A Little Primer for Off-Grid Microgrids
Episode 4a of “How to monetize a microgrid?” — building a grid from the bottom-up
We have finally arrived at the most interesting microgrid market (at least in my opinion), off-grid microgrids. These are the microgrids that are not attached to a utility’s grid and are totally independent from the wholesale markets. They are mostly in emerging countries in order to provide energy access and increase energy availability.
Off-grid microgrids have been receiving an increasing amount of attention not just as a sustainable means of bringing electricity to the 789M people still living without access, but also because they are becoming increasingly competitive thanks to technological improvements and economies of scale. Energy access and availability have been the main driver in this context, but we are also seeing more strategic interests due to the size of the market and the possibility of building infrastructure from scratch. Looking at the influx of private companies into the energy access landscape whilst simultaneously acknowledging that most of the developed world has built their grid infrastructure as a national effort, what contributions can or will the private sector really make?
As I am conscious of length, I have split this article into two; this one providing the required background information, terminology and trends to then enable us to dive straight in on the upcoming 101 of designing an off-grid microgrid.
Electrification Status
In 2019, 840M people still had no access to electricity, down from 1.2B in 2010. Although energy access is improving with an average of 131M people gaining access to energy every year for the past ten years, the rate of progress is not fast enough when factoring in population growth. The World Bank estimates that unless further changes are made we will miss the UN SDG 7 goal of ensuring reliable, sustainable and modern energy for all by 2030, with 674M people still without energy [source].
- Grid expansion
Grants, funds and subsidies on all levels exist to help reach this goal, but it has become clear that traditional electrification programmes are insufficient. Grid extensions into rural areas are very expensive, often exceeding $2,000 per connection [source]. Under these conditions, last-mile electrification will be far too slow.
- The most expensive electricity worldwide
In rural areas, $10/month per household (or up to 30% of their disposable income) is spent each year on kerosene, dry cell batteries and other stop-gap solutions which are expensive, dangerous and dirty [source]. The mobile phone adoption and the appearance of off-grid charging kiosks have brought electricity and more effective lighting solutions, but the kWh price is often much higher than in developed countries. Charging a phone costs around $10.5/kWh (as compared to US: $0.12/kWh, or Japan: $0.26/kWh). This is the price of availability.
New Enabling Trends
Fortunately, this is changing as the following trends are enabling new more sustainable ways to provide electricity:
- 7-fold Cost decrease
A considerable and continuous decrease in costs of solar and batteries is the first hurdle for off-grid energy to take off. In the last decades, both solar and battery prices have decreased 7-fold, defying all predictions [souce].
- Technology-enabled financing
The next hurdle has been financing. However new technologies enabling microfinance solutions and innovative business models utilising mobile payments have emerged. Pay-as-you-go (PAYG) solutions allow customers to spread the cost of an SHS over time. Customers only pay a small initial down payment and then top up daily or weekly via mobile payments in order to unlock the energy and use the system. At the end of the term, usually 1–2 years, the system unlocks permanently. This technology has enabled even those populations without any access to banking to obtain previously unaffordable things. Finally, extremely high-efficient appliances have greatly contributed to getting the most ‘utility’ out of even smaller solar systems.
From SHS to Microgrids
Basic electrification for first-tier users began with solar lanterns and progressed to SHS. These systems can be sold as products using PAYG and meet basic needs, but cannot easily scale as people move up the energy ladder and want to power bigger appliances. That’s when microgrids come into the picture: they can provide energy access and availability more efficiently and reliably than SHS or even, in many countries, the grid.
When talking about bigger appliances, we tend to mean productive use appliances. These are appliances that allow customers to generate additional income by, for instance, powering a water pump, a sewing machine, or a cricket incubator. This is crucial for scaling as it allows users to move up the energy ladder. The added expense ultimately generates additional income which opens up the ability to add further expense by purchasing the next appliance, and thus generate further income, and so forth.
How to make it a reality?
Most of the developed world has built its grid infrastructure as a national effort. In regards to emerging countries, the trends identified in this article are creating the clear potential for profitable business models which is therefore of course appealing to the private sector. I firmly believe the sector can play a significant role in electrifying the 674M people still living off-grid. According to a more recent report by the World Bank (2019), falling costs, new technologies, and favourable enabling environments have made minigrids/microgrids an option to connect 490 million people. It seems clear that there is a space and a demand for the private sector to be a part of the solution for meeting the SDG7 targets and electrifying the vast number of people who have been left behind. For this to happen in reality, we need to further improve the public and private interplay through a well-designed framework of regulations, grants, subsidies, and tenders.
So the concept and the trends look promising, but questions remain:
How can you build a financially sustainable business out of microgrids? Which technology is most suitable to build a grid bottom-up? Which business model is most scalable in a given environment? How do you set the price when there is no market to refer to and the marginal cost of electricity is zero?
Read the next episode to satisfy your curiosity on these questions (coming in a few days)!
[Procrastinatively authored by Annette, kicked up the bum by Vicky. We work together to choose the best content and elevate each other’s work. More on us and our approach here]
*** Update ***
The article-series is complete now! Here are the quick links:
- A Quick Overview of Microgrids (and How to Monetize Them) — Episode 1 of “How to Monetize a Microgrid?” : Introduction the world of microgrids
- How to Monetize Microgrids Running on the National Grid? — Episode 2 of ‘How to Monetize a Microgrid?” : on-grid microgrids on existing infrastructure
- Why Pay for Private Infrastructure with an On-Grid Microgrid? — Episode 3 of “How to Monetize a Microgrid?” : on-grid microgrids with private infrastructure
- (Current one) A Little Primer for Off-Grid Microgrids — Episode 4a of “How to monetize a microgrid?” building a grid from the bottom-up
- Designing an Off-Grid Microgrid 101 — Episode 4b of ‘How to monetize a microgrid?”: building a grid from the bottom up
