6 ways to reduce the cost of mini-grids from $0.60 / kwh in 2018 to a $0.23 / kwh

Sub Saharan Africa has made great strides in recent years towards universal electrification. Many countries like Ethiopia and Uganda set ambitious goals of 100% of population with access to electricity by 2030, and Kenya has targeted 2022 for the same.

In order to hit these ambitious targets, no doubt mini grids will play a large part in reaching some of the rural populations who live far from the existing distribution grid, but in great enough density to make a minigrid feasible.

When trying to achieve universal access to electricity there are generally three options:

  1. grid extension,
  2. localized mini grids for power generation and distribution within a small area of a certain number of independent off takers, and
  3. stand alone solar battery solutions to serve individual homes or needs.

An analysis of the cost of grid extension, mini grids, and stand alone solar-battery systems shows that there is a threshold of distance from the grid and population density that makes a minigrid the best option for electrification. Distance from main grid lines makes grid extension too expensive, and population density makes a localized mini grid with distribution more cost effective than individual solar-battery systems for individual consumption.

According to the Energy Sector Management Assistance Program, ESMAP, in order to achieve universal access globally at least cost, 490 million people should be served by 210,000 mini grids, most of which should be solar-hybrids, and that this would require an investment of $220b. And that as of 2018, 47 million people are connected to 19,000 mini grids, mostly hydro and diesel-powered, at an investment cost of $28 billion. Furthermore their report showed there were 7,500 mini grids planned, mostly in Africa, mostly solar-hybrid, connecting more than 27 million people at an investment cost of $12b.

This leaves a huge gap to be covered by the minigrid sector within the next decade.

But there are certainly some large obstacles to overcome. The first and foremost of these is that minigrids are still too expensive for most of the populations that need them.

In 2018, a report was written by a non profit organization called the Rocky Mountain Institute, who describe themselves as dedicated to research, publication, consulting, and lecturing in the general field of sustainability, with a special focus on profitable innovations for energy and resource efficiency. The report was titled Minigrids in the Money: six ways to reduce minigrid costs by 60% for rural electrification.

In this report, mini grid costs from around the world are assessed and analyzed, along with target figures that could be realized by 2020. Their analysis identified a pathway by which the cost of minigrids could be reduced by 60% by 2020, though admittedly this is a generalized approach that may vary according to the specific market and company strategy.

This report is relevant again as we see a continued interest in funding for minigrids, and as we have now reached the midpoint of 2020 and we can see if their predictions were accurate and how their advice can be applied for success today focusing on East Africa.

The report came up with an average LCOE for a well-run minigrid at $0.60 /kwh.

By analyzing the cost categories and amounts and understanding them in context, the authors identified 6 key areas that present cost savings opportunities in minigrid development, construction and operation.

These six areas and the potential for cost reduction according to their analysis are shown in the table below:

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Here is a visual representation of the finding of this report:

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The first and largest cost saving opportunity is available by reducing the cost of hardware and equipment.

According to their analysis, this can be done with the following four recommendations:

  • a. Leverage ongoing hardware cost declines
  • b. Pursue bulk purchasing and streamlined procurement
  • c. Use standardized designs and simplified construction methods
  • d. Use a “minigrid-in-a-box” approach

The cost of $0.60/kwh includes certain assumptions about equipment costs. The cost of panels was at $0.30/W, Now in 2020 you can find panels in Kenya at this same price or lower. You can beat this price further by taking advantage of economies of scale and ordering large quantities of panels.

The report also assumed lead-acid batteries at a cost of $175/kwh in sub saharan Africa. Lithium-Ion batteries are a big improvement on lead acid batteries for several reasons including a greater depth of discharge, longer life cycle and lower maintenance cost. Advances in super capacitor technology also shows signs of promise developing longer lasting storage solutions.

The advice is clear, and not surprising: EPC’s should leverage new technologies and alternative designs to increase efficiency and lower cost, thereby achieving lower LCOE. Building a strong relationship with a reliable supplier is a great way to reduce costs by allowing bulk purchases. By finding a supplier who can supply multiple items across the bill of quantities can also save a lot of time and money for EPCs.

Working with designers and developers in the global supply chain can lead to reduce costs and better delivery time.

Seeking minigrid designs that are innovative and high quality can provide lower capex and opex. Including working towards a standardized “mini-grid-in-a-box” approach where the equipment is supplied in a container and then the container becomes the housing for electronic equipment. Surprisingly, using the container to house the equipment can often be cheaper than building custom units for each minigrid.

