3Q 2017 OFF-GRID AND MINI-GRID MARKET OUTLOOK

3Q FRONTIER POWER MARKET OUTLOOK

EXECUTIVE SUMMARY

The market for micro-grids and hybrid generation in emerging economies is growing with particularly strong demand from islands, remote regions, and the mining sector. While the project count remains small, policy-makers and project developers are growing more comfortable with the role these systems play in serving remote regions. While such installations are on the rise, the markets for small diesel generators and portable solar kits both shrank last year.

• At least 20MW of renewables-based commercial or industrial micro-grid projects were announced since April, primarily in Africa’s mining sector. Vendors are gaining valuable experience with contract structures and operational challenges. Aggreko, the market leader for rental power, recently introduced a solar-diesel hybrid product and bought an energy storage company to better control integrated projects.
• More broadly, the popularity of renewables is growing across emerging markets. Non-OECD countries bought $722 million worth of PV equipment from China in March 2017, the most since January 2015. India was by far the biggest buyer while total spend on PV from China has stalled in East Asia and Africa.
• China and India are not just the largest PV trading partners, but active investors in renewables and rural electrification in Africa, which they regard as a promising market for component exports. Between them, Indian and Chinese governments and state-owned banks announced $189m in loans for African projects since April.
• India’s domestic solar boom is well under way, along with efforts to improve the quality and reliability of its power. BNEF research shows that outages declined since the government stepped up efforts in 2016, but large areas remain affected by frequent black-outs.
• Sales of diesel generators smaller than 375kVA in Africa and the Middle East fell by 25% in 2016, but competition from renewables is still too weak to explain the collapse. The market for branded portable solar kits suffered an 8% decline in 2H 2016, the latest period for which complete data is available.

BY THE NUMBERS

• 25% decline in diesel generator shipments to emerging economies in 2016.
• 7.3 hours of average power outages per month in India this year.
• $1.8 billion China’s PV exports bought by developing countries in 1Q 2017.

FOCUS THEMES

The two most populous countries in the world have both recently taken steps aimed at accelerating investments towards supplying more reliable energy in currently underserved areas. China’s Belt and Road Initiative is set to provide the background to expand its activity in Africa’s energy sector, and India has made progress on improving supply quality on its grid and is rethinking its electrification strategy.

POWER OUTAGES IN INDIA

The gap between supply and demand for electricity in India has sharply narrowed over the past five years, as the country installed 113GW of new capacity from 2012–15. However, that boost in supply improved the quality and reliability of electricity supply did not reach all customers, BNEF found in recent research. There are many reasons for this, notably the financial health of local utilities, one of the most important indicators in determining whether conditions improve.

Reliability indices in India

Since 2016, the Indian government has increased transparency on the performance of the grid and is publishing outage data collected from meters installed on feeders on the web. Among the indicators is the System Average Interruption Duration Index (SAIDI) which measures the duration of power cuts for the average consumer. On aggregate, the data suggests that the SAIDI declined from 19.4 hours per month in May 2016 to 6.1 hours per month in March 2017 (Figure 2).

This overall improvement hides stark regional differences. While reliability in large cities like New Delhi is high, the situation in other parts is far worse. The states of Jammu & Kashmir and Uttar Pradesh see some of the most severe outages, while Gujarat and Maharashtra are examples of far better power reliability. Power reliability can even vary significantly from one feeder to another. The vast majority of outages are shorter than six hours per day. Nonetheless, 4.8 million people, or 3.2% of the 151 million people living in towns where data was available, experience outages of six hours or more on an average day.

A changing government approach to rural electrification?

