Mini-Grids, Mighty Power

to serve as a benchmark to measure progress. In the process of writing the report, they interviewed sixty eight organizations and they also included six detailed case studies. The case studies were for Uganda, Tanzania, Nigeria, India, the Philippines and Indonesia. You can see the full report and the data under the publication section at SE for All dot org. That's s E F O R A L L dot org and there you will find State of the Global Minigrids

Market Report. Additionally, it can be found at b NF GO on the Bloomberg terminal and at benof dot com or on b ANF mobile app. Quick reminder, b an EF does not provide investment or strategy advice and you can hear our full disclaimer at the end of the show. I am Dana Perkins and you're listening to Switch It on the b N e F podcast. Now let's hear from Tak and Ulama about mini grids. Hi, Tak, nice to see you as a see you know we'll actually hear you. I guess we we can't even see each

other now, but nice to hear you. And Ulam, nice to have you on the show as well. Nice to be on the show. So we are going to be talking today about global mini grids in the state of the minigrid market. So let's start at the very beginning talk. What is a mini grid so many grey is like small independent PAS system can be either isolated computerly from the main grid or it can be connected to the grid to make it the more context it is a group of intaco have to distributed energy resource its with

load or with loads within clearly defined electrical boundaries. And then these distributor energy resources can be very different kind of technologies are typically the modern minigrates, combined solar energy storage and diseel generators, but they all work as a single entity and typically in the emerging markets, this minigrids is used for energy access in the remote areas where there's completely off gride. However, it is also can be

connected to the main gride. So for example, when the main grid system has some troubles m the milgrid control system can give order to the mitigrate to disconnect from the main grid and the minigrate can continue to operate and supply extacity to the customers. So sometimes it connects into the main grid, sometimes it doesn't, but it could in theory operate completely autonomously. That's kind of the differentiator from my understanding. You mentioned solar storage and diesel generation.

Tell me a little bit quickly about the storage element. So what are we talking about with storage? Is it the lithium my own batteries that were familiar with in cars or is it a different type of battery technology that we're calling upon. Yeah, that's a good question. So

it really depends on markets. But typically in imagine market, which is our main focusting this research, is let us in batteries because the biggest reason is because still cheap and then available in many of the African countries or imagine Asian countries. However, if you look at the high

income countries. It's such as the US waste Adia the reason why own botteries are taking more share, and then we can see gradual uptake of Riffin wine botteries in emerging markets to be integrated into the minigrate as well. So those who listened to this show switched on usually focuses on a research report that we did. Now this this is a really big one. So it's a long, in depth global research report. Tell us a little bit more about what our mini grid research for this report

was focused on. So the main focus is very comprehensive topics to be covered about mini grids, but the essential purpose is to understand what's the latest status of the minigrids for energy access in emagine markets, particularly in South

South Africa, Asia and island nations. And then the reason why I said comprehensive is because, um, there's a lot of information and a clear understanding of what is happening, not only just in terms of market strends, but also the business models, financing policy reguations and impacts and also technologies, and I we need to cover those areas in the research.

Um Hence I said it's comprehensive. Now I know that this piece of research from our standpoint, you know, we we tend to be very engaged with the research that we do. And I don't think I've spoken to anybody who works at be Enough who isn't excited about the projects they get they end up doing. However, I think every now and then we get something that we feel

like it's truly meaningful. And I think doing a project with sustainable energy for all is for us, you know, great honor, and I think this is where I kind of want to take it with, you know, when you guys were given the opportunity to work from this, and maybe we'll pivot to you just because we haven't heard from you yet on the show today. You know, what about this project did you personally find really engaging? And you know, maybe why were you excited to work on

this project? So I originate from the south of Nigeria River State to be specific, that's also known as the Self Self or in the Niger Delta region, and when traveling back home, I see energy poverty every day and the lack of stable, stable power seriously affects people's lives, and where the grid is available, consumers experience frequent power cuts ranging from as much as four to fifteen hours per day. And I think about it, that's four to

fifteen hours of no light at random points during the day. Right, it's hard to get anything done by that. I mean almost everyone relies on their own gasoline or diesel generator if they can afford that of course, Um that's how bad the grid is. I mean almost every household has a switch outside their door where you can basically switch between grid power, so main grid power or your own generator. And that concept is actually unthinkable in the West if

you think about it. So to put things into context in alone, actually Nigeria spent a whopping sixteen billion dollars to power these privately owned generators, and honestly, I really think mini grids or distributed distributed energy systems in general, for example rooftop TV, will solve this problem and provide localized regions with stable power instead of the country relying on one massive, unreliable national grid. And what is it that makes the national grid so unreliable and needing this

distributed source so important? Nigeria has struggled with the grid for a long time. Nigeria has a population of some two million people and in total, the install capacity is probably just over thirteen gigawatts of power, and of that thirteen gigawatts, they probably generate on average less than four gig gigga watts per year as an average generation. I mean, the grid is outdated, there's not enough capacity to go around, and of course there's a lot of political issues as well.

