Village Power concept

According to recent IEA figures, around 1.3 billion people in

the world do not have access to electricity. In many countries

rural electrification can be the backbone of development and

alleviation of poverty: potential benefits could be immense,

in terms of local entrepreneurship empowerment,

opportunities for education and access to basic levels of

healthcare. Traditionally, the development of a power grid

(transmission and distribution overhead lines) is expensive in

terms of money: an emerging country may struggle to fund

this kind of infrastructure. A possible solution is a bottom-up

approach, the distributed generation, or village power, that

shifts the electricity paradigm towards the so called

“prosumer” (producer and consumer). Besides the traditional

diesel generators, state-of-art technology provides for new,

environmentally friendly, capacity: high-efficiency

photovoltaic, mini-hydro, wind energy, geothermal.

Market and geography

In order to test the model and tackle the customer needs

where it is more relevant, target market is represented by

Sub-Saharan Africa, with particular regard to East Africa. The

total population with no access to electricity in SSA region is

around 600 million. In order to launch the project, we will

consider two similar countries, Kenya and Tanzania, with a

relevant share of population not connected to the power

grid. At the same time, both the countries have witnessed a

dramatic increase in utilization of mobile phones, whose

money transfer services are necessary for the

implementation of project.

Opportunity

Isolated communities in rural areas face a number of

challenges:

• Access to sanitation and agriculture water

• Access to first aid and hospital facilities

• Food preservation

• Communication via chargeable mobile devices

Portable diesel generation sets currently provide for all these

needs. Given technology and cost constraints, no viable

alternatives to diesel generation are envisaged. Renewable

Energy Sources (“RES”) can play an integral role to decrease

generation costs and allow for a higher differentiation and

reliability of electricity supply.

Electricity Market Microfinance for Village Power (“Village

Power”) will establish a microfinance lending fund for the

deployment of RES in the two countries, specifically targeting

rural population with no access to the grid.

Assumptions

According to an analysis performed by RES4MED, a

benchmark off-grid village would consist of:

• 1000 inhabitants, 200 houses

• 20 small shops, 20 cell phone charging centers, 2

water pumps and 2 milling machines

• 5 km of roads with street lights

Such a community would present the following hourly

demand pattern, with estimated 234 MWh of yