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Case Study: Microgrid Regulation for Energy Access in Emerging Markets

by Powerhive
August 13, 2015

Last month the American Council on Renewable Energy (ACORE) published a report about opportunities and challenges for expanding rural renewable energy access in Africa. The report included a case study about energy sector regulation and how it has an impact on microgrid rural electrification. Powerhive CEO Chris Hornor co-authored the study with Marc van Gerven, VP Global Marketing at First Solar. The full text of the report can be found here.

An estimated 20% of the world’s population—approximately 1.4 billion people—live without access to electricity,1 stifling economic and human development. As governments, international organizations, and companies across the globe strive for universal electricity access, it is clear that microgrids will play a critical role in achieving this goal.

Recent cost declines in solar photovoltaic (PV) and storage technologies have made microgrids the most cost-effective energy access solution in more than half of the world’s offgrid areas, such as sub-Saharan Africa.2

As government agencies and multilaterals have come to realize, achieving energy access goals requires an environment where policy encourages private-sector microgrid development. A flexible regulatory environment can assist in enabling energy access. In addition, policymakers must evaluate the ability of a provider to effectively deliver electricity to the end-user while complying with local standards. Conversely, in markets that lack an established regulatory framework governing microgrids, or that exempt microgrids below a certain size from regulation, providers may find themselves in a position where they are able to pioneer and prove their models, using the results to make the case for microgrids.

Powerhive: A Case Study

Powerhive is a microgrid solution provider in emerging markets, with a proprietary technology platform that streamlines microgrid development and customer management. Powerhive’s experience in Kenya provides a useful case study for identifying mechanisms the private and public sectors alike can use to incentivize and spur the development of microgrids in emerging markets.

With over two years of field testing, Powerhive’s four pilot projects each offer 100% renewable energy to customers who purchase electricity on a pay-as-you-go basis using mobile money applications on their mobile phones.

To test Powerhive’s business model and technology, the first pilot project of 1.5 kW was commissioned in August 2012, catering to a small cluster of residential customers in the village of Mokomoni. Customers in Mokomoni use the electricity for indoor and outdoor security lighting, mobile phone charging, and to power small appliances such as radios and televisions.

The next three sites, serving approximately 1,500 people, were built in summer 2013 in the villages of Nyamondo, Matangamano, and Bara Nne. At 10, 20, and 50 kW, they are capable of supporting larger clusters of users, which include light commercial loads from customers such as welders, carpenters, and millers.

To scale its solution more broadly in Kenya, Powerhive began the process of seeking concessions in 2014. Concessions are an important tool for private-sector companies offering a public good and, in this case, provide the holder with the exclusive right to supply power in a given area for a number of years. By guaranteeing such exclusivity, concessions increase a provider’s ability to attract financing, while being regulated as a utility opens the door to eligibility for government-sponsored incentives.

Powerhive-leveraged data gathered through its technology platform from its pilot projects when it applied for concessions. This data was used to demonstrate the true costs and benefits of electricity provision in remote areas to the Energy Regulatory Commission of Kenya (ERC).

In addition to demonstrating economic, environmental, and quality-of-life impacts, the data also provided proof of the microgrids’ reliability, acceptance by local governing bodies, financial solvency, and safety. As a result, Powerhive was able to show that its microgrids offer a grid-quality service at a reasonable cost in off-grid areas. As a result, in February 2015, the ERC granted Powerhive’s wholly-owned subsidiary in East Africa concessions to operate as Kenya’s first privately held utility company.

This ERC decision set an important precedent in microgrid regulation. The concession will allow Powerhive to generate, distribute, and sell renewable electricity from microgrids to the Kenyan public. As a direct result of the Kenyan concession, Powerhive will significantly scale its off-grid utility service over the next year, constructing 100 microgrids – powered by First Solar’s solar PV technology and operated with Powerhive’s control technology—that will serve 100,000 residential and small business customers. The ERC’s actions illustrate how regulators can unlock private-sector scalability through policy instruments.