So I would say they're the basic problems, which is basically what's caused people to go to their own private generation. And from the population standpoint, this is one of the fastest growing countries in the world, so in you know, in reality, this is an important problem to fix pretty

quickly because their demand is only to be higher. So from mini grid standpoint, we've established that we definitely think it's critically important um and that there's an advantage here because really these diesel generators are serving almost like a

mini grid for individual homes. So my question is what is the role of diesel generation in the storage and mini grid market, because you guys mentioned at the beginning, and I believe that was Utak, you said that diesel generation still does have a role to play in the mini grid market. So conventionally that mini grads are not really new, but conventionally that many rural communities rely on only diesel minigrades or sometimes hygder mitigrate depending on the

resources are available. But that there a program now is I mean if you if you have to partise, if you want to run These are two narrators to provide existcy. It's expensive and also it's environmentally harmful and then also

for good for health of neither. In the last ten years, technology has become more cheaper, especially solar and battery storage, and also technologies such as control system to integrate and operate distribute to enery resources as a sample entity has become available, so many countries or developers have paid attention to switching. Um those diesel integrates to solar hybrid integrates as it's cheaper in terms of cost of excity and

then it's rest harmful environmentally UM. But diesel still makes the important rule because if you install just solar together with energy stories only, the system can be much bigger and then becomes expensive in terms of capics the initial costs because the minigrates still need to supply sciity to customers during the night when sun is not shining, so that diesel generator still preates the role to provide exacity

even part of the twenty four hours. But if you combine with the sort of hybrid systems, you could potentially reduced round hours of Diger generations. Hence the course of exacity and also the course of diesel fuel would be reduced. So the diesel generation was almost being replaced by the

storage rather than by the soular so to speak. If if we're thinking about it from a transition standpoint, so regarding many grids in emerging markets, so may you had pointed out that you know, having a diesel generator is almost unheard of, and I must say, you know, we've got one in my house in California, but that's only for when you know, you have a massive earthquake and the power goes out, which I will say some of that has to do with well also when I was

a kid and we had rolling blackouts due to end ron, so that that was a totally different story and we've moved far far beyond That's your right, Consistent power is something that we're used to and diesel generators aren't going to start popping up. So these mini grids, this flexibility, this ability to you know, generate locally, store locally and also not lose as much energy, and the transmission distribution

process has some benefits. Do you these many grids and micro grids having the applicability in emerging economies only or do you see them in other parts of the world. So, for example in California where I grew up. So what I'd say, I mean, my focus clearly has been looking at Sub Saharan Africa. Personally, I would say it's for emerging markets where the grid has been unreliable, possibly for the past ten or so years, or even twenty or years,

for example in Nigeria. Having spoken to many of the stakeholders in the industry, be that developers or financiers, all of them seem to be really clear that they don't see the grid getting much better in the next five years. And that's similar for for many of the Subsuan African countries. So when we talk about emerging markets, I will say that many grids can potentially be the future of providing stable power in these emerging markets. Now, the reason why

I say that is because I'll give you one good example. Actually, So at one point I visited a mini grid in again in the south of Nigeria, next to port Ourcots. To be specific, it wasn't a very big one. It was probably around Killer Whatsoso. However, what you find is that the guys it was a fully off grid location. But one interesting thing there was that the community take ownership of the power in a way, they provide security because when they get grid power, they can't control if

it works or not. However, if you have the minigrid on site and everybody has their own, community kind of clock closes that gap. So I would say that that example sort of showed me that once you see stable power and you can operate your business or do the standard things that you need to do, you would want to see more of those systems go up. So to summarize this, I'll see that clusters of minigrids can solve

all the localized problems. If the grid improves in ten years, fine, but in the next five years, I don't see that happening, and I think that minigrids by the way forward in these emergent markets. Let's talk a little bit more about the financing, because you quickly touched upon that. You know, the demand is there for people who want access to electricity, the need for them to have reliable, consistent you know, no,

