Ethiopia Financing Gap Business Models Off-Grid Energy ... · Financing Gap and Business Models in...

FinancingGapandBusinessModelsinOff-GridEnergySectorinEthiopiaFrameworkContractforMobilisingInvestmentforNDCImplementationProjectinEthiopia

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ABOUTTHISDOCUMENT

Thisdocument isanoutput fromtheMobilising InvestmentProject forNationallyDeterminedContributions (NDC) implementation,an initiativeof theClimateandDevelopmentKnowledgeNetwork (CDKN) that is contracted through and managed by SouthSouthNorth (SSN). TheInternational Climate Initiative (IKI) of the German Federal Ministry funds the MobilisingInvestmentprojectfortheEnvironment,NatureConservationandNuclearSafety(BMU),onthebasisofadecisionadoptedbytheGermanBundestag.DeliverypartnersfortheprojectincludetheNational Renewable Energy Laboratory (NREL),OverseasDevelopment Institute (ODI) andPricewaterhouseCoopersUK(PwC).

Throughout the development of this report, a consultative approach was taken with bothgovernmentandnon-governmentstakeholders.Thereportwasresearchedandwritteninclosecooperationwith the EthiopianMinistry ofWater, Irrigation and Energy. To complement thisconsultativeapproachand for thepurposesofdatacollection, the teamcarriedout individualstakeholder interviews. Final results from the researchwerepresented toamulti-stakeholderworkshopinAddisAbabainJuly2019.

DISCLAIMER

Theviewsexpressedinthisdocumentarenotnecessarilythoseof,orendorsedby,BMUoranyoftheentitiesdeliveringtheMobilisingInvestmentproject,whocanacceptnoresponsibilityorliabilityforsuchviewsor information,orforanyrelianceplacedonthem.Thispublicationhasbeen prepared for general guidance on matters of interest only and does not constituteprofessional advice. You should not act upon the information contained in this publicationwithout obtaining specific professional advice. No representation or warranty (express orimplied) is given as to the accuracy or completeness of the information contained in thispublication, and, to the extent permitted by law, the entities managing the delivery of theMobilising Investment project do not accept or assume any liability, responsibility or duty ofcareforanyconsequencesofyouoranyoneelseacting,orrefrainingtoact,inrelianceontheinformationcontainedinthispublicationorforanydecisionbasedonit.


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DOCUMENTCONTROL

Documenttitle Financing Gap and Business Models in Off-GridEnergySectorinEthiopiaReport

Referenceno. N/A

Preparedby Ms. Nishu Chaudhary, Associate Director, IPE GlobalLimited

Reviewedby Mr.ShewangizawKifle,ClimateResilienceandEnergyExpert

Approvedby Mr. Sunil Verma, Country Head, IPE Global Limited,Ethiopia

Date 26August2019

NB: This report should be read in conjunction with the report on ‘Ethiopian RegulatoryEnvironmentandCapacityConstraintsinOff-GridEnergySector’.

Copyright© 2019, this is anOpen Access report distributed under the terms of the CreativeCommonsAttributionLicense(CCBY4.0)(https://creativecommons.org/licenses/by/4.0/)


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TABLEOFCONTENTS

ABBREVIATIONSANDACRONYMS 8

EXECUTIVESUMMARY 11

CHAPTER1:MINI-GRIDBUSINESSMODELS 16

CHAPTER2:BUSINESSMODELSSUITABLEINETHIOPIANCONTEXT 26

CHAPTER3:BUSINESSMODELS-BESTPRACTICES 33

CHAPTER4:MINI-GRIDECONOMICSANDFINANCINGMECHANISMS 38

CHAPTER5:PUBLIC-PRIVATE-PARTNERSHIP(PPP)MODELSINETHIOPIA 47

CHAPTER6:AGGREGATIONOFMINI-GRIDSTOUNLOCKPRIVATEINVESTMENT 51

CHAPTER7:TARIFFGUIDELINESANDMETHODOLOGYFOROFF-GRIDSYSTEMS 54

CHAPTER8:RECOMMENDATIONS 59

CONCLUSION 63


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ABBREVIATIONSANDACRONYMS

Abbreviation BPR BusinessProcessReengineeringCBE CommercialBankofEthiopiaCE CitizenEngagementCFL CompactFluorescentLampCDKN TheClimateEnergyKnowledgeNetworkCO2 CarbonDioxideCRGE ClimateResilientGreenEconomyDBE DevelopmentBankofEthiopiaDoE DirectorateofElectrificationDP DevelopmentPartnerEAPP EasternAfricaPowerPoolEEA EthiopianEnergyAuthorityEEP EthiopianElectricPowerEEPCo EthiopiaElectricPowerCorporationEEU EthiopianElectricUtilityERP EnterpriseResourcePlanningESDP EducationSectorDevelopmentProgrammeFDI ForeignDirectInvestmentGDP GrossDomesticProductGIS GeographicInformationSystemGIZ DeutscheGesellschaftfürInternationaleZusammenarbeitGoE GovernmentofEthiopiaGTP GrowthandTransformationPlanGW GigawattGWh Gigawatt/hourHDI HumanDevelopmentIndexHH HouseholdHSPD HealthSectorDevelopmentProgrammeIAIP IntegratedAgro-IndustrialParksICT InformationandCommunicationTechnologyIDA InternationalDevelopmentAssociationIDP InternallyDisplacedPersonsIEC InternationalElectrotechnicalCommissionIKI InternationalClimateInitiativeIPEGlobal IPEGlobalLimitedIPP IndependentPowerProducerIRM ImplementationRoadmapKm KilometersKPI KeyPerformanceIndicatorKw KilowattkWh Kilowatt/hourLED Light-EmittingDiodes


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LV LowVoltageMDCL MarketDevelopmentCreditLineM&E MonitoringandEvaluationMFI MicroFinancialInstitutionMIS ManagementInformationSystemMoFEC MinistryofFinanceandEconomicCooperationMoWIE MinistryofWater,Irrigation,andEnergyMSME Micro,SmallandMediumEnterprisesMST MinimumSubsidyTenderMt MetrictonsMTF Multi-TierFrameworkMV MediumVoltageMW MegawattNBPE NationalBiogasProgramofEthiopiaNDC NationallyDeterminedContributionsNEP NationalElectrificationProgramNES NationalElectrificationStrategyNGO Non-GovernmentalOrganizationNICSP NationalImprovedCookstoveProgramOPEC OrganizationofthePetroleumExportingCountriesPAYGo PayasYouGoPPA PowerPurchasingAgreementPPP PublicPrivatePartnership;PowerPurchasingParityPSE PrivateSectorEnterprisePSNP ProductiveSafetyNetProgramPVOC Pre-verificationofConformityREB RegionalEnergyBureauREF RuralElectrificationFundSC SteeringCommitteeSDG SustainableDevelopmentGoalsSE4All SustainableEnergyforAllSHS SolarHomeSystemSME SmallandMediumEnterprisesSSA Sub-SaharanAfricaSSN SouthSouthNorthTVET TechnicalVocationalEducationandTrainingUEAP UniversalElectricityAccessProgramUK UnitedKingdomUN UnitedNationsUNDP UnitedNationsDevelopmentProgrammeUSAID UnitedStatesAgencyforInternationalDevelopmentUNICEF UnitedNationsInternationalChildren’sEmergencyFundWHO WorldHealthOrganizationWp WattPeak


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ACKNOWLEDGEMENT

ThisreportonUnderstandingtheEthiopianRegulatoryEnvironment inrelationtoOff-Grid(Mini-grid) Energy Project under Framework Contract forMobilising Investment for NDC1ImplementationProjectinEthiopiawasmadepossiblewiththesupportofSouthSouthNorth(SSN).

For completion of report, IPE Global is indebted to the officials of Ministry of Water,IrrigationandEnergy,GovernmentofEthiopia;EthiopianElectricUtility(EEU)and;EthiopianEnergy Authority (EEA). The information and insight received from them are the majorsourceforoverallstructuringofthereport.

Sincere thanks tovariousstakeholders, including theprivatesector,developmentpartnersandcitizensofEthiopiaforinsights,experiencesandaspirationsrelatedtoOff-Grid,mainlyMini-gridsectorinEthiopia.

WearegratefulforthesupportandtechnicalguidanceprovidedbySouthSouthNorthduringthelifetimeofthisassignmentwithoutwhich,thisreportmaynothavebeenpossible.

1Nationally determined contributions (NDCs) embody efforts by each country to reducenational emissions and adapt to the impacts ofclimate change. The Paris Agreement (Article 4, paragraph 2) requires each Party to prepare, communicate and maintain successivenationallydeterminedcontributionsthatitintendstoachieve


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EXECUTIVESUMMARY

Ethiopia’s National Electrification Program (NEP 2.0) represents the country’s action plan toachieve nationwide access to electricity by the year 2025. Currently, only 44 percent of thepopulationhasaccesstoelectricitywith33percentservedbygridelectrificationand11percentbyoff-grid(solaroff-gridandmini-grids).2Toprovideenergytotheremaining56percentofthepopulationover thenext six years, theGovernmentof Ethiopia is implementing a fast-paced,ambitious grid connection rollout program, led by the Ethiopian Electric Utility (EEU), and acomplementaryoff-gridaccessrolloutprogram.Theoverallcostofthegrid(USD3.5billion)andoff-grid(USD2.5billion)programsisaboutUSD6billion.

Thegovernmenthasderegulated theoff-gridmarket and introduced legislation toestablishasupportiveenablingenvironment, in linewith thebestpractices,as reflected in theprevailingquality standards, custom duties and lifting of testing requirements. Energy Regulations areunder revision, and the Ethiopian Energy Authority (EEA) has developed a draft of TariffGuidelinesandMethodology forOff-GridSystems inconsultationwithstakeholders to finalizecost-reflectivetariffs,andsustainablemini-gridbusinessmodelsinEthiopia.

TheEthiopianNationalElectrificationProgram(NEP)2.0,recognizesthatmini-gridtechnologiescanprovideahigherlevelofserviceandcansupporthighloads,includingforsocial(e.g.healthand school facilities) and productive uses, for energy intensive businesses and even smallindustries.Theadoptionofamini-gridprogramispartoftheEthiopianGovernment’sapproachtowardsintegratedplanning,asmini-gridsandsolarhomesystems,aswellasgridconnectivity,aretechnologiesthatcomplementeachother,supportingdifferentlevelsofcurrentandfuturedemandandreflectingdifferenttimeframesforaccessprovision.3

Ethiopia’s National Electrification Program 2.0 (NEP 2.0) specifically references the off-gridprogramandmentions that theprogramrequires full leveragingofall available implementingagentsandresources—public,private,aswellaspublicprivatepartnershipsandcooperatives.NEP2.0callsforadramaticaccelerationinconnectionsandimprovedqualityserviceswithmini-grid solutions to be targeted in areas where the load justifies the investment. NEP 2.0 alsosupports the establishment of regulatory certainty in the enabling environment by theintroduction of a set of policies, regulations, and incentives supportive of the whole off-gridecosystem across the value chain, including mini-grid developers. Foreign private sectorparticipationisencouragedandproductiveuseintheagriculturesectorisproposedasawaytoincreaselocalvaluegenerationandjobcreation.4

In spite of policy support fromNEP 2.0,mini-grid interventions are currently limited in scopeandcapacityinthecountry5duetoreasonsthatarecommonthroughouttheNDClandscapeinsub Saharan Africa. In an attempt to address this gap, the government and developmentpartners are testing scalable business models, mainly with a view to stimulating privateinvestment toachieveuniversal countrywideelectrificationbyyear2025.This isanambitioustarget that requires collaboration between government, the private sector and developmentpartnerstoachievesuccess.

The preferred choice for mini-grid business and operational model depends on the national,2NationalElectrificationProgram(NEP)2.0

3NationalElectrificationProgram(NEP)2.0

4NationalElectrificationProgram(NEP)2.05(PleasereferTable5:Summaryofongoingmini-gridinitiativesinthecountryinEthiopianRegulatoryEnvironmentandCapacityConstraintsinOff-GridEnergySectorReport)


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socialandpoliticalcircumstancesaswellasonthesizeandstructureofthemini-grids.Notonlyin Ethiopia, but throughout Africa mini-grid business models are largely unproven, althoughprogress has beenobserved in certainAfrican countries such as Kenya, Tanzania andNigeria.Thisreportdescribesthevariousbusinessandoperatingmodels includingtheUtilityOperatorModel, the Private Sector Operated Models and the Community Operated Model as well aHybridModel,whichdrawselementsfrommultiplemodels.

TheUtilityOperatorModel isknownandunderstood inEthiopia.TheEthiopianElectricUtility(EEU)operatesaround31isolateddieselgenerateddistributionmini-gridsystems.Recently,theMinistry of Water, Irrigation, and Energy (MoWIE) and EEU has identified over 250 villagesthroughout the country that require connection via mini-grid technologies (solar, hydro orhybrid). Prior to scaling up thesemini-grid projects,MoWIE and EEU have launched 12 pilotprojectsinallthenineregionsofthecountrytodeterminetheappropriatetechnical,financialandoperationalfeasibilityofmini-grids.Selectedprivateorganizationswilldesign,developandcommission thesemini-grid systemswithin a sixmonths -contract period andwill hand themover to the EEU, which will further develop and commission the 12 mini-grid distributionsystems(EEU-EPC6led).

Duringthe initialstagesofmini-gridgrowth inEthiopia, thegovernment fundedandoperatedmodel supports the fulfillment of national electrification objectives and enables learning, iseasier from a regulatory perspective, and government subsidization of tariffs ensuresaffordability forhouseholds.Alignedwith the social objectivesof theGovernmentof Ethiopia(GoE),EEUchargesthesametariff–amongstthelowestinsubSaharanAfrica-forthe31mini-grids aspaidby customers for gridenergy in Ethiopia.However, thismodel is not scalableorfinancially sustainable in the medium term. In addition, skilled human resources withappropriate technical capabilities are limitedand capacity scale-upwill addadditional cost. Inaddition utilitiesmay face political interference and delays in procurement due to competinginterestswithingovernment.

Experience inEthiopiaandelsewhereshowthatnationalutilitiesrarelygobeyondoperatingafewmini-gridsbecausethesetendtobetoosmallandscatteredtobemanagedefficientlybystate-owned entities. This context creates the opportunity for private-sector operated sites.Howeverunderdevelopedmarkets like Ethiopia provide challenges for even themost capableproject development companies. To attract this new breed of private off-grid utilities, theEthiopian Government needs to address the enabling environment by removing barriers toprivatesector investment. Foracountry likeEthiopiawithanunderdevelopedprivatesector,opening up a market that has traditionally been the domain of the state takes politicalcommitmentandclear-sightedleadership.

Thekeyingredientsforsuccessfulprivate-sectorledinvestmentinthissectorarethefollowing:(i)anenablingpolicyandregulatoryenvironment; (ii) theabilityforoperatorstochargecost-reflective tariffs; (iii) flexible and investor-friendly licensing procedures; (iv) availability ofaffordabledebt-financing; (v)established rules tomitigateconflictswithcustomers; (vi)andatrustedregulatorymechanismintheeventthatanexistingmini-grid,is‘absorbed’bythemaingrid.Regulatorymechanismstoaddressthisriskaredescribedlaterinthisreport.

InEthiopia,theEEAhasconfirmedthattheABCmodel-Anchor,BusinessesandConsumers-isthe preferred business model for private sector mini-grids. This model has the potential to6EngineeringProcurementandConstruction


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address both the private sector’s requirement for cost reflective tariffs as well as thegovernment’s requirements for household tariffs that are aligned with the national tariffthrough a tiered tariff model. Currently, however, there are no examples of commerciallysuccessful private-sector owned and operated mini-grids in Ethiopia. Various pilot anddemonstrationsiteshavebeen implementedwith financialand technical supportofdonors inthe country. For example, Power Africa has been supporting private organizations like Ethio-ResourceGroupPLCandRensysEngineeringandTradingPLC forwindpowermicro-gridsandsolar mini-grid systems, respectively, in the Amhara region. The ‘ABC’ model has potentialparticularlywheretheanchortenantisafarmingclusterandtheelectricityisusedtoincreaseproductivitythroughirrigation,coldstorageandagri-processing.Intheorytheanchorcustomerconsumes a consistent proportion of the supply and provides a regular revenue streamwithadditional small businesses and households contributing to the business case. Renewableenergy and hybrid solutions can play an important role in the Ethiopian mini-grid sector byreplacing diesel generators reducing emissions and lowering the levelized cost of electricity(LCOE)forfarmingcommunities.Aclusteringapproachwhichentailsnon-interconnectedmini-gridssupplyingelectricitytovillageslocatedclosetoeachotherandbundledtogetheraspartofone operational unit can also help to achieve financial viability by reducing costs and drivingeconomiesofscale.

A few community operated pilot sites have been implemented in Ethiopia. The investmentcapital for communitymini-grids generally comes from grants, supplemented by contributionfrom the community (in cashor in-kind).GIZ&EnDev7are testing theCooperativeModel forhydromini-grids under projects/initiatives like ‘Engrin, Abaye, Timbil, Idris,Waro,Naso,Gibe,Ameka and Fuamo in Amhara, Oromia and SNNP regions of the country. Whilst communitymodels are generally not scalable, they do contribute to the learning environment and self-managedpublicinfrastructurehasbeenshowntoreduceconflictbetweenpotentialcustomersand government. However, insufficient local technical and managerial capacities, unclearownership structures and lack of finances can limit this type of arrangement. The modelrequires grant funding to cover all capital costs, and the associated low tariffs are ofteninsufficienttocoveroperations&maintenanceandreinvestmentcosts.

TheEthiopianGovernmentisinterestedtotrialpublic-privatepartnerships(PPPs)intheenergysector formini-grids.PPPs,whicharea typeofhybridmodelwheredifferententitiesmaybeinvolved in investment, ownership and operation, require a well-constructed regulatoryframeworkthatincludesprotectionofpropertyrights.Otherexamplesofhybridmodelsincluderenewableenergyservicecompanies,andtheuseofconcessions.

Inthisevolvingspace,theDesco(DistributedEnergyServiceCompany)isabusinessmodelthathasattractedattention.ItrequiresaPPPandoftenutilizesabuildownoperate(BOO)approach.The featuresofDESCOs include longrelationshipswithcustomersandtheprovisionofenergyserviceswitha‘payperuse’model.Increasinglythereareexamplesofoff-gridDescosthatcanoperate without necessarily requiring any external subsidy support and can provide areasonable return on investment and the government has an expectation that the success ofDescosinAsiacanberepeatedinEthiopia.ItmustbenotedthatrecentresearchconductedinIndia,Tanzania, Senegal,Uganda reported thatat the timeofwriting,noneof the20Desco’s

7TheEnergisingDevelopment(EnDev),programmeisamulti-donor initiativedeliveredbyGermany’sGIZandtheNetherlands’EnterpriseAgency (RVO). EnDevEthiopiapromoteshouseholdelectrification throughpicohydropower andmicrohydropowerplants, byprovidingtechnicalassistanceandintroducingappropriatelow-costdesignsforhydropower


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evaluatedhadreachedprofitability8.

Thegovernmentisalsoconsideringthescale-upofanEEU-ledEPCapproach,wheretheprivatesector or cooperatives install generation assets and operate and maintain the system undercontractwith the EEUwhowouldown thedistribution assets,with themedium-termgoal toconnect the infrastructure to themain grid. This approachmayprovidequickwins and assistearlylearningbutisnotscalableinEthiopiainthelongrunduetofinancialconstraints.

From a tariff perspective, EEA iswilling to pilot different tariff regimeswith varying levels ofsubsidy.Stakeholdersagreethatenergy-basedtariffs,fee-forservicetariffsandflat-ratetariffsallhavearoletoplayinthecountry.Howeverwhichevertariffmodelischosenorimplemented,attracting private sector investors requires a risk-equivalent return. In consultation withstakeholders,EEAhasrecentlydevelopedadraftofTariffGuidelinesandMethodologyforOff-Grid Systems. At the time of writing, this set of guidelines is under revision, but thereexpectationsthatthiswillprovidesomeclarityaroundfuturetariffsforthemini-gridecosysteminEthiopia.

