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  • A Framework to Support Policymakers in Selecting Public Instruments to Promote Private Investment in Solar PV-Battery Mini-Grids in Developing Countries

    Derisking Renewable Energy Investment: Off-Grid Electrification

  • Derisking Renewable Energy Investment: Off-Grid ElectrificationB

    UNDP partners with people at all levels of society to help build nations that can withstand crisis, and drive and sustain the kind of growth that improves the quality of life for everyone. On the ground in nearly 170 countries and territories, we offer global perspective and local insight to help empower lives and build resilient nations.

    United Nations Development Programme 304 East 45th Street New York, NY 10017 USA www.undp.org

    Founded in 1855, today ETH Zürich is one of the world’s leading research universities. ETH Zürich has more than 20,000 students from over 120 countries, including 4,000 doctoral students. About 500 professors currently teach and conduct research in engineering, architecture, mathematics, natural sciences, system-oriented sciences, as well as management and social sciences. The Energy Politics Group (EPG) forms part of ETH Zürich’s Department of Humanities, Social and Political Sciences and in its research centres on questions related to the governance of technological change in the energy sector.

    ETH Zürich, Energy Politics Group Haldeneggsteig 4 CH-8092 Zurich, Switzerland www.epg.ethz.ch

    Authors (UNDP): Oliver Waissbein, Hande Bayraktar and Christoph Henrich.

    Authors (ETH Zürich): Tobias S. Schmidt and Abhishek Malhotra.

    Contributors: Marcel Alers (UNDP), Léonore Haelg (ETH), Claire Jin (UNDP, intern) and Usha Rao (UNDP).

    External reviewers: Subhes Bhattacharyya, Courtney Blodgett, Sagar Gubbi and Hisham Zerriffi.

    Acknowledgments: UNDP and ETH Zürich would like to thank the mini-grid developers and investors, and other stakeholders, in Uttar Pradesh, India and Kenya who participated in structured and informational interviews for the illustrative case studies. The authors would also like to thank the external reviewers for their valuable comments and inputs.

    This publication builds on the original Derisking Renewable Energy Investment (UNDP, 2013) report, which established the methodology which has been tailored to solar PV-battery mini-grids in this publication. For further information, please visit undp.org/DREI

    Disclaimer: The views expressed in this publication are those of the authors and do not necessarily represent those of the UN, including UNDP, or UN Member States.

    This report should be referenced as: UNDP & ETH Zürich (2018). Derisking Renewable Energy Investment: Off-Grid Electrification. United Nations Development Programme, New York, NY and ETH Zürich, Energy Politics Group, Zurich, Switzerland.

    Design: Camilo J. Salomon (camilo.salomon@optonline.net, www.cjsalomon.com)

    December 2018, New York & Zurich

  • Derisking Renewable Energy Investment: Off-Grid Electrification 11

    Figures, Tables and Boxes 3

    Acronyms 7

    Forewords 10

    Executive Summary 14

    1. Introduction 24

    2. Overview of the DREI Methodology 28

    2.1 Electricity Access: Current Status and Trends 29

    2.2 The Drivers of Change 30

    2.3 The Role of Financing 32

    3. Derisking Solar Mini-Grid Investments through Public Instruments 34

    3.1 High Financing Costs for Solar Mini-Grids 35

    3.2 Public and Private Strategies to Address Investment Risks 37

    3.3 Designing Cost-Effective Instrument Packages 39

    3.4 Overview of the Derisking Methodology 40

    4. Derisking Table for Solar Mini-Grids 42

    5. Illustrative Solar Mini-Grid Case Studies 54

    5.1 Approach to the Modelling Exercise 55

    5.2 Case Study: Uttar Pradesh, India 59

    5.3 Case Study: Kenya 79

    6. Conclusion 100

    Annexes: 104

    A. Methodology and data for the illustrative modelling exercise 105

    B. References 119

    Table of Contents

    Derisking Renewable Energy Investment: Off-Grid Electrification

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    Derisking Renewable Energy Investment: Off-Grid Electrification2

    This Full Report is accompanied by an Executive Summary only version.

