Thought Leadership: Scalable Mini-Grid Design Requires Expandable Systems

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Scalable Mini-Grid Design Requires Expandable Systems: Why Modular Technology and Finance are Key to the Sector’s Growth and Sustainability

The role of mini-grids in advancing universal electrification and other associated SDGs is well established, with the World Bank stating that mini-grids offer the best (and lowest-cost) solution to connect many hard-to-reach communities that are presently unelectrified — including 380 million people in sub-Saharan Africa. Toward this end, the mini-grid sector continues to grow and mature, with innovative use cases like e-cooking, e-mobility and other Productive Use of Energy projects harnessing distributed renewables to improve lives and livelihoods.

These efforts focusing on demand stimulation are crucial for achieving mini-grid sector growth, with sustainable site revenues, operation, maintenance and (most importantly) community impact. However, beyond pilots, scalable replication of such demand-side innovations requires time and patience for community uptake. Thus, smart mini-grid design requires expandable right-sized systems with “modular” finance and technology that enable these systems to start small and grow alongside demand. Yet while operators and advocates recognize the importance of this design philosophy, it is not presently common practice due to various hurdles.

Fortunately, new efforts in the sector are beginning to offer solutions. We’ll discuss some of these solutions below, exploring how they’re leveraging modular finance and technology to address persistent challenges to the growth of mini-grid access in Africa.

A FINANCING GAP FOR SUSTAINABLE MINI-GRIDS

Expandable “right-sized” mini-grid design is key to efficient capital expenditure (CAPEX), affordable customer tariffs and long-term sustainability in the sector. Put another way, constructing mini-grids that aren’t used to their full capacity has a cost. Sometimes, that cost is absorbed by the operators, which are already working with thin margins — or even negative ones, depending on grants, subsidies or other support to fill the gaps. Other times, the cost is passed on to users, reducing affordability and shrinking the customer base.

We find that this reality is widely recognized among the sector stakeholders we’ve engaged over years of academic and commercial research at our clean energy innovation company Vittoria Technology, based in South Africa. Yet mini-grid systems today are still often oversized and underutilised. This is largely due to a lack of modular finance and technology options promoting expandable, right-sized systems that can grow at the same pace as customer demand.

That is a fundamental obstacle to building the 160,000+ mini-grids the World Bank has estimated are necessary to achieve universal energy access across sub-Saharan Africa. Furthermore, modular finance and technology are also critical to maintaining each existing system’s reliability, as equipment capacity degrades and community demand increases over time. These needs are particularly vital to consider when looking toward the future uptake of Productive Use of Energy appliances and the growing adoption of practices like electric cooking, agro-processing, cold storage, e-mobility and other exciting uses of renewable energy.

The persistent reasons for mini-grid oversizing — despite the clear rationale against it — include funders’ preference for large investments (grant, debt and equity), overly optimistic demand projections, and the technical complexity of system expansion. The outcome is overpriced, underutilised mini-grids. As most mini-grids developed today are funded by a mix of grant, equity and debt capital — alongside select government and co-op models — this practice has significant long-term financial ramifications. Oversizing a mini-grid means that project is over-financed, and paying back investors is a challenge when the operator’s mini-grid is not generating the projected revenues needed.

The battery component is of particular significance to this problem, accounting for up to 30% of CAPEX, according to the U.S. National Renewable Energy Laboratory and mini-grid developers we have interviewed. This is the single largest capital expenditure, despite declining cost trends in battery production. Reducing the size of this component alone would drastically lower the project development cost, while better matching immediate customer demand. However, expanding battery banks over time to meet demand growth is technically difficult, as new and old batteries don’t work well together. This combination of high cost and technical complexity is what we call the “battery barrier.” Addressing it will help build a sustainable mini-grid ecosystem.

ADDRESSING THE BATTERY BARRIER IN THE MINI-GRID SECTOR

Batteries are a vital component for clean energy mini-grids, enabling 24/7 electricity — even when the sun isn’t shining — and replacing diesel back-up generators, reducing CO2 emissions and environmental impact. If they’re viewed as long-term scalable systems, with sustainable funding for ongoing upgrades, batteries can be more affordable and lower maintenance than diesel generators. But off-grid industry experience has proven that getting this wrong — for example, choosing non-scalable technology or failing to provide funds to upgrade batteries over time — causes reduced reliability, lower customer satisfaction and, ultimately, may lead to customer defection from the system entirely. The recent IEA report “Batteries and Secure Energy Transitions” sums up this risk: “Today, for instance, developers focus on capital expenditure and make inadequate provision for maintenance. This contributes to the unnecessarily large number of off-grid systems that fail prematurely and permanently. For a variety of reasons, batteries are often the root cause of these failures.”