The second largest opportunity for cost saving is in the area of efficient load management. An ironic problem that is often an obstacle for scaling up of minigrid development is inadequate demand.

Many rural communities who are far from urban life consume disproportionately low electricity. And their load profile often does not match the generation load profile of solar PV. A rudimentary load profile of such rural and residential communities shows a small peak in the morning hours and a large peak in the evening hours with a low baseline during the day when solar energy is most available. Solar PV provides most power at the day time hours when sun is most intense. This load profile mismatch results in inefficient electricity production and consumption which drives up the LCOE.

A solution to this problem is to try to stimulate demand with productive daytime use.

The figure below shows the baseline load described above as a dashed line with a small peak in the morning and a small peak in the evening, and the more desired load as a blue line with higher daytime demand.

Successful minigrids have tried to position themselves next to some high consumption, machinery, factory or industrial consumer, thereby consuming more of the cheapest electricity and lowering the LCOE. These could be hospitals, business districts with shops, schools or other consumers,

Another approach is to work in tandem with communities and finance institutions to introduce productive use loads during the daytime to provide employment and an efficient use of available electricity. This could be gran mills, cassava grinders, welding equipment, sewing machines, refrigerators, water pumps, and other important devices that can spur development.

A new example is to bring desalination machines that can purify contaminated and salty water by consuming some of the daytime production from solar.

Regardless of the method, the results show that by increasing the daytime load factor, the LCOE reduces. Or put another way, as productive use increases the load factor, the electricity becomes more affordable for everyone.

The third largest cost saving opportunity identified is effective customer management. However, the study assumed that effective customer management would result in more effective load management—therefore half of the savings attributable to more efficient and productive daytime consumption was attributed to this category. So actually productive daytime loads and increased load factor is a more significant factor for low LCOE than their percentages show.

Effective customer management can also lead to greater customer acquisition and customer retention leading to lower costs.

The fourth largest cost saving opportunity is project development costs. This has cost saving area has benefitted with greater access to satellite data, geospatial technology, better computer simulations and standardizing the equipment and installation as much as possible.

Using this data to cluster minigrids within a concentrated area can also save a lot of money in gathering data, feasibility studies, maintenance and more.

But standardizing equipment was projected to have the greatest cost reduction result. This doesn’t mean standardizing on an old design or equipment list, this means finding the best equipment and suppliers as described in the first cost saving area, and then standardizing the minigrid design and installation as much as possible to reduce variable costs in the engineering stage, site preparation and procurement.

Other recommendations are to work with local partners who have experience within each region, including to train and hire regional managers, Local expertise can leverage existing customer relations, provide a better understanding of potential productive use loads that can drive economic development and more.

The fifth largest cost saving opportunity identified is affordable financing.

Commercial loan rates available for minigrids in sub Saharan Africa are still too high for scaling minigrids effectively, at around 15 to 20%. Most existing minigrids have been partially funded through grants or subsidized interest rates. Through a more favorable blend of debt and equity, the report says that the weighted average cost of capital for a minigrid could reach 9%.

Some recommended actions to work toward this goal include working with suppliers and standardizing equipment designs as described above. Also recommended is to pursue additional financing to include machinery and productive use equipment thereby helping customers increase demand and providing diversification to investors.

The sixth largest cost saving opportunity identified is supportive enabling policy. A good enabling policy can make business easier by lowering costs and delays. However as I write this Kenya is on the verge of revoking the tax exemption on solar goods. If this is true we can say the enabling policy has gone in the wrong direction, but it is too soon to make an evaluation of this new development.

In conclusion, the greatest cost saving opportunity lies with the equipment and design process. EPCs should pursue new minigrid designs that leverage the latest developments in technology. This includes evaluating different manufacturers and different components within the minigrid.

In tandem with this evaluation, EPCs should look for global suppliers who can provide savings by supplying equipment in bulk or wholesale, and who can also supply several items in the bill of quantities, thereby providing savings on time and shipping costs. Such suppliers may also be able offer engineering and design support thereby providing additional value and cost savings.

The other major opportunity for cost savings is in stimulating load demand to more closely fit the solar production load profile. We have provided a few suggestions in this article to provide a starting point, however EPCs will have to get creative and innovative to find effective and scaleable solutions.

But the point remains, that minigrid costs are declining and those solar EPCs who stay adaptable will thrive in this decade.