Sources of private capital in Ethiopia are limited and investment is likely to come from largeregionalmini-grid operatorswho are able to benefit from economies of scale. Under privatefinancingmechanisms, distribution and generation assets are financed either by corporate9orproject10 finance mechanisms. In Ethiopia access to both equity and debt finance remainchallenging and is likely only possible with cost reflective tariff rates. Raising debt finance inparticular, remainsa challengewith current commercial long-term lending ratesexceeding15percent.Developmentfinancemayinsomeinstanceshelptobridgethefinancinggap.

Mini-grids are a new concept in Ethiopia and the government faces challenges related to theshortage of trained mini-grid engineers and quality assurance skills. The current uncertaintyrelated to tariffs and lack of established scalable business models adds further challenges.HowevertheGoEistakingapragmatic learningapproachtothisdevelopmentchallenge.Theyhaveexpressedthedesiretopilotvariousapproacheswiththeprivatesectorbyharnessingtheexpertise and capacity of the EEU in the off-grid space. However at the time of writing thisreport, this has yet to be realized. It is expected that implementation progress and lessonslearnedfromthefirstEEU-EPCpilotof12solarmini-gridswillprovidesomeguidanceintermsofthewayforward.

Basedonconsultationswith thegovernment,developmentpartnersandprivatestakeholders,thisstudymakesthefollowingrecommendationstostimulatethegrowthofthesector:

i. MinigridpilotprogrammesshouldtrialdifferentbusinessmodelstoevaluatewhatworksintheEthiopiancontext

ii. Private SectorOperated for-profit businessmodels using anABCmodel can address boththeprivatesector’srequirementforcost-reflectivetariffsandGovernmentrequirementsforhouseholdstobenefitfromthelownationaltariff.

iii. Demonstrationminigridsforagriculturecommercializationclustersshouldbesupportedbygovernment, to prove the ‘productive use’ thesis. This model has the potential to

8HowaNewBreedofDistributedEnergyServicesCompaniescanreach500mmenergy---poorcustomerswithinadecade-AcommercialsolutiontotheenergyaccesschallengePepukayeBardouille&DirkMuench(June2014)9Corporatefinanceisbasedonthebalancesheetoftheentityreceivingthefinancing.Lendershaverecoursetoallassetsoftheentity,buttheydonothaveasecurityinterestinanyassets10Projectfinancereferstothefinancingofaprojectbasedontheprojectedcashflowsoftheprojectandthevalueoftheasset


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significantly benefit the rural economy through improved agricultural productivity andenhancedfoodsecurityandisalignedwiththeCRGEandotherclimatechangepolicy.

iv. Private-sectordevelopersshouldbeencouragedandincentivizedtosecuregrantfundingtoimprove equity returns and reduce project risks, particular during the early stages of thedevelopmentfthesector.

v. Aproject preparation facilitywill assist private developers to build a pipeline ofmini-gridprojects.

vi. Legislation to enforce a minimum percentage of local equity will have benefits in themediumtermbysupportingthedevelopmentofEthiopianprojectdevelopers.

vii. Theriskofgridarrivalneedsasetofclearguidelinescommunicatedtoprivatedevelopersandinvestorsthathelpstoaddresstheirconcerns.

viii. Thelicensingprocessforprivatesectorprojectdevelopersneedstobeaddressed.Delaysinthisareawillresultindeveloperschoosingothergeographiestoinvest.

ix. Development partners should support capacity building of government and local privatedevelopers.

ix. Affordable financial instruments, such as guarantee products, to hedge against foreignexchange fluctuations will help to address a significant barrier to investment.


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CHAPTER1:MINI-GRIDBUSINESSMODELS

Electricity access in rural areas can be provided inthreeways-byextendingthenationalgrid,bystand-alonesystemsandbymini-grids.Ruralelectrificationexpertsusuallyrecommendusinggridextensiononlywhere the cost per connection is reasonable, andrather deploying stand-alone systems (e.g. SolarHome Systems and pico-PV systems) in scarcelypopulatedareaswithweakdemandpotential. Mini-grids may be suitable for rural settlements andagriculturalclusterswherethecostofgridextensionistoohigh.11

Mini-grids can be a game-changer for rapid, cost-effective, and high-quality electrification inrural Africa. The International Energy Agency (IEA)anticipates thatmore than50percentof theworld’srural population, currently without energy accesscouldbebest suppliedwithelectricity viamini-grids.Under the right conditions, mini-grids cancomplement national grid electrification strategies.This in turn can modernize standards of living andenablesmallruralbusinesses.12

NationalElectrificationProgram(NEP)2.0

Whilestillinanascentphaseofmarketdevelopment,the performance of mini-grids around the world indicates the potential for communitieselectrified by mini-grids to become commercialcenters for surrounding villages. The EthiopianNationalElectrificationProgram(NEP)2.0,recognizesthatmini-gridtechnologiescanprovideahigherlevelof service and can support high loads, including forsocial (e.g. health and school facilities) andproductiveuses,forenergyintensivebusinessesandeven small industries. The adoption of a mini-gridprogram is part of the Ethiopian Government’sapproach towards integratedplanning, asmini-gridsandsolarhomesystems,aswellasgridconnectivity,are technologies that complement each other,supporting different levels of current and futuredemand and reflecting different timeframes foraccessprovision.13

Ethiopia’s National Electrification Program 2.0 (NEP 2.0) specifically references the off-gridprogramandmentions that theprogramrequires full leveragingofall available implementingagentsandresources—public,private,aswellaspublicprivatepartnershipsandcooperatives.11Mini-gridPolicyToolkit-PolicyandBusinessFrameworksforSuccessfulMini-gridRollouts.

12Ibid.


Image SEQ Figure \* ARABIC 1 (Courtesy Nazret.com)

Mini-grids

Mini-grids in Ethiopia are described as localpower networks which utilize distributed orembedded generation resources and manageelectricity supply and demand. With a typicalisolated mini-grid system, the mini grid utilitycould operate both as the power producer anddistributor to off-grid consumers in the localcommunity(EEA).

AccesstoelectricityinEthiopia

Ethiopia has achieved good progress inconnecting33percentof itspopulationwithon-grid electrification and 11 percent with off-gridpre-electrification, with the combinedachievement of 44 percent of electricity access.By 2025, at least 65 percent (over 15 millionpeople) are targeted to be connected throughgrid solutions. The remaining 6 millionhouseholds in rural and deep rural areas(equivalenttoabout35percentofthepopulationin 2025) are targeted to be connected throughoff-grid,includingmini-grids.


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NEP2.0callsforadramaticaccelerationinconnectionsandimprovedqualityserviceswithmini-gridsolutionstobetargetedinareaswheretheloadjustifiestheinvestment.NEP2.0supportstheestablishmentofregulatorycertaintyintheenablingenvironmentbytheintroductionofasetofpolicies,regulations,andincentivessupportiveofthewholeoff-gridecosystemacrossthevaluechain,includingmini-griddevelopers.Foreignprivatesectorparticipation,whichwillleadto foreign direct investment, is encouraged and productive use in the agriculture sector isproposedasawaytoincreaselocalvaluegenerationandjobcreation.14

In spite of policy support fromNEP2.0,mini-grid interventions are currently limited in scopeandcapacity in thecountry15. Thegovernmentanddevelopmentpartnersare testing scalablebusiness models, mainly with a view to stimulating private investment to achieve universalcountrywideelectrificationbyyear2025.

Generally, thepreferred choiceof amini-gridbusiness/operationmodeldependsonnational,socialandpolitical circumstancesaswellason thesizeandstructureof themini-grids.Whenusing mini-grids as part of a rural electrification portfolio, policy-makers worldwide need totailor policy and regulatory frameworks to one or more suitable models. Mini-grids can beoperated by utilities, dedicated private companies, community-based organisations or acombinationofthese.Mini-gridbusinessmodelsdescribetheorganizationalstructureofmini-gridimplementationandoperation.Thefourmainmini-gridmodelsarethefollowing:16:

● UtilityOperatorModel

● PrivateSectorOperatedModel

● CommunityOperatedModel;and

● HybridModel

Thesemodelsdifferbasedonwhoownsthepowergenerationanddistributionassets,andwhooperatesandmaintainsthesystem.Theyarefurtherdefinedaccordingtotherelationshipswithcustomers.Atpresent, there isno ‘bestpractice’or ´one-size-fits-all´businessmodel formini-grids.Successfuldeploymentofeachmodeldependsonitsuniquecontext,includingthenaturalenvironment (e.g. geography, energy resources and climate/weather conditions), the localsocio-economic contextand thepolicyand regulatoryenvironment.Thepolicyand regulatoryframeworkdetermineswhichmini-gridoperatingmodelscanflourishinacountry.17

14NationalElectrificationProgram(NEP)2.015(PleasereferTable5:Summaryofongoingmini-gridinitiativesinthecountryinEthiopianRegulatoryEnvironmentandCapacity

ConstraintsinOff-GridEnergySectorReport)16Rolland,Glania,ARE/USAID(2011).HybridMini-GridsforRuralElectrification:LessonsLearned

17Ibid.


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Mini-gridscanhavetwooperationalentitiesviz.asmallpower producer (SPP) and a small power distributor(SPD).18Operatorscanalsofulfillbothroles(generationanddistribution)andcanproduceandsellpowereitherto public power distributors or directly to end-users.The size of the mini-grids and the available energysources also shape the organizational structure. In allthese configurations, management and operations19canbecontractedtoathirdparty.Thefourmodelsareexplainedbelow:

UtilityOperatorModels-Thebasicconceptbehindthismodel isthatthenationalorregionalelectricityutilityownsandoperatesthemini-grid.Itisresponsiblefortheinstallation,repairandmaintenance, and operation of themini-grid. Tariff collection is also the responsibility of theutilitystaff.Tomeetsocialobjectives,thegovernmentmayrequiretheutilitytochargepricesatsimilar levels to those paid by customers connected to the national grid. If so, tariffs paid bylarger consumers linked to thenational gridmay be used to cross-subsidizemini-gridconsumers(Franzetal.,2014).Initialfinancingislikelyto be provided by the utility andsubsidizedbytheactorssuchas thegovernmentordonors (IED,2013).20Presently, where grid power is notyet available, the Ethiopian ElectricUtility (EEU) operates severalisolated diesel generationdistributionsystemsinthecountry.

Private SectorOperatedModel - Inthis model, the private sector isresponsible for building, managing,and operating mini-grids. Potentialsponsors are likely to generatefunding from various sources,including equity and commercialdebt. Subsidized funding for suchmini-grid operations may alsoprovided by the public sector(governments) and donors throughgrants, subsidies, or loanguarantees.Currently,inAfricatherearealimitednumberofexamplesofsuch models in which the entire

18MoreinformationonSPDsandespeciallyonSPPscanbefoundinTenenbaumetal.(2014)

19 China Village Power Project DevelopmentGuidebook;Getting Power to the PeopleWhoNeed itMost; A Practical Guidebook for the

DevelopmentofRenewableEnergySystemsforVillagePowerProjects,Doeetal.,SET/UNDP/GEF(2005),chapter5.220Businessmodelsformini-gridsbyTayyabSafdar-SmartVillages,newthinkingforoff-gridcommunitiesworldwide

“Whoownsamini-grid,whatisthesizeofamini-grid andwho are the customers of themini-gridenergy,determinethesuitabilityofa mini-grid business model in any country.There is currentlyno provenbusinessmodelformini-griddevelopmentinAfrica.”

RepresentativeofaDevelopmentPartner

Criticalfactorsrelatedtoeachmodel

Utility Operator Models can be scaled-up quickly, but only if public funding is available. While tariffs can be cross-subsidized with ease, this model is prone to political interference and procurement problems (International example - Tsumkwe mini-grid in Namibia, a PV-hybrid mini-grid with a capacity of 202 kW supplying power to 3,000 residents as well as 35 commercial and public-service customers).Private Operator Models have a high potential for scaleup, for attracting private investments and for mobilising the know-how of the private sector. However, they require a supportive enabling environment (International example - Powerhive in Kisii and Nyamira, Kenya operates four PV mini-grids and supply electricity to over 1,500 customers in Kenya).Community Operated Models are well suited to ensure local ownership and sustainability but are exposed to management risks and usually require high grant components (International example - Four hydropower mini-grids in Kenya at Thima, Kathamba, Tungu Kabiri and Kipin).Hybrid Models combine different aspects of these three models and may present a good compromise and initial starting point for mini-grid scale-up (International example PPP model - In Senegal, the Government owns the mini-grid and a private company is awarded a 15-year concession to operate and maintain it. This approach has been followed by 18 mini-grids powered by solar PV and diesel generators in Senegal).

Source:-Lights,Power,Action:ElectrifyingAfrica(2017)


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fundingcomesfromprivatesources.InEthiopiasofar,nosuchmini-gridexists.

Improvements in technology, innovations in finance and development of customer-management platforms as well as dedicated support from donors and national governmentshave contributed to an increasing focus on Private SectorOperatedmini-grids (IRENA, 2016).Yadoo (2012) observes that entrepreneurs working to establish mini-grid operations in theprivate sector are likely to require substantial subsides as well as an anchor customer. InEthiopia, private organizations like Ethio-Resource Group PLC and Rensys Engineering andTrading PLC are using thesemodels to operatemini-grids in the Amhara regionwith supportfromPowerAfrica.

Developing sustainable businessmodels for privatemini-grid developers remains a challengeworldwide. However, evidencesuggests that there are innovationsthat can help operators achievescale.Thefollowingbusinessmodelshave evolved keeping in mind thechallengeoflowrevenuegenerationfrom end users while bearingoperations and management costs(Franzetal.,2014)21:

The franchise approach:Managementcostsarebornebythefranchiserwithminimumcosttothefranchisee. If the franchiser hasmany franchisees, themarginal costofmanaginganadditionalfranchiseeis reduced due to economies ofscale. Dade et al. (2014) observed that franchising has the potential to improve marketefficienciesandhelpachieve scale.Thisapproachhasbeen implemented in IndiawhereHuskPowerSystems(HPS)haspilotedthefranchisemodel(PalitandSarangi,2014).Aspartofthesemodels, HPSmotivates and trains a local entrepreneur to own and operate themini-grid. Tohelp develop and adapt the franchise model, HPS has received support from the ShellFoundation. This businessmodel hadhelpedHPS expand and the company is now looking todevelop technologies and tweak their business 22model to expand their operations further inIndiaandAfrica.

Anchor,businessesandconsumers-“ABC”model:Inthismodel,theoperatoraimstodevelopsites with certain characteristics. There is an anchor customer at the site that requires aconsistent and stable load eg. telecommasts, agro-processing factories or gas stations, thatgenerate a stable cash flow for the operator. Access to stable revenue can have a positiveimpactonthesustainabilityofmini-gridsandhelpimprovetheirbankability(SE4All,2016).Localbusinesses can also be supplied by themini-grid and household consumers are an additionalsourceofrevenuetoaugmentrevenuesfromthefirsttwosources.AstudybyGIZhighlightsthepotentialforthismodeltobeimplementedinSub-SaharanAfrica.Therearemorethan150,000telecomtowersinthecontinentandmanyoftheseareinruralareas,withlittleornoelectricity

21Businessmodelsformini-gridsbyTayyabSafdar-SmartVillages,newthinkingforoff-gridcommunitiesworldwide.

22Desjardinsetal.,2014onmini-gridsbusinessmodels.

Commerciallyviablemini-grids

Capital or operating subsidies can help mini-grids to become commercially viable for private investors.Mini-grids that charge higher tariffs to households than the tariff charged by the national utility can support commercial viability. This model is being implemented in countries like Cambodia, Mali and Senegal but is not currently not envisaged for Ethiopia.If mini-grid operators are able to charge higher tariff rates to commercial and industrial enterprises within the village, this can support commercial viability. This is a form of cross-subsidization.Mini-grid operators that support increased demand through productive uses and increase the number of connected households with the ability are able to improve financial viability.


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supply. With the increase in mobile phonecoverage inAfrica, thisnumber isbound toincrease further. This presents anopportunity for mini-grid operators to tapinto a growing revenue streamandexpandcoverageinruralareas.Long-termcontractsthatensureastablerevenuestreamarealsolikely to improve access to capital. Miningand agro-processing facilities presentfurther opportunities for the successfuldeployment of the ABC model. GIZ hasinstalled such a mini-grid model inKabunyata village in Uganda. Electricity issuppliedtothemobiletowerinthevillageusingasolar-dieselhybridmini-gridsystem.Thishastranslatedinto40percentcostsavingsforthetelecomoperatoroncostoffuel.Localbusinesseshavealsogainedfromaccesstoelectricityandhavebeenabletosaveonfuelcostsastheywerereliant primarily on diesel (GIZ, 2014). Corporates can be incentivized to become anchorcustomersbyprovidingtaxcutsorbyofferingotherbenefits.However,aproblemof theABCmodelisthathouseholdsreceivetheresidualpoweravailableafterconsumptionbytheanchorload customer (Gollwitzer et al., 2015) which may not meet the requirements of the localcommunity, reducing the impact that comeswith access to electricity for rural communities.Also, not all sites can have anchor customers, as a study by the International FinanceCorporationinKenyashows.Thiswouldmeanthatpotentialinvestorsarelikelytoignorethoseareas.23TheGoEconsiderstheABCmodelappropriatetoattractprivateinvestors.

Clusteringapproach:Whennon-interconnectedmini-gridssupplyelectricitytovillages locatedclose to each other, thesemini-grids are bundled together as part of one operational unit toreduceonoverheadcosts. LowerBondo(80kW)andUpperBondo(56kW),aclusterofmicro-hydro schemes implementedby Practical Action andoperated byMEGA (social enterprise) inMulanje,Malawiareusingthisapproach.

Theclustermanagersplayanimportantroleasconduitsbetweentheoperatingplantsandthesenior management of the company. There is evidence that clustering has also beenimplemented in mini-grids installed and operated by the government. In the State ofChhattisgarhinIndia,thelocalRenewableEnergyDevelopmentAuthorityi.e.ChhattisgarhStateRenewableEnergyDevelopmentAgency(CREDA),whichisoperatingmini-gridsinremoteareasofthestate,hastakenacluster-basedapproachtoreducetransactioncosts(PalitandSarangi,2014).IntheCREDAmodel,eachclusteriscomprisedof10–15villages.Ateamineachclusteriscomprisedofonetechnician,anassistanttechnicianandanoperatoraswellasavillageenergycommittee.Clusterteamsareexpectedtomeetcustomerrequirementssuchasreplacinglampsand implementing maintenance, supervised by management who receive regular reports(GNESD, 2014). The clustering approach can also help lower the cost of capital for mini-gridoperators. Development financial institutions in this space encourage operators with proventrackrecordstobundlemultiplemini-gridsintolargertransactionstoreducetransactioncosts.As mini-grid operators establish track records, this model is likely to accelerate and helpoperatorsachievescale(Franzetal.,2014).ArecentreportbyENEA,aconsultingcompany inZambia,showsthataclusterapproachislikelytosupportmini-griddevelopment.Theyusethe23Businessmodelsformini-gridsbyTayyabSafdar-SmartVillages,newthinkingforoff-gridcommunitiesworldwide

Image SEQ Figure \* ARABIC 2 (Courtesy Power Africa)


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exampleof a cluster of small-scale, hydro-poweredmini-grids operatedby a social enterprise(MEGA) inMulanje,Malawi.Thebusinessmodel isbasedonmanagingaclusterofninemini-gridsthatarelocatednearthesameriver.Theproximityofthesemini-gridscontributestowardsreducingMEGAsoperatingcosts(ENEA,2015).Whileclustersmightdriveeconomiesofscaleforoperating costs, management of clustered mini-grids requires high levels of technical andmanagement skills. This will be especially true as load factors increase. The lack of trainedpersonnel in sub-Saharan Africa may pose challenges for this model which also requiresgovernment regulatory support such as concessions or in the case of mini-hydro, exclusiveaccesstocertainbasinsorrivers.

