Some points to consider when investing in mini-grids

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.

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