Q&A with Smart Power Myanmar CEO Richard Harrison: Part 2

This interview was first published on the Myanmar Energy Monitor by FMR Research and Advisory.

Since the beginning of the year, Smart Power Myanmar (SPM) has announced a number of new initiatives aimed at supporting mini-grid developers and fostering growth in the country’s renewable off-grid electrification market.

These initiatives include a new data analytics function, a partnership with the Private Financing Advisory Network (PFAN) to connect companies with private investors, and the country’s first-ever infrastructure financing facility targeted at mini-grid developers. Most recently, SPM announced a new accelerator program developed with the Miller Centre for Social Entrepreneurship, based out of Santa Clara University in California.

Recently, Myanmar Energy Monitor spoke with CEO Richard Harrison about SPM’s work and get his perspective on the country’s off-grid energy market.

We note that the interview was completed before Pact Myanmar, SPM’s parent company, announced the signing of a new MoU with the Department of Rural Development (DRD).

What are the major challenges to growth for mini-grid developers in Myanmar right now?

SPM’s “Decentralised Energy Market Assessment”, conducted by Roland Berger and published in May 2019, set out to answer this very question and determine what steps needs to be taken. From its findings, our experience in the field and the results of other key studies, we know that developers face three main challenges: limited access to finance for communities and micro-businesses; a need to stimulate demand; and diseconomies of scale.

Access to finance is crucial to the success of mini-grids in Myanmar but, at present, is limited. There are multiple reasons for this, including: the high perception of surrounding risks; uncertainty over the level of demand in off-grid villages; and difficulty in accessing debt finance with sustainable, suitable conditions for private developers. Overcoming this barrier would drastically increase the number of mini-grid sites around the country.

Demand is an often-neglected segment in terms of support, as the evidence from more mature mini-grid markets has demonstrated time and time again. You cannot simply build mini-grids and expect energy demand to grow; the ecosystem has to be nurtured. SPM is strongly promoting the importance of having a programmatic approach to demand — and this is a message we are delivering to development financing institutions across the spectrum. Supporting rural demand growth — which includes value chains and the broader economic ecosystem — is essential as, without this, mini-grids cannot be commercially viable. People want electricity; this is clear. However, villages need to use enough electricity to make investment cost-effective for developers, creating a virtuous cycle. Research shows that developing local value chains and productive uses of energy enhances the potential of mini-grids. Programs targeted at encouraging the productive use of energy, such as those that help villages to convert machinery from diesel to electricity and to purchase electric-power tools, are just one of the approaches that can be used to realise rural demand growth.

Diseconomies of scale hinder developers as they vastly increase the costs of developing additional mini-grid sites. We believe that to promote economies of scale, there are two key mechanisms: streamlining and pooling key processes into shared platforms managed by the government or by third parties; and supporting a certain level of market concentration allowing large players with sufficient size to emerge.

Addressing these core challenges will enable developers to grow their businesses and, ultimately, increase energy access in Myanmar.

Have there been any positive developments in the last year regarding the mini-grid market?

Many! I like to say that the Myanmar mini-grid market is one of the most promising success stories in the world — and one of the least promoted.

Myanmar has the fastest growing mini-grid market in the world, thanks in part to generous subsidies, but also thanks to emerging private investment. If the momentum continues, developers could be providing hundreds of thousands of customers with electricity in the coming years. Much of this progress is thanks to the significant contributions made by the World Bank and the DRD, as well as the technical support provided by GIZ and others. This collective work is crucial to the development of the mini-grid market and has given rise to about a dozen promising private-sector enterprises that are already starting to transition into viable off-grid energy companies. This is also starting to attract other financing institutions, including L’Agence Française de Développement, the Italian Development Agency, the Asian Development Bank, Norfund, the IFC and, more recently, local commercial banks.

The DRD’s off-grid electrification program continues to accelerate its pace. More than 70 mini -grid projects have benefitted from the program over the last year, with many finished and others under construction. These sites already provide access to energy for thousands, and consumption data gathered from these projects will inform future investments.

Innovative financing has also made serious leaps in the last year. The launch of the SPM-designed equipment loan financing facility with AYA, MCB and A Bank was a truly significant milestone, and other banks are designing similar products. These will help SPM to achieve its goal of $20m in available facilities in 2020, which will be enough to finance nearly all the equipment needs of developers for the year.

Another factor that will have major impact on the potential mini-grids in Myanmar is the policies developed to regulate the market. Can you talk a bit about that process?

Regulatory reform is critical, and until new, modern regulatory frameworks are agreed upon, their absence will continue to limit the true potential for decentralized energy in Myanmar. Several bodies, including the Japanese International Cooperation Agency, the World Bank and GIZ, are all advising on the draft regulatory framework. The goal is to develop a simpler, near-term regulatory strategy to increase the rate of last-mile electrification through a mix of public and private investment, thereby increasing the viability of mini-grid businesses and encouraging investors’ interest in the market.

Any effective framework will need to establish the rights of small-scale electric power enterprises, provide guidelines on setting tariffs and outline developers’ options in situations where the national grid arrives in a village that already has a mini-grid.

Related to that last element is the need to create regulations for feed-in tariffs. In the future, we hope that mini-grids will be able to sell power to the grid and contribute meaningfully to Myanmar’s overall power mix. The DRD is ensuring that mini-grids are built under strict requirements so their projects are grid ready, but we also need a policy framework to support this transition.

How do you expect the COVID-19 pandemic to impact the mini-grid market over the next few months? What about in the next year?

Though Myanmar has relatively few cases so far, we are already starting to see an impact on the sector. Developers constructing and operating plants located near quarantine centres in border areas, for example, are facing disruptions. While future impacts are hard to predict, we do expect to see some delays on project development, at least over the next few months, as communities adjust and companies learn to operate under a new normal.

Communities are already feeling economic strain, and it may get worse if conditions do not improve. Many communities rely on remittances from family members working abroad, but these workers have returned to their villages. If the situation derails the upcoming planting season, this will be another concern. As part of our extended commitment to communities, SPM will be providing financial assistance through our Energy Impact Fund, as well as large volumes of personal protective equipment for current mini-grid communities to protect themselves.

Again, longer term, the effect that the COVID-19 situation will have is difficult to predict and we are constantly assessing the latest information and developing various scenarios and working on how to best deal with them.

How has the COVID-19 pandemic and the unfurling response in Myanmar impacted SPM’s activities?

The safety of our staff and the communities we serve always comes first. The SPM team has been working remotely for more than two months now to protect themselves and also the communities that we work in. Overall, I’m impressed with how successfully we have made this transition, though of course nothing can compare to being able to interact in person with the team and our key stakeholders in Yangon and Naypyitaw.

The pandemic has made us adjust certain plans — moving our Mini-Grid Accelerator Program for developers online and delaying the launch slightly, for example, but we are still carrying on as normally as we can.

We have taken this time to try and better understand the needs of both mini-grid developers and the communities they serve. While we are avoiding travelling to communities, we have been working closely with the DRD and local committees to conduct phone surveys with residents and have kept in close contact with developers. This is giving us a much better understanding of the support communities require and what SPM may be able to do to help.

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