CommunityOperatedModel:Themini-gridisoperatedandmanagedbythelocalcommunity,organizedinacooperativethatisgovernedbygovernmentregulations.Evidencesuggeststhatcommunityparticipationcontributestothesuccessofmini-grids.Financingfortheseenterprisesisprimarilygrantbasedandthelocalcommunityprovidescontributionsin-kind(SmartVillages,2015). Examplesof in-kind contributions include,providing landand labor as sweat equity. Insome circumstances, community-managed and operated mini-grids may be able to providecheaperelectricitytoruralcommunities(Yadoo,2012).Theycreateco-benefitopportunitiesforthelocalpopulationsuchasempowermentthroughlocalmanagement;paymentforfeedstock;or,ifgrid-connectedatalaterstage,incomefromfeed-intariffsandthepotentialtoconnecttoamore resilient electricity network (Yadoo and Cruickshank, 2012). There is usually a lack oftechnical expertise within the community, therefore planning, design and implementation isdone by third parties. To ensure the sustainability of suchmodels, it is important that tariffscoverthemainoperations,maintenanceanddepreciationcosts.Decisionmakingislikelytobelocalized in suchmodels.However, this dependson the scale of operation. Furthermore, it isimportanttoensurethattherequisiteskillstooperateandmaintainmini-gridsareavailableinthelocalarea.Intheabsenceofadequatelytrainedhumancapitalsuchmini-gridsarelikelytobeunsustainable.ItwillprovideopportunitiesforwhatTenenbaumetal.(2014:25)referstoas“boutique electrification”, which implies that it does not lead to sustained and significantelectrification. Currently, in Ethiopia, the European Union is financing five hydro mini-gridsimplementedbyGIZ,testingamodelfordistributedrenewableenergygenerationthatisbasedoncooperatives(GovernedbyProclamationno.985CooperativeSocietiesLawofEthiopia).Thisinitiativeisaimedatscalingupthemarketforprivateorpublicagencies.

Hybrid Model: These models combine different aspects of the models identified above.Differententitiesmaybeinvolvedininvestment,ownership,andoperations.Thereisadivisionof labor between the responsibilities of various actors through joint ventures or othercontractualarrangements.Thegenerationanddistributionofelectricitycanbedividedbetweengovernment companies, private firms or local communities in the form of small powerproducers (SPPs)andsmallpowerdistributors (SPDs).Thesuccessof thesemodelsdependonthe regulatory framework and clarity of property rights. Below are some examples ofcontractualarrangementsthatareapartofhybridmodels:-

● Public-privatepartnerships:Publicsectorcouldbuild,operateandmanagethemini-gridwiththeprivatefirmresponsibleformaintainingthesystem.TheGovernmentofEthiopiaiskeenonDistribution Energy ServiceCompany (Desco) arrangementswhich are also viewedas aformofPublic-PrivatePartnership(PPP)underaBuildOwnOperate(BOO)model.

● Renewableenergyservicecompanies(RESCOs):Assetsareownedbythegovernmentandthemachinery is operated and maintained by RESCOs who are also responsible for tariffcollection.


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● Concessions:Beneficial termsaregiven to theconcessionaire toprovideelectricity to ruralareas.Thesetermscouldbeintheformofgeographicmonopoliesorpreferentialtariffs.

● Powerpurchaseagreements24:Distributionandgenerationassetsareownedandcontrolledby different entities and a power purchase agreement is signed for providing electricity(Franzetal.,2014).25

Asummaryofthesemini-gridbusinessmodelsisgiveninTable1.

Table1:SummaryofMini-GridBusinessModels

Ownersofpower

generationanddistribution

assets

TypeofModels

UtilityHybridModel

(Private/Utility/Community)

Private(Unregulated)

Private(Regulated)

Community

Briefdescription

Government orparastatal utilitymanages allaspects of mini-grid

Private actorsgenerate andutility distributesthe electricity, orthe reverse; orprivate entitycommercializeselectricitygeneratedbyanddistributedthrough publicassets

Privatecompanymanages allaspects, in theabsence ofgovernmentregulations

Privatecompanymanages allaspects, in aregulatedenvironment

Communitymembersorganizeto managegeneration anddistribution in aregulatedenvironment,withsupport and/orcoordination fromanNGOorprivatecompany

Advantages Can absorb fundseasily; Lessregulationneeded;Connection ofmini-grid tomain-gridcanbeeasier;

Crosssubsidization oftariffs, thusaffordabilityeasilyensured;

Aims to fulfillnationalelectrificationaims

Different actorscontribute theirstrengths,technical andmanagementknow-how;Scalable, profit-able;Lessconflictpotential withcustomersincaseof distribution byutility with cross-subsidizedtariffs

Commercialsustainabilitycreatesincentives forlong-termoperation;Ability to actfast withoutgovernmentinterference;

Profitabilityideally allowsforscalingupofoperations

Scalabilitythrough privatecapital;

Technicalknow-how, highreliability;

Profitabilityideally allowsfor scaling upoperation;

Legalsecurityofregulatedmarket attractsprivatefinance

Self-managedpublicinfrastructure;

Less conflictpotential withcustomers andofficials;

Creating assetsand localownership;

Enabling self-determinationandeconomicdevelopment

24 The agreement that governs the sale and purchase of power is known as a PPA or power purchase agreement. A PPA is a contract

betweentwoparties,onewhoproducesorgeneratespowerforsale(theseller/producer/projectcompany)andonewhoseekstopurchasepower(thebuyer/offtaker).25Businessmodelsformini-gridsbyTayyabSafdar-SmartVillages,newthinkingforoff-gridcommunitiesworldwide.


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Disadvantages Not the corebusiness;Unsuitablecompanystructure forsmallerprojects;

Strainonfiscus;

Politicalinterference;Possiblycorruption inprocurement

Complexmanagement,feasibility ofmodels dependson regional/ localcontext/structures;

Non-fulfillmentofcontracts due toconflictsbetweenbusinesspartners;

Insolvencyofonepartner (eitherSPD or SPP) putsfull operatormodelatrisk

No financialsupport frompublicobtainable;

Gridinterconnection

challenging/impossible;

Changes inregulation andfixed tariffs canreduceprofitability;

Conflicts withcustomers dueto monopoly;Insufficientquality andsafety risks ofservice canoccur if it isnotsupervised,which cancontribute to abad image ofmini-grids

Reliableregulationneeded,dependency onlengthyapprovalprocedures;

Debt-financingneeded forscaling up;Vulnerable tochanges inregulation,fixedtariffs, conflictwithcustomers;

Hightransactioncosts;

Potential risk:gridinterconnections

Insufficient localhuman (technicalandmanagement)capacity;

Often unclearownershipstructure;

Usually highgrantsneeded;

Tariffs notcoveringoperation andmaintenance(O&M) andreinvestmentcosts;

Corruption riskdue tooverlapping ofmanagement andsocial and familyconnections

All the businessmodels have advantages and disadvantages. The variousmodels need to betested,takingintoconsiderationrequirementsofownership,sizeofmini-gridsandavailabilityofcustomers.Different strategiesare required tomakeeachmodela success, includingdemandmanagement, promotion of productive end use, quality of electricity service, tariff design,revenuecollectionandenduserfinance26asdiscussedlaterinthisreport.

Since utilities have experience in electricity generation, distribution as well as carrying outadministrativeprocessesandunderstandacountry’s legalsystemcomprehensively, theUtilityModel is often the starting point. In Ethiopia, the EEU operates around 31 isolated dieselgenerated distribution mini-grid systems using this model. Recently, the Ministry of Water,IrrigationandEnergy(MoWIE)andEEUhaveidentifiedover250villagesthroughoutthecountrythataresuitableformini-gridelectrification(solar,hydroorhybrid).

Priortodevelopingthesesites,MoWIEandEEUlaunched12pilotprojectsinnineregionsofthecountry to determine the appropriate technical, financial and operational feasibility. Privateorganizations,selectedthroughacompetitivetenderingprocess,havebeenselectedtodesign,develop and commissionmini-grid systems at these siteswithin a sixmonths-contract periodand,oncecomplete,willhandthemovertoEEUforcommissioning.

The contractswere awarded to four international private companies, including three Chinesefirms and one Spanish firm. Norinco International Cooperation Ltd. will design, develop andcommissionprivate power generation system inOromia (Beltu and Bahima villages).GuodianNanjingAutomationCo.LtdhasbeenselectedtodeveloptheprojectsintheSNNPregion(Tum

26https://greenminigrid.se4all-africa.org/how-it-works/help-desk-developers-and-operators/mini-grid-business-models.


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andOmorata villages), andCET and R Consortium have been selected to develop projects inthree regions - Somali (Qorie village), Gambella (Ungoge village) and Benishangul (Albasavillage).ASpanishprivatecompanyTramaTecnoAmbientalS.L.willdevelopprojectsinAmhara(BanbahoandWaselVillages), Tigray (Arae village) andAfar (Kusrewadvillage).Adecisionontariffsforthese12pilotmini-gridswillbetakenbyEEUatalaterstage,basedontheexperienceof the four private firms. These sites are geographically, demographically and socio-culturallydiverseandthis is likely toresult invaryingcapitalandoperationalcostsacrossthesites.EEUwillmanagethesemini-griddistributionsystemsand intheprocesswill learnvaluable lessonsthatwillassistinthescalingup.

According togovernment sources, theCommunityModel inEthiopiamay improveoperationsandmaintenancebyincreasingasenseofownershipinthecommunity.Howevercommunitiesgenerally lack the technical and business skills required for runningmini-gridswhich at timesleadstohighercostsfromoutsourcingtheseservices.Accordingtosomeprivatestakeholders,theBuildOperateTransfer(BOT)modelmaybeagoodoptionfortheEthiopiancontextunderaCommunityModel.Though,thisrequiresstrengthenedcapacitiesoflocalcommunitytooperatethemini-gridsystemssustainably;whichisnotoftenthecase,asobservedbyGIZ’sexperienceofoperatingfivemicrohydropowermini-gridsusingthismodel.Ithasbeennotedthatdespiteintensecapacitybuildingefforts,thecommunitylackstheskillstosuccessfullyoperatethemini-grids.Fromaprivatebusinessperspective,itwouldbebestiftheprivatecompanybuilds,owns,operates and transfers the system to the community (i.e. essentially sells its assets to thecommunity),andthenthecommunitycontractstheprivatecompanytocontinuetooperatethesystemonacontractbasis.

TheGovernmentofEthiopiaiswillingtopromoteprivateinvestmentinmini-grids if itensuresefficiencyandprivatecompanieshavethecapacitytoofferbetteroperationandmanagementservices.Butforthismodeltoflourish,enablingpolicymustbeimplemented.Thisincludestheability to charge cost-reflective tariffs, flexible and investor-friendly licensing procedures,affordable debt financing, established rules to mitigate conflicts with customers along withregulatoryactionsandoptionswhichareavailable, in theeventthatanexisting isolatedmini-grid is ‘enveloped’ or ‘absorbed’ by the main grid. The GoE has proposed three options forprivateinvestorsinthecasewheregridextensionarrivesatasitewhereamini-griddeveloperhas invested. The options are (i) Desco Mini Grid Model, (ii) Grid Connected Small PowerProducerand(iii)SaleofMiniGridAssetstotheNationalGridLicensee.Theseoptionsneedtobecommunicatedtoprivatedevelopersandbecomepartofcontractualagreementsbetweenthegovernmentandprivatedevelopers.

Over thepast fewyears, thegovernmenthasset thestageto increasethepenetrationofoff-gridtechnologies,takingaseriesofimportantmeasurestoderegulatethemarketandestablishanempoweringenvironment,inlinewiththebestpracticesasreflectedintheprevailingqualitystandards, custom duties and lifting of testing. Lighting Global (LG) standards are nowmandatory for products up to 15 Watt Peak (Wp). This is combined with the InternationalElectrotechnicalCommission(IEC)standardsthathavebeenadoptedforsystemsupto350Wpby the Ethiopian Standards Agency. For pico-PV products, the Government of Ethiopia hasharmonizeditsnationalstandardswiththeLightingGlobalQualityStandards,aswellasthetestmethods specified in IEC TS 62257-9-5. For larger systems, it accepts a variety of verificationcertificates from third parties. The Ethiopian Revenues and Customs Authority (ERCA), nowMinistry of Revenue, usually charges up to 35 percent duty and an excise tax of up to 100percent on imported products. However, importers of solar products under 15Wp have


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been exempted from both, thanks to theproclamation from the Ministry of Finance andEconomic Cooperation (MoFEC), now Ministry ofFinance on renewable energy. Larger home solarsystems with quality certificates are also benefitingfrom this exemption (but 15 percent VAT and 3percent withholding tax is still applicable). Tostreamlineimportationofoff-gridsolarproducts,theCouncil of Ministers has approved certification ofproducts before shipment (Pre-Verification ofConformity, or PVOC). The Ministry of Trade hasremovedtheprocedureoftakingsamplesfromeveryshipment, related testing fees, and a previous 0.5percentdepositbasedontheshipmentvalue.

Moreover, recently the developed draft of TariffGuidelines and Methodology for Off-Grid SystemsdraftedbyEEAinconsultationwithstakeholders,andpresently under revision, will strengthen the mini-gridecosysteminEthiopia.

Image 3 (Courtesy Green Mini Grids - SEforALL Africa Hub)


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CHAPTER2:BUSINESSMODELSSUITABLEINETHIOPIANCONTEXT

The government’s electrification targets aimto serve at least sixmillion households withoff-gridenergyby2025inEthiopia,mainlyinrural and deep rural areas. The EthiopianGovernment aims to adopt business modelsthat ensure a return on investment forprivate sector companies, ensure theavailability of convenient payment options,affordability of off-grid services, andadequatequalityofaftersaleservices.

Presently, the GoE, with the support ofdevelopment partners and privatestakeholders is testing various mini-grids business models to learn what works best for thecountry.Mini-gridsarebeingoperatedby:

• EEUadoptingaUtilityOperatorModel;

• Privatecompanies,withfinancialandtechnicalsupportfromdonors;

• CooperativeslikeinCommunityOperatedModel

Table2belowprovidesexamplesofthesevaryingoperatingmodelsinpracticeinEthiopia.

Image 4 (Courtesy Ethio-Resource Group PLC)


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Table2:Mini-GridBusinessModelsinEthiopia

ModelType Interventions Observations

UtilityOperatorModel

TheEEUoperatesaround31isolateddiesel generation distribution mini-grid systems in Ethiopia. Recently,MoWIEandEEUhaveidentifiedover250 villages throughout the countrythat need to be connected viamini-grid technologies using solar, hydroor hybrid configurations. Prior toscaling up solar mini-grid projects,MoWIEandEEUhave launchedpilotprojects in different regions of thecountry to determine theappropriate business model andtechnical, financial and operationalfeasibility.EEUhasidentified12pilotvillages that need to be electrifiedusing solar and ESS power systemswith backup diesel generators. TheEEU has awarded contracts to fourinternational organizations. Theseprivate companies27 will design,install, commission and operate themini-grid system and deliver to theEEU after a six month-contractperiod. Thereafter, EEU will beresponsible for managing the mini-griddistributionsystems.TariffrateswillalsobedecidedbyEEUbasedonregionspecificexperience.

EEUhasbeenresponsiblefortheinstallation,repair,maintenance and operation of these 31 mini-grids.Tariffcollectionisalsotheresponsibilityoftheutilitystaff. To meet social objectives of the GoE, EEUcharges the same tariff rates for thesemini-grids aspaid by customers who are connected to the maingrid. This model requires fewer regulations and toconnect these EEU operatedmini-grids to themaingrid is less complicated from an institutionalperspective. Indeed, five out of the total 31 mini-gridsarealreadyconnectedtothemaingrid.

In the initial stages of the growth of the sector inEthiopia, this model helps to establish standardpractices, provide learning-by-doing and informspolicyrelatedthesectorinEthiopia.

Howeverscalingupthismodel ischallenging: itputspressure on government funds and it is affected bypolitical interference. Thismodel, will likely only beadopted in limited areas and is not a scalablesolution for large scale implementation in thecountry.

PrivateSectorModel

As of now, no mini-grid is beingowned andmanaged, exclusively bythe private sector in Ethiopia.However, theprivatemodel isbeingtested with financial and technicalsupportofdonorsinthecountry.Forexample, Power Africa has beensupporting private organizations likeEthio-Resource Group PLC andRensys Engineering and Trading PLCforwindpowermicro-gridsandsolarmini-grid systems, respectively, in

In the Ethiopian context, a regulated private sectormodelmay prove the correct formula to encouragethegrowthofmini-gridsifagreementcanbereachedaround tariffs. Private companies can manage allaspects of mini-grids under the overall policy andregulatory framework of the government, includingtariff regulations. Commercially sustainable tariffswill create incentives for long-term operation. Thismodel is flexible, with less/limited politicalinterference like any other private-ownedbusinesses.Thismodeliseasilyscalableusingprivatestakeholders’ funds and technical know-how. Also,

27InJune2019,MOWIEhasawardedcontracttofourinternationalprivatecompanies,outofwhichthreeareChinesefirmsnamelyNorinco

InternationalCooperation Ltd.whichwill design,developandcommissionprivatepowergeneration system inOromia (BeltuandBahimavillages),GuodianNanjingAutomationCo.LtdthatwillworkinSNNPregion(TumandOmoratavillages),andCETandRConsortiumwhichwill establishmini-grids in three regions of Somali (Qorie village), Gambella (Ungoge village) and Benishangul (Albasa village). A SpanishprivatecompanyTramaTecnoAmbientalS.L.will set-upmini-grids inAmhara (BanbahoandWaselVillages),Tigray (Araevillage)andAfar(Kusrewad village)- Formore details please refer ‘Ethiopian Regulatory Environment and Capacity Constraints in Off-Grid Energy Sector’report


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Amhararegion.

Ethio-Resources Group have beenengagingwiththeEEAformorethan18monthstohaveoperatinglicensesissued.Asof July2019 licenceshavestill not been issued due todisagreements about tariffs and thetreatment of grant funding in thecapital structure of the operatingcompany.

legalsecurityofregulatedmarketwillattractprivatefinance.However,forthismodeltoworkinEthiopia,the GoE must establish pro-investor regulations,including investor-friendly licensing procedures,financing opportunities (through DBE, REF etc.),increased local manufacturing of mini-gridsequipments, capacity building of human resources,policiestomitigateconflictwithcustomers,clearandsuitable regulations specifying options for privateinvestors when grid envelopes the mini-grid etc.,alongwithcost-reflectivetariffs

CommunityOperatedModel

GIZ/EnDev is testing cooperativemodel for hydro mini-grids underprojects/initiatives like ‘Engrin,Abaye, Timbil, Idris, Waro, Naso,Gibe, Ameka and Fuamo inAmhara,Oromia and SNNP regions ofEthiopia.

ThismodelmaybesuitableintheEthiopiancontext,but isnotscalablefromafinancingperspectiveas itrelies on grant finance for capital expenditure.Community members can manage generation anddistributioninaregulatedenvironment,withsupportfromNGOsorprivatecompanies,providedtheyhavethe required technical and managerial capacities.With clearownership structures and tariffs that cancover operation costs, this model can generateemployment and lead to economic development atgrassrootslevelsinEthiopia.

HybridModel Asofnow,EthiopiadoesnothaveaHybrid Model. EEU submitted an‘Off-gridElectrificationProject-I (SHS& Mini-grid)’ to MoFEC to beconsidered under a PPP model butthis projectwas not shortlisted. TheGoE is working to have an off-gridPPPprojectinthefuture.

This model could be a frontrunner for the privatesector model in Ethiopia, wherein both GoE andprivate investors can combine strengths tocontribute funds, technical and managerial skills tointensify growth of mini-grids. Since themanagement of this model is complex, clearoperating modalities are required between thepartners mainly around roles, contractualobligations,exigencieslikeinsolvency,etc.

