The evolution from Mini-Grids to Off-Grid Utilities


Shell Foundation believes that off-grid utility models – vertically integrated companies operating independently from national utilities – will be transformative for energy access in emerging markets as we work towards SDG7.

In this article we surmise findings from two reports developed over the last nine months looking at:

  1. The evolution of the mini-grid sector to an off-grid utility model, and the potential for this more mature, integrated approach to accelerate universal energy access. Download the report
  2. The financing needs to support the sector, from public/donor funding mechanisms to commercial investment opportunities. Download the report

Findings based on 20 years of working on energy access

At Shell Foundation, we have been working to address this access to energy gap for nearly two decades; more recently in partnership with structured co-funding partnerships with DFID and USAID.

Our commitment to accessible energy has led us to support various energy solutions, including solar home systems (SHS), biomass cookstoves, powered agricultural equipment, mini-grids and various financing intermediaries, improving the lives of over 60 million low-income people across Africa and Asia.

We do this because the meeting of complete energy needs of low-income consumers is essential to unlocking the development of emerging markets. Almost all countries with less than 2000KWH per person are at the bottom of the UN Human Development Index (see chart.)

Our experience working with mini-grids – beginning with Husk Power Systems in 2008 – has helped us understand how business models would need to evolve to utility standards in order to be successful in the long term, including the critical adoption of 24-hour residential and commercial services, demand stimulation and smart metering.

The potential of Off-Grid Utility models

The role of off-grid utilities holds great promise as part of the energy mix, if harmonised with the expansion of state-owned utilities and solar home systems.

We believe various trends in the sector have now created an opening for off-grid utility models to scale:

  • Expanded developer base
  • Decreases in technology prices
  • Technology innovation
  • Private sector interest
  • Policy improvement
  • Donor engagement

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To date, minigrids and off-grid utilities are reaching only a fraction of a percent of households with energy access in sub-Saharan Africa.

A holistic financing view for decentralised utilities

Our partners at Factor[e] Ventures believe that while the last five years can be seen as a pilot phase for the off-grid utility sector, we are now entering the transition phase en route to a scalable infrastructure industry.

During this transition phase, as costs come down and developers gain experience in their business models, precise, co-ordinated donor interventions can help move the sector past its infancy, unlock commercial capital, create economies of scale, and allow the sector to reach an Internal Rate of Return inflection point to reach scale.

The role of public/donor funding in unlocking commercial capital

Public/donor funding is needed to directly reduce CAPEX costs for early stage developers, allowing a more secure return for investors. It also indirectly reduces costs by allowing developers to access economies of scale – AMDA members currently forecast average technology costs to drop by 44% as connections rise by 300%, subject to them being able to receive the appropriate funding.

For those that question whether public/donor funding detracts from a sector’s viability, there are several precedents to show that non-commercial capital can de-risk and grow nascent energy sectors, from the Rural Electrification Agency in the US in the 1930s to the current trend towards offshore wind in Europe.

What is required however is innovative new business models and financing for subsidy needs.

Konexa and SMART RBF

Last year we launched a new enterprise that subsidises rural electrification by the urban and industrial areas. Konexa is working with distribution companies in Nigeria to provide an holistic energy model where large industry customers with high energy demand allow for lower tariffs for rural, off-grid customers.

We are also supporting a SMART Results Based Financing (RBF) facility that AMDA has developed and which will allow the sector to gain stability and maturity:

  • Simple: Subsidy is fixed and available once connections are installed, eligibility is clear.
  • Measurable: Funds are disbursed based on specific, measurable outcomes – not arbitrary approvals. The facility will be results based so it’s easy to measure when payment is due.
  • Africa-Wide: Developers work regionally − consistency in how subsidies are managed improves rate of deployment and reduces application and reporting timing and costs. It will also reduce gaps in programmes across countries which stall progress in the sector.
  • Repeatable: The programme is designed to be repeatable and consistent to create certainty for the private sector and encourage more commercial investment. The amounts can reduce over time and operating guidelines can be tweaked based on learnings, but it’s important to ensure the facility builds trust and credibility if the sector is to mature.
  • Timely: Funds are deployed in a timely manner once connections are verified. The management structure ensures facility managers’ performance can be measured and incentives can be aligned. For example, IT processes that can track facility manager service level agreements on response times.

Ultimately, the SMART RBF facility should leverage consistent donor/government funding and off-grid utility data to gain trust from commercial investors, so they can more confidently invest in the sector and build a commercially viable off-grid utility sector over the coming years.

In partnership with DFID and USAID, Shell Foundation has supported the design of the RBF operating guidelines and is providing $1.5m to test the facility by the end of 2019.

DFID and USAID logos

A forward look

We hope that sharing our learnings and those of our partners within this article and the two reports, will offer a meaningful contribution to the sector’s knowledge. Realising the potential of off-grid utilities across emerging markets will require a concerted collaboration between government, financiers, practitioners and the private sector.

The contribution of off-grid utilities in achieving SDG7 has just begun.


Download the Bridging the Gap report (pdf, 1mb)

Download the OGU funding report (pdf, 1mb)