Financial & operational bundling strategies for sustainable micro-grid business models

Sep 21, 2018

Source/author : United State Agency International Development & Energy for Impact

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An estimated 1.1 billion people—roughly 600 million of whom live in Sub-Saharan Africa (SSA)—still lack access to modern electricity services.1 Achieving universal electricity access by 2030 is expected to require investment of roughly $45 billion annually—more than half of which is expected to be in microgrids2 and isolated power systems.3 Investment of this scale, however, is unlikely to be met by governments and donors alone, which is why successful mobilization of private investment is so important.

The micro-grid industry in SSA is at an important inflection point. Across the continent, pilot micro-grid projects have been launched and some developers have started to achieve meaningful levels of deployment. Lessons learned from those successful developers and the donor- and government-driven programs point to the critical role of streamlining operations and using novel approaches to financing to increase the growth of the sector. As with any industry, operational and financial economies of scale are critical for long-term viability.

Different approaches to business models for micro-grids are being implemented across SSA. This diversity of approaches reflects the level of maturity of the industry, but also is an artifact of the variety of different contexts in which micro-grids operate. This report begins with the different micro-grid business and financing models currently being used, which helps to contextualize applications of bundling.

At its simplest, bundling refers to combining projects or different aspects of projects into a portfolio to improve operations and profitability or to improve ability to access competitive funding (e.g., by lowering transaction costs, mitigating risks through diversification, reaching an investment size that is attractive to more financiers). Operational bundling is covered first as a means of making micro-grids and the developers that build them into more bankable investments. This includes everything from standardizing performance monitoring to automating distribution-system design to consistent and clear customer agreements.

As the industry increasingly streamlines operations, new opportunities emerge for the second category— financial bundling—as the risks and returns for micro-grid projects and developers become more predictable and the value proposition becomes clearer. Financial bundling includes everything from financial pooling mechanisms—including funds for micro-grid growth and end-user financing—to financial products for de-risking micro-grid investments.

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