The EEU has recently established a mini-grid unit inpreparation for the rollout of the mini-grid programunder the NEP. This unit has a leanmanagement andoperational structure and is expected to employ thelatestsoftwareandmonitoringtools,aswellasamini-gridspecificcallcenterforrespondingtoquestionsandcomplaints. The mini-grid unit is expected to play acentralrolefortherolloutofthemini-gridsprogramme.Withintheunit,technicalmaintenanceofmini-gridswillbe organized to ensureminimumdowntime in case oftechnicalfailures.

Asperthemini-gridprogram,privatecompaniescanbeeitherprofessionalmini-gridoperators(currentlynotactiveinthecountry),orexistingEthiopianindustrial companies thatare interested innatural resources in rural areas.Cooperativesmayhavethesolepurposeofoperatingmini-gridsoragriculturalcompaniesthatdecidetorunthemini-grid as a side business to electrify their members and/or see some advantage in

Image 5 (Courtesy NEP 2.0)


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processingagricultural goods.A cross-subsidy schememayhave tobedesigned to incentivizeruraldevelopmentanddemandgrowthandsupporttheoperatorinbecomingthedrivingforcebehindlocaldevelopmentandlivelihoodcreation.Theinclusionoftrackingandmonitoringtoolsandprocedureswouldbe linkedtothedisbursementofcross-subsidythroughapartiallyfixedpaymentandaperKilowatt/hour(kWh)charge.Fortheimplementationofthismodel,privatesector/cooperativeswouldberequiredtopartlyinvestinthemini-gridassets,conveyingsomerisktotheoperatorandthereforealigninginterestsandactions.28

The government states that even though mini-grids and other off-grid systems may betechnically well-designed, this alone will not be enough to ensure the long-term financialsustainabilityofprojects.Thereasonforthefailureofmanyoff-gridprojectscanbeattributedtotheadoptionofinappropriatebusinessmodels.Itisalsoimportanttorecognizethatmini-gridtariffswill depend on the type of businessmodel adopted.29. EEA states that the ABCmodelcouldbethebasisforsuccessfulmini-gridprojectsinthecountry.Theabilitytoidentifyandsigna PPA with a bankable ANCHOR (A), and service other BUSINESS (B) customers will make itpossible to supply the COMMUNITY (C) customers with electricity at lower costs, while theoperatoralsobenefitsfromincreasedsalesandenhancedscaleofoperations.Thismodelisnotapplicable everywhere as it depends on A and B customers. Outside of ABCmodel projects,governmentmayhavetoconsideroptionsofproviding incentivesandsubsidiestomakemini-grid tariffs attractive for private investors. In Ethiopia, off-grid business models, from tariffoutlook are broadly categorized asfollows:-

For-Profit Model - With the For-Profitbusiness model, the approved tariffshould allow the developer to fullyrecover the Operations andMaintenance (O&M) and capital costs,including return on investment. Tosuccessfully implement thismodel, thedevelopermustfirstidentifyan“anchorcustomer”whichcouldbeacommercialload,withwhomitcansignalong-termcontract and define important issuessuch as price, service quality, plantavailability and reliability. Even thoughthe developer may benefit from someconcessional or grant financing, thefinancial viability is basically achievedthrough the tariff and hence, therevenuestreamfromthetariffcollection.SincetheFor-profitbusinessmodelseekstooptimizerevenue collection, developers tend to use pre-paymentmeters or special revenue collectionmechanisms. Developers also may establish customer service centers in the community torespondtocustomerservicequerieswithtechniciansavailabletoundertakesitevisitstosolvetechnicalproblems.


29TariffGuidelinesandMethodologyforOff-GridSystemszerodraftdevelopedbyEEA

DistributionEnergyServicesCompany

(Desco)

“The Government prefers for-profit off-grid businessmodels,suchastheDescoModelsuitableinEthiopiancontext. Of course, we have to consider generaleconomic and social development aspect of thespecifiedarea.”AnEEAOfficer

TheDistributedEnergyServiceCompanyorDesco isacommercial business model where the privatecompanyinstallsenergygeneratingassetsandinstallsand owns the local grid infrastructure. In contrast totypical utilities, (national or private) the DESCO doesnot focus on delivering “free-flow kWhs” but rathercharges thecustomerby supplyingenergy serviceseglighting, cellphone charging; the ability to use a fan,TV,radio,computer;orpowerforaretailbusiness.


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The Government of Ethiopia is keen on implementing mini-grids using a DESCO type ofarrangementunderaPublic-PrivatePartnerships (PPP).Thisbusinessmodelrequiresthemaindistributionlicenseetobuildgoodcustomerrelationshipbyconnectingoff-gridcustomersandcollectingtheelectricitytariffsfromtheconsumers.Themaindistributionlicenseecanprovideeachmarketsegmentwiththeagreedservices.Forinstance,thelicenseecandecidetoprovideenough electricity for basic services such as lighting, mobile phone charging, television,computerusage,smallbusinessesetc.TosuccessfullyoperationalizetheDescoModelandmakeit affordable, the licensee caneither eliminateupfront connection feesor spread theupfrontcosts over a period. The distribution licensee can adopt Pay-Per-UseModel, RentalModel orLeaseFinanceModeltoensurecostrecoveryandfinancialsustainability.

Thepay-per-usemodel requires the licensee tochargeconsumer tariffsbasedon theservicesusedor consumed (i.e. basedon kWh), or per hours of supply of certain services.Under thisapproach, the consumer buys the right to certain amount of supply of electricity for certainperiodoftime,withnofurthercommitments.Undertherentalmodel,theconsumerisrequiredtomakefixedperiodicpaymentsorpayfixedfeeperweekorpermonth,evenifhe/shedoesnotusetheappliances.Asperthisapproach,aconsumerhasaccesstocertainhoursofsupplyof electricityor a certain amountof electricity consumedand the consumerpays regular andperiodic fees on aweekly ormonthly basis. A lease financemodel is used if the distributionlicensee also installs stand-alone solar systems as a way of enhancing accessibility.With thisapproach,thelicenseemaydecidetosellitsassetstoconsumersaftertheyhavemadecertainpaymentsoveraperiodoftime.Underthisapproach,consumerhasaccesstocertainhoursofsupply of electricity or certain amount of electricity consumption and after the end of thecontractualperiod,theassetsareownedbytheconsumers.

To ensure a high level of revenue collection and to achieve financial sustainability, thegovernment suggests companies use specific revenue collectionmethods, including use of anAgent(Thelicenseecanappointanagentfromtheoff-gridcommunitytomanuallycollectthefeesfromconsumers-thismethodisknowntoreducetheriskofdelinquency);useofscratchcards (thisapproach requires consumers tobuy scratch cards fromvendors, similar tomobilephonetop-upcards, toeitheractivateaccess to thesystemor top-upusagecredit foragivenlevel of service or period of time); and use ofmobilemoney (this involves the use ofmobilephoneforvirtualpaymentwherethesystemactivatesortops-upusagecredit.Thismethod issimilartowhatiscommonlyusedformobilemoneytransfer).

Partly-SubsidizedModel–Thepartly-subsidizedoff-gridbusinessmodel isbasedonapprovedtariffswhichenablethedevelopertorecoveronlytheO&Mcosts,whilecapitalcosts,includingreturnoninvestmentaresubsidizedfromexternalsourcesorfromthegovernment.Thepartly-subsidized model usually relies on grants or concessional finance from the government,multilateralorbilateralagencies,tocoverthecapitalandinsomecasestheO&Mexpenses.ThisimpliesthatalargeportionorallthecapitalcostsaresubsidizedbuttheO&Mcostsareusuallyrecoveredthroughthetariff.

Thus,thismodelfocusesongridreliabilitytoensureasteadyflowofrevenuetocoverallO&Mexpenses. Unlike the For-ProfitModelwhich is developed around an “anchor customer”, thepartly-subsidizedmodeldoesnotfocusoncustomerselectionorthecustomer’sabilitytopay.Theaimistostrikeabalancebetweensupplyingprofitableconsumers,aswellastheentireoff-gridcommunityorvillage,irrespectiveoftheabilitytopay.Customersforthismodelareoftenpoor rural dwellers and for successful implementation of thismodel, it is important that the


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developerachievesservicereliabilitytomaintaincustomer loyalty.Underthisbusinessmodel,developersmuststrikeabalancebetweenfactorsthatenhanceO&Mcostrecovery,witheffortswhichwillincentivizecommunityinvolvementandcooperation.TheGoEiskeenonestablishingthis model in rural villages where there are no opportunities for anchor customers and hasproposedusingsubsidiesfromthegovernmentreservesorfromdevelopmentpartners,tocovercapitalcostswithtariffsenablingthedevelopertorecovertheO&Mcosts.

Wholly-Subsidized Model - Under the wholly-subsidized model, the focus of the off-griddeveloperisnotoncostrecovery,butratheronpreventiveandcorrectivemaintenanceusuallyusing contractors in the short term. This is usually complementedby in-kind local communitylabor for non-technical maintenance. The wholly-subsidized model also relies on grant andconcessional financing tomeet its expenses. Theaimofusing contractors is for theexpert toworkwiththelocalcommunitytechniciansandbuildtheircapacitiesthroughhands-ontrainingso that they canmanage, operate andmaintain the off-grid systems in themedium to long-term.

Costrecoveryandminimizingtheimpactofhighcostofgenerationfromtheoff-gridsystemsisexpected to be achieved through the tariffs by utilizing the ‘Bulk Generation Charge tariffMethodology’, to calculate the system generation tariff. This approach also seeks to achieveimplicitgenerationcostcross-subsidizationbyusinglow-costgenerationtocross-subsidizehighcost generation foroff-grid systems.Whatevermodel is adopted, it shouldbe complementedwithbuildingthecapacitiesofoff-gridlocalvillageorcommunity,throughhands-ontrainingsothat they will be able to operate andmaintain the off-grid system to help reduce operatingcosts.

For developingmini-grids in areas within 25 km of the existing network, the Government ofEthiopia intends to harness the expertise and capacity of the EEU, cooperatives and privatesectordevelopers.Theextenttowhicheachwillplayarolewillbedeterminedbasedonfurthersizingofthemini-gridsites’potential,implementingprogressandlessonslearnedlikefromthefirstEEU -EPCpilotof12 solarmini-grids.Thegovernment is considering thescale-upof twobusinessmodeloptions-

(i) EthiopianElectricUtility(EEU)-ledwithEngineering,ProcurementandConstruction(EPC).

(ii) Private sector or cooperatives to install generation assets, operate and maintain thesystem,whereEEUwouldretainownershipofthedistributionassets,asmostofthesitesareexpectedtobeconnectedtothegrid.

EEU-ledwithEPCprojectsaresimilartoturnkeyprojectswhereprivatecompanieswillproviderequiredhumanandmaterialresourcesforthedevelopmentandconstructionofmini-grids.Theprivatecompanieswill coordinatewithdifferentactors involved in theprocessofestablishingmini-grids and will be responsible for conducting all design, engineering, procurement,construction, commissioning and testing activities. These private companies (EPC contractor)will undertake the entire risk of mini-grid establishment, in lieu of a fixed contract priceestablishedbyEEUwithmutual consensus.Besides,EEUandprivatecompanywillagreeonafixedcompletiondatefortheoverallcontract,andactivitieswillbelinkedtospecificmilestonestofacilitateaccountabilityofpayments.AspartoftheEPCcontract,theEEUwillmanageissuesrelated to monetary security, supplier's warranty, defect liability as done in general EPCcontracts.

TheGoE considers thismodel economical as one company coordinates all thework unlike in


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traditional option, which consists of contracting the development and execution of mini-gridprojectsseparately,commissioningdifferentagents.UndertheEPCprogram,privatecompanieswill deliver completely functioning mini-grid facility to EEU by carrying out the design,engineering,procurementandconstructionuntilasetdate,inreturnforapredeterminedprice.ItisimportanttonotethatEPCcontractsdonotconstituteprivatesectorinvestment–theEPCCompanyispaidtodevelopafullyfunctioningmini-gridandthisdoesnotfacilitatemediumoflong-terminvestment.

Underthesecondmodel,privatestakeholdersorcooperativeswillinstall,operateandmaintainmini-grids along with recovering tariffs as per the agreed rates, but ownership of thedistributionassetswillliewiththeEEU.

EventhoughEthiopiahastodate,nofullyprivatelyownedmini-grids,thegovernment iskeenon supporting both public and private actors, public-private partnerships (PPP) as well ascooperative models. Lessons learnt by the testing of ongoing utility, community and donorsupportedprivatebusinessmodelsinthecountrywillinformchangesthatneedtobemadetoadvance the enabling environment.Moreover, international best practices in otherAsian andAfricancountrieswillalsoguidingthegovernment’soff-griddevelopmentagenda..

In this current early stage of mini-grid development in Ethiopia, Utility and Cooperative ledbusinessmodelsarerelevanttotesttheconcept.However,providingoff-grid/mini-gridsenergyto millions households by 2025, will require a rapid ramp up through involving the privatesector.Privatecompanieswill invest theirmoney in theEthiopianmini-grid spaceonly if theycan achieve the necessary returns on their investment and cost reflective tariffs are clearly apreconditionforthis.InitsTariffGuidelinesandMethodologyforOff-GridSystems(draft),EEAhasreflectedthisunderstandingalongwiththeoptionsavailableforprivatemini-gridoperatorswhenthegridarrives.EEAishopefuloffinalizingthissetofguidelinesbyJuly2019.


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CHAPTER3:BUSINESSMODELS-BESTPRACTICES

Mini-gridmodelsvaryaccordingto (i) theownershipandmanagementof thedistributionandgenerationassetsofthemini-gridasdiscussedinthepreviouschapter;(ii)size(varyingfromafewkilowattstoupto10megawatts);(iii)andcustomers(whichmayincludehouseholds,smallbusinesses, large anchor clients or a mixture of all three). While some business models asstartingtogaintraction,therearearguableasyetnoprovenmini-gridbusinessmodelsinAfrica.

Inthesectionbelow,weoutlineexperiencefromvariousdevelopingcountries:

Kenya is unique in the world in terms ofthe depth and dynamism of its off-gridsolarmarket. Since 2009, 2.7million solarlanterns and home systems have beensold,includingmorethan700,000in2015-16 alone. Kenya’s off-grid solar marketgrowth has been underpinned by thecountry’s political stability, economicgrowth, ease of doing business, andsupportive policy environment. Marketgrowth has also been enabled by thewidespread use of microfinance, mobilephones,andmorerecently,bywidespreadadoptionofmobilemoney,whichplaysakeyroleinmanypay-as-you-gosystems.Underservedcounties were identified by the Government of Kenya’s Commission on Revenue Allocation(CRA), which defined criteria for identifying marginalized areas and sharing of ‘equalizationfunds’, based on a wide range of economic and social indicators.30 Individual county profileswere provided through CRA research, which, combined with data from the 2016 FinAccessHouseholdSurveyandtheNationalCensus,gaveasenseofthetotalunelectrifiedpopulationbycounty and the income brackets. Commercially viable and non-viable areas were identifiedbasedongeo-spatialmapping,MTF(Multi-TierFramework)survey,awillingnesstopaysurvey,analysis of existing market trends and consultations with companies.With support from theWorld Bank, Kenya undertook a geo-spatial mapping exercise and a multi-tier frameworksurvey.Geo-spatialmappingenabledthegovernmenttodeterminethemostappropriate‘least-cost’solutionformeetingthecurrentlevelsofdemandaroundthecountry,whilethemulti-tierframework survey provided a detailed analysis of the quality of energy access and demandestimates. Based on this analysis, plans for grid extension, mini-grid deployment, and thepromotionofstand-alone,off-gridsolarsolutionsweredeveloped.

In Ethiopia also, aMulti-Tier framework (MTF) global energy access surveywas conducted in2017,whichprovidedamoreaccuratebaselineassessmentoftheaccessoutlookinthecountry. MTF31surveywasconductedinbothruralandurbanareasforthedevelopmentofabaselinetotrackprogresstowardtheachievementofuniversalaccess,andtheresultsnowconstitutethe30NationalElectrificationProgram2.0

31TheMTF redefinesenergyaccess from the traditional binary count to amultidimensional and comprehensivedefinitionof access and

identifiestheaccessratebasedonthequantityofserviceavailableacrosssixtiers(from0to5),fromaminimumof4hoursperdayto23hours per day, where Tiers 1–2 typically correspond to off-grid services, Tiers 3-5 to mini-grids and grid-based connectivity. The MTFcomprehensiveapproachtoservicedeliverydefinesaccessas“theabilitytoavailenergythatisadequate,availablewhenneeded,reliable,ofgoodquality,convenient,affordable,legal,healthy,andsafeforall.”TheMTFlooksatelectricityaccess“beyondconnections,”locatingatitscenter theend-userperspectiveonelectricityservices, that is,what iselectricitygoing tobeused for,dependingonhowmuchservice isprovided.Inotherwords,theMTFlooksatelectricityasanintermediatefactor,notanendgoalinitself,therebyincorporatingthehumanandeconomicdevelopmentdimensionstoservicedelivery.

Image 6 (Courtesy http://cleanleap.com)


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baseline for access in the country. Through the tiers approach, the survey supplemented andcomplementedEEUcustomeraccounts,gathered further informationabout the reliabilityandqualityofgridservices,andshedlightonthecurrentpenetration—formalandinformal—ofoff-gridtechnologies,aswellasonthewillingnessandabilitytopaybyruralandurbanhouseholds.Besides, the GoE also conducted a geo-spatial analysis and mapping, reflecting the digitizedlocationoftheexistingmediumvoltage(MV)networkandtheproximitytoanddensityofthepopulation,whichallowedfortheupdateofthecostingofthegridprogramandinformedthesizing, costing, and implementation mechanism for the off-grid program. The geo-spatialanalysisalsoidentifiedthelocationofroads,distributionchannelsandpaymentlocations,whichhave informed the implementation framework for the off-grid program comprising solarsystemsandmini-grids.

Themini-gridsysteminKenyahastraditionallybeenmanagedbythenationalutility.Overthelastfewyears,therehasbeenachangeinthepolicyframeworkand,likemostcountriesinsub-SaharanAfrica,thegovernmenthasset-uparuralelectrificationagency.Thereisnowamovetoconvertdiesel-basedplantsgeneratingelectricity inthesemini-gridsystemstohybridsystems.Atleastnineofthe21operationalmini-gridshadbeenhybridized(solar/wind)by2014inKenya(ECA, 2014). The Government of Kenya through the Privatization Commission has alsodeveloped a public-private partnershipmodel for the hybridmini-grids. The government hasbeenestablishingmini-gridsunderpublic-privatepartnership(PPP)model,jointlyimplementedbyRural ElectrificationAuthority (REA) and thenational utility, theKenyaPower and LightingCompany Limited (KPLC). Private companies build generation and distribution network andoperateandmaintainthoseassetsoverseventotenyears.Theminigridcustomersarebeingchargedaregulatedtariff,paidtoKPLC.TheprivatecompaniesreceivemonthlypaymentsfromKPLC for services provided under the Power Purchasing Agreement (PPA). Involving privatesector has supported the scalability of mini-grids using private capital. The private investorshave technical skillsand trainedmanpower tomanagethe infrastructure,which is stimulatingthegrowthofthesectorinKenya.

China represents one of the most successful instances of state-directed electrification byutilizingmini-grids.Off-gridsystemsinthecountrywereprimarilybasedonsmall-hydropowergeneration systems. In 2001, the Chinese central government launched the TownshipElectrification Program with a target of supplying electricity to 1,000 townships, which isequivalent to almost 1million people.Within a span of 3 years, 377 villageswere electrifiedusingsmallhydropower(264MW)and688villageswithPVandPV-windhybridmini-grids(20MW) (Zhang and Kumar, 2011). Local communities also have some agency in the system astariffs are decided by the village committees (Bhattacharya and Ohiare, 2012). Furthermore,there was a major focus by central planners on developing the local capacity for designing,operating and maintaining systems. This supported the decentralization of off-grid energysystemsinthecountry,ascapacitieswereavailableatgrassrootlevels.

