was more in the context of what happens when you have an isolated mini grid and the grid expands more quickly in a particular direction than is expected, because distribution utilities, their decisions to expand to particular communities, is often a bit unpredictable and driven by local politics. What happens when this mini grid arrives and how can we give comfort to the mini grid developer that this distribution utility is not going to take over their customers and charge a lower tariff and in that case there were provisions for, okay, you could become a franchisee and resell electricity at retail tariffs that you purchase wholesale from the national utility, or you can sell electricity back or, as was the case in also the Nigerian regulations that Anensis pioneered, this model of the utility buying out the assets plus an additional fee that represented the revenues for the first year. And I think in practice we haven't seen those regulations in my understanding really tested because just having those on the books have kind of kept those interactions from happening.

Speaker 4 45:44

But there haven't been a lot of, with the exception, I think, of the regulations in Nigeria that you guys worked on, regulatory frameworks that really address this question of mini grids that are interconnected from day one, mini -grids that are interconnected from day one and in some ways that's an interesting blank space because you are seeing these interconnected mini-grids from day one happening in the United States and Europe and other OECD countries. So I think it's an area that I would expect to see some movement in other countries, probably building on Nigeria as a pioneering leader.

Speaker 2 46:20

All right. Last question, aaron Are you scaling up your interconnected mini-grid development? Where will your interconnected mini-grid operation be in three years from now?

Speaker 3 46:32

Yes, we are. We'd love to scale it up. We have ambitious goals and let's see if we can achieve them. But we'd love to get to 50 megawatts of interconnected mini grids across multiple markets. One thing I will say is I think the opportunity of interconnected mini grids really touches on the future of how the energy system in Africa can look.

Speaker 3 46:49

The interconnected mini grid market should not just be restricted to small peri-urban towns. But again, let's take Abuja Electricity Company as an example. In Nigeria they serve Abuja, which is the federal capital territory, niger State, nassarawa State and Kogi State. Adc doesn't have enough financial or technical resources even to fix Abuja itself. And so what will happen over time?

Speaker 3 47:11

If we and some of our peers in the sector are able to prove that we can take a county capital, a suburb, a larger suburb, and turn those around and provide 24-7 power, generate revenue for the discos, the direction this will ultimately move in is actually huge subconcessions. So eventually ADC and they're already rumored to will look at subconcessioning this partner at an entire state or province level. That's, I think, the place. That's really, really cool. So we're not there yet. Powertest is not there yet. We'd love, in three years, to get 50 megawatts, but the long term in 10 or 20 years, is actually to build regional utilities that have really low ATC and C losses, that use modern technology, that have come through the real mini-grid sector, but to manage it at scale across the continent. So that's where we'd love to be in the next decade or two.

Speaker 2 47:54

All right, chris. One final question to you. Interconnected mini-grids are being tried in Nigeria, as we just said. Which other governments are, or should, be interested in deploying a similar approach? Let's specifically think of Africa.

Speaker 4 48:11

That's a good question. I mean, I think, as Aaron says, the conditions of insufficient power supply and utilities that are insolvent or financially failing is pretty common across Africa, and so I would think that the opportunities for this model that has been pioneered in Africa really makes sense in a lot of countries, everything from the more wealthy countries like South Africa, which have had, you know, a lot of problems with load shedding, and all the way to poorer countries like Sierra. Leone and Liberia that have even less reliable power supply.

Speaker 2 48:50

Thank you, Chris. Thanks a lot, Aaron. Let's hope that more and more interconnected mini grids are being built and that they stabilize the African and the electricity distribution systems all over the world. Thanks for being my guest today and goodbye for now.

Speaker 3 49:08

Sure. Thank you both. It's a pleasure.

Speaker 1 49:10

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