Integrating isolated mini-grids with an IDF-compliant regulated distribution sector: a long-term perspective towards universal electricity access

Abstract

Renewable energy mini-grids are playing an increasingly important role in advancing the electrification process in many developing countries. Significant steps have been taken by governments, regulators and development finance institutions to create conditions for the private sector to scale-up deployment of mini-grids in areas where grid is unlikely to expand (at least in the medium- to long-term) because it is not the least-cost option - sites too far from the main grid, with too low and disperse demand - or because of the dire financial conditions of the distribution company and the subsidized tariffs render grid extension an unviable proposition. Under the present conditions, in most rural areas in low-access developing countries the three modes of electrification (on-grid, mini-grids and stand-alone systems) coexist and are largely developed in silos. The current plans to roll-out stand-alone and mini-grid solutions will continue this trend. In particular, mini-grid focused initiatives based on the Results-Based Financing (RBF) approach1, such as the Universal Energy Facility2, can mitigate some of the administrative risk associated with accessing financing support and components procurement hurdles and inefficiencies presently plaguing private mini-grid companies in developing countries. Being subject to light-handed regulation or no regulation at all, the deployment of mini-grids under this kind of arrangement can be fast, with obvious advantages for the yet unserved population. However, with a limited track record, concerns may arise about the long-term inclusiveness (i.e., leaving no-one-behind) and permanence (i.e., financial sustainability, vocation) outcomes of such approaches once they are left to their own devices to meet demand growth over the project lifetime and to replace worn out components. The Global Commission to End Energy Poverty (GCEEP) has deliberated, and widely supported, the adoption of the Integrated Distribution Framework (IDF)3 as an ideal first solution to achieve universal access to electricity efficiently and sustainably. The IDF proposes that an "entity" (comprising one or more public and private actors) must be responsible for undertaking the distribution activity in a given area (under an investment-worthy contract like a concession) to ensure universal coverage through the optimum mix of the three electrification modes, which will dynamically evolve - as demand grows and the grid extension segment becomes financially viable - towards a higher proportion of the grid extension solution. It aligns with the view that over the long-term, the distribution sector in all low-access countries will need to converge to the well-tested regulatory principles of distribution business i.e., long-term remuneration schemes based on a cost-reflective revenue requirement for all electrification modes. However, the IDF requires a more complete regulatory support and a comprehensive business plan covering all electrification modes, compared to targeted approaches to scale-up mini-grid solutions (e.g., through the RBF) and its implementation will be necessarily slower. Would it be possible to take advantage of the strengths of both approaches, while minimizing their weaknesses? This paper explores the point of convergence between measures to rapidly scale-up isolated mini-grid development in unelectrified areas, and steps taken towards an IDFapproach in the distribution sector broadly. Rather than viewing the two as conflicting approaches, given the longevity of electricity assets and distribution activities, the paper argues that the design of isolated mini-grid programs could integrate elements that provide the building blocks for the potential integration of isolated mini-grids into a regulated distribution business. Anticipating and planning for the transition will help address potential regulatory risks, internalize the transition in mini-grid business and financing models, and support a symbiotic co-evolution of the three electrification modes.