China pursued the development of small mini-grids where the plants first operated instandalonemodeandwere then connected to thenational grid as it expanded into the ruralareas. TheChineseprogramremainsoneof thebiggestdecentralizedgenerationprograms. Italsoshowsthatthereisnoinherentin-builtinefficiencyingovernmentsponsoredandoperatedmini-grids.

TheNigerianFederalGovernment ispilotingaprogram toprovideelectricity to rural areas indifferentzonesof thecountry.Communities inmostof theseareasare remotely inaccessible,


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therefore traditional grid extension projects areprohibitively expensive. As part of this initiative, asolar-based mini-grid project has been installed inone such community. In this example of a hybridoperationmodel,thelocalcommunityprovidedlandandisalsosupposedtoprovideongoingsecurityforthesitewiththerestofthefundingcomingfromtheFederalGovernmentofNigeria.Throughtheproject,120householdshavebeenprovidedwithelectricity.In Ethiopia also, the government is consideringpersuading communities to provide land andmanpower to private companies under overallregulations as per the national laws. Thismodel requires financial and technical cooperationfromprivateinvestors,governmentandcommunities.

Insomecountries,thedeploymentofmini-gridsinruralareashasbeenquitesuccessfulbasedonpublic-privatepartnerships.Mali presents anexampleof such a case. In 2015, therewerearound more than 160 standalone mini-grids in operation being supervised by the MalianAgencyfortheDevelopmentofDomesticEnergyandRuralElectrification(AMADER).Eachmini-gridonanaverageprovidesaround500connections.Thedevelopmentofthemarketforprivatemini-gridswas supported by the government through AMADERwith support from theWorldBank and the German Development Bank (KfW). While the mini-grids are operated by theprivate sector, AMADER plays an important role as it provides potential investors in smallermini-gridswithasubstantialpercentageofinitialcapitalcostsofupto80percentoftheprojectvalue.Grantsarereleasedbasedonpotential investorsreachingcertainmilestones.Toensurethat the investor(s) has a stake in the business, they are supposed to cover the remainingamountwithin60daysofthestartofconstruction.Recently,AMADERhasalsostartedprovidingcapital cost support for hybridization of the diesel-based mini-grids. Potential investors aregrantedrevenuecertaintyastheyareprovidedmonopolyrightstosellelectricityfor15yearsinthearea.Privateoperatorsarealsoallowedtosettheirowntariffs.However,finalapproval isprovidedbyAMADER(Raietal.,2015).32

InTanzania,thereareanumberofprivatesector-operatedmini-grids.Privatecompanieshavebeeninvolvedinestablishingsolar-dieselhybridmini-gridsystemstoprovideelectricitytoruralcommunities.E.OnoffGridSolutions (EOGS),using theirbrandnameRafikiPower,developedandinstalledacontainerizedhybridsystemwhichiscomprisedofa6kWpPVarrayandbatterystoragewith a capacity of 20kWh. The system installed in Itaswi villagewith a population of1,000 people also includes a kiosk with various services such as a refrigerator and a batterycharging station. The mini-grid system is connected to 130 households in the village andincludes smart meters. In other areas, such as Terrat in Northern Tanzania, the mini-grid iscommunity-owned and managed. Electricity is generated by a 380 kW Jatropha seed-basedbiodieselplant.Theplantprovideselectricitythroughamini-gridsystemto224households inthevillagealongwithseveralsmallandmedium-sizedenterprises.Householdsandbusinessesaremeteredandarechargedathigherratesthanthenationalgrid.Thereareplanstoaugmentbiofuel-basedgenerationwithabiogasplant(SVI,2015).Thegovernmentisalsopilotinghybridoperationalmodelsthroughpublic-privatepartnerships.

32Ibid.

Image 7 (Courtesy Simi Vijay Photography/for the World Bank)


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Indiahaswitnessed some success in thedeploymentofprivate renewableenergybasedminigrids.Thedominanttechnology inthe Indianscenarioseemstobesolar, followedbybiomassand hydro-based grids. Public policy has played an important role in the dominance of solarmodels.Biomassbasedmini-gridshavealsoplayedanimportantpartinincreasingdecentralizedenergy access to communities in rural areas of India. Husk Power Systems (HPS) and DESIPower33are twocompanies thatareworking in thisareaandhaveestablishedbiomassbasedmini-grids.Bothcompaniesbegan theiroperationsby installingplants thatutilize ricehuskasthe basic fuel and have now diversified to other biomass sources, including wheat husks,elephant grass,mustard stems, corn cobs etc. (GNESD, 2014). A typical plant of HPS supplieselectricity to300-400households inaclusterof two to fourvillageswithina radiusof1.5km(Bhattacharya, 2013; GNESD, 2014). Husk Power Systems has been funded by several socialventurecapitalinvestorssuchasAcumenFundandBambooFinance,corporatefoundationsliketheShellFoundation,multilateralinstitutionssuchastheInternationalFinanceCorporationandMinistry of New and Renewable Energy (MNRE), Government of India (Husk Power Systems,nd.).

Nepal uses the community model. There are morethan 200 community-based organizations (CBOs)operating in the country under the ambit of thegovernment supported, National Association ofCommunity Electricity Users Nepal (NACEUN). Localcommunity members are trained to operate andmaintain the infrastructure. Electricity is sold at ratesthat are fixed by the National Electricity Authority.CBOs also provide theirmemberswith small loans tobuyequipmenttosetupproductiveenterprisessothattheycantakeadvantageofaccesstoelectricity.

Community-based mini-grids are also being operated quite successfully in other countries inSouthAsiasuchasPakistan.Similarsmall-scalesystemsarealsoworking inSouthAmerica. Innorthern Peru, Practical Action installed a small 40 kW hydro-based mini-grid to serve 160households in Tamborapa Pueblo. The projectwas part of an initiative by the Inter-AmericanDevelopmentBanktopromotemini-hydrobasedpowersystems.Capitalwasprovidedbylocalandstateagencieswhilethecommunitycontributedinkindthroughunpaidlabor.Electricityisavailable 24 hours a day and has been used for many productive and household activities.SimilarexamplescanalsobefoundinSriLankawheretheprivatesectorandotherstakeholderslikenon-governmentalorganizationshaveplayedan important role inorganizingcommunitiesto deploy mini-grids. Local communities have been organized into “Electricity ConsumerSocieties”andthemodelhasbeenhighlysuccessful(Ariyabandu,2005).

The installation ofmini-grids is driven by several objectives, including political, economic andeven partner-state programs. Private and community builtmini-grids are also seen, however,theseareusuallydrivenbyeconomicmotives.Avarietyofoperatormodelshavebeenusedtoinstallmini-gridsaroundtheworld–rangingfromconcessiontoanchor-clientorNGO-driventoutilityoperated.Still,adequatepolicyframeworksformini-gridprojectsareyettobedevelopedinmostcountries.Afewcasestudies34aredemonstratedinTable3.

33DecentralisedEnergySystems(India)Pvt.Ltd

34Mini-gridPolicyToolkit-PolicyandBusinessFrameworksforSuccessfulMini-gridRollouts

Image 8 (Courtesy Wind Power Nepal)


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Table3:CaseStudiesonMini-GridModels

LocationMini-gridTechnologyandOperator

ModelRemarks

CapeVerde

AC-coupled wind-PV-diesel hybrid mini-grid Community Model (donor led,grant-based).

Solar/winddieselhybridapplied in a remote islandforruralelectrification.Relativelyexpensive.

India BiomassPVmini-grids regulatedprivatesector PPP model (Subsidized privatesector model with reducing subsidiesandsemi-commercialroll-out).

Indian experience in hundreds of off-gridcommunitieshasspecialrelevancetoAfrica.

Kenya Diesel gen-set with solar additionsModel:nationalutilityledmodel.

Dieselmini-gridsasexamplesofthemostprevalenttypeofmini-gridsinAfrica.Thecasestudyexploreshow the addition of PV to a diesel system canimproveperformance(on-goingKPLCprojects).

Namibia AC-coupled hybrid inverter technologyHybrid (utility and community aspects,andsystemdesignoptimization)

Hybrid diesel-PV mini-grid as an example of theimportance of project design, whereby, ideologicalconsiderationsareproventobenotverypractical.

Rwanda Mini-grids that are subsequentlyconnected to the main grid model:regulated private sector-ledinstallations (incorporated into thenationalgrid)

Privatelycreatedmicrohydroplantsandmini-gridsshowing that local organizations can be strongenough to develop, finance and operate microhydroplants; the initial systematic assistancepaysoffastheseprojectdevelopersarenowtechnicallyand financially capable of replicating theirexperiences. The regulatory framework is crucial,which in this case prevented the mini-grids frombeingbuilt.

Senegal AC-coupled hybrid inverter technologyHybrid(concessionmodel).

Mini-grids as a representative case study for theWest African experience of government-subsidizedPV/diesel hybrid mini-grids to fill in areas notservicedbythenationalgrid.

Somalia Unregulatedprivatesectorled. No alternatives planned so the private sectorsteppedin.

Tanzania Gas-firedgeneratormini-grid(biowaste,biogas,etc.)regulatedprivatesectorled(anchor client led model incorporatesintonationalgrid).

Tanzania experience of Tanzania Wattle and theirbiomassbasedmini-gridisrelevanttoAfrica.

International best practices related to growth of mini-grids clarify that private sectorinvolvementismandatoryforscalingupmini-gridsacrossthelengthandbreadthofacountry,andEthiopiaisnoexception.Thesuccessofmini-gridbusinessmodelsdependsongeographic,political and social context besides ownership, size, management and clientele. Hence, it isnecessarytotestbusinessmodelsbeforecascadingthem.InEthiopia,currentlythegovernmentisplayingalargerroleinestablishingandmanagingmini-grids.However,sooncountryspecific,pro-privateinvestormodelsareexpectedtoemerge.


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CHAPTER4:MINI-GRIDECONOMICSANDFINANCINGMECHANISMS

Mini-gridoperatorsneedtocovertheircostsandarisk-equivalentreturnthroughrevenuestobe attracted to invest. The costs of mini-grids accrue through project development andinvestment (also reinvestment), cost of generation and distribution assets, running cost fromoperations,maintenanceandmanagement.Revenuesformini-gridsoriginatefromconnectionfees,electricitysalesandgrantsorsubsidies.Connection fees,electricitysalesandsometimessubsidiesdependonthenumberofcustomers,theirwillingnesstopayforelectricitywhichhasadirectbearingonmini-grideconomicsalongwithcustomers’electricitydemand.

To estimate profitability,mini-grids need precisepredictions of electricitydemand. Investors mustassesspowerdemandforthenear future in rural areaswhere people do not havepersonal experience withelectricity, and thenaccurately estimate demandgrowth over time. The dailyand seasonal demand forelectricitydependsonvariousfactors, including income patterns of consumers and therefore, available cash for consumerapplicationsofelectricity,seasonsandtheirinfluenceonlighting,coolingloadsandotherloads,operationofsmallindustries,businesses,farmsetc.,cropcyclesforfarming-relatedproductiveloads(e.g.irrigation,milling),efficiencyofappliancesandmachines,andoccasionaleventslikefestivalsandweddingscausingadhocincreaseindemand.35

Thus,themini-gridmustbesufficientlyflexible,technicallyandinitsoperatormodelandtariffmodeltomeetthedemandsofcustomersasmatchingcustomers’electricitydemandwiththeelectricitysupplyiscriticalfrombothaneconomicandtechnicalperspective.

Fromatechnicalperspective,likeinallelectricitygrids,electricitysupplymustmeetelectricitydemand.Yet,asmini-gridshavefewercustomersandlessvariedconsumertypesthannationalgrids, theconcurrencyofdemand ishigherand loadprofilesaremorevolatile.A typicalmini-gridloadcurvewithmainlyresidentialcustomerscanbeseeninimage9,withsomeproductiveuseduringtheday,apeakfromlightingandtelevision(TV)duringtheeveninghours,andlittledemand at night. The technical solutions formeeting demand have costs.Moreover, a basiceconomicperspective is thatthemoreelectricityproduced inasystemcanbesold, the lowerthe tariffs for the customers can be. Consequently, mini-grid economics mainly depend onelectricity demand, electricity supply, fixed and variable costs, and the potential revenues.Electricity demand, electricity tariff plus connection fees, and electricity supply areinterdependent. For example, the lower the electricity tariff the higher the overall electricitydemandbut lowmarginonelectricitysupplycosts. Investmentandrunningcosts inmini-gridscanbesplitintofixedandvariablecosts(PleasereferTable4).

35Ibid.

Image 9: Typical load curve of a large mini-grid


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Table4:FixedandVariableCosts

Fixedcosts VariablecostsTypical fixed costs are generation and distributioninfrastructurecosts.Theseincludethedepreciationofassets, interestondebtandfixedtaxesandfees(e.g.on infrastructure and land). Further, fixed costsinclude overhead and transaction costs, localmanagement, and local operations such as localpower plant operation, money collection,maintenance, guards, customer relationshipmanagement,fixedtechnicallosses(self-consumptionof inverters, batteries, iron losses of transformers,etc.)andcleaningofequipmentandbuildings.

Variablecostsincreasewithdemandinmini-grids.They are for example fuel costs, lubrication oil,maintenance costs that depend onruntime/energy throughput, load-dependenttechnical losses (conversion losses of inverters,copper losses of transformers, battery storagelosses), battery depreciation and revenue- orenergy-related taxes. In biomass systems, thevariablefuelandmaintenancecostsareincreased.In hydro power stations, fixed asset depreciationishigher.

FixedcostsareindependentofvariationsinthenumberofkWhproduced,showmarginalornoshort-termdependencyonthenumberofcustomersconnected,anddependonlymarginallyonthe number of sites serviced. Variable costs, on the other hand, increase with electricitygenerated.Besidescosts, revenueand tariffsarealso important factors that impacteconomicviabilityofmini-gridsinacountry.

Revenues can be acquired through connection fees, subsidies and tariffs. In general,monthlyelectricity bills of more than 7.60 EUR are not affordable for a large share of the ruralpopulation.Thus,spreadingconnectionfees,obtainingsubsidies,andofferingdifferenttarifforservicelevelsforcustomergroupsusuallyimprovestheaffordabilityforcustomers(Banerjeeetal.,2008;WorldBank,2008).

Inaddition,theamountofsubsidyavailablealsoinfluencestheaveragetariff,theaffordabilityand the scalability ofmini-grids. Higher subsidies result in lower tariffs andmore people canaffordthetariffs.

Grants and subsidies must be high enough to allow affordability for customers (increasingelectricityaccess),andhence,increasingelectricity demand and improving theeconomics, which in turn can attractprivate investors. At the same time,grantsandsubsidiesshouldbeaslowaspossible to allow scaling up beyond afew pilot projects and upgrading ofexisting mini-grids. In fact, more thangrantsandsubsidies,privatecompaniesareattractedtoinvest inmini-gridsduetoattractivetariffs.

Tariffs for mini-grids could either bepure flat rate/basic prices (which arefixed regardless of electricityconsumption), pure energy prices(which are tariffs-based, solely on theconsumed amount of energy) or acombination of both. Electricitycustomers usually prefer higher energytariff componentsoverhigher fixedbasic tariff components since thisprovides themwith

Pay-As-You-Goandmini-grids

Pay-as-you-gomeans that electricity customers pre-pay andconsume electricity based on the availability of cash. Thismeans that electricity consumption can vary considerablywithtime.Thisisnotwellsuitedtooff-gridelectricitysystemswithhighfixedcostssuchasPVandbatterybasedmini-grids.Insuchsystems,theoperatormusttrytosellalltheelectricityproducedbeforeitgetslost,whichoccurswhenthebatteryisfull. The lower the amount of available/produced electricitythat is sold, the lower the revenues and the higher is thetariffper kWh.Thus,adailyelectricitydemand thatusesallthe electricityproducedwouldbe favorable for the system’seconomicsandtheaffordabilityofelectricityforallmini-gridcustomers. Toprovide the flexibilityrequired forpay-as-you-gopaymentandrelatedvarying loadcurves,amoreflexiblepower source is required. This power source should have alowinvestmentcostandcanhavehigheroperationalcosts.Adieselgeneratorwouldbesuchapowersource.ForPV-basedmini-grids, flat-rate or take-or-pay contracts are thus moresuitablethanpay-as-you-go.


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more financial flexibility. As customers usually oppose high basic prices that reflect the fixedcosts,thecalculatedmargincanonlyberealizedbysellingacertainamountofelectricity(kWh)per year. Any kWh sold beyond the planned electricity sales volume will generate an extramargin.36

Fromamini-gridpointofview,theriskwouldbelowestifthetariffwouldhaveacombinationofbothprices,where revenues from the fixedbasic tariff exactly covered the fixed costs andenergypricesareslightlyhigherthanvariablecosts.Unfortunately,highfixedtariffcomponentsdonotincentivizecustomerstouseelectricityefficiently.37

This efficient use of energy is, however, necessary in a mini-grid system with limited powergeneration and distribution capacity. Flat rate tariffs are nonetheless used in nano-grids andmini-grids,althoughtheirappropriateness isquestioned.Atariffconsistingoftheenergytariffcomponent only, like in a pay-as-you-go scenario, results in the highest possible risk for themini-gridoperator38.Table5explainsdifferenttariffstructuresinmini-gridsandtheschematicdiagram39 in image 10 below, shows how electricity prices can be derived from electricitygeneration,distributionandsalescosts.

Table5:TariffStructureinMini-Grids

1 Energy-basedtariffsdependontheactualelectricityconsumedandarethus,basedonmeasuredkWh.Forexample,onePVdieselhybridmini-gridinBangladeshhasaconnectionfeeofc.47EURandanoperationaltariffofc.0.28EUR/kWh(Philipp,2014).

2 Power-basedtariffsarebasedontheexpectedpowerconsumption,whichinturn,determinesthemaximumpoweravailablefortheconsumers.ThesetariffsarecalculatedonaWattbasis.Abasictariffwouldlimitconsumerconsumptionto,fore.g.,60Wandchargeeachconsumer5.54EUReachmonth(ESMAP,2000).Itmightalsobelinkedtothenumberoflightbulbsandappliancesthattheconsumerproposestouse.

3 Fee-forservicetariffschargeforservicesprovidedandnotperunitofenergy.Thetariffisbasedonkg,hour,litersorotherunitsofservice,fore.g.,TVservice:0.68EURperhourper.

4 Customer class tariff regime sets diverse tariffs according to consumer group, for e.g., residents,institutionsandbusinesses.Itismostlyusedtocross-subsidiesresidents.

5 Steppedtariffregimeincludesdifferenttariffsdependingonconsumptionleveloftheconsumers.

6 Progressivetariffsconsumerspaylowtariffsforthefirstkilowatt-hours(orWatts)andhighertariffsforfurtherconsumption(cross-subsidization).Itmayalsoincludealifelinetariff,whichbasicallyisasubsidizedtariffprovidingbasicelectricityneeds.

7 Regressivetariffslargerconsumerspayalowerunitprice.

8 Flat-rate tariffs fixed tariffs thatdonotdependonelectricity consumption, andonlyneeda loadlimiterasameteringtechnology.

9 Time-basedtariffsvariabletariffsbasedonthetimeofday.Theyaremostlyappliedforcommercialandindustrialconsumersandarealsousedforloadscheduling(DemandSideManagement).

10 Flexible tariff structure includes tariffs that change according to electricity demand or powerdemand,providingincentivesforelectricityusagewhensurplusenergyisavailable.Here,advanced

36Ibid.

