Are distributed energy service companies the future?

18 Jun

Historically the strategies of national governments in countries where people lack access to electricity have focused on grid expansion. The approach of the government of Kenya for example is primarily about lowest cost options for increasing generating capacity to feed the expanding national grid.

But alongside grid development we’re seeing a significant shift in donor thinking, with ‘off grid’ becoming an increasingly important focus. The US have a substantial ‘off grid’ component in their Power Africa programme, the UK has a new ‘green mini-grids’ programme soon to launch, the International Finance Corporation are embarking on major studies, and GIZ and KfW are supporting a range of programmes. Other funders are following suit.

Approaches differ and the paradigms are still evolving, but there is increasing interested in some quarters in the potential of commercially managed mini-grids. A recent paper by Pepukaye Bardouille and Dirk Muench from Persistent Energy describes well the potential these distributed energy service companies represent.

As Barbouille and Muench make clear DESCOs are still in their infancy. None have so far reached profitability. The business models look promising though, as GVEP can attest from our work with a number of the companies pioneering these approaches. The large amount of donor funding starting to flow into this area has the potential to help many of these businesses reach commercial scale.

Two issues which Barbouille and Muench don’t discuss in their paper are government policy and social equity. Few governments in Africa have policies which positively encourage and support DESCOs. This is not surprising considering the ‘early stage’ of the industry.

But supportive policy will be needed. Identifying suitable sites for deployment free of the risk of a competing grid extension is difficult and costly. GVEP recently commissioned studies for two sites in Tanzania which showed that a solar mini-grid could be viable. But government plans to extend the grid into the area led us to advise against a mini-grid. DESCOs need a clear national planning framework to operate within, and help with identifying good sites.

The social equity issue is a tougher one to crack. DESCOs can potentially operate on a purely commercial basis though in many African settings margins are thin. Avoiding reliance on subsidies clearly has benefits for a DESCO. But will governments support a two track electrification approach where the rural poor pay a lot more per kWh for electricity than those connected to the national grid. Fee for service models rather than a tariff are a way of avoiding direct comparison with the grid – but the underlying issue of ‘social equity’ is still there.  Why should the urban elite benefit from investments in infrastructure which are subsidised while the off-grid community receives no support?

Much work remains to be done on policy and strategy issues in individual countries before DESCOs find themselves in an environment which positively supports their growth. But there can be little doubt that this is an area where we will witness major change in the next few years.


One Response to “Are distributed energy service companies the future?”

  1. Niki Cutts July 2, 2014 at 2:57 pm #

    In terms of social justice, all individuals should have the right to energy in the 21st century. Practically bringing this into fruition is another thing. Small subsidies may be achievable either through charitable donations, corporate social responsibility schemes, or eventually income gathered from pollution taxes. It is clear though, that strong policies in this area are needed as well as close cooperation with charities and industry.

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