As the Director of Economic Regulation for the Kenyan ERC, Dr. Frederick Nyang, wrote, “The Powerhive permit was granted in recognition of the fact that grid expansion is not always the most economical choice to expand energy access; off-grid alternatives have a role to play […] Powerhive has demonstrated that its microgrids are capable of operating in compliance with the prescribed standards for residential and commercial electricity service provision.”

Microgrids: Powerful Impact

Before accessing electricity, typical residential customers in these villages relied on kerosene for lighting and disposable batteries to power small appliances (e.g. radios). They frequently walked miles to central kiosks where they could pay to charge their cell phones. Typical commercial customers relied on diesel generators, which are costly to operate and difficult to maintain. With microgrid access, Powerhive customers have been able to save money while increasing their use of energy services. Customers are now able to light their homes longer to work or to study. They also benefit from increased access to information, entertainment, and connection via radio, television, stereo, and satellite dish. Existing businesses have been able to expand, and many customers have substantially increased their incomes by opening new businesses, which include butcheries, chicken hatcheries, corn mills, and hair salons.

Best Practices for Microgrid Regulation

Powerhive’s experience in Kenya has provided the company with an understanding of the policy levers that can streamline deployment of microgrid solutions, as summarized below. These regulatory best practices will encourage financing and construction of microgrids by private-sector actors across un-electrified markets worldwide.

  • Seek electricity distribution concessions: Concessions for electricity distribution have historically been granted to publicly owned utility companies that use regional scale grid infrastructure. However, regulators must appreciate the role that microgrid service providers can play in delivering affordable access to energy in areas where grid expansion is an expensive undertaking. Concessions incentivize suppliers, while also making projects “bankable” to enable scale.
  • Establish cost-reflective tariffs: Many national energy regulators have implemented fixed tariffs based on the cost of providing electricity to urban areas through the national grid. These fixed tariffs act as price ceilings that prevent the development of rural electrification projects, because tariffs based on urban cost data are insufficient to recoup the capital costs of electrification in rural areas. Regulators should allow energy service providers to set tariffs that are commensurate with the high capital costs of rural electrification. Powerhive’s pilot data and market research have demonstrated that most customers are willing and able to pay for electricity so long as it is priced fairly and below the cost of polluting alternatives such as kerosene and diesel.
  • Encourage risk-reflective rates of return: During the last few years it has become clear that private-sector financing has the ability to fuel a major acceleration in the pace of rural electrification by enabling new off-grid solutions to reach scale. Governments endeavoring to achieve high rates of electrification should allow energy providers to offer their investors risk-reflective rates of return in order to attract the necessary private-sector financing.
  • Plan for future growth: Regulators should give preference to appliance-compatible systems that can power income-generating activities, and to modular systems that can grow easily over time. Regulators also should plan for the future by clearly delineating how microgrids can retain their value when and if grid extension reaches communities served by microgrids. Ideally, microgrids will be able to connect to central grids in the future, providing their communities with resiliency from outages and serving as a generation source for the grid. Powerhive’s success is largely due to the fact that its microgrids offer appliance-compatible AC electricity in sufficient quantities to allow usage growth over time.
  • Streamline regulation: Regulators should amend existing guidelines for grid regulation to better fit the scale of microgrids. The level of red tape required for a multi-gigawatt utility-scale solar project could negatively impact the economics of a community-scale microgrid.

The Powerhive experience in Kenya has blazed a path for microgrid regulation in emerging markets that can catalyze growth of an affordable, clean, modern solution for energy access. If followed, these guidelines for regulators could bring effective microgrid solutions to unelectrified areas around the world that currently face severe limits to development.

About ACORE

ACORE, a 501(c)(3) non-profit membership organization, is dedicated to building a secure and prosperous America with clean, renewable energy.

ACORE provides a common educational platform for a wide range of interests in the renewable energy community, focusing on technology, finance, policy and market development. We convene thought leadership forums and create energy industry partnerships to communicate the economic, security and environmental benefits of renewable energy.

References

1International Finance Corporation, “IFC and Infrastructure,” April 2015, www.IFC.org.

2Africa-EU Renewable Energy Cooperation Programme (RECP), “Mini-grid Policy Toolkit: Policy and Business Frameworks for Successful Mini-grid Roll-outs,” 2014, euei-pdf.org.

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