37SBI(2013).ScalingupSuccessfulMicro-UtilitiesforRuralElectrification;PrivateSectorPerspectivesonOperationalApproaches,Financing

InstrumentsandStakeholderInteraction38DevelopmentandRuralElectrification”TOOL:MGPTFinancialModelforMini-grids(minigridpolicytoolkit.euei-pdf.org/tools)

39TheYaxisshowsthecost/price,andtheXaxisshowstheamountofelectricitysoldperyear


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meteringsystemsareneeded.

GoEandprivateinvestorsconsiderthatenergy-basedtariffs,fee-forservicetariffsandflat-ratetariffsareappropriateintheEthiopiancontext.

Asuitablemini-gridmodelneedstoconsiderthatprivatemini-gridoperatorsinAfricaexpectaprojectInternalRateofReturn(IRR)ofatleast12percentandanequityIRRabove16percent.These IRRsareadequate for socialentrepreneursand impact fundsbutpurelyprofit-orientedcompanies and investors will likely require higher returns. Private stakeholders in Ethiopiaappreciate that acceptable/viable returnonequitywill dependon the sizeof the investment,geographiclocationetc.

The returnonequityonmini-grids shouldbe at least equal toor exceed returnonequityonbankshares(20-40percent).

Table6showssimulationresultsofaPVdiesel-batterymini-gridsystembasedondataadaptedfrom a real-life example in Bangladesh, including the technical design, capital structure, costsummaries, financial indicators and tariff design. This is considered as an exemplarymini-gridmodelfordevelopingcountries.

Table6:ExemplaryMini-GridModelResultsofBangladesh

TechnicalSystemDesignSolarPV 100kWpDieselgeneratorsizeBatterysize

100kVA560kWhC10

Batteryinvertersize 60kWSystemtype MixedAC/DCcoupledMini-gridlength Approx.3.5kmMini-gridefficiency 96percentCapitalEquity 20percentDebt 30percent

Image10Schematicmini-gridelectricitycosts,pricesandprofitmargin(Müller,2001)


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Grant 50percentTotalinvestment 520,000€RenewableFractionRenewablefraction 47percentO&M&MCostSummary1Dieselpriceonsite 0.70€/LOverheads 15,000€/yearFinancialIndicatorsProjectIRR 10percentEquityIRRProjectlifetime(insimu).

15percent20years

DebtTermsTenure 10yearsGraceperiod 2yearsInterestrate 6percentType ConstantprincipalamountTariffElectricitysalespricePurelyenergybasedNofixedbasictariffcomp.

0.43€/kWhThisisadeviationofthesimulationfromtheactualsetup

ElectricitysalesAverageelectricitysales 420kWh/dayO&M&MCostSummaryIIO&Monsite 10,000€/yearBattery/inverterreplacement After7years/5years

A cost-reflective tariff is amajor precondition for increased private investment inmini-grids,globally. The tariff-setting process can be used by project developers and regulators.Usually,there is a national regulatory authority that must approve tariffs with the objective ofguaranteeingfairtariffsforthecustomers.InEthiopia,EEAismandatedtopromoteinvestmentin off-grid electrification under Energy Proclamation No. 810/2013. The Proclamationempoweredtheregulatoryagencytoperformitsroleregardingregulationofbothgrid-relatedand off-grid tariffs. EEA is yet to approve off-grid (including mini-grid) tariffs in the country.However,thetariffsareexpectedtobeataleveltoattractprivateinvestorswhichisimportantforthedevelopmentofthesector.

Along with understanding the economics of mini-grids, availability of financing options andsourcesofinvestmentisakeyingredientforthegrowthofthesector.Asdiscussedearlierinthisreport,mini-gridsarefinancedbothbypublicandprivatefinancemechanisms,includingprojectandcorporatefinance(PleasereferTable7).


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Table7:UnderstandingProjectFinanceandCorporateFinance

ProjectFinance CorporateFinanceProject finance refers to the financing of a projectbasedontheprojectedcashflowsoftheprojectandthe value of the asset. A project's financing istypicallynon-recourse,thelendershaverecoursetothe assets of the project itself, but they have norecourse to the owners of the project. The lendersare repaidbyproject cash flowsor, in aworst-casescenario,byforeclosingontheprojectandacquiringthe project assets. In a typical project financing, aspecialpurposeentityiscreatedtoowntheassetsoftheproject andenter into the financingdocumentsand the project documents, including PowerPurchasingAgreement(PPA).

Corporate finance, by contrast, is based on thebalance sheet of the entity receiving the financing.Lendershaverecoursetoallassetsoftheentity,butthey do not have a security interest in any assets.There are typically no (or very few) restrictions oncash flow. Documentation is relatively light. Raisingfunds through corporate finance may be cheaperthan through project finance. However, corporatefinance is only available to fairly credit -worthyborrowers, and where the financing providers areconfident in a relatively deep secondary market.Capitalmarketsareunlikelytotakeconstructionrisk.

Thenascentstateofthemini-gridsector,aswellasthepoliticalpressuretolimittariffs,arethemainreasonsto justifytheneedforgrantfunding(Public financing) (Tenenbaumetal.,2014).Capitalsubsidiesareacommonmethodofreducingprojectcosts.Theycanoffsetthehighcostsofgridinfrastructureanduserconnectionsandbedisbursedinintervalstoensureperformance.Capitalsubsidiesmaybecalculatedbasedonthenumberofconnections,totalcapitalcosts,orprojectInternalRateofReturn(IRR).GrantstypicallysupportprojectstoachieveequityIRRsintherangeof15-20percent40,whichmaynotbeanadequatereturntocompensatefortherisksencounteredindevelopingcountryprojects.Besidescapitalcosts,grantfundingmaybeusedtoprovidetechnicalassistance(TA) for feasibilityworktomakeprojects investible,or tobalancedevelopmentriskbyprovidinggrantstomatchequitycommitments41.Whilethestructureandvolumeofsubsidiesareimportant,attractingprivatecapitalrequiresanefficientdisbursementprocess. Subsidy programs that are not responsive, generate high transaction costs anddeliveredbyinefficientgovernmentagencies,willfailtodeliverthesectorstimulustheyaimtoachieve42.

Under theprivate financingmechanism, thecapital requiredtostartabusinessor tobuildaninfrastructureprojectisusuallyobtainedbyraisingeithercorporateorprojectfinance.Mini-griddistributionandgenerationassetscanbe financedusingbothapproaches.Aprivatecompanythatbuilds theseassetscouldraise fundsat thecorporate levelorestablishaSpecialPurposeVehicle(SPV)forwhichitcouldarrangeprojectfinancing.

40ThisIRRistypicalforprojectsrealisedinindustrialisedcountries,whichcompriselowerrisksthanprojectsindevelopingcountries

41Mostert,KfW(2005).FinancingRenewableEnergy;Instruments,Strategies,PracticeApproaches.Justice,UNEP(2009).PrivateFinancing

ofRenewableEnergy-AGuideforPolicymakers42Mini-gridPolicyToolkit-PolicyandBusinessFrameworksforSuccessfulMini-gridRollouts


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Communities generally do not have abalance sheet/track record to raisecorporatefinance.Instead,communitymini-grids are developed andimplemented by a third-party projectdeveloper that structures a projectentity, into which financing would beraised, and in which the communitywouldhavesomeownershipbasedontheir contribution in terms of land,labor,materials,etc.

As mentioned earlier, project financeis considered to bemore appropriatefor mini-grids, as they are highly capital intensive. However, project finance is a challengingsolution in the near term. Even bundled mini-grid projects are relatively small, and projectfinanceisdifficulttojustifybelow20millionEUR43.Projectfinanceequityinvestorsacceptlowerinternal rates of return (IRR) due to predictability of cash flows, which mini-grids do notnecessarily provide. Since project finance formini-grids ishardtocomeby,mostmini-griddevelopmentcompaniesareraisingcorporatefinance from equity investors to builddemonstration projects and develop theirbusinessmodels. Through corporate finance,a developer may be financed in multipletransactionsasitdeployssystems,incontrastto an infrastructure project that requires alarge financial commitment at “financialclose”priortothestartofconstruction.

It is alsonecessary tounderstand theprofileand requirements of potential equityinvestors.Veryearly stage (seed)equitymaybe sourced from angel investors44, slightlylater-stage funding may be provided byventurecapitalfunds45andexpansioncapitalbyprivateequityfundsandpubliccapitalmarkets.Investment decisions are based on the operator model, the market opportunity, themanagement team track record and the perceived scalability of the company. An increasingnumberofAfrica-focusedinvestorsidentifythemselvesasimpactinvestors46withamandatetoachieve social and environmental impact in addition to financial returns and which are

43DevelopmentandRuralElectrification”TOOL:MGPTFinancialModelforMini-grids

44 An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent

individualwhoprovidescapitalforabusinessstart-up,usuallyinexchangeforconvertibledebtorownershipequity.Angelinvestorsusuallygive support to start-ups at the initialmoments (where risksof the start-ups failing are relativelyhigh) andwhenmost investors arenotprepared toback them (Dr.TomMcKaskill, p.2 p.3An Introduction toAngel Investing:A guide to investing in early stage entrepreneurialventures(PDF)45Venturecapital(VC)isatypeofprivateequity,aformoffinancingthatisprovidedbyfirmsorfundstosmall,early-stage,emergingfirms

thataredeemedtohavehighgrowthpotential,orwhichhavedemonstratedhighgrowth(intermsofnumberofemployees,annualrevenue,orboth)(PrivateCompanyKnowledgeBank)46 Impact investing refers to investments "made into companies, organizations, and fundswith the intention to generate ameasurable,

beneficialsocialorenvironmentalimpactalongsideafinancialreturn"(2017AnnualImpactInvestorSurvey)

“Wedon’tprefer corporatefinancingofmini-gridprojects.Ourpolicies and proclamations recommend project financing.Private companies intending to work in mini-grids in EthiopiashouldestablishaSpecialPurposeVehicle(SPV)forwhichtheycould arrange project financing. We don’t go for corporatefinancing because any such debt will be transmitted to thecountry’sbalancesheets,whichwedon’twanttoseethis.Since,Ethiopia’s debt burden is already very high. So, the PPP policydoesn’tallowcorporatefinancing.Also,wedon’tallowmothercompanies to invest as a PPP without establishing the projectcompany(inthecountry).”-

PPPProjectDevelopmentandMonitoringDirectorateOfficer

Ethiopiaencouragesprojectfinance

In the Ethiopian context, both private investors andgovernment stakeholders consider project financing asa more viable option for financing of mini-grids. TheGoE’s Public Private Partnership Proclamation (PPPProclamation) No. 1076/2018 and Public-PrivatePartnership Policy (PPP Policy) 2017 advise to followproject financing for infrastructure projects, includingenergy. Article 44 of PPP Proclamation states that thePPPDirectorateGeneral shall require that a successfulprivatebidderestablishaProjectCompanyincorporatedunder the laws of the Federal Democratic Republic ofEthiopia whose sole purpose shall be to execute andimplement the Public Private Partnership AgreementandotherProjectAgreements,ifany.


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measured by job creation, by new/improved energy access, or by carbon avoidance. Whilesomeacceptlowerthanrisk-adjustedreturns,manyinvestorstargetrelativelyhighreturns(e.g.20 percent + equity IRRs). The numerous challenges associated with mini-grids provideinsufficient risk-adjustedreturns for investorsseekinghigh-growthandscalableventures,withhigherpotentialreturns.

In addition to private investors, multilateral development banks and development financeinstitutions(collectively“DFIs”)design,finance,andoperatefacilitiesthatprovideequity.Theseactors typicallyprioritizedevelopment impactaswell as financial viabilityandprovidegrowthequitytoestablishedcompaniesorcapital for largerprojects.Whilemini-gridspresentseveralchallenges to these financiers, there is an increasing interest in pursuing mini-]s as viableopportunities.Successfulpilotprojectsandlarge-scalerolloutswillhelpthesenaturalinvestorsparticipate,whoarebringingtheirexperienceinenergyprojectdevelopment.

Therisk/returnprofilemismatchlimitsthenumberofpotentialequityinvestors,thus,accesstoappropriatedebtfinanceishighlychallengingformini-griddevelopers(cKinetics,2013).Debtistheoretically available from local and international banks, DFIs, funds and crowdfunding47platforms.Guarantees fromDFIsareviable throughmechanismssimilar tosolarhomesystemfinancing and guarantee systems set up by theWorld Bank. At >15 percent interest rate forloans from Ethiopian banks, further complicated by a lack of understanding of the risks andbusinessmodels, it ischallenging formini-gridprivate investors inEthiopia.However,asmini-grids are largely an unproven model, thus far, commercial lenders are hesitant to lend. InEthiopia,privateinvestorspreferfinancingfromlocalbanksanddevelopmentpartners.Grantsare available for pilots but in the long term and for larger projects these are not enough..International investors are willing to provide equity and debt but current regulations forinternationalinvestmentaretimeconsumingandonerous.

Projects will struggle to raise commercial debt until some of the technical, regulatory, andoperationalchallengesareaddressedandrisksmitigated.Localfinancialinstitutionsarenaturaldebtprovidersduetotheirability tounderstandmarketdynamicsandperformduediligence.However,theseinstitutionshavelimitedexperienceincashflowanalysisandrelyonacollateralforcorporatelending.Localbankstypicallyoffershorttenure,highcostloansthatarenotviablefor mini-grids. Interest rates may range from 16-24 percent, while the few precedents forproject finance have resulted in interest rates around 10 percent. In Ethiopia, the currentcommerciallong-termlendingratesare>15percentwithvariableratesfromCommercialBankof Ethiopia, Awash National Bank, Dashen Bank, Hibret Bank, etc. and some micro financialinstitutions(MFIs).

Mezzanine48 finance is closer to equity than debt on the risk/return spectrum, in so far asmezzanine investors have a lower degree of preference than lenders and they are paid afterlenders in the event of bankruptcy/ liquidation. Therefore, mezzanine instruments typicallycommand a higher return to compensate for this additional risk relative to debt. However,mezzanine finance is typically paid before equity, and thus, it does not command as muchfinancialreturn(interestrate)asstraightequity.

Development finance institutions (DFIs) attempt to fill thegap leftby localbanks, though the

47Crowdfundingisthepracticeoffundingaprojectorventurebyraisingsmallamountsofmoneyfromalargenumberofpeople,typically

via the Internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over US$34 billionwas raisedworldwide bycrowdfunding(DefinitionofCrowdfundingwww.merriam-webster.com.RetrievedOctober23,2017)48Mezzaninefinanceisahybridofdebtandequityfinancingthatgivesthelendertherighttoconverttoanequityinterestinthecompanyin

caseofdefault,generally,afterventurecapitalcompaniesandotherseniorlendersarepaid


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limited scale of mini-grids leads to prohibitively high transaction costs. In some cases,developersbundlemini-gridsintosufficientlylargetransactions,atrendlikelytoaccelerate,asdevelopers establish track records.49 DFIs may also provide credit lines or guarantees toencouragelending. Impactfundsandcrowdfundingplatformsalsoprovidedebt,althoughthelimitedamountofcapitalavailableisunlikelytofinanceatscale.Nevertheless,theymaylendtopilot projects to demonstrate project viability and carry lower interest rates and higher risktolerance than many banks. In these initial stages of mini-grid sector development, severalcountriesareusingbothpublicandprivate financingoptions tosupportmini-grid investment.Through favourable laws and policies like Public Private Partnership (PPP) and financingmechanisms, nations endeavor to increase financial resources available for the developmentanddeliveryofmini-gridenergythroughleveragingprivatesectorinvestmentandmanagement.

In Ethiopia, since 7 June 2018, grid and off-grid energy interventions are being financed by aloan ofUSD 375Million (LoanNo: IDA-6157& IDA-6158) till 7 July 2023 under the EthiopianElectricUtilityUniversalElectricityAccessProgram.Also,acreditlineattheDevelopmentBankofEthiopia(DBE)hasalreadyundergonetwophasesofimplementation,withanoverallfundingofUSD40million.PhaseIwasbetween2012–2016(USD20million).PhaseIIstartedin2017withthesamefunding–32percenthasbeendisbursedwhilst68percentwasstillavailableasof31 March, 2019, although as of the date of this report, no private mini-grid projects haveapplied or been financed. The DBE through its External Fund and Credit ManagementDirectorateprovides2yearsworkingcapitalloanand5yearsprojectloan.ManyapplicantswhowereoriginallyinterestedinaccessingDBEcreditlinetoestablishmini-gridswereskepticalthata mini-grid project might not generate enough revenues to repay the loan within 5 years.Besides, private investors are waiting for clearer directives regarding distribution and saleslicensingandmini-gridtariffs.

49Lindlein,Mostert,KfW(2005).FinancingRenewableEnergy; Instruments,Strategies,PracticeApproaches. Justice,UNEP(2009).Private

FinancingofRenewableEnergy-AGuideforPolicymakers


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CHAPTER5:PUBLIC-PRIVATE-PARTNERSHIP(PPP)MODELSINETHIOPIA

To sustain the present growth momentum and achieve the targets of the Growth andTransformation Plan II (GTP II), the Government of Ethiopia is mobilizing resources fromdifferentsourcesotherthanthetraditionalgovernmentfinancingtomeetthegrowingdemandforpublic services.PublicPrivatePartnerships (PPP)areoneof the toolsavailable to improveinfrastructure services and mobilise private finance and have provided some success in theagriculturesectorinthecountry.

TheMinistryofFinance(MoF)hasdesignedaPublicPrivatePartnership(PPP)programtorealizegovernment’s partnership with the private sector and support the preparation of a legalframeworkforPPPs.

PPPsforinfrastructureprovisionsarenewforEthiopiaandwillfocusonafewcarefullychoseninfrastructureprojects,totestthePPPmodel,withenergybeingoneoftheprioritysectors.ThefirstPPPproject inEthiopiawas related togridelectricity (production)and thegovernment iskeentotestthefinancingofdistribution(transmissionlines)underaPPPmodel,oncethelegalframeworkisdeveloped.

AllPPPprojects, including in theenergysector,undertakenbya ‘ContractingAuthorities’ thatmeetthegeneraldefinitionofPPPmustbeevaluatedtoensurethataPPPdeliveryapproachisappropriate for the proposed project. This is particularly true during the early years of PPPprogramdevelopment,whencapacitywithinthegovernmenttodeliverPPPprojectsislimited.Asaresult,bothon-gridandoff-gridenergyprojectsproposedusingaPPPapproachwillneedtobestudiedindetailtoevaluatewhethertheymeetcertaincriteria.

Anoverviewofkeyevaluationcriteriaisprovidedbelow50:-

Value for Money - Private sector participation in the delivery of infrastructure services candeliver value beyond public sector service delivery. However, the involvement of the privatesectoralonedoesnotguaranteethatsuchvaluewillbegenerated,orthatthisvalueisadequateto justify the associated costs to the government. Private sector involvement is expected togeneratebenefitssufficienttojustifytheirimplementationasPPPsaredeemedtodeliverValueforMoney (“VfM”) and demonstration of this expectation is a requirement. VfM is generallyderived by comparing the expected cost to the government for the implementation of theproject under a PPP delivery approach to the expected cost for delivering the same projectunderatraditionalpublicprocurementapproach.AwidevarietyofestimatedbenefitsandcostsmaybeconsideredindeterminingVfMandfurtherguidanceonhowtoevaluateVfMwillbelaidoutinthePPPFramework.

50EthiopianPublicPrivatePartnershipPolicy


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However, it is important to recognizethat the costs to governmentassociatedwith individualprojectsmayinclude both financial and economiccosts and related benefits. Also, theimportanceoftheimpactofaproject’srisk allocation on VfM cannot beoverlooked. To maximize VfM, risksshould be allocated to the party bestabletomanagethem.Thisreducestheoverall cost to the governmentassociated with the delivery of theproject.TocalculateVfM, therefore, risksassociatedwithaproject’s implementationmustbeconsidered.Theseincludeboththerisksthegovernmenthastransferred,forexample,thevalueofavoidingresponsibilityforaparticularcostoverrun,aswellastherisksthegovernmenthasfullyorpartiallyassumed,forexample,providingapaymentguaranteewhichmayormaynotbecalled.GiventheexpectedcostsofPPPprojectdevelopment,contractvaluesofgreaterthanUSD 50million are generally expected to bemost appropriate. However, projects below thisthresholdmay also be suitable for PPP delivery, if they exhibit sufficient potential to deliverVfM.