no fifteen hour blackouts is definitely there as well. But from a financing standpoint, who are building these projects and kind of what are there big economic gains or they largely organizations like the World Bank and the i m F that are going in and doing the projects for you know, another purpose as well. During the report we looked at so we had fourteen funders in the minigrid Funders group and essentially they approved a total of say two billion dollars by the end of February. However, only

had actually been dispersed into the mini grid sector. Let that sink in thirteen percent, which the low number of two billion dollars, right, and most of those funds were directed to African countries. Now, while the picture on the ground is likely to be better than the data suggest, it's clear that there can be significant delays and getting funding and therefore in projects basically moving forward. Right. So

that's on the finance inside. And then I mean there are some possible reasons behind why that there's such a low disbursement rate. Again, I repeat that thirteen of two billion dollars and for example, one complex and lengthy procurement processes in governments to the minigrid market is not mature enough, meaning there's a lack of potential funded fund receivers I developers in the market. And three policy reform to make the minigrid market to be I say, more friendly with

project development and funding timelines. Just don't think, I guess the policy. So policy is probably critically important to get this off the ground. As you point out, So which countries are kind of doing the best at adopting this, I'd say Nigeria. Now it's not because I did this case studies, So just going to say, you're really happy this is the one you know, Just just clear. Look, I worked on the financing section, the economic section, and

the Nigeria case study. But when you ask me that question, which countries doing the best this is actually industry would agree with me. It will be Nigeria. It's I would say, it's a country that has made the minigrid market conditions friendlier towards product development and investment, more sold than others. And basically in twenty seventeen, the Nigerian government introduced a

robust MINIGOD regulation which includes clear grid arrival rules. So it sets up three options for mini good developers for when the main grid reaches their mini grid asset, because one problem developers have always had is okay, you say that the grid may not improve in five years, but

what aboutally improving ten years? Right then you've got to say, okay, Therefore, if I invest money into a minigrid, what's going to happen when the I don't know the distribution company, the national distribution company decides to extend my grid to my local community. And then I would say that the minigrid regulation Nigeria covers this because one, they provide a clear compensation schedule, so they say you get twelve months of

revenue plus appreciated asset value should the national grid take over. Two, developers can export their mini grid electricity to the grid, their minigrid gets recognized as the main grid system. And three operating the minigrid in parallel to the main grid. There's another option. So another point why I say in Nigeria is the government has developed the largest results based finance in mechanism under what's called the Nigeria Electrification Project

also known as the NET or n EP. Now, the total amount of the budget to support solar minigrids under This program is two hundred and twenty million dollars which comes from the World Bank and the African Development Bank. Now, results based financing is very interesting and as I said, we feel like it's the future. Results based financing is where the host government agrees to pay a per connection grant developers once they can prove a minigrid is operational

and provides reliable power to end users. So, in summary, I would say results of based financing is an excellent way of ensuring developers complete their end of the deal before they get the grant from the government and again keeping all parties happy, right because the end user gets stable power. But that's taking on an awful lot of risk on the part of the person building the project

to begin with. How easy is it for them to get ahold of the financing at the end, and how are they able to get the loans to start the project to begin with. This is where we think results

based financing essentially closes the viability gap. So if you can get a guarantee from the government that you are going to be paid x amount of like x percentage of your capex, say six months after what once your projects go online, and you can prove that the operational It's great, right, because then you can go to the lenders, the commercial banks, which actually we have spoken to quite a few commercial lenders that said they really feel that

results based financing will close this viability gap. So once the results based financier sees that actually you have this agreement from the government two to basically cover your capex or to cover a portion of your capex once you've completed the project. So it is a grant cash. You're not going to have to pay this money back, remember that,

So it's different finances, it's a grant. What really makes sense here is that the commercial financier will say, okay, since you've got this guarantee from the government, we can therefore lend you the money for you to carry out construction. So once construction complete, you know you're gonna you're going to be paid within six months, right the I don't know whatever percentage could potentially depending on what the agreement is with the government, you will be paid for each

of those connections and you can therefore pay back the lender. Right. So it just makes the viability of the project far more promising with results based financing, and it gives some sort of guarantee the commercial lenders too, So this is a bit of a path forward that other countries can definitely learn from you mentioned previously. And and maybe let's

pivot over back to you tak Uh. We're saying that, you know, Nigeria that a lot of people are saying that over the next five years, they're not anticipating that the state grid is actually going to expand. I don't know if that's the right way to phrase it, but this minigrid market is a really good place to look. So let's look further beyond the next five years. How

about the next ten years. What do you see the outlook for mini grids in the next ten years, not just in Nigeria, but globally the island nations as well and the other places that you also looked at in