In India (and many other developing countries), policy-makers have historically regarded rural electrification with off-grid technologies as a philanthropic activity, favouring expansions of the existing grid. There have been some signs in recent months that conventional wisdom is shifting. In June, India’s influential NITI Aayog think tank called for a pragmatic “de-mystification” of the challenges of rural electrification in a draft national energy policy¹. More than 300 million people still rely on kerosene for lighting. The commission says that the widespread assumption that rural electricity supply is welfare rather than a commercial activity is erroneous, citing studies that willingness to pay in rural areas is high and exceeds the long-run marginal cost of supply. The draft policy recommends raising the statistical definition of a village as ‘electrified’ to require connections to all residents, not just public infrastructure in the village. It also states that consumers should be recognized as revenue generators once connected. The report sees a role for grid-connected micro-grids in boosting power quality and reducing peak demand in areas far from the next substation. The states of Uttar Pradesh and Bihar already have targets, albeit modest ones, for micro-grid generation capacity. A policy cleared on May 29 by the state cabinet in Bihar calls for 1GW of rooftop solar and 100MW of solar on micro-grid projects, out of a total capacity target of 3GW PV by 2022².

IS CHINA RAISING ITS PROFILE IN AFRICA’S DISTRIBUTED ENERGY MARKET?

Several announcements over the last few months suggest that the Chinese government and Chinese companies are accelerating their activity in Africa’s off-grid energy sector. Greater engagement would be in the spirit of Beijing’s $1 trillion Belt & Road infrastructure investment program, whose maritime arm is planned to reach out to eastern Africa (see Figure 3). Chinese suppliers already dominate Africa’s market for both diesel generators and solar panels, but these are often sold by relatively small private companies. More orchestration of these efforts by the government or state-owned enterprises could lead to larger projects and compete with Western-backed development initiatives to foster Africa’s clean energy markets. Chinese companies have already dominated investments in fossil-fuelled or hydro power projects in Africa in recent years.

Most prominently among Chinese-led activity in the past few months was an agreement by Bank of China to lend $123 million for Cameroon’s solar-based rural electrification program. The program is meant to reach 350 communities with 32kW PV each, according to a PV Magazine report³, suggesting the total project size is 11MW. Huawei, the world’s largest solar inverter manufacturer, will deliver components and smart meters for the micro-grids. On July 20, governors of China’s Hebei province and Nigeria’s Kaduna state also agreed a partnership to develop solar plants, among other projects⁴. On June 30, the Chinese government donated $3 million worth of off-grid solar home systems and street lights to the local rural electrification program in Ghana⁵. The government efforts broadly complement a few private Chinese companies already targeting rural African energy consumers. Made-in-China products have long dominated the market for the estimated 8 million portable solar kits sold annually in Africa. In April, Shenzhen Power Solution Ltd said it plans to retail a basic solar-powered light for as little as $2, far below the cost of most branded comparable products, according to a Xinhua report⁶. In perhaps the most unexpected partnership, China-based Sumec Group and Nari Group tied up with American rapper Akon to structure more than $400m in solar deals across 17 nations in Africa. The venture’s financial vehicle, Solektra International, has credit lines for a further $600m outstanding, according to a Bloomberg News report⁷. While China is looking to invest more in Africa, Japan is planning its own initiative in the energy sector in Africa. On July 3, the government of Japan agreed with African Development Bank (AfDB) to launch the Japan-Africa Energy Initiative⁸. Japan will provide up to $6 billion in both concessional and non-concessional finance to support AfDB’s goal achieving universal energy access by 2025 in Africa. The program is part of Japan’s efforts to export domestic technologies, with a particular focus on low-emitting coal. Most of the funds are likely to be deployed in large-scale energy projects.

NEW: BNEF FRONTIER POWER DATA HUB

The Frontier Power Data Hub is an interactive tool to view market fundamentals and regulations for distributed energy in more than 20 developing countries in Sub-Saharan Africa and Asia (Figure 4). The tool also allows users to assess the size of solar markets by analyzing time series data on PV equipment exports from China by non-OECD countries.

The Country overview shows the information on policy and regulatory frameworks for clean energy and electrification. It also includes statistical information such as electricity and fuel prices, electrification rates, or installed capacity on the grid (see Figure 4). The country comparison tab plots the same data across multiple nations to help identify trends or regional leaders in a certain field (for instance comparing the rules on arrival of the main grid). These two parts of the tool are also available for use by the public here.

