This blog was written by Anjal Niraula, and was first published on August 2016, by GSMA.
Nepal has been going through a massive energy crisis. Only 70 percent of Nepal’s population (of 28 million) has access to electricity. Even the ‘electrified’ population are subjected to regular black-outs because of irregular supply and aging infrastructure.
For remote areas, grid extension can be quite expensive. As such, solar microgrids seem to be a promising solution. One that can provide people with not just basic access to lighting, but also with high quality, grid-comparable electricity to operate productive end use (PEU) loads that help local micro enterprises generate revenue.
To test the commercial viability of solar microgrids, Gham Power began developing the very first solar microgrid in the remote, mountainous districts of Khotang and Okhaldhunga in Nepal. This project was an exercise in identifying the optimal mix of debt, equity and assistance funding that would make rural solar microgrids financially viable to private developers. The project also focused on powering PEU loads. This would ensure higher load demand, and promote local businesses, with the hypothesis that this would increase the commercial viability of the project.
This was a big step forward for the solar industry in Nepal as this project represented many novel interventions not seen before in the sector:
- Co-ownership – Shree Halesi, a solar microgrid company that holds the microgrids in Khotang and Okhalduga, is co-owned by investors from the community and the project developer.
- Commercial debt – This was the first time a commercial bank in Nepal provided asset financing to a rural electrification project.
- Developing an asset class – The project included grant assistance from GSMA to increase the rate of returns for investors., in a country where IPOs for commercial banks and large hydropower projects get routinely oversubscribed. We hope that this structure will attract private investors to invest in solar microgrid projects.
- Anchor tenants – Ncell (a mobile operator in Nepal) signed a Power Purchase Agreement (PPA) with a solar microgrid for the first time. This agreement provides financial stability to the microgrid, and also reduces operational costs for the MNO.
- Pre-paid metering – The project uses pre-paid meters to ensure regular payment collection, while also allowing valuable operational data to be collected.
About four months after the official start of the project, few learning have become apparent
- Local ownership pros and cons
These microgrids benefit from a strong involvement of the local community through financial and in-kind contribution. There is a powerful sense of ownership among the local investors who have a direct incentive to look for growth and as such, are always looking for new ways to generate additional revenue. In addition to the investors, the microgrid company employs full-time local support staff who have been trained to manage local operations and maintenance. The community is heavily involved in making decisions regarding the growth of the microgrid and day-to-day operations.For private developers (Gham Power in this case), there is an added responsibility to oversee the operations (including financial audits), attend regular board meetings, prepare annual plans and develop capacity among the local stakeholders to execute the day-to-day operations. Unfortunately these fall outside the core competency of the private developer, a fact further complicated by the remoteness of the project site. This makes it difficult for the private developer to be constantly present locally to help out with operations.If projects are to be replicated all over the country, it is vital to decouple the project developer from the microgrid company. Developing standard processes and practices to help project owners and operators navigate through the day to day operations and business challenges without constant help from project developers will be very crucial.
- Existing businesses vs. creating new businesses
Consumers using diesel generators for commercial purposes prior to solar microgrid installation found it quite cost-effective to switch to solar. This includes a local petrol pump, cyber café, poultry farm, and several small lodges and eateries (‘hotels’ in Nepali terms). They already had a consistent customer base and had a pretty good idea of the income that they could make. They had a reference as to what their energy costs were, which were the lean months, and understood the nitty grittiness of running their businesses quite well. All of this helped them understand the direct value of electricity from a solar microgrid, and they have become the best customers – both in terms of electricity usage and in terms of the ability to pay.However, people who were not operating any PEU loads have actually been quite hesitant to start new businesses. The cost of the equipment has been too high for some people while some think that the electricity tariff from the microgrid may be too high. Along with local partners we are considering opening up a few businesses owned by the microgrid company to help demonstrate to the local community that there is ample opportunity for generating revenue with PEU. We are also connecting new entrepreneurs with local banks so that they can finance the capital cost for their equipment like a rice mill, fridge, and water pump.
- Prepaid metering Prepaid meters are absolutely vital in ensuring that the payments are made on time. However, the quality and reliability of these meters have not been up to the mark. We have had several instances where the meters stopped working and had to be replaced. While waiting for replacements, we connected our customers directly to the supply without any meters – a move that is financially quite risky for the operations. The customers would always delay making the payments when connected directly. Without the meters, it is impossible to collect regular payments and sustain microgrids. Having robust metering equipment is crucial, and we are considering keeping some spares readily available.
- Scaling up
We were very clear from day one that we needed to come up with a replicable model for scaling our business, and that this microgrid cannot be a one-off project. For this project to be replicable, there are a lot of issues that still need to be resolved. As of now, if we were to develop any similar projects again, they will still require financial assistance for a considerable number of years, until the cost of equipment drops by about 30 – 50 percent.While this project has opened up a way for commercial banks to invest in microgrid projects, their interest rates still need to be lower than prevailing commercial banking rates for the project to be sustainable. Also, the exit options for investors, especially in the hypothetical case of the national grid becoming available to a community served by microgrids, needs to be resolved if more equity investors are to be encouraged to invest in such projects.
- A phased approach to microgrids
To get around some of the challenges faced during microgrid operation, we are currently developing a new series of microgrids which are centered on a PEU load. Under this model, we first lease solar-powered equipment (e.g., a rice mill, a water pump, or a fridge) to an entrepreneur in a rural community. Once operational and profitable, the enterprise can scale up as a microgrid and sell excess electricity to other households in the community. This significantly reduces the time and cost of project development. It also establishes strong precedence of solar electricity helping generate revenue before scaling the system to serve the entire community. Additionally, the cost of the system stays low, and the project can be executed without much external support. We are also incorporating built-in prepaid meters integrated with mobile money platforms to ensure regular payments.Over the next few months, we are sure that the Shree Halesi microgrid company will continue to evolve and provide us with learning about factors crucial to successful microgrid operation, practical ways to cut costs and ideas to increase project revenue. As more data on microgrids is gathered, a better understanding will also be developed about how microgrids could be better structured to facilitate private investment, provide opportunities for further innovation and achieve efficiency as well as growth.