Green mini-grid market development program : access to finance business line

Jan 04, 2019

Source/author : African Development Bank & Economic Consulting Associates

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Executive summary

Mini-grids as commercial enterprises, in developing countries, operated by private entities, with independent financial support, that have a goal of being profitable, are relatively new and unproven. As such, the market for financing mini-grids contains many uncertainties and untested business models.

Mini-grid financiers are considering multiple investment products and approaches, with developers requiring a range of types of support. Each has different characteristics, appropriate for different circumstances. The variants include: debt v equity; early-stage v long-term; project finance v balance sheet; international v domestic; commercial v charitable; project v company. The complexity is compounded through the influence of grants and subsidised funding.

Financiers active in Sub-Saharan Africa are unfamiliar with the risks involved in the mini-grid market, as it doesn't properly approximate markets with which they are more familiar, eg, solar home systems and grid-connected renewable generation. As the market is still developing, the risks are not yet properly priced in returns observed for financiers. Financiers remain more likely to invest in opportunities they understand with risks that are reflected in the returns being realised.

Financiers can benefit from increasing their understanding of mini-grid regulatory frameworks, which determine the level and profile of returns available. They determine the costs that an operator can recover, and the timeframe for doing so, which dictate potential returns to financiers. Frameworks set out how to treat subsidies received, which are typically to directly benefit customers rather than financiers. The value of a mini-grid sold when the grid arrives will likely follow an established formula based on the value of the assets.

International investors have minimum investment size thresholds, typically no lower than $1 million. With minigrid investments usually well below this (for a single project), it is difficult to attract international investors, Packaging multiple sites into a single investment could allow an investment to pass this threshold and make the investor's transactions costs more efficient for the size of the investment.

Forecasting customer demand for electricity services is critical for calculating tariffs, and therefore for cash flows and financier returns. Financiers can benefit from understanding the processes for developing load forecasts, and the risks of over-estimating or under-estimating loads.

All financiers require financial models of forecast cash flows and returns to investment. These models are also used by developers, regulators, and donors. While financiers will likely build their own models, a degree of standardisation of financial models can assist less sophisticated stakeholders and increase the transparent transfer of information between all parties.

A web-based platform can deliver materials to a wide range of financiers very cost effectively but lack the benefit of personal interaction. Classroom-style workshops allow interaction, and discussion and networking benefits, but can be overly time consuming. One-to-one training is costlier but can be very effective in working through materials at an appropriate pace. Transaction support following high-level introductions will cater to senior managers with limited time for training workshops but require costly expertise. All training options can be considered, with the chance to utilise the same materials across multiple approaches.

We have had discussions with a selection of potential service providers, including universities, web-based platform providers, and transaction support advisers, all of whom are already engaged in supporting the mini-grid market, and would be willing to provide further targeted support for financiers alongside their existing mini-grid training.

Most stakeholders are already familiar with slide decks, available online or presented in person at workshops. Online slide decks can be enhanced through recorded audio narration. Many of the requirements identified can benefit from practical exercises, eg, allowable cost determination, tariff calculation, load and financial forecasting. These can be made available online and in workshops. Other materials can be developed on a bespoke basis for use in one-to-one training sessions and transaction support.

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