May 26, 2024

African mini-grid developers demand end-user cross-subsidy from govts, donors to close solar power affordability gap

Oredola Adeola

Mini-grid project developers in Africa have called on Governments and international donors to work out funding mechanisms aimed at cross-subsidizing electricity prices and absorbing variances associated with higher tariffs.

 

This was part of the major highlight of the just concluded three days 7th Mini-grid Action Learning Event, organised by the Africa Minigrid Developers Association and the World Bank, featuring the launching of the World Bank’s Mini-grids for Half a Billion People report.

 

EnergyDay gathered that the event provided the opportunity for developers and donors to delve into the sector’s technical and economic challenges, exchange what is working, and collectively brainstorm innovative ways to move the sector forward.

 

According to Hadley Taylor, Programme Manager, Policy and Regulations,Sustainable Energy for All (SEforALL), the theme of the event centred on scaling the mini-grid market, it also allowed for refreshingly frank discussions around the urgent need to ensure the sustainability of existing mini-grids, particularly across Africa.

HIGHER END-USER TARIFFS

 

The participants at the event observed that mini-grid companies in Africa have continued to face mounting political pressure regarding end-user tariffs, exacerbated by macroeconomic circumstances and devaluing local currencies.

 

Speaking on the impact of the higher tariffs on the mini-grid sector, Taylor said, “In the early days of the mini-grid sector, end-user tariffs – the price paid by consumers per kilowatt hour – were benchmarked against the avoided costs for traditional fuels and modes of power.

 

“In many cases, this approach is even followed in the tariff calculator model that is submitted for regulatory or funding approvals.

“But today, since there has been an increasing number of mini-grids in operation, avoided costs are not the most commonly cited comparator.

“Instead, consumers and politicians focus on how mini-grid electricity prices compare to those of the national grid, or between mini-grids themselves,” Taylor said.

 

The SEforAll Programme Manager also noted that a key discussion throughout the three days of the event was whether framing the issue of the comparatively high end-user tariffs is in fact a question of affordability or rather perception.

EnergyDay gathered that the concern of the developers was based on the reality that most rural and remote communities are asked to pay electricity tariffs far higher than those connected to the national grid.

It was observed that national utility companies enjoy lower benchmarking tariffs from policymakers while also benefiting from a multitude of subsidies and bailouts to keep the lights on.

The operators at the event emphasised that based on the unfair relief given to the operators of the national grid, those in the mini-grid sector cannot escape the tariff comparison in public perception.

EnergyDay observed that the World Bank’s report targets a USD 0.20 per kilowatt tariff for mini-grids end users which is continually benchmarked against the national utility tariffs.

The participants agreed that mini-grid companies should indeed be able to charge cost-reflective tariffs, otherwise, the sector will collapse.

In view of the prevailing issues of the higher tariff vis a vis cost-reflective charges, the mini-grid developers therefore called on Governments and donors to come together to work towards subsidizing and in some cases even cross-subsidizing to improve equity in electricity pricing, regardless of technology, relieving the burden from project developers to absorb the variance.

LOCAL CURRENCY FINANCE

Developers at the event also identified local currency financing as another missing link in the financing landscape for mini-grip operators.

Emphasising the challenge in the context of macroeconomic challenges, they observed that the ability of mini-grid developers to access financing in the same currency that tariffs are paid is of utmost importance.

They noted that some partners such as the Global Energy Alliance for People and Planet (GEAPP) in Nigeria and Green Growth Fund have started to address this issue, but cautioned that there is still a large gap to fill.

According to them, the finance community must come together to understand how to leverage local currency if the mini-grid sector is to prove sustainable through the current economic crisis, much less scale up in the future.

NATIONAL INTEGRATED ELECTRIFICATION PLAN AS AN ENABLER

Highlighting a major thing that the government need to do to help their mini-grid business grow, the mini-grid developers also called for clear and reliable integrated electrification plans.

Developers cited delays and added costs caused by countries having multiple and sometimes conflicting electrification plans designating the communities for mini-grid electrification.

It was observed that sometimes a developer will already have a project approved based on one plan, only to have a new electrification plan introduced and require new approvals.