Summary: In this article, the first in a series of 4, we look at the macro trends underpinning off-grid energy investments. Investors are taking note as this previously untapped market opens up.
Can’t start the power without a spark: Exploring the opportunities in the off-grid power sector in Asia
An electric dream
More than 1.1 billion people in the world today still do not have access to electricity, most of whom are found in rural areas in Asia or sub-Saharan Africa.
Within ASEAN, estimates point to at least 134 million people who do not have access to electricity. In certain regions (e.g. Myanmar, Cambodia), less than 30% have reliable grid access and many more have no grid connection at all.
The more fortunate have electricity supplied by diesel generators which are environmentally destructive, expensive and can be quite unreliable.
The electrification gap is set against the backdrop of rising electricity demand and a trend toward urbanisation where electricity supply (and in turn economic output) is concentrated. Urban migration in many cases is not a lifestyle choice – but a function of necessity. Health, education and the environment – on top of economic development concerns – are also severely impacted by the electricity supply gap.
There is now however a growing trend to assess this supply gap as a chance to turn the electricity industry on its head. Rather than wait for central grid connection to be built by a state owned enterprise (who prioritise connecting economic centres over rural villages), technological developments have provided decentralised populations with an opportunity to take control of their own destiny.
Costs for behind the meter power generation through renewables and energy storage have dropped dramatically in recent years while providing ever increasing yields. The development of supply and demand side technological improvements and mobile phone digitisation point to a smarter, real time energy future.
Emerging market community electrification projects include a small but growing portfolio of merchant mini-grids operated by local players with foreign investment. Pay as you go and flexible payment plans – together with innovative contracting structures between power developer and a local community intermediary – can help mitigate payment concerns.
Investors are taking note as this previously untapped market opens up.
Power to the people
Recent studies carried out by the Economic Research Institute of ASEAN and East Asia in Cambodia have pointed to costs of electricity (in US$ per kWh) ranging from $0.015 for grid connected power to $1.00 for power generation from diesel generators in rural areas. These prices are staggeringly expensive for those on some of the lowest wages in Asia.
Therefore a more affordable electricity solution is needed.
The levelised cost of energy for solar – the average costs of a power plant over its lifetime divided by its output - has in some jurisdictions fallen below US$ 0.65 cents per Watt (e.g. in India) and the rate of cost reduction continues to decrease.
Meanwhile Mckinsey reports that battery costs have come down to $230 per kilowatt-hour in 2016, compared with almost $1,000 per kilowatt-hour in 2010.
These cost reductions will enable a paradigm shift to move away from the passive consumer model – dependant on a central (often state owned) utility – to a smarter system with bi-directional flows of power based on prevailing load requirements.
Watt’s the trend?
The International Energy Agency has estimated that to achieve global electrification goals, grid extension will account for 30% with 70% coming from mini-grids and off-grid systems.
We see two major trends in emerging markets to complement traditional “central led” grid extensions:
- Private sector led mini-grids and standalone generation
Private sector developers or communities are investing in rural off-grid solutions through either standalone renewables systems (e.g. rooftop solar; biomass electricity generation) or isolated (island) mini-grids in the following circumstances:(a) while they wait for a grid roll-out; (b) to get some/more power; (c) to reduce the cost of the power (as a hedge against high diesel prices); and/or (d) to achieve environmental aims.
To the extent the electricity supply is stable and affordable, these users may never rely on the national grid for all power needs if distributed generation is entrenched before the grid is rolled out.
The end game for policy makers may be to eventually connect up all “island” mini-grids to the national grid, to the extent practically and technologically possible.
Private rural electrification schemes in India has seen some notable progress for exmaple gasifying discarded rice husks.
- State led electrification programme
The other model is a state led approach where regional distribution companies take the lead to operate rural sub-projects as part of their ordinary operations. For example in China, many of the 27,000 hydro power plants operating in rural areas were initially connected up to local mini-grids and thereafter connected to the national system (rather than the other way around). This model could be rolled out with significant success in other parts of Asia, which has the benefit of substantial hydro resources, irradiation levels (most countries have around 300 sunny days per year) and biomass resources that can be put toward gasification.
Don’t blow a fuse
Lack of investment into grid and transmission infrastructure means that significant numbers of people are without access to electricity. Meanwhile, energy demand is increasing as populations urbanise, putting greater pressure on existing grid infrastructure which has been deprived of investment. Certain Asian regions have ample supply of renewable energy and off-grid energy presents the opportunity for a technology jump similar to mobile phones which are dominant in regions where fixed line infrastructure was never – or at the very best poorly - developed.
Developers, community aggregators, energy service companies, intermediaries, data monitors, financiers, national and local governments, mini-grid operators, DSR operators, battery manufacturers, EPC contractors – and of course commercial and industrial consumers - all have roles to play in this brave new world. But only if the new order is embraced by government, institutional stakeholders and current beneficiaries of the existing central state model.