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    Figures, Tables and Boxes

    Figures, Tables and Boxes

    Figures EXECUTIVE SUMMARY

    Figure E.1: Impact of financing costs on solar PV-battery and diesel-powered mini-grids’ generation cost in low and high-risk investment environments

    Figure E.2: Pre-derisking financing cost waterfalls for solar mini-grids in Uttar Pradesh, India and in Kenya

    Figure E.3: Post-derisking financing cost waterfalls for solar mini-grids in Uttar Pradesh, India and in Kenya

    Figure E.4: LCOEs for diesel and solar mini-grids in Uttar Pradesh, India and Kenya (USD/kWh)

    Figure E.5: Investment leverage performance metrics for the selected instrument packages in promoting solar mini-grid investment in Uttar Pradesh, India (2023 target: 323 MW) and in Kenya (2023 target: 77 MW)

    CHAPTER 2 Figure 2.1: The MTF’s five tiers of electricity access

    Figure 2.2: Annual financing for PAYG solar home system companies (million USD)

    CHAPTER 3 Figure 3.1: The different capital intensity of electricity generation from solar-PV

    battery mini-grids and diesel-powered mini-grids

    Figure 3.2: Impact of financing costs on solar PV-battery and diesel-powered mini-grids’ generation costs in low and high-risk investment environments

    Figure 3.3: Drivers and components of investor risk for off-grid renewable energy investments

    Figure 3.4: Public instrument selection for off-grid renewable energy investments

    Figure 3.5: Overview of the DREI framework to support policymakers to promote off-grid renewable energy investments

    CHAPTER 5 Uttar Pradesh, India Case Study

    Figure 5.1: India: Electricity generation by fuel (1971 to 2014)

    Figure 5.2: Uttar Pradesh, India: Pre-derisking financing cost waterfall for solar mini-grids

    Figure 5.3: Uttar Pradesh, India: Post-derisking financing cost waterfall for solar mini-grids

    Figure 5.4: Uttar Pradesh, India: LCOE for the diesel and solar mini-grids

    Figure 5.5: Uttar Pradesh, India: Investment leverage ratio

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    Figure 5.6: Uttar Pradesh, India: End-user affordability

    Figure 5.7: Uttar Pradesh, India: Carbon abatement

    Kenya Case Study

    Figure 5.8: Kenya: Electricity generation by fuel in Kenya (1972 to 2014)

    Figure 5.9: Kenya: Evolution of mini-grid policy and regulatory framework

    Figure 5.10: Kenya: Pre-derisking financing cost waterfall for solar mini-grids

    Figure 5.11: Kenya: Post-derisking financing cost waterfall for solar mini-grids

    Figure 5.12: Kenya: LCOE for diesel and solar mini-grids

    Figure 5.13: Kenya: Investment leverage ratio

    Figure 5.14: Kenya: End-user affordability

    Figure 5.15: Kenya: Carbon abatement

    CHAPTER 6 Figure 6.1: Derisking’s integral role in electrification strategies

    ANNEX Figure A.1: Solar mini-grid investment targets for Kenya and Uttar Pradesh, India

    Figure A.2: Interview questions to quantify the impact of risk categories on the cost of equity and debt

    Figure A.3: Illustrative simplified application of the methodology to determine the impact of risk categories on increasing financing costs

    Figure A.4: Typical mini-grid set-up

    TABLES EXECUTIVE SUMMARY Table E.1: Summary table of public instruments to promote investment in solar

    mini-grids in Kenya.

    CHAPTER 2 Table 2.1: Examples of mini-grid business models

    CHAPTER 4 Table 4.1: Derisking table for solar PV-battery mini-grids

    CHAPTER 5 Uttar Pradesh, India

    Table 5.1: Uttar Pradesh, India: Interviewee feedback on risk categories for solar mini-grid investments

    Table 5.2: Uttar Pradesh, India: Summary table of public instruments to promote investment in solar mini-grids

    Table 5.3: Uttar Pradesh, India: Summary of LCOE outputs for sensitivity analysis on key input assumptions (USD/kWh)

    Table 5.4: Uttar Pradesh, India: Summary of key outputs for different electrification scenarios.

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    Table 5.5: Uttar Pradesh, India: Summary of key outputs for sensitivity analysis on light-touch vs comprehensive regulatory track breakdown

    Table 5.6: Uttar Pradesh, India: Effect of upfront capital subsidies for solar mini-grids on post-derisking LCOE (USD/kWh)

    Table 5.7: Uttar Pradesh, India: Summary of load profile changes on system size and post-derisking LCOE (USD/kWh)

    Table 5.8: Uttar Pradesh, India: Summary of load profile changes on system size and post-derisking LCOE (USD/kWh)

    Table 5.9: Uttar Pradesh, India: Summary