this report. I think the globally, I think the more governments we expect that the more governments are realizing that distributed energy technology is including many grides and the soul of home system for the PRAMO roles for en as the access purpose, because I mean, the one issue in this sector is a roup of governments conventionally thought that great extension is the best way to supply exacity and

a reliable way. However, there are two problems. One it's it's very expensive in terms of building such infrastructure and also secondly in terms of the cost parer ecstacy on ky to about the our basis, it's difficult for rural customers to pay for the extacy because this high cost compared to other distribute energy resources such as minigrations or consist What are we talking about in terms of costs,

like how much more expensive is it? Yeah? We have it actually, so give me immediate collarlesses and in calgated cost of excity for different technology configurations. If you use a soul or hybrid mini grads um, the cost of excity in a hey to about our basis can be between fifty cents and one dollar party about hour. But if you used let's say just diesel generates in the same scenario, it could be more than it could be more than double dot simply because the community uses a

lot of diesel fuels, which is costly. Do we foresee a situation where mini grids cost competitive compared to um diesel, I think is what you're saying correct exactly? So do we foresee a situation where many grids which are cost competitive compared to diesel, but not really when compared to some of these you know, well developed, established large infrastructure

grids like the one i'm recording this podcast on now. Um, do we foresee a situation where they become price competitive close to parity or is it always just going to be more expensive given the level of complexity. So I think that the economics of the many grids of microL

it's quite complex, um depending on where it is. So if I talk about imaging markets, it's definitely cheaper in terms of cost party or our basis, but the program is still it's course, is expensive from the customers prospective. That's why public funding is always very important to make projects possible. But in the context of the country is such as the US Austra area, it's a different story there. It's not only just cost comparison between many grids or

micro grids and the great exist. It's also about the value you get from reliability of texicity. One of the big reasons why some developers are installing micro grids or minigrades in the US is resiliency improvement, because there are in some state there is a potential risk of greater nexiscity is cut down due to the hurricanes or sometimes wildfires. So combination with those of different reasons resiliency in the cost some deripairs, some customers decide to install s to

micro grids. SOAK, you've you've taken a look into the future for us, What is your view on the next ten years for many grids micro grids? So what I'd say is to scale the mini grid market. It is important to have these two things right. So one, it's important to have subsidies as many good projects do have a high risk, as take mentioned earlier, and results based financing is the favorable subsidy as it's straightforward, as we also explained, and again as it also ensures that the

work gets done right. You don't want to give that grants and then all of a sudden nothing's getting done. Number two now, being able to get project financing. This this is something we haven't touched on yet actually, so being able to get project financing for a portfolio of minigrid projects as opposed to a single project, because a single project is too small to attract project financing. So we think that the future business model will be I'm

a developer. I owned say ten or twenty or even fifty or potentially a hundred minigrids under an SPV a special purpose vehicle, and each of those minigrids have a predictable revenue stream. What is project financing. Project financing is being able to lend on predictable future cash flows. So if I can predict the revenue of each of those, say fifty projects minigrids, I can then go to a commercial financier and he can lend me money based on

that future Nash law. So we think that you need to have results based financing on each of those assets as well as project financing to be able to scale the sector upright, because if you think about utility scale projects are usually finance with project financing because you can just carry out bigger deals. But no one's going to do project financing on say a fifty killer what project You're looking at megawatts plus projects to get project financing. And the other thing is there has to be an

availability of public funding. That's very important to attract commercial investors. And finally back to the Nigeria point. If Nigeria's performance based grants work, which the World Bank and African Development Bank are implemented now, there could be more results based financing programs in the next ten years based on what's happened in Nigeria now. So Nigeria in the way is leading, so you see a pretty bright future. It's just there's a lot of criteria that need to be met. Maybe

take some notes. If you're listening and you're thinking about doing these sorts of projects, We've we've got some things that can help you out. So when launching into this report, I think people always when they start to reachsearch research something, they have a few assumptions and let's maybe you know, play a little bit of fact tennis. Here was there one factor finding each of you guys had to close us out today that you found particularly interesting when doing

this project, I found it. Why interesting thing is the large measure energy companies, all your measures and trading houses are participating in this mini greak market as a financials So for example, Shell Total they both invest in some very experienced minigree differ bads who are different playing projects in Africa, and also the Japanese trading houses such as needs Be. She recently told to they all they all

invest in Mani gree different pls as well. So of course still financial as well is very important to support many grades. But with the very very real public funding, we have seen more big private corporate are participating in this sector, which is very a positive news, and I pulled and to push that sector forward. Okay, how about you? So for me, it was basically one I mentioned earlier.

