You would think that installing mini-grids in rural parts of Nigeria would be the solution to the darkness caused by an inefficient national grid. However, that is not the case. Instead, too many mini-grids have become commercial failures.
A mini-grid is a small scale integrated system which has the capacity to both generate and distribute electricity within a local area, without relying on the national grid. In Nigeria, mini-grids can generate at most 1MW of electricity (compared to the national grid generation capacity of 12,000MW), which predominantly comes from solar power but can be hydro or diesel-based.
The formative years of the Nigerian mini-grid system
The first wave of mini-grids in Nigeria were grant-funded by international organisations like the World Bank and the UK's Department for International Development (DFID). The market has gradually become more commercial in the last decade but the high cost of mini-grids means there is still a reliance on donor funding.
The growth of the market can be traced to the role played by the Rural Electrification Agency (REA) set up in 2005 to lay down a roadmap and framework to ensure rural communities have access to reliable and affordable electricity. And as nothing in Nigeria can thrive without an association, the association of mini-grid developers (Nigerian Chapter) was launched in 2018, alongside other bodies like the Renewable Energy Agency of Nigeria.
It is unclear how many mini-grids have been set up, given the paucity of data in the space, but most of the systems installed have either been pure solar mini-grids or solar-diesel hybrids (with and without batteries). In Gbamugbamu village in Ogun State, Rubitec Solar installed a mini-grid that serves nearly 300 households and 150 businesses, using a mix of grant and equity investment. Up North, the Bissanti village mini-grid project is designed to serve over 1,500 people in Niger State. And in the red sand soil of the east, a Green Village Electricity (GVE)-funded system completed an installation in 2014 for the people of Egbeke town in Rivers state, serving almost 2,000 residents.
In October 2019, the Federal Government partnered with the REA on a World Bank-funded project to install solar home systems and mini-grids to underserved parts of the country. Lolade Abiola, the head of the mini-grid component, explained that “renewable energy is the next big thing for the sector” as the project aimed to deliver affordable and reliable electricity to 300,000 homes and 30,000 businesses.
As the mini-grid market becomes more commercial, alternative funding models are emerging. A recent report by RMI revealed that most commercial mini-grids are financed by debt and equity with a 70/30 split, which is usually raised via concessionary loans, impact investment or crowdfunding. However, many commercial mini-grids have struggled to provide a stable return on investments as tariffs charged (and collected) have fallen short of operational and capital expenditures.
Lessons from Experience
Mini-grid developers are now exploring a public-private partnership (PPP) model to properly share risks and responsibilities among the involved parties. Under this model, different stakeholders are assigned specific roles & responsibilities. For example, the regulator might be responsible for revising tariffs and enforcing standards, the private developers would be responsible for maintaining and operating the system, and the local community (customers) would be responsible for the security of the asset and bill enforcement. Including community engagement has been a fruitful way of increasing the sustainability of mini-grids in local areas. When the community buys into the project, they buy the electricity.
Going further, detailed community engagement is key to exploiting the economic and social potential of mini-grids in rural communities. Only when developers understand how the community uses electricity and why, etc. would they be able to design a commercially-viable and economically-empowering system. This community engagement would show that Nigeria’s mini-grid policy should not be a one-size-fits-all approach as each community (and resident) is different.
Mini-grid tariffs for rural households range between ₦150/kWh and ₦170/kWh, less expensive than “I better pass my neighbour” generators but more expensive than national grid tariffs. Some residents need electricity for basic lighting in the evenings (alternative: kerosene lamps) while others use them to run mills in their shops (alternative: generators). The former’s load requirement probably does not justify paying for electricity supply through the mini-grid while the latter would benefit from the mini-grid. Navigating the different levels of willingness-to-pay within a community is difficult, but smart meters that record consumption can help mitigate this.
In some cases, an anchor client model is adopted where the developer identifies a cluster of clients with enough electricity demand to justify a mini-grid in that area—this model undercuts Nigeria’s Energising Education Programme which uses mini-grids to provide electricity to federal universities and teaching hospitals. At a smaller scale, a private developer may target a telecoms tower located in a rural part of a community as a promising anchor client to set up a mini-grid to serve the wider community cluster.
Another reliable strategy for private developers is starting small. The idiomatic expression “from the tiny acorn, grows the mighty oak” should be reflective in the working process of development. Developers are sometimes overly ambitious in the size of the project they attempt to build and construct a wide distribution network to cover the area. They then find themselves having to scale back later due to a shortage of funds or unexpected challenges. Have you ever seen electricity poles erected in communities before and then being used as community décor props? That’s the result. Rather than starting out with an extensive distribution network that spans the entire community, with the hopes of converting these residents into customers, it may be prudent to start with anchor clients or heavy-users and grow as demand increases.
The truth is not every rural area in Nigeria would benefit from a mini-grid; some would be fine with solar home systems or smaller solar lighting products. Remembering the importance of product-market fit in local communities would free mini-grids from the current boom-bust cycle.