What are the pros and cons of each ownership model?

Speeches Shim

Short Answer

There are notable advantages and disadvantages to the various mini-grid ownership models. The best ownership model for a given mini-grid project will depend on the government’s policy and regulatory framework, community support for the project, available financing and the technical and managerial capacity of the owner(s). Before choosing an ownership model, project developers need to understand the pros and cons of each model and the operating environments where each model works best.

Further Explanation of Key Points

The The following tables summarize the pros and cons of community-based, private-sector, utility-based and hybrid ownership models.

Community-based Ownership Model

Pros

  • Community-based projects can electrify remote areas where projects are not cost-effective for utilities and private investors, and therefore respond to community energy needs.
  • Communal ownership can facilitate proper management and delivery of high-quality services, which benefits the local community.
  • Projects can create local jobs and training opportunities.
  • Communities can use profits from mini-grid projects to support other community development projects.

Cons

  • Communities often lack the financial and technical capacity to install, operate and manage mini-grids.
  • Communities sometimes set tariff levels too low, compromising the financial viability of the project.
  • If the project lacks an effective mechanism to monitor consumption, some members of the community might overuse electricity.
  • Corruption in certain cooperatives can divert resources or decrease community support.
  • Local politics can impede the project.
  • Enforcement and ensuring payment can be challenging.

Private-sector Model

Pros

  • Operations, maintenance and management tends to be more efficient.
  • If the private investor has a stake in another business in the region (like a manufacturing plant), they have an incentive to maintain high-quality electricity services.
  • Political motivations, which can influence utilities, are less likely to influence private-sector actors.
  • If the investment is profitable, private-sector investors can scale up operations.

Cons

  • Without supportive policies, regulations and financing for mini-grids, rural electrification may not be cost-effective or be too risky for private actors.
  • Small-scale project developers, who are more likely to implement rural electrification projects, may lack technical and financial management capacity.
  • Changes in regulations or fixed tariffs can jeopardize project success.
  • In markets with extensive regulations governing mini-grids, lengthy approval times can delay projects.

Utility-based Model

Pros

  • As the conventional drivers of electrification, utilities have relevant experience.
  • Utilities often have strong technical expertise, maintenance capacity and financial management systems.
  • Utilities often have good access to legal services and systems to manage regulations.
  • Utilities can more easily connect mini-grids to main grids.
  • Utilities may be able to provide subsidies for mini-grid consumers through tariffs collected from grid-connected customers.

Cons

  • Utilities can be inefficient.
  • When short-term political agendas drive projects, projects are vulnerable if conditions change.
  • In markets with few regulations governing mini-grids, profit-driven utilities have little incentive to electrify poor communities.
  • If utilities don’t engage communities and promote a sense of local ownership, projects can fail.
  • Mini-grids generally aren’t a utility’s core business, so the project might not receive the attention it needs.
  • The utility’s corporate structure might not work for smaller projects.
  • The cost of meeting regulations can strain limited budgets.

Hybrid Model

Pros

  • Involving multiple partners combines the advantages of other ownership models.
  • Well-designed, hybrid ownership maximizes effectiveness and efficiency.
  • Collaboration leverages each partner’s strengths and decreases the need for capacity building.
  • Collaboration can address the weaknesses of one partner with the strengths of another.

Cons

  • Projects with many stakeholders can be difficult to establish and maintain.
  • Differences in management systems across partners can increase transaction costs.
  • Meeting the needs of all stakeholders in the local context requires careful planning.
  • Conflicts between partners can lead to non-fulfilment of contracts.
  • One partner’s financial problems could put the whole venture at risk.

Putting it Into Practice

When choosing an ownership model, project developers need to consider the local context alongside each model’s advantages and disadvantages. Location-specific factors can impede or promote mini-grid development depending on the ownership model.

The following tables summarize conditions that favor each ownership model. The lists are not exhaustive, so the project developer will need to consider other factors specific to the project, its location and the local community.

When to Consider a Community-based Model

  • In very remote areas where electrification isn’t cost-effective for private entrepreneurs or utilities. (In these areas, community ownership may be the only option—and often only with financial support from governments/donors to cover upfront costs)
  • When the community supports the project and is willing to pay for services
  • When the community and developer can establish a clear ownership structure
  • When the developer has a clear plan for both short-term and long-term financing
  • When a public or private entity can manage technical operations and maintenance or build local capacity to do so, including the sourcing of replacement parts, should they be needed

When to Consider a Utility-based Model

  • When the government’s rural electrification plan and/or other policies support utility-based mini-grid approaches
  • When utilities are prepared to work with communities to achieve mutual objectives
  • When the government and utility have a clear plan for grid extension, including guidelines for what will happen if the national grid reaches a community served by a mini-grid

When to Consider a Private-sector Model

  • When the government has created an enabling environment (policies, subsidies and/or long-term concessions) that promotes independent power production by private businesses
  • When the government has established efficient procedures for licensing, land easement and other requirements
  • When financing is available for private-sector developers

When to Consider a Hybrid Business Model

  • When political will, policy and regulatory frameworks support mini-grid development by multiple actors.
  • When the project developer doesn’t have the necessary capacity to manage the project alone
  • When stakeholders define and understand each actor’s roles and responsibilities and create a system for collaboration

Resources

Alliance for Rural Electrification (2011). Hybrid Mini-Grids for Rural Electrification: Lessons Learned.
This comprehensive report describes the lessons learned from projects implemented by members of the Alliance for Rural Electrification. The report addresses the key technical, financial, organizational and institutional issues relevant to developing sustainable, replicable mini-grid implementation models.

Global Village Energy Partnership International (2011). The History of Mini-Grid Development in Developing Countries.
This history provides an overview of the opportunities and challenges in mini-grid development in developing countries. The discussion includes many different mini-grid ownership models.

World Bank (2014). From the Bottom Up: How small power producers and mini-grids can deliver electrification and renewable energy in Africa.
This guide provides practical guidance on how small power producers (SPPs) and mini-grid operators can deliver electrification and renewable energy in rural areas, examines ground-level regulatory and policy questions that must be answered to achieve commercially sustainable investments, and discusses design and implementation of feed-in tariffs for SPPs in developing country contexts.