Southeast Asian development: The IEA’s 2011 World Energy Outlook estimated that nearly half of all unelectrified rural areas would be most economically served by mini- grid solutions. Given that much of Southeast Asia is made up of archipelagos, mini- grids look set to play an especially prominent role in this region.
Three statistics sum up the future of renewable energy development in Southeast Asia: a doubling of electricity demand by 2025, 130 million people living without electricity, and a goal of 23% of the primary energy supply to come from renewables by 2025. A doubling of electricity demand is driven by rapid economic development in many areas and a modernization of energy consumption.With 130 million people without electricity, this means a potential transformation of millions of lives and an untapped market for electricity services. A 23% renewable energy goal shows the government support to prioritize renewable energy to seize these two opportunities.
Across Southeast Asia, mini-grids take on a variety of sizes, operating in varied circumstances, and serving different customer needs. Small mini-grids power remote villages, medium-sized commercial mini-grids power resorts, plantations, and mining operations, and large-scale mini-grids power entire island population centers. Each use case faces a unique set of challenges that are being overcome with varying degrees of success.
Despite the variety in mini-grid systems, burdensome and unclear regulations and a shortage of initial finance remain the most common challenges for all mini-grids across the region.
Myanmar is proving to be a promising market for mini-grid development. Basic financial and governmental infrastructure is still being established, yet there is a high demand for electricity, as 70% of the population is still not electrified. The civilian government led by Aung San Suu Kyi has prioritized the provision of basic infrastructure to the nearly 65% of the population in rural areas without these services.
A 2014 electricity law has helped to streamline the regulatory process for companies trying to set up mini-grids in remote areas. Permits are available for electricity generation under 30 MW, and low license fees exist for distribution projects below 1 MW. Still, by far the biggest challenge communicated by mini-grid developers was a lack of clear administrative processes, laws, or regulations.
In 2014, mobile phone penetration in Myanmar was only at 10%, the lowest in the region. The government is targeting 82% coverage in five years when more than 50% of customers will be off-grid. The expansion of telecommunication towers into the rural areas offers the opportunity to create mini-grids that serve both the village and telecom towers.
Micropower International, a mini-grid developer, is taking advantage of the opportunity presented by telecommunication towers to construct solar powered mini-grids that serve both the cell tower and the rural villages in the surrounding area. Micropower International is currently developing more than 50 mini-grid projects totaling 5 MW. Almost all of the systems serve a cell tower and one or more rural villages.
By signing a long-term contract with the network provider, Micropower International can lower the risk associated with providing power to rural villages. The combined load from the cell tower and village increase the mini-grid capacity, which in turn lowers the cost of electricity for both the village and the cell tower. Alakesh Chetia, the CEO of Micropower International, told pv magazine that solar mini-grids can reduce the operating cost of cell towers by more than 20%. The village also receives electricity at rates lower than what they were paying for energy alternatives like diesel generators or solar home systems.
The mini-grid systems are around 100 kW in capacity, with 30 kW devoted to the cell tower and the remaining 70 kW to the village. Investors are often hesitant to back village mini-grid projects because of the risk that villagers won’t be able to pay for the electricity. The reliable load from the cell tower provides a consistent revenue stream that decreases the overall risk of the project, making the mini-grid more attractive to investors.
Micropower International is utilizing an Energy Service Company (ESCO) business model, by providing electricity services to commercial and village customers. In this business model, the commercial customer is referred to as the anchor tenant. By signing a contract to provide power to a large number of locations owned by one commercial entity, the developer can lower the transaction cost, which is one of the main challenges in deploying small-scale village mini-grids. The new supply of reliable electricity can spur development in villages as the electricity allows villagers to be more productive at night through lighting. Villagers can also utilize the electricity to power productivity enhancing appliances and machinery.
Chetia believes that mini-grid technology has transformative potential. “The business innovation of pre-paid mobile phones has allowed even the poorest villagers to communicate with who they want when they want to. We see the same thing happening in electricity with pre-paid solar. No community need be too poor or too remote to have electricity,” she said.