Affordability- PPP agreements frequently represent a long-term commitment of governmentresourcesortheresourcesofend-userswhopayfortheservice,oracombinationofthetwo.Regardless of the source of revenue to the private party, such revenue stream must beevaluatedtoensurethat it iswithinthemeansofthegovernmentandend-userstomeetanypayment obligation. As a result, studies investigating the delivery of projects through a PPPapproachshouldincludeappropriateprojectionsofexpectedtariffand/orexpectedgovernmentbudgetallocation.Theseprojects shouldbecomparedagainst theexistingconstraints suchasend-userabilityandwillingnesstopayandtheexpectedavailabilityofgovernmentfunds.Ifend-userabilityorwillingnesstopayisinsufficient,thegovernmentbudgetmaybeusedtoreduceend-usertariffs,whereappropriate.

Public Interest - Consistent with the government’s commitment to ensure protection of thepublicinterest,individualprojectsshouldbestudiedtounderstandthewaysinwhichissuesofpublic interestmaybeimpactedoverthelifeoftheproject.Thismayincludeanevaluationofthe environmental, health and safety impacts of the development or delivery of a particularpublic service, alongwithother issues thatmayhaveabearingon thewelfareof thegeneralpublic or end-users of the service. These impacts should be clearly presented so that thegovernment can make an informed determination with respect to the protections that mayneed to be put into place to ensure the safe and equitable implementation of the project inaccordancewiththeEthiopianlaw.

Sustainability - Given the long-term nature of PPP agreements, PPP projects will need toweathermanychangesincircumstances,bothforeseenandunforeseen.Totheextentpossible,PPPagreementsarewrittentoenableflexibilitytoallowpartiestoadapttochangingsituations.However, the best assurance of sustainability is a project which has the potential to deliverbenefitstobothpartiesoveritslife.Whenbothpartiesaretrulybenefittingfromthedeal,eachwillstrivetofulfilthespiritoftheagreementdespitefuturechanges.Forthegovernment,thismeans not only considering whether the quality and price of an infrastructure service is

“There is no operational PPP model for off-grid energy inEthiopia,sofar.WehavereceivedaPPPproposalfromEEUforoff-gridelectrificationprojects-I (SHS&Minigrid)butwecouldnot shortlist that project as it did not match PPP Policyselection criteria. Off-grid electrification, by nature, isfragmented and small, which is a problem. In PPP selectioncriteria,sizeoftheprojectisamajordeterminant.Anyoff-gridPPPprojecthastobelargeenoughtojustifytransactioncosts.Otherwise, we find it difficult to consider off-grid PPPprojects.”-

AMoFOfficer


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acceptable, but also ensuring that the private party will have an opportunity to earn anappropriate profit given the risk it has assumed. A government’s commitment to structuringwin-win agreementswill also serve to increaseprivate sector interest in theproject, thereby,drivingacompetitiveselectionprocessandimprovingVfM.Forbothreasons,theassessmentofthe attractivenessof theproject toprivate sector parties is an important step indeterminingwhetheraprojectcanbesuccessfullyimplementedthroughaPPPapproach.

InstitutionalCapacity-PPPagreementsarebothcomplexandtimeconsumingtoprepareandalso impose long-term commitments on the government. These commitments fall into twobroadcategoriesi.e.fulfillinggovernmentobligationsundertheagreements,whichmayincludeamongothers;providingland,connectinginfrastructure,makingtimelypayments,oradjustingtariffsovertime;andmonitoringtheperformanceoftheprivatesector’sobligationsundertheagreement.

Achieving VfM is dependent on both howwellpreparedaproject isandhowwellthegovernment meets its ongoingcommitments. Therefore, it is important toclearlyunderstandthe institutionalcapacitythat will be required during the projectpreparationstageandthroughoutthelifeofthe project. A realistic plan demonstratinghow these issues will be managed by theContractingAuthorityshouldformanintegralpartofthegovernment’sevaluationofwhetheraPPPdeliveryapproachisappropriate.

InMarch2017,EEUproposedthefirstever ‘Off-gridElectrificationProjects-I (SHS&Mini-grid)’underBuildOperateTransfer(BOT)formofaPPP,tobeimplementedinallregionsofEthiopiaoveradurationof5years.Themaximumcostproposed for projectdesign, constructionandoperationwasUSD100,000,000.Theprojectproposed‘Fee/ChargescollectedfromEndUser’,aspaymentmodality.

ThroughthisPPPoff-gridproject,EEUwantedtodemonstratethatitispossibletosupplypowerwithinlimitedspaceandwantedtoattainlastmileconnectivity,quickly,forruralvillages(ruralelectrification)with renewable energy source. According to EEU, the project had tremendouscontributionforotherinfrastructuredevelopmentinruralvillagesbysupplyingpowerforthemlike telecom, water etc., and it could have had a significant impact on integrated ruralinfrastructuredevelopmentsuchaswater,socialsectors(health,schooletc.)alongwithcreatingjobopportunityfortheruralyouth.

Thisoff-gridprojectaimedat:-● ProvidingruralhouseholdswithhomesolarsystemLED lightsandcellphonechargingwith

additionalcapabilitiestoincludeotherloadssuchasfans,radio,refrigeratorsandcooking;● Providing and deploying microfinance andmobile payment system that allow villages the

abilitytousemoneythatwaspreviouslybeingusedtopayforkerosene lightingtopayforthenewsolarhomesystemthroughamicrofinancestructure;

● Deploying local business infrastructure to support the local villageswith electricity,water,andmicrofinanceandmobilepaymentwithanetworkofsolarkiosksystem;

● Implementsustainableroadmapthatallowsvillagesfromeverystageofpovertyoraccesstoearnandgrowwithincreasedfunctionalityandcapabilityofoff-gridtechnology;

● Design optimum business model of micro grid with renewable energy resources with

EEUprefersPPPtofulfilitselectrificationtargets

EEU has a plan to electrify 2,034 rural villages per yearand 10, 150 villages within 2016-2020 but the currentperformingcapacityperyearisaround350villages.Thereis a big gap between target and achievement andstrategic initiatives are needed to fill the gap. Dataindicates that one of the main challenges of ruralelectrification is shortage of finance/funds. PPP projectscanbeasolutiontothefundinggap..


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leastcostofpowerproductionscheme;● Transferthemaintenanceandoperationknowledgeofmicrogridsystem;● ConducttestandcommissioningtogetherwithattendeeswhowillbeassignedO&Mworks

ofmicrogridsystem;and● DevelopmentofEco-FriendlyEnergyTownalongwithinstallationofindependentmicrogrid

systemandcommissioningtogetherwithEEU.

The Ethiopian PPP Policy criteria of VfM, affordability, public interest, sustainability andinstitutional capacity guided the approach and methodology of the draft proposal.Unfortunately thisprojectcouldnotbeshortlisted forPPPmodelduetogapsagainst thePPPPolicycriteria.

Both EEU and theMinistry of Finance areworking towards successful off-grid (mini-grid) PPPprojectsandareconfidentofbridgingthetechnicalandfinancialinthenearfuture.

Furthermore, to encourage private investors, the GoE aspires to set attractive tariffs and isconsideringthescopeofaggregationtounlockprivateinvestmentinoff-grid(mini-grid)energyinfrastructure.


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CHAPTER6:AGGREGATIONOFMINI-GRIDSTOUNLOCKPRIVATEINVESTMENT

An estimatedUSD $ 48 billion of annualinvestments are required to provideelectricity access to about 1.1 billionpeople worldwide by 2030 (IEA and theWorld Bank, 2015). In Ethiopia, theoverall costing for ongoing grid and off-gridprograms isaboutUSD6billion.Forthe grid access component, two mainsources of funding are envisaged - 50percent syndicated from developmentpartners under concessional terms andgrants. The other half of the funding isprojected to come from customerrevenues, and the government’s equitycontributions. For the off-grid accesscomponent,thegovernmentcontributionisestimatedtobeabout40percent-USD1 billion-and the remaining-USD 1.5billion-for syndication throughdevelopmentpartnersandprivatesectorresources.

Private investment is likely to play amajor role in meeting energy targets (UNCTAD, 2014) for both the grid and off-grid sectors.However attracting private investment for mini-grids is a challenge due to multiple risksinherent in the sector in Ethiopia51. Table 8 below outlines generic risks, most of which areapplicable in the Ethiopian context. Off-grid electrification projects (including mini-grids) areoften unattractive for the private investors due to unfavorable risk-return profiles and smallinvestment volumes (Schmidt, 2015). Studies reveal that both issues can potentially beaddressedbyaggregatingprojectsintolarger,diversifiedportfolios.

The potential of aggregation to redirect financial flows into small-scale renewable energy isbeginningtoberecognizedinternationally52.Forinstance,solarhomesystemdevelopersinEastAfricasuchasBBOXXandM-Kopahaveclosedaggregationtransactionsin2016.Internationally,theClimateAggregationPlatform(CAP)initiativewasannouncedattheCOP21climatetalksinParis(UNDP;GEF;CBI,2015).Structuringpoolingfacilitiescanaggregateoff-grid(includingmini-grid) projects to reduce risks, increase investment volume, and lower transaction costs(Davidsenetal.2015,Gershensonetal.2015andOrlandietal.,2016).

51Scalingupfinanceforoff-gridrenewableenergy:Theroleofaggregationandspatialdiversificationinderiskinginvestmentsinmini-grids

forruralelectrificationinIndia-ArticleinEnergyPolicy·September201752Ibid.

Aggregation-incontext

Energy aggregation iswhenagroupof companiesor localinstitutions partner together to buy energy from a singledeveloper,ormultipledevelopers,atsmallervolumeswhileretaining the economic advantages of a high-volumepurchase.Thetermiswidelyusedtodescribebulkpurchasesofrenewablesfromwind,solarandhydro-powerprojects.

Project aggregation is creating a portfolio of projects, likethe ideaofamutual fund,whichblendsadiverse rangeofrenewable energy projects together. This method allowsbuyerstotransactwith less riskandgetaccess toahighervalue product in one transaction, instead of buying intodifferent projects across multiple transactions. Think ofproject aggregation as investing in an index fund versus asinglestock,reducingtheoverallriskofarenewableenergypurchase.

Buyer aggregation on the other hand, references whenseveralnon-utilitybuyerscombinetheireffortsandincreasetheir buying power to access more projects. Aggregatingsmaller buyers together allows them to access a similarrange of projects as a larger entity would and at anaffordableprice.


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Table8:RiskCategoriesforRenewableEnergyMini-GridProjects

RiskCategory Description KeyStakeholderGroupPowermarketrisk

Risk arising from limitations and uncertainty in theenergy market (on and off-grid) regarding marketoutlook,price,accessandcompetition.

Power market-relatedpolicymakers; legislators;regulators.

Permitsrisk Risk arising from the public sector’s limitations toefficiently and transparently administer mini-gridrelatedlicensingandpermits.

Permit administrators in acountry. EEA in Ethiopiancontext.

Technologysourcingrisk

Risk arising from limitations in the quality andavailability of mini-grid hardware, as well as thecustomstreatmentofhardware.

Technology supply chain;technical regulator; customs(excise).

Financingrisk Risksarising fromscarcityofdomestic investorcapital(debtandequity) forrenewableenergy,anddomesticinvestors'lackoffamiliaritywithrenewableenergyandappropriatefinancingstructures.

Domestic investors (equityand debt), financial sectorregulator.

Currencyrisk Risks arising from currency mismatch between hardcurrencydebt/equityanddomesticcurrencyrevenues.

Nospecificstakeholder.

Gridextensionrisk

Risks arising from uncertainty in grid extension plansandtechnicalregulationsfor integration intothemaingrid.

Utility, distributioncompany; utility/gridregulator.

Socialacceptancerisk

Risksarising from lackofawarenessand resistance torenewableenergyandmini-gridsincommunities.

Generalpublic;NGOs.

Paymentandcreditrisk

Risk arising from customers' willingness, ability, andmethodsofpaymentforelectricity/

Endusers;consumerfinanceactors (consumer banks,credit data actors, end-consumerfinanceregulator).

Sovereignrisk Risk arising from a mix of cross-cutting political,economic,institutionalandsocialcharacteristicsinthecountrywhicharenotspecifictomini-grids.

Nospecificstakeholder.

Laborinputsrisk Risks arising from the lack of skilled and qualifiedpotentialemployees.

Labor force, educationalinstitutions.

Developerrisk Risks arising from limitations in the developer'scapability to efficiently and effectively design, install,operate,maintainandmonitortheproject.

Mini-griddeveloper(BOO).

Among all the above-mentioned risks, lack of financingmainly due to unfavorable risk-returnprofiles,smallinvestmentvolumes,andabsenceofappropriatefinancingsourcesandstructures–continuestobeoneofthemajorbottlenecksinscalingupmini-griddeployment.Aggregationofprojectscanhelptomeetthischallenge(Gershensonetal.(2015)andDavidsenetal.,2015)byreducingtransactioncostsforprivateinvestors,increasingaccesstoinstitutionalcapital,andlead todiversificationof risks. Financial aggregationbundles togetherenergyopportunities tolower transaction costs, risks and the costof capital. Financial aggregators canbring togetherenterprisesortheirassetsintoportfolios,diversifyingriskacrossmanyinvestmentsandmakingthesectormoreattractiveforinvestors53.

53Turningupthevolume:financialaggregationforoff-gridenergy-ClareShakya,RebeccaByrnes


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The GoE agrees that risk-return profiles formini-grids can be made more attractivethrough enabling policies that facilitateaggregation of projects into diversifiedportfolios,buttillnow,aggregationisabsentinEthiopiaasoff-grid(mini-grid)marketsizeis relatively small. Both GoE and privatestakeholders understand that bundlingtogether smaller loans and assets fromrelatively small-scale decentralized renewable energy projects and enterprises can createinvestment products thatmeet the larger-scale needs of institutional investors. Once off-gridmarket size in Ethiopia reaches a medium scale, aggregation will happen. Together withaggregation,attractivetariffsformini-gridsareexpectedtoescalateprivateinvestment.

“AggregationwillhappenonlyafteralargemarketdevelopsforminigridsinEthiopiawithhundreds(perhapsthousands)of operators. The first thing is therefore to create anattractive environment for small aswell as largemini-gridinvestors (both local and international). There are obviousadvantagesofaggregationinefficiency,cost,reliabilitythatwillcomewithaggregation,itwillhelpprivateinvestors.”-

APrivateMini-GridStakeholder


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CHAPTER7:TARIFFGUIDELINESANDMETHODOLOGYFOROFF-GRIDSYSTEMS

Ethiopia is presently reviewing its Energy Regulation. The updated Energy Regulation wouldallowforbusinessmodelswithcost-reflectivetariffstoattractprivatesectorparticipationwhiledecreasingtheneedforpublicsupportformini-gridsscale-up.54

Asustainableoff-grid(includingmini-grid)tariff,mustcoverthesystem’sefficientandprudentlyincurred cost comprising the capital expenditure (CapEx) and operating expenditure (OpEx),including fuelcosts.Thecostofservice fora typicalminigridwhichsupplieselectricity tooff-grid consumers should recover the local generation cost andmini distribution grid, includingretailcost,asexplainedbelow55;also,Table10providesinformationongridandoff-gridtariffsinselectedcountries:-

LocalGenerationCost

TheRevenueRequirementsforoff-gridelectricitygenerationisgivenas:

RROG,i=(RABOG,i×WACC)+O&Mi+Depi+Taxest

where:

RROG,i=Revenuerequirementsforoff-gridgenerator,i,

RABOG=RegulatoryAssetBaseforoff-gridgeneratori,

WACC = Benchmark Weighted Average Cost of Capital as established by EEA per the attachedmethodology(AnnexONE),

O&Mi=OperationandMaintenanceexpenditureforplanti,

Depi=Depreciationforplanti.

Taxest=Taxespayablebydeveloperduringperiodt

The generation tariff would be computed and denominated in KWh, and would be based on aforward-looking tariff philosophy, which takes account of production forecasts over a period atleast4years.

MiniDistributionSystemCost

Sinceatypicalminigridoperator,inadditiontooperatingandmanagingthegrid,alsoundertakesretailactivities,therevenuerequirementsforthedistributionssystemshouldrecoverthefollowingcosts:

i.Networkassetsandequipment.

ii.Retailcosts:Customerservice,metering,billingandcollections.

Thetotaldistributionsystemrevenuerequirementsisthereforeexpressedasfollows:

DRROG=(WACC×RAB)+O&Mi+Depri+Lossesi+CSCit+Taxes

where:

DRROG=DistributionSystemrevenuerequirementsforoff-grid;

WACC=BenchmarkWeightedAverageCostofCapitalasdeterminedbyEEAortobedetermined

54TariffGuidelinesandMethodologyforOff-GridSystems(ZERODRAFT).

55Ibid.


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basedonmethodologiesannexedtothisguideline;

RAB=RegulatoryAssetBase;

Lossesi=Lossesassociatedwiththeoff-gridsystemi;

Depri=Depreciationofminidistributionsystemassets;

CSCi=CustomerServiceCostsforoff-gridsystemi,

Taxest=Taxespayableduringperiodt;

Theretailoff-gridtariffwouldthereforecomprisethefollowingtwocomponents:

I. Off-gridGenerationTariff

II. Off-gridDistributionTariff

Theretailtariffcanthusbeformulatedas:

ORT=OGT+ODT

where:

ORT=Off-gridretailtariff;

OGT=Off-gridgenerationtariff;

ODT=off-griddistributiontariff;

Indeterminingandapprovingoff-gridtariffs,EEAwillundertakerevenuerequirementanalysis,so that the Authority would be able to determine the actual cost of operating the off-gridsystem.Theanalysiswill furtherestablish the revenue-cost gap, if any,which canariseunderboththepartlyandwhollysubsidizedoff-gridbusinessmodels (thesemodelsaredescribed inChapter2above)asdiscussedunder:-

Partly-SubsidizedModel:FullConnectionCostSubsidy-Underapartly-subsidizedmodelwherethemini-gridoperator receivesonlyconnectionsubsidybutnocapital subsidy,and the retailtariffiscappedatthenationalend-usertariff,theoff-griddeveloperwouldstillneedtomeetitscapital cost. Theexact levelof capital subsidy can thereforebedetermined from the revenuerequirementanalysis.

Partly-SubsidizedModel:PartialCapitalCost,ConnectionSubsidy-Thereisalsoapossibilitythata developer operating under a partly-subsidized business model could benefit from partialcapitalsubsidyandfullconnectionsubsidy.Withthismodel,ifthetarifftotheoff-gridcustomeris capped at the national average end-user tariff, the developer may still require externalfundingsupporttoclosetherevenue-costgap.Theamountoffurthersubsidyrequiredcanonlybe quantified after a detailed revenuerequirementanalysisisdone.

Partly-Subsidized Model: Connection,Partial Capital SubsidybutUnconstrainedTariff - Under the partly-subsidizedmodel, the developer benefits from fullconnectionandpartialcapitalsubsidy,butunlike the above scenarios, the off-gridretail tariff is not capped at the nationalend-user tariff. Under this scenario, the

Recommendationsontariffdesignandstructure

The off-grid tariff should be set by EEA as a consumption-based tariff, denominated in Birr/KWh.The off-grid retail tariff should be capped at the national average end-user tariff.

In localities, where there are commercial customers which can serve as “anchor loads”, these loads could pay a tariff which exceed the national average end-user tariff. This will enable the commercial customers or loads to cross-subsidize the poor and vulnerable residential consumers.


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off-gridretailtariffmaybedifferentiatedasfollows:

(a) Theregulatorcouldallowthemini-gridoperatortochargethelargecommercialcustomersorthe“anchorloads”,atariffwhichexceedsthenationalaverageend-usertariff.

