Mini-grids seem to be on the rise again. I started looking at this opportunity 4 years ago, and everyone was expecting the model to slowly die for lack of financial sustainability, but it has since then gained a lot of momentum and interest from both donors and strategic investors. Supporters have committed billions to the mini-grid. It is still a mystery why only a small percentage has been disbursed so far; surely, that’s due to the CPs that remain unaddressed. That’s why it is quite prudent not to open the champagne bottle when you read the word “committed,” as it can typically be 5 years away from the actual disbursement in our markets, but I am digressing. So, what to assess when analyzing a mini-grid project?
– Project or operator? They both have different economics. Mini-grid projects that will get repaid through connection and consumption fees are typically subsidised and take between 5 to 8 years to break even. The developer or operator might start incurring cash right away, with development and O&M fees. Hence, we see many investors considering mostly opportunities at developer/operator level.
– What is creating uncertainty and risk at the project level? Typically, nothing is certain, from the licensing to the collection. Operators spend a lot of resources battling through the licensing process, construction, client selection and collection. As an investor in a mini-grid project, you need to assess the operator’s action plan in tackling all the above, which usually results in an extraordinarily complex picture.
– The easier path? Donors’ increased interest in financing mini-grids offers some investment opportunities. They can look at funding the project’s development/construction with the donor’s promise to pay it all back once it is ready (in the line of result-based financing). It is not risk-free, but it makes the exposure much shorter-term, and the risk much clearer to assess, and doesn’t depend on the long-term viability and economics.
As one client told me, investors are starting to understand the mini-grid model, but it is already old, and most of us have moved to new approaches. I agree that it is very hard to streamline, that it is fast-evolving and each mini-grid project has unique economics, requirements and funding structure.