It was the fact that from the Minigrid Funders Group a total of two billion dollars were dispersed as of February, but the fact that only of that funding had actually been were committed, but only were dispersed. So that's a really low number and a lot needs to be I mean, it could be the data again, but that needs to improve, should I say, or to put it in another way, there's money to be spent. There is definitely money to

be spent. And the other point I had was that the fact that it's really obvious that solo solo hybrid minigrids, based on the like the c O numbers that Attacking quoted earlier, it's just cheaper to solar rather than just having the diesel generator and having that run in twenty four hours a day or whatever. It's just cheaper and the final point is that I found it really interesting how results based financing and I keep pushing this point

because honestly, the financier is really the commercial funders. Financiers really want to make it clear that they need to see this. Results based financing is just like magic in a way because it just solves many problems. It solves the problem of people being awarded a contract and potentially taking the money by not doing the work, where results based financing doesn't allow for that. It basically says that, look, I'm going to guarantee you this. I'm a host government,

I've got sovereign guarantees they or whatever. I will give you this money, but you need to prove that your system is providing stable power. So it's really powerful because one issue that you found in Sub Saharan African countries is that you may get someone awarded a contract. It could be to build a bridge, but then some of that contract money doesn't get the funds don't always get

used appropriately, and results based financing fixes this. It makes developers work hard, gives the end user something to be happy about, and then it gives the government some guarantee that these guys I'm giving the money to is going to be used. So we've talked a lot about like the opportunities and solutions as we see them, and I think that's it's always very constructive to think about how we're going to get things done. But let's acknowledge some

of the challenges that exist. So take you know, you have a few I think that immediately come to mind when we were prepping for this. So what are some of the biggest barriers that you see? I think that this is a common challenge for the migrant sucer. So we already we already talked that UM technology is already available the coastal Solar about their stories got cheaper. However, UM.

The reason why many public organizations such as development, development financing institutions and don't agencies are involved are because of the challenge. So the first challenge is there's a lack of regulation that protect cast throws of the migrants. Some people stay that as create cleer lows of the main grate arrival on many grades, which means that if the main grid, which is the main grade, what would happen

to the assets? So the developers always concerned that if there's no cle creer rule, the mity grate assets cannot be compensated by the state owned utilities, or they mean they may have the lower accessy tariffs from the state utility. Unfortunately, at the moment um there's just more than ten countries we have studied have such creal rules, including a Nigeria.

The second reason is customers. So the dominant customers for the milling grids are rural household who typically dely on our culture and then income is typically limited or sometimes unpredictable depending on the weather conditions that affects agricultural productivity. By that it's sometimes difficult for minigry customers to pay for the electricity from sula hybrid miniguies, even though the the cost of the migrant is still competitive against other alternatives.

That second way, yeah, the second reason, just to delve into that a little bit more. Not only is it going to be difficult for them to pay, but my question is how do they go about even requesting this access? How does some of these governments go about actually trying to find out who wants these sorts of projects and is most engaged and interested and supportive of them. So essentially many customers won't have the labor ectacity. But the way the way to find out where they develop the

migrants is different by an organization, the typically government. If the governments think that minigrates it is very important technology to provide exacity UM. Sometimes they they do the investigations and then they stop the candidates. For example the case of Nigeria are initially the government selected the two thousand candidate sites and then after that they listed up. But

also the private companies. Some private companies do that. Example, it's identification of the potential minigrate site is work that many developers do. So they sometimes use the satire images to identify the concentrated communities with commercial industrial customers. Often the case they also visit the candidate communities to check the feasibility with the minigrate projects. So there are different ways. Points three is a typical size of minigrate is very small.

So in the countries like the United States, the microgride mini grade project is typically more than one MiG a lot. This is huge and but they need African case for mini grades for communities that typically less than fift So from the investors point of view, if you invest good single so will hybrid many grades. UM. The retail can be very limited. So unless you have a portafolio of many many projects, it's not very attractive for invest from

the investment perspective. So that's why I'm making ports for you. Is another input on saying um to make the investment workable. So TAK, thank you very much for joining us today. Thank you very much, Thank you for having us. Bloomberg Anya is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor should it be construed as investment advice, investment recommendations, or a recommendation

as to an investment or other strategy. Bloomberginny F should not be considered as information sufficient upon which to base an investment decision. Neither Bloomberg Finance LP nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording, and any liability as a result of this recording is expressly disclaimed.