Subhes Bhattacharyya The Business and Financial Models Workshop was held in Cambridge in January 2016. The workshop invited participants from business, academia and NGOs to address the following questions: o It is generally considered that private enterprises and independent power producers have a key role to play in bringing sustainable energy-enabled businesses to un-served rural communities. o What are the main opportunities and challenges in establishing viable business and financial models for these organisations, and what innovative approaches are emerging to meet these challenges? o What support can governments and development agencies usefully provide? More info: http://e4sv.org/events/smart-villages-in-developing-countries-business-and-financial-models-workshop/

1. InstituteofEnergyandSustainableDevelopment
Financial Models for Mini-grids in
Developing countries
Smart Villages in Developing Countries
Business and Financial Models Workshop
Cambridge
5th January 2016
Prof. Subhes Bhattacharyya
De Montfort University
Leicester, United Kingdom
subhesb@dmu.ac.uk

2. InstituteofEnergyandSustainableDevelopment
In this presentation
• Financial viability of mini-grid businesses
• Financial Models in practice
• Way forward

3. InstituteofEnergyandSustainableDevelopment
Balancing act
Investment
costs
Operating
costs
Fuel
costs
Losses
Subsidies
and
grants
Tariffs
and
charges
Supplier/
user
credits
Other income
Financial viability
requires (NPV of)
Income >= Expenses

4. InstituteofEnergyandSustainableDevelopment
Income-side constraints
• Tariff and charges
– Affordability: upper limit often set by consumers’
spending on alternative fuels
• Undue competition from subsidised fuels or supplies
• Subsidy discrimination against off-grid solutions
– Differential pricing strategy: Often limited by service
design
• Multiple rates unlikely for lighting only services
• Limited consumer base for cross-subsidisation in Lighting-plus
services
• Anchor loads may exercise monopsony power

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Income-side constraints…2
• Other income: limited by size and potential
– Carbon credit:
• Limited by transaction costs
– relevant for large projects or on an aggregated basis;
• Constrained by market dynamics
– Other monetised services / products
• Limited potential

6. InstituteofEnergyandSustainableDevelopment
Expense-side drivers
• Investment-related costs
• Operating costs
– Staffing level
– Service level
• Fuel costs
– Fuel requirement
– Fuel supply costs
• Others
– Operational efficiency
Cost of capital Capital requirement
Source and term of
funding
Technology choice
Various business risks
- bankable contracts;
- creditworthiness;
- local risks
Geographical location
General market condition Component/ capacity
replacement frequency
Viable businesses must
- Economise on costs and
- Maximise their income.

7. InstituteofEnergyandSustainableDevelopment
Mini-grid financing
State funded
• 90-100% capital
cost
• Operational
support
• Socially
motivated
investment
• Tariff not cost-
based
• Examples: CREDA,
WBREDA (India),
TANESCO, KPLC/
Ken Gen (Kenya)
Donor funded
• Grant support for
capital
investment
• Some
contribution from
users
• Limited or no
operational
support
• Tariff to cover
operating costs
• Examples: DFID,
GIZ, NORAD,
DANIDA, Shell
Foundation, EU
supported
projects
Privately funded
• Project
developer’s
equity
contribution
• Debt from
financial
institutes
• Grant
• No operational
subsidy
• Tariff at least to
cover costs
(capital and
operating)
• Example: HUSK
Power, Mera Gao,
DESI Power
(India)
Joint Liability
Groups
• Group ownership
(often by users)
• Similar to hire
purchase model
• Group liable to
debt repayments
and servicing
• Asset ownership
transfers to group
on debt
repayment
• Example: Mlinda
Foundation
installing pico-
grids in
Sunderbans
(India) with
NABARD
financing
Co-operatives
• Equity
contributions by
members
• Other resources
from grants, and
loans
• Social tariffs
commonly
charged
• Examples:
Mini/micro-hydro
Hydro Mini-grids
in Nepal

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Other financing options
• Off-balance sheet financing (Project finance)
– Mini-grid project as a SPV
– Bankable contracts with major consumers
– Financing on the basis of cash flows
– Only possible for large-scale projects
• Crowdfunding
– Funding sourced from the local and wider public
– Each makes a small contribution/ donation,
– Special rewards offered in return
– SolarNanoGrids project raising crowdfunds

9. InstituteofEnergyandSustainableDevelopment
Comparison of options
Financing
model
Contribution to cost
minimisation
Contribution to
income maximisation
Issues
State funding Reduces capital (and
operating) costs
Limited attention Limited availability,
viability and
sustainability
Donor funding Reduces capital cost Some attention to cost
recovery
Limited access and
sustainability
Private funding Increases financial cost Serious attention to
revenue generation
High tariff, suitable
in niche areas
Joint Group
Liability
Reduces financial cost Attention to debt
servicing
Social coherence
and supportive FI
required,
Co-operatives Some reduction of financial
cost possible
Limited attention Strong group
dynamics required
Project
financing
Unlikely Attention to cost
recovery
Only big projects
qualify
Crowdsourcing Financial cost reduction
possible
Not directly Access, regulatory

10. InstituteofEnergyandSustainableDevelopment
Way forward
• No single option fits all cases
– Use any possible combinations
• Flexible financing arrangements needed
– Not just capital grants;
– Support for risk mitigation, component replacement, and
other cost reduction options
• Explore Innovative fund designs
– Flexible viability gap funding
– Funding for entire project cycle
• Exploit rural development – Mini-grid nexus
– Embed within integrated rural development agenda
– Explore Energy-Agriculture-Water –Health nexus