As with all village electrification efforts, one of the main challenges Micropower International faces is the perceptions and educational levels of rural communities. Considerable resources must be devoted towards skill development to maintain the remote infrastructure. The developer also needs to take into account the local cultural values in how it does project siting, payment collection, operations and maintenance, and any other touch points with villagers.
Most mini-grid deployment in Myanmar will be centered on electrifying remote villages and infrastructure. In Indonesia and the Philippines, the large island chains open up the opportunity to also integrate solar into larger, utility operated mini-grids.
Indonesia has more than 600 isolated grids, around 150 of which are over 50 MW in size. Many of these island grids are powered entirely by diesel. Integrating solar power, biomass, or small-scale hydro is an effective way to lower cost and eliminate fuel transportation. With 60 million Indonesians across 12,500 villages currently lacking access to electricity, there is an enormous opportunity here to use solar powered mini-grids to electrify villages.
Similar to Myanmar, the regulatory environment remains one of the main challenges for mini-grid deployment in Indonesia. Any assets touching the grid of state-owned utility Perusahaan Listrik Negara (PLN) require direct approval from PLN. Private companies can sell generation equipment to a customer on a PLN grid, so long as the generation equipment doesn’t export electricity back into the grid. ESCOs are allowed to sell power directly to customers if they are off the PLN grid. However, if the ESCO is inside the territory of one of Indonesia’s energy cooperatives (ECs), the ESCO must get prior approval from the EC, even if the ESCO’s assets are not connected to an EC’s grid.
Rural areas in western Indonesia, which have a high industry presence, are among the most attractive areas for mini-grid development. The industries provide anchor tenants for ESCOs, and the relatively higher population densities and economic activities allow for higher disposable incomes than in other regions of Indonesia. The low population densities in the eastern islands are more challenging, as the cost of power distribution can be very high.
Andre Susanto, a clean energy consultant at PT Inovasi Dinamika Pratama, states that there are several different business models being tested. Pay-as-you-go schemes where villages are charged by the kilowatt-hour (kWh) have been used across Indonesia. The government has also held tenders for mini-grid construction with six-month to one-year maintenance periods. To better manage the issue of long-term maintenance, Susanto worked with the government to develop a local team to maintain the system and collect monthly fees of around $2-8 from each household. This fee paid for the local operation and maintenance to clean the system and take responsibility in reporting system failures. Take or pay models have also been tested, but the low economic activity in the location wasn’t suited to this model.
Many potential anchor tenants exist in Indonesia, from telecom towers to mining camps, lumber mills, pulp and paper factories, and food processing plants. Singapore-based startup Canopy Power is building a track record with commercial businesses that they will use as a foundation to expand into village electrification. Canopy power’s current business model involves selling turnkey mini-grid equipment to off-grid commercial operations as well as providing professional services across the value chain. Sujay Malve, the CEO of Canopy Power, notes that “few players have all the expertise to complete a mini-grid project from start to finish. Canopy power can provide fully integrated solutions across the value chain.”
With diesel prices around $1 per liter, the cost of generation for commercial mini-grids can range between $0.35 and $0.40/kWh. The payback periods for integrating solar into diesel mini-grids is between four and seven years. Solar allows for a 25% reduction of diesel consumption – deeper reductions in diesel use are possible with battery storage. The payback period for solar plus storage is still around four to seven years, but the capital expense is much higher. Solar plus storage can allow for a 70% reduction in diesel consumption. Since storage is the most expensive technology in a hybrid mini-grid, Malve predicts that the declines in the price of storage will ensure that solar plus storage will become the more compelling technology offering.
Malve notes that one of the challenges faced by startups executing an ESCO business model is the large up-front investment. Building a mini-grid to sell electricity as a service requires long-term, deep-pocketed investors. Establishing credibility with these kinds of investors requires a long history of well-executed projects, especially in regions with high regulatory risk.
