Smart Incentives for Mini-Grids through Retail Tariff and Subsidy Design

Countries have diverse energy goals. Mini-grids are playing an increasing role in achieving countries’ energy goals such as: supporting rural electrification, community self-reliance, local resilience, and emissions reductions. Depending on unique country circumstances, clean energy mini-grids can be less expensive than extending transmission infrastructure across long distances (i.e. for rural applications), more reliable than fuel-based technologies such as fuel-based lighting, and work well with flexible loads such as mobile phone charging. In developing countries local populations often pay high electricity prices due to various market and other circumstances. These high prices can make mini-grids an attractive option.

While attractive, mini-grids are also very high capital investments that make sense only if properly valued. Based on international experience it has become clear that mini-grids only become viable when the appropriate tariff structure is in place to balance consumers’ ability and willingness to pay, with the capital and operating costs of a mini-grid. Additionally, tariffs must incentivize private investment to make mini-grid deployment sustainable. This report analyzes cost and value of multiple tariff structures; along with how the tariff can be applied based on electricity consumption, peak capacity, and services provided. The paper also recognizes that subsidies and government outreach play a key role in mini-grid deployment. Some important considerations for designing tariffs described in the report are included below.

• Well-constructed tariffs are fundamental to mini-grid operators’ long-term sustainability. At a minimum, the tariff must cover the operator’s costs. For example, even if there is a subsidy for 100% of the system cost, if the designed tariff does not cover the operating costs or additional capital investments (i.e. replacing batteries) then mini-grids will not be viable.
• The methodology for calculating tariffs and subsidies must be transparent and standardized. Before a project can attract private investment, there needs to be a known rate-of-return. Having a standardized and transparent process helps the private entity obtain the capital it needs to build the mini-grid.
• Tariffs are always affected by the customer’s willingness and ability to pay. Even mini-grids with well-constructed tariffs have been abandoned after the tariff failed to account for all the local variables such as readily available fuel for lighting that meant customers had alternatives competing with the mini grid service.
• Enabling flexibility and simplicity in tariff structuring. For example, some communities value equality such that a fixed tariff (in /kWh) is preferred. Other communities want lower prices for their lower-energy consumers, and higher prices for high energy consumers to help individuals control their electricity bills. These communities have used step-rate tariffs where the per-kWh price of electricity increases with consumption to address these concerns. Central governments can establish a centralized formula for both fixed tariffs and step tariffs for simplicity, while letting the community choose which tariff is most suitable for their local values.