(b) Thepoor and low-usage rural households are chargeda tariff, notexceeding thenationalaverageend-usetariff.Withthisapproach,thetariffsforthe“anchorloads”andcommercialcustomersareusedtocross-subsidizetheruraloff-gridpoorresidentialconsumers.

The Energy Regulation stipulates that in approving grid and off-grid tariff in relation togeneration, transmission, wheeling, distribution and sale of electricity, EEA may includeapprovedtariffadjustments,whichrequirespriorapprovalbyEEAtoreflectperiodicchangesinthecostoffuel,costofpowerpurchase,rateofinflation/deflationandcurrencyfluctuation.

The Tariff AdjustmentMechanism (TAM) for such systems will be formulated to account forchangesinO&Mcosts,sincethesearethemainongoingcostswhicharelikelytochangeduringthelifeoftheproject.Asthecapitalrelatedcostsareassumedtobefixedovertheproject’slife,thesecostswillnotbeadjusted.Therefore,foroff-gridtariff,themainvariablecostswhichareadjustedandhence“escalated”aretheO&Mcosts.Theautomaticadjustmentformula isthusformulatedasfollows:

OFTt=αOFTt-1+βOFTt-1CPIt

CPIt-1

where:

OFTt=Off-gridretailtariffapplicableinperiodt(Birr/KWh);

OFTt-1=Off-gridretailtariffinthepreviousperiod(Birr/KWh);

CPI=ConsumerPriceIndexforEthiopia,aspublishedbytheCentralStatisticalAgency;

β=MeasurestheshareofO&McostintheOFT,andknownasO&Mcoefficient;

α=Determinedas1–β.DeterminedasshareofpercentageofcapexintheOFTandknownasfixedcostcoefficient;

Assuminganoff-gridoperator incurs fuel cost in theelectricitygenerationprocess, theaboveTAMcanbemodifiedtoaccommodatethefuelcostasfollows:

OFTt=αOFTt-1+βOFTt-1(CPTt+FTt)

(CPIt-1FPt-1)

where:

FPt=FuelPriceinperiodt;

FPt-1=FuelPriceinpreviousperiod;

ToestablishthebenchmarkO&Mweights(i.e.β)andintheabsenceofactualcosts,EEAcouldusethefollowingindustrialbenchmarkvaluesinTable9.

Table9:BenchmarkO&MCosts

Renewabletechnology O&MasapercentageofcapexBiomass 1.0percent-6.0percentWindOn–shore 2.5percent-4.4percentOff–shore 3.5percent-5.5percentGeothermal 2.0percent-3.0percent


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SolarSolarPV 1.5percent-2.5percentSolarThermal 1.0percent-2.5percentSmallHydro 3percent–4percentSources:WorldEnergyCouncil,(2004),“RenewableEnergyProjectsHandbook”,U.K;IRENA(2013),”RenewablePowerGenerationCostsin2012

EEA is currently finalizing thedraftofTariffGuidelinesandMethodology forOff-GridSystemswhichwouldsupportdevelopmentofprivatesectorfriendlyenvironmentintheoff-grid(mini-grid)sectorofEthiopiabyestablishingattractivetariffsandsubsidiesscales. Ifpublicsubsidiesarerequiredinthepre-electrificationareas,theywilllikelybeprovidedtotheoperatorperkWhsold to third party household and public customers. The GoE proposes a fully automaticmonitoring of electricity sold through information technology as a key requirement for thesmooth implementation of the cross-subsidy. Along with establishing guidelines andmethodologyoftariff,thezerodrafthasalsodetailedtheregulatoryactionsandoptionswhichareavailable,intheeventthatanexistingisolatedmini-grid,is‘enveloped’or‘absorbed’bythemaingridinfuture.Thisistoensurethatthenecessaryregulatorymechanismsareputinplacesothattheprivatesectorisnotdisincentivisedtoinvestinisolatedmini-grids.EEAisconsideringallowingtheoriginalmini-gridtoconvertintoanyoneofthefollowing:-

i. Descomini gridModel: This iswhere anexisting isolatedmini-gridwhich is ‘enveloped’or‘engulfed’bythemaingrid,isgiventheoptiontoconverttoaSmallPowerProducer,whilethe national distribution licensee operates the distributionmini-grid unit, to supply to theoff-gridcommunity.

ii. Grid connected Small Power Producer: This is where the previously isolated mini-gridoperatorwhichhasbeen‘enveloped’,decidestofocusonelectricitygenerationandsales,tothemaingrid licenseeandno longerengages inelectricitygenerationandretail tooff-gridconsumers.

iii. Sale ofmini grid assets to the national grid licensee: This refers to the situationwhere anexistingminigridoperatordecidestosellall itsassets (i.e. thedistributionnetworkand/orthegeneratingunit),tothemaindistributionornetworklicensee.

Table10:GridandOffGridTariffsinSelectedCountries

Country On-GridTariff Mini-GridTariffIndia $0.04/kWh56 HuskPowerSystems-$2.41/mo

WBREDA(PS)-$1.28-$4.32/mo57Burundi $ 0.04/kWh for first 50 kWh per 2-month

billingcycleUnavailable

Ethiopia For households approx. $ 0.01/kWh for thefirst50kWhplusaservicechargeofapprox.$0.10,withtariffsincreasinginblocksbasedonconsumption

Notfinalizedyetbutexpectedtobeintherangeof0.30US$/kWhto1.20US$/kWh

Kenya $0.226/kWhforresidentialcustomers Off-grid (including mini-grids) $0.50 -$0.80/kwh

Malawi $0.066/kWhforfirst50kWh Notfinalizedbutacost-reflectivetariffmethodiscurrentlyunderdevelopment

Rwanda $0.20/kWhbetween15and50kWh Off-grid licensees are free to set their own

56 largest power company, NTPC, sells electricity from its coal-based generation units at a princely Rs 3.20 per kWh.

https://qz.com/india/984656/solar-power-is-now-cheaper-than-coal-based-electricity-in-india-but-the-math-makes-no-sense/57ComparisonofcoststoberecoveredbyTariffs(Schnitzeretall2014)


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tariffs under supervision of Regulationauthorities

Tanzania

$0.04-0.16p/kWhforresidentialcustomers Off-grid (including mini-grids) tariff rangesbetween$0.5-$2/kWh

Uganda $0.20/kWhforresidentialcustomers ForOff-gridtariff,developershavetoapplyfora license, part of which is to obtain tariffapproval

Zambia Residential$0.011/kWhupto200kWh Tariff exemption formini-grids under 100kWp,cost-reflectivetariffsforabove100kWp


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CHAPTER8:RECOMMENDATIONS

Basedonconsultationswiththegovernment,developmentpartnersandprivatestakeholders,this report makes the following recommendations to support the growth of mini-grids inEthiopia:

1.MinigridpilotprogrammesshouldtrialdifferentbusinessmodelstoevaluatewhatworksintheEthiopiancontext

TheGovernmentofEthiopiasupportsthedevelopmentofmini-gridbusinessmodelswithEEUplaying a role through public private partnerships. Private Sector business models also havesignificantpotentialandpilotprogrammesshouldtrialdifferentbusinessmodels.

It is clear that significant private sector investmentwill be required to address the ambitioustargets outlined in theNEP. Regional private developers and investors have the financial andtechnical capacities required to scale growth ofmini-grids towards universal access by 2025,provided a supportive regulatory environment with investor-friendly policies. These includecheaper and quicker licensing process, easy availability of debt financing, availability of hardcurrency,increasedlocalmanufacturingofmini-gridequipments,etc.58

CommunityOperatedBusinessModelmayalsobesuitableforEthiopiaduetoitsadvantagesoflocalownership,lesserconflictswithcustomersandself-managedpublicinfrastructure.Forthismodeltowork,technicalandmanagerialcapacitiesofcommunitieswillneedtobedeveloped.Establishment of clear ownership structures and divisions of work are critical to ensurecommunityoperatedmodelsareself-sustainable.

PublicPrivatePartnership(PPP)Projectsarealsolikelytoencouragesomeforeigncompaniestoinvest in the sector. Ethiopia has achieved some early successes attracting private sectorinvestment into agriculture through PPPs with large international agri-business and thisexperienceshouldbeleveragedintheenergysector.

2. A detailed tariff study will help to evaluate tariff levels and subsidies under differentbusinessmodels.

TheGoEhasproposedthreetariffmodelsinitsdraftofTariffGuidelinesandMethodologyforOff-Grid Systems viz for-profit model (not subsidized), partly-subsidized model and wholly-subsidizedmodel.PrivatestakeholderssuggestthatGoEmustnotregulatetariffsifasubsidyisnot available for the private investor. Fixed or regulated tariffsmay have a cooling effect oninvestorswhilehightariffswillreduceaffordabilityandpayment.Projectdevelopersunderstandthesetrade-offsandwillneedtojustifytheirproposedtariffsduringlicenseapplication.

Underapartlysubsidizedmodel,tariffthatonlyallowtherecoveryofO&Mcostsprovidelittleornoscopeforreturnoninvestment.This isnotlikelyincentivizedeveloperstotakerisksandinvest in this market. It is understandable that government may want to regulate tariff fordomesticconsumersandacertainminimumelectricitysupplyshouldbereservedfordomesticconsumers.Oncesuchsupplyisensured,developersshouldbefreetosupplyanchorconsumersata ratethatprovidesareturntothe investor.Thiswillallowfinancialviabilityof theprojectandalsoensureaffordabilityfordomesticconsumers.

Since,theentirecostsareborneeitherbythegovernmentorbydevelopmentpartners,wholly58 For details please refer ‘Chapter 3- Capacity Challenges for the Private Sector, in Ethiopian Regulatory Environment and Capacity

ConstraintsinOff-GridEnergySectorReport


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subsidizedmodelsarenotscalableandsustainablebutmayprovideearlylearninginanascentmarket likeEthiopia. It isdifficulttomotivateprivateinvestorstoprovideinfrastructureunderthismodelunlesstheyarerespondingtoanEPCRFP,wheretheyprovidetheirexperienceandexpertiseindesign,procurementandimplementationandhandoverthesitetogovernmentatcompletion.

3.Minigridsforproductiveuseinagriculturecreatetheopportunityforcostreflectivetariffsandshouldbethestartingpointforapilotprogrammewithprivatesectorinvestment.

The Government of Ethiopia does notwant a major price difference betweenthe tariff rates for grid and mini-gridenergytomeetitssocialobjectives.Gridtariffs in Ethiopia are very low forhouseholds at approx. $ 0.01/kWh forthe first 50kWh, when compared toothercountries.Costreflectivetariffsarecurrentlyexpectedtobe in therangeof0.30 US$/kWh to 1.20 US$/kWh, whenevaluating other countries’ experiencesbut will differ from region to region,owingtogeographical,demographicandsocio-culturalvariationsamongthenineregions.TheABCmodel creates opportunities for charging different tariff levels where the anchor tenanteffectivelysubsidizeshouseholds.Theagriculturesectorisagoodstartingpointwhenlookingatelectricityforproductiveopportunities.Thiswillenableground-waterirrigation,processingandstorageofagriculturalproducts leading to increasedproductivityand improved livelihoods forrural farmingcommunitiesaffectedbyclimatechangeand isalignedwiththeCRGEandotherclimate change policy. A robustM&E design should be used to test for financial viability andunderstanddatapointsinthepilotprogramme.

4.Private-sectordevelopersshouldbeencouragedtosecuregrantfundingtoimproveequityreturnsandreduceprojectrisks,particularduringtheearlystagesofthedevelopmentofthesector.

In theearly stagesof adevelopmentof anascentmarket, de-risking finance canoftenplay acatalyticroletoestablishearlydemonstrationprojects.Oncetheseprojectsareupandrunningand showing financial viability, the need for grant finance is likely to decrease. However tosecure grant finance for their projects, companies will need to invest time and resources todevelop competitive funding proposals. Companies should be encouraged to secure grantfinancebyallowingallorpartofthegranttobecountedasequityinthecapitalstructure.

5.Aprojectpreparationfacilitywillassistprivatedeveloperstobuildapipelineofmini-gridprojects.

ScalingupprivateinvestmenttosupportNDCswillrequireastrongandtransparentpipelineoflow-carbonprojectsthatgenerateanacceptablefinancialreturnforprivateinvestors.Howeveracommonandrecurringthemefrommoststakeholders includingprojectdevelopers,advisoryfirms,private sector fundsandDFIs suggests thatearly-stageprojectdevelopment support toconduct feasibility studies, address risks and structure transactions, is vital to bring projectsfrom concepts to finance-ready investments. This is evenmore critical in an underdevelopedmarket like Ethiopia where capacity gaps coupled with poverty and affordability challenges


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makecraftingof investmentcaseschallenging.Clearlythere isapressingneedformuchmoreearlystageriskfinancetotakedevelopmentsfromideastobankablebusinesscases.Lastly,theGoEshouldsupportnationalprivatecompaniestoaccessinternationalenergyfundslikePrivateFinanceAdvisoryNetwork(PFAN),SustainableEnergyFundforAfrica,theWorldBankfinancingand others, to ensure availability of foreign currency. Concessional climate finance may alsoprovide a source of lower cost capital for mini grid projects particularly as there compellingmitigationandadaptationbenefitsforcleanenergyminigrids.

6. Legislation to enforce a minimum percentage of local equity will have benefits in themediumtermbysupportingthedevelopmentofEthiopianprojectdevelopers.

Thismechanismhasbeenusedtovaryingsuccessinothercountries.Itisimportantthattargetsarerealisticandachievableotherwisethiswillserveasabarrierto investment. It is importantthat private sector stakeholders are engaged so that this mechanism achieves the necessarybalance.

7.Theriskofgridarrivalneedsasetofclearguidelinescommunicatedtoprivatedevelopersandinvestorsthathelpstoaddresstheirconcerns.

The GoE has proposed three options for private investors in the case where grid extensionarrivesatasitewhereamini-griddeveloperhasinvested. Theoptionsare(i)DescoMiniGridModel, (ii) Grid Connected Small Power Producer and (iii) Sale of Mini Grid Assets to theNational Grid Licensee. These options need to be communicated to private developers andbecomepartofcontractualagreementsbetweenthegovernmentandprivatedevelopers.

8.Thelicensingprocessneedsimprovement

Theprocessofobtaininggeneration,distributionandsale licenses shouldbesimpler, cheaperandquicker. Indeed, someargue that very smallmini-gridsup to50 kWshouldbeexemptedfrom any license regulations. Private developers view delays in licensing and inconsistentlicensingprocessesassignificantprojectrisksandmayencouragedeveloperstolookelsewherefor projects. The entire licensing process needs to be reevaluated in order to removebottlenecks and reduce regulatory risks. For exampleprojectdevelopersneed clarityon tarifflevelsandlicensingtermsbeforebeingrequiredtoinvestininfrastructure.

9. Development Partners should support capacity building of government and privateinvestors

Mini-grids are a new concept in Ethiopia for both the government and private investors.Government counterparts are constrained on setting streamlined licensing process, designstandardsforinstallationofmini-grids,establishingproceduresfortariffsetting,qualitytesting,power quality measurement, etc. International energy partners may support the GoE bydisseminating best practices in these areas. Knowledge exchange visits, will be beneficial toexpeditefinalizingproceduresandregulationsrelatedtomini-gridtariffsandrelatedaspects.

10.Reducetheforeignexchangerisk

Generally international debt and equity finance to developing countries is denominated inforeign currency which creates a foreign exchange risk for project developers who receiveprojectcashflows in localcurrencies.Experiencedproject financeadvisorscan implementriskmitigationmeasures includinghedgingandcurrencyswapshowever these instrumentsadd tothecostsofprojectsandwillimpacttheinvestmentcase.

TheEthiopiangovernmenthasidentifiedmeasuresthatsupportincreasedaccesstoforexinthemarket, aswell as decrease the need to access for supply chain components. The GoE is


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promotingincreasedforeignprivatesectorparticipationintheEthiopiansupplychaintoreducecoststhroughthedevelopmentoflocalmanufacturingcapacity.


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CONCLUSION

Asthepopulationcontinuestogrowworldwide,sowillthedemandforaffordableenergy;andthe climate change risks will continue with increasing use of fossil fuels. Investing in cleanrenewablepower,improvingenergyproductivity,andensuringenergyforallisvital,ifwearetoachieveSustainableDevelopmentGoal7of ‘AffordableandCleanEnergy’by2030.Developedand developing countries are working towards expanding infrastructure and upgradingtechnologytoprovidecleanandmoreefficientenergytoattainsustainabledevelopment,andEthiopiaisoneofthefrontrunnersintheAfricancontinentinthiscontext.

Ethiopia has abundant renewable energy resources and has the potential to generate over60,000 megawatts (MW) of electric power from hydroelectric, wind, solar and geothermalsources.AsaresultofEthiopia’srapidGDPgrowthwitnessedoverthepreviousdecade,demandfor electricity has been steadily increasing. Despite the country’s huge energy potential, it isexperiencingenergyshortagesas it struggles toserveapopulationofover100millionpeopleand meet the growing electricity demand which is expected to grow by approximately 30percentperyear.59

EthiopialauncheditsfirstNationalElectrificationProgram(NEP)in2017.Sincethenthecountryhas achieved significant milestones in connecting 33 percent of its population with on-gridelectrificationand11percentwithoff-gridpre-electrification.Although,substantialprogresshasbeenmade inthesector,Ethiopia’selectrificationneedsarestill significant.MorethanhalfofEthiopia’s population (56 percent) still does not have access to electricity. By 2025, Ethiopiadesires to attain middle-income country status, with 100 percent rural and urban electricityaccess.TheupdatedversionoftheNationalElectrificationProgram(NEP2.0)initiatedin2019,focuses on integrated grid and off-grid electricity access and provides an implementationframework for the achievement of 35 percent of off-grid access by 2025, andmini-grids areexpectedtoplayapivotalroleinthis.

However,thissectorischallengedbytechnicalcapacities,regulatoryandfinancialissues,alongwithsocio-economicconsiderations thatneed tobewell-thought-out toaugment thenascentmini-grid sector. (Please refer report on Ethiopian Regulatory Environment and CapacityConstraints in Off-Grid Energy Sector for details on mini-grid background and challenges inEthiopia). Lack of proven businessmodels andmini-grid tariffs are themajor bottlenecks thesector currently faces. Presently, Ethiopia is testing various models include with support ofdevelopment partners. The government is keen on scale-up ofmodels like EEU-ledwith EPC,andPrivatesectororcooperativestoinstallgenerationassets,operateandmaintainthesystem,whereEEUwouldretainownershipofthedistributionassets,asmostofthesitesareexpectedtobeconnectedtothegrid.

Inaddition,theGoEhasestablishedPublicPrivatePartnershipsforthetransformationofenergyproject financing and implementation, projects are ongoing in grid energy and efforts areunderwaytohavePublicPrivatePartnershipprojectsinoff-grid,includingmini-gridsinEthiopia.

Asthemarketsizegrows,theEthiopianGovernmentwillalsoexplorepossibilitiesofaggregationofmini-grids to unlock private investment. The government is working to establishworkabletariffs and the EEA has developed a draft of tariff guidelines and methodology for off-gridsystems. Cost reflective tariffs are currently expected to be in the range of 0.30US$/kWh to

59https://www.export.gov/article?id=Ethiopia-Energy


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1.20US$/kWh, according to other countries’ experiences, but need to be validated based onimplementation experiences in different regions to ensure sustainability of theoff-grid sectorandstimulateprivatesectorinvestment.

Lastlyinordertosecureprivateinvestmentinhigh-riskinfrastructureprojectsinruralanddeepruralareas,privatedevelopersneedtobelievethatthemarketwill flourishandthatthestatewill work with them in a supportive manner. On the other hand, governments need to beconfident that the private sector will do business responsibly particularly when delivering aservice,whichhaslongbeenthedevelopmentalmandateofgovernment.

Ethiopia Financing Gap Business Models Off-Grid Energy ... · Financing Gap and Business Models in...

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