While finding project investors can be a challenge, the financial regulations in Indonesia are an even greater impediment. Projects 10 MW in size and above allow for up to 95% foreign ownership, but foreign ownership is limited to 49% on projects from 1 to 10 MW. Below 1 MW, the law prohibits foreign ownership entirely. This presents a challenge, as many large commercial mini-grids fall below the 10 MW range and nearly all small island mini-grids are below 1 MW. This necessitates finding a local partner to own 51% to 100% of the project.
Though a more straightforward transaction, selling mini-grid equipment directly to commercial customers or island utilities is not without its own challenges. Most turnkey mini-grids that Canopy Power sells fall into the $500,000 to $2 million range, which is less than the $3 to $5 million minimum transaction size for many investment funds. Finding financing for projects around this size is a challenge in most solar markets around the world, though certain funds have taken notice of the opportunity in this funding gap. Malve observes, “instead of investing $10 million in a utility-scale PV plant with a 10% return, funds are investing smaller sums into mini-grid projects earning over 20%.” Organizations like the ADB have also become aware of the financing gap and are working on new funding solutions, indicates Malve.
The motivations for mini-grid development in the Philippines are similar in many respects to Indonesia. Only 22 of the 233 off-grid utility regions have 24/7 electricity service, 70% have only eight hours or less of electricity per day.The government reports that as of 2014, 83% of households were electrified and aims to bring that to 90% by 2017.
Unlike Indonesia, the regulatory environment in the Philippines is easier to navigate and laws on foreign ownership are more straightforward there. Foreign ownership is limited to 40% for all system capacities, though there seem to be some legal loopholes that developers can use to circumvent this restriction.
The government has played a supportive role in setting up tenders to add renewable energy onto the large island mini-grids, though the tenders have so far attracted limited interest from the private sector. Michael Vemuri, Chief Advisor for Renewable Energy at the GIZ, explained that the lack of technical expertise among government energy agencies about hybrid systems leads to a lack of interest in public tenders. GIZ has supported the National Electrification Administration over the last 18 months in building capacities on the technical aspects of integrating renewables into the grid and on how to design high-quality tender documents.
In addition to integrating renewable energy into the existing mini-grids on large islands, private companies can work in partnership with small electric cooperatives to generate and distribute electricity on small island grids.
The ADB supported a feasibility study of adding solar plus storage onto a diesel grid on the island of Barangay Cobrador in Romblon province. Fishing, boat making, and small marble industries make up the economic activities in the village. The island has one elementary school, a health center, a day care, and 15 streetlights. The 15 kW diesel generator powers these facilities as well as 138 of the 234 households for eight hours from 4 to 6 a.m. and 5 to 11 p.m. The standard tariff is PHP 30($0.61)/kWh, but the true cost of generation from the diesel is PHP 68($1.37)/kWh. The addition of 30 kW of solar and 175 kWh of lithium- ion batteries, with financial assistance from the government, brought the standard tariff down to PHP 11 ($0.22)/kWh.
While the feasibility study helped to lay a pathway for small villages to add solar to their grid, progress has been slow. Powersource, a Philippines-based mini-grid developer, cites the need for a one-stop- shop for regulatory permitting. Electrifying a small community now requires two levels of approval: one from the regional and local governments, and a second approval at the national level. These extra layers of bureaucracy increase transaction costs and development lead times, limiting investment capital and private sector interest in mini-grids.
Susanto and his team have audited over 200 mini grid systems and surveyed over 100 communities. From this experience, Susanto reflects, “technology is not a barrier. The business model is not a barrier. There are enough technologies and business models out there that this is not a concern for implementation.” The main challenges in the region are the slow and unclear regulatory policies and a shortage of financing. As the sector matures, well-developed operation and maintenance systems that work with the local culture and available resources will be essential to long-term profitability.
Despite these challenges, developers are finding ways to overcome the varied challenges inhibiting the growth of mini-grids in Southeast Asia. Whether it be the lure of millions of potential customers or the desire to provide better livelihoods, companies will continue to pursue mini-grid development. And as solar and storage continue their rapid cost declines, the vision of no villager being too poor or too remote for electricity is becoming more and more a reality.