Challenges and Solutions in the Ugandan Mini-Grid Market

Ashley Wearne, GIZ

Village to be electrified in Lamwo, Northern Uganda (Picture: GIZ)
  • German government commits €5.5 million for solar PV mini-grids in Uganda through GIZ and plans additional €15 million for upscaling through KfW
  • European Union commits €4.2 million through GIZ and WWF and plans a further €15 million for scaling up in partnership with KfW.

While solar PV mini-grids have proven to provide technical and financial viability for rural electrification in countries like India, Nigeria and Kenya, framework conditions have been tough for developers, particularly when you consider the role that the private sector plays in this new field of power distribution. In countries with low electricity connectivity, rural electrification is usually implemented through either grid extension or isolated systems like solar home systems. However, mini-grids are a cheaper solution for less populated rural communities, providing sufficient energy for productive use, under faster implementation than grid extension.

Compared to on-grid electricity and solar home system companies, mini-grid developers face a new and completely different operating environment. They are (often) expected to co-invest in the generation plant, identify sites, conduct feasibility studies and design the systems (involving financial risks), apply for generation and distribution licenses, and negotiate contracts with various government agencies. During operation, developers are expected to adhere to regulated tariffs and service standards, operate and maintain systems, and support customers to connect and use electricity safely or efficiently. And they do all of this within the framework of donor-funded projects, which also include various requirements for the provision of financial support.

In the past, mini-grids have been implemented as unsolicited projects, proposed by developers bringing their own finance. Under those conditions, only eleven projects have been realized in Uganda, partly due to the difficulty in finding sites and getting them approved, but also because of tedious licensing procedures which were designed for large generation and distribution projects.

In 2016, GIZ and the Government of Uganda (GoU) initiated the Pro Mini-Grids project to open up the mini-grid sector by streamlining institutional processes, lobbying for political and donor support, identifying viable projects and ultimately implementing a sizeable bundle of mini-grid projects to prove the technical and financial potential on a scale that will convince industry and decision-makers alike.

Together with the Rural Electrification Agency (REA) and Electricity Regulatory Authority (ERA), GIZ created a tender mechanism, incorporating a streamlined licensing procedure, an integrated financing component, a complete contractual framework for investment security, and two bundles of villages, evaluated and approved for electrification through mini-grids. Under this arrangement, REA publishes the tender in this complete form, inviting EPCs, developers and investors to submit bids for the two separate bundles. While the ‘winner take all’ approach means that only two applicants go on to implement projects, the aim is to achieve a critical mass of mini-grids, 40 in total, that will encourage the sector to grow. Fortunately, more donor commitments are now being tabled for further projects.

Working within the national electricity framework, it was important to use a mechanism for the project that provides transparency, efficiency and value for money, while at the same time paving the way for future mini-grid projects. Usually, mini-grid developers have applied for funding directly to donors, be it for support with feasibility studies, financing generation and/or distribution, applying for individual licenses or subsidizing customer connections and tariffs. Sustainability was a key concern in designing the Pro Mini-Grids approach – when mini-grid projects in Africa fail due to poor financial performance or unsatisfied customers, governments lose faith and operators lose support. Keeping all parties engaged is a difficult balancing act: communities want reliable and affordable power, operators need investment security and stable revenues, governments prefer proven technologies (read: grid extension), and donors impose stringent legal conditions under tight deadlines.

Developers have now been prequalified to bid on the two bundled projects. The mini-grids installation is expected in second quarter 2019. In Kampala, the Nakawa Vocational Training Institute has launched solar technician trainings for mini-grid installation and operation with support from the German government. Mini-grids now being included in the Ugandan Energy Policy which is currently under revision, and mini-as well as various Ugandan policy instruments, plans and strategies.

Promotion of Mini-Grids for Rural Electrification and Promotion of Mini-Grids in Northern Uganda are implemented by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH for the German Federal Ministry of Economic Cooperation and Development under the German Climate Technology Initiative (DKTI), and the European Union under the Development Initiative for Northern Uganda (DINU).

Ashley Wearne, Pro Mini-Grids, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ)


 

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