Incentivising Mini-Grids: A Guide for Policymakers

Incentivising Mini-Grids: A Guide for Policymakers 3648 2736 aflp

Incentivising Mini-Grids: A Guide for Policymakers

The ‘Smart Incentives for Mini-Grids through Retail Tariff and Subsidy Design: A Guide for Policymakers’ was developed to provide information and guidance to the African Mini-Grids Community of Practice (AMG-CoP). The AMG-CoP is a peer-to-peer working group for African state and non-state actors committed to creating an enabling environment for mini-grid deployment in their countries. This guide explores the incentives for private sector to invest in mini-grids and deliver on rural electrification objectives. A number of countries have already begun to adopt policy frameworks for private sector retail tariffs or have implemented grant or subsidy programmes to support the deployment of mini-grids. Where available, early learnings from these experiences have informed this work. 

The report demonstrates that clean energy mini-grids are receiving increasing attention as a cost-effective means to deliver energy access and achieve climate change commitments. However, the economics of mini-grids in developing countries remains a challenge as there are often high upfront capital and operational costs and they tend to serve a lower-revenue customer base. The structure of tariff and subsidy policies has become a central factor in determining the viability of private sector participation in the deployment of mini-grids as an effective energy access solution.

Establishing effective and fair tariff and subsidy structures is a complex process and conditions will vary significantly across different regions.

Policymakers therefore need to consider a well-informed and context-specific approach. As stated in the guide:

“there is no one-size-fits-all approach to establishing effective and fair tariff and subsidy structures”

The guide highlights the following considerations that policymakers need to take into account: 

Retail tariff policies: When setting retail tariff policies, policymakers must balance the politics of tariff rates in different communities, developers who need to maintain viable business models and customers who want access to energy at a tariff that they can afford and are willing to pay.

Subsidy policies: Subsidies can be delivered by either supplying certain elements to the developer directly, or by a financial transfer paid for inputs or outputs such as generation or distribution outcomes, or on a capital or operational basis. Output-based capital subsidies for distribution outcomes (connections) are a common option. 

The figure below is taken from the report and demonstrates the challenge of setting tariffs as there are many, often conflicting, variables that need to be taken into account:

This guide was made possible through support from the German Government’s International Climate Initiative Mobilising Investment for NDC Implementation (IKI MI). It was compiled by Electric Capital Management, the Co-Chair of the Low Emission Development Strategies Global Partnership (LEDS GP) Finance Working Group. Read the full resource HERE.