EVERY EVENING, NEARLY A THIRD OF OUR planet’s population is plunged
into darkness. With no access to electric power, much of the world will
rely on toxic kerosene lanterns, low-quality dry-cell battery torches, or
loud and expensive diesel powered generators. These technologies are not
only expensive in the long-run, but are also sources of pollution, damaging
household health and global climate. The global lack of universal energy
access is perhaps our greatest collective failure; it locks people in poverty,
harms their health and causes large scale environmental damage.
One critical solution expected to fill much of the energy gap is the
mini-grid: a standalone energy system that provides power to multiple
households, employing a range of renewable energy options. However,
mini-grids are challenging to finance for two primary reasons: high risk and
high transaction cost. To address these barriers and substantially increase
the flow of private capital into the sector, new approaches to investment
need to be developed. In this report, we provide a framework for such a
solution: the Mini-grid Pooling Facility (MPF).
We begin by outlining the current state of access, global financing requirements,
and mini-grids as an asset class. Over 65% of off-grid populations
are expected to benefit from mini-grids by 2030, and over 30% of
total investment into access is expected to be in this asset class, totaling
between $4 and $50 Billion annually.
The first barrier to minigrid investment is the scale and complexity of
associated risk. Renewable energy mini-grids will primarily be employed in
regions with low levels of socioeconomic development, complex business
environments, unstable political regimes, and often vague or unsupportive
regulatory frameworks. This results in a complex challenge for firm
managers and financiers, who have to mitigate, allocate, and eliminate
the complex risks that prevent successful and sustainable development, construction, and operation (see section 6 for a detailed risk analysis).
While some can be easily (although not inexpensively) managed through
insurance products, other risks are hard to quantify, challenging to price,
and even more difficult to address.
The second barrier to effective financing of mini-grids is the transaction
cost facing potential investors if projects are approached individually.
Regardless of size, any individual minigrid project incurs a set of fixed
transaction costs including identification, diligence, and platform development
expenses, which are described in detail in section 7. These fixed
costs are often significant relative to the size of the potential investment
often overwhelming the financial viability of an individual project.
We propose a solution that addresses both of these barriers through
project and capital pooling. An MPF can strategically select projects into
portfolios, thus diversifying risk and increasing capital requirements. By
centralizing some fixed expenses, transaction costs can be lowered significantly
on a per-project basis, thus increasing returns substantially for
potential investors. The MPF can also serve to attract previously unavailable
capital, better leverage philanthropic investment, result in lower
technology costs, and deliver other benefits (see section 8). While the
potential of this approach is substantial, MPF managers must also be conscious
of the drawbacks of creating portfolios of mini-grids, and these are
outlined in section 8.2. Best practices can also be derived from the case
studies we present in this report, which are summarized in the appendix
at the end of the report.
We conclude by discussing potential structures for an MPF, including
private and public options. It is critical that developers, investors, and
researchers work together, conduct the proper analysis, and determine
which structure is most appropriate in the working context. While this
report does not prescribe any particular approach, we hope that the information
provided in these pages serves to inform firm managers, investors,
development finance institution leaders, and other relevant stakeholders
in this complex decision process. Ultimately it is our hope that effective
implementation of the concepts in this paper will contribute to increased
energy access for all.