Development of sustainable framework models for private sector investments in renewable energy mini-grids

Abstract

Uganda’s largest population lives in rural areas, where most people still lack access to electricity. The government of Uganda has set ambitious targets to provide universal access to electricity for the country by 2040. The current electrification approach by government is increased centralized power generation through construction of large power plants and extension of high and medium voltage transmission and distribution lines. To investigate the prioritisation of electrification approaches towards achieving universal access, this research has used a case study of 20 rural Ugandan villages to propose a least cost electrification approach. Furthermore, technical and financial analyses have been applied on these 20 villages to develop a sustainable subsidy and tariff structure to support public and private sector implementation of mini-grid projects in Uganda. HOMER was used for mini-grid sizing, and an Excel-based financial model developed for the financial analysis. Findings from this research show that mini-grids provide the least cost electrification option for all 20 case study villages with an average cost of energy of $ 0.49 /kWh, compared to standalone systems at $ 0.75 /kWh, and grid extension at $ 2.42 /kWh. The average Net Present Cost (NPC) per customer was 797, 1,233 and 3,147 USD/customer for mini-grids, standalone and grid extension respectively. For policy makers, this analysis estimates that grid extension only be explored for villages above 250 customers and less than 6 km from an existing grid. Using a proxy analysis with willingness to pay surveys, it was found that customers can afford tariffs of 0.27 – 0.38 USD/kWh. This was lower than current costs of alternative energy services (e.g., kerosene for lighting, etc.). Surprisingly, this tariff is 50-100% higher than on-grid tariffs paid by richer urban customers. This research shows that the optimal use of government subsidies is a Build Own and Operate (BOO) approach on the generation plant and at least a 15-year concession, with an 18% equity IRR on the private investment. For this optimum scenario (BOO and 15 years), the required subsidy on the generation plant is 56% and 46% to achieve the 0.27 and 0.38 USD /kWh tariffs respectively. The investment structure is distributed at 31%, 32%, and 37% for the generation plant subsidy, distribution grid subsidy, and private investment respectively. The distribution grid (including connections) are 100% financed by the government and remain as government property to be leased to grid operators when the grid arrives or at the end of the project.