MARKET FUNDAMENTALS

CURRENCIES

Baskets of Asian and African currencies remained relatively stable over 1H 2017 compared with the U.S. dollar, ending within 1.5% range from the start of the period. The appreciating Indian Rupee is pulling the Asian portfolio upwards thanks to sustained high levels of foreign investment. The African currency portfolio was initially shaken by South Africa’s cabinet reshuffle at the end of March, but has since stabilized albeit with higher volatility. The impact has been negligible on the costs and competitiveness of distributed renewable energy goods and services.

DIESEL GENERATOR SALES

Patchy coverage of the grid and recurring power cuts in many emerging countries force businesses and consumers to rely on back-up diesel generators, often several times a week. This fleet of small ‘gensets’ accounts for a sizeable portion of the installed power generation capacity in these nations. In Nigeria, South Africa or the Philippines, for instance, we estimate that more gigawatts of diesel generators were sold during 2010–15 than were commissioned in utility-sized power plants in the same time.

by 25% year-on-year, to less than 380,000 units. The drop was particularly pronounced in Africa and the Middle East (Figure 6). South Asia was the only region where sales increased, driven by a surging demand in Pakistan due to the prolonged power crisis there. Sales also rose in India, despite a sharp narrowing of the electricity supply gap (see section 2.1).The easing of South Africa’s electricity shortage after 2015 was a major contributor to the drop, but not the only one. Nations across the continent procured far fewer gensets than in prior years. The drop is too large to be explained by rising competition from renewables.

DIESEL PRICES

Diesel prices rose slightly in India, Pakistan, South Africa, and Kenya (Figure 7) during the first half of 2017, even as front-month Brent crude oil future prices fell by 14%. Ghana is a notable exception where retail diesel prices slipped over the period. The 25% fall can be explained by a new tax cut for oil companies provided by the Ghanaian government.

PV SHIPMENTS

In March 2017, emerging countries bought $722 million worth of PV equipment from China (Figure 8), the highest value since January 2015 — where the data starts. The same markets now also purchase more than 60% of China’s PV exports. India continues to be the major driver within this trend. The country increased imports from China from $296 million (37% of the total) in January 2017 to $464 million (44%) in February, and onto $508 million in March.

Despite record-high levels of PV exports from China to emerging countries, almost all of the activity is in South Asia, primarily India and Pakistan (see Figure 9). Latin America and the Caribbean also increased imports from $71 million in Q1 2016 to $215 million in Q1 2017. To further analyze this data, see our data hub that allows to customize charts of PV exports from China.

MICRO-GRIDS

Commercial and industrial micro-grid projects with a total of 20MW of renewable capacity have been announced since April, amid a continued rush by equipment manufacturers and energy companies to buy storage start-ups. Residential micro-grids saw $386 million in program and loan announcements, almost exclusively by governments and development banks.

COMMERCIAL AND INDUSTRIAL MICRO-GRIDS

The commercial and industrial segment of Frontier Power benefits from comparatively stable off-takers and often favorable economics. Projects on islands and in the mining sector are particularly common as such sites generally offer the requisite land for renewables development and have high incumbent costs associated with diesel generation. The most noteworthy new hybrid renewables/diesel or renewables/storage projects since April include:

• Rental power giant Aggreko announced it will supply the Nevsun copper and zinc mine with a 29.5MW, including 7.5MW of solar under a 10-year supply contract.
• Tata Power Solar’s 3MW PV plant at an iron ore mine in the state of Jharkhand owned by Tata Steel⁹. The site is grid-connected and benefits from a net metering arrangement, but can be islanded and function as a micro-grid in case of an outage.
• Enel Green Power Chile and Electro Power Systems’ solar+storage micro-grid in the Atacama Desert, consisting of 125kW PV, along with a lithium-ion battery and hydrogen storage system. The total hybrid storage capacity exceeds 580kWh and the installation requires no diesel generator for back-up¹⁰.