A case of such mini-grid customer fallout over run-down batteries was highlighted by a critical 2022 article in Bloomberg, which cast doubt on the reliability of solar mini-grids in Indonesia due to inadequate battery maintenance and funding. The article makes clear why, from a developer’s perspective, in the absence of reliable financing and technology for upgrades, oversizing mini-grid systems — even with the financial gamble this implies — is better than risking an under-capacity scenario. This is one of many reasons why demand stimulation initiatives have become prominent in the sector. Aside from their social benefits, these initiatives (in theory) allow developers to address the problem of unused capacity in an oversized system. However, our research with mini-grid developers has revealed that in practice, early, active appliance and training programs within a new mini-grid community are often premature — with limited sustainable success. Again, this suggests the best approach is building expandable systems that are right-sized for immediate modest demand, then growing their capacity alongside a community’s journey up the “energy ladder” over time.

Our work has shown that mini-grid developers — a frugal lot by necessity (and often by nature) — are ready to adjust their design practices to improve sustainability and adaptability, but are looking for signals and tools that will support a shift to expandable, scalable systems. Vittoria Technology’s Battery Bank Africa (BBA) model leverages both modular technology and modular finance to offer this support for battery systems — the most expensive and, arguably, most complex part of a mini-grid. Through this software-enabled “Storage-as-a-Service” battery leasing platform, we provide expandable Li-ion battery products at affordable monthly rates. In addressing the battery barrier, BBA combines affordable blended finance offered at smaller, scalable terms with faster turnaround compared to traditional finance sources available in the market. By supporting retrofits (in which old batteries are replaced with new ones), the construction of new mini-grids, and even lead-acid battery system upgrades (adding Li-ion expansions via custom technologies), BBA aims to help mini-grids achieve lower levelised cost of energy and cost per connection, greater adaptability, and better long-term sustainability. Through our approach, operators can more easily navigate this common challenge, replacing failing batteries or adding additional capacity as those needs arise.

One BBA case study is the model’s ongoing pilot in Rwanda, in which we’re leasing lithium iron phosphate batteries to a local mini-grid operator, enabling the expansion of a maturing system’s lead-acid battery bank. Through innovative technology and blended finance, BBA is supporting this mini-grid’s battery upgrade, aiming to curtail the system’s reliance on back-up power sources (originally diesel, now intermittent grid) within the refugee community it serves. Our intervention has enabled the mini-grid to improve service while avoiding large upfront CAPEX, instead shifting costs to a manageable operating expense fee. Further BBA pilot projects will be coming online this year in Rwanda and other markets.

BEYOND THE BATTERY BARRIER: OTHER KEY NEEDS FOR SCALING MINI-GRIDS

Batteries are obviously not the only component of a mini-grid system. They also need scalable solar photovoltaic modules, inverters and grid network components, among other equipment. But these are more straightforward than batteries, with less technological complexity involved in their expansion and replacement over time. Financing those equipment upgrades, however, is indeed difficult — akin to what’s required for battery upgrades — and modular finance solutions are also needed.

Thus, mechanisms like CEI Africa’s “densification” grants present an exciting development. Launched in 2023 in response to mini-grid operators’ feedback, this modular results-based financing approach provides mini-grids with up to $300 per connection for adding new customers and equipment upgrades to existing systems. These grants are a great start, but additional finance tools of this nature are needed to tackle the full breadth of the challenge.

Until then, however, most mini-grid developers that hope to scale their operations or upgrade their equipment are stuck with several poor options — either lumping expansion costs within a larger portfolio raise, chasing one-off competition grants to cover these expenses, or simply running the diesel generator more often (or reducing service) until other solutions emerge. Self-funding is not viable at present, as cash reserves (if any exist) are precious resources guarded for general company operations.

Mechanisms like BBA and CEI Africa’s densification grants represent a growing acknowledgement of the need to change the sector’s system design approach. They are important steps toward a more enabling ecosystem, driving new connections while maintaining and sustaining existing ones. For now, however, they are the exception more than the rule, and the sector needs more efforts like them to truly thrive. When this happens, sub-Saharan Africa — and the world — can more sustainably and effectively transition to distributed renewable energy systems, leveraging scalable, reliable, affordable mini-grids to accelerate progress toward the goal of universal clean energy access.

Authors: Nathan Sermonis is Co-founder and CEO, and Liam Murphy is Co-founder and COO at Vittoria Technology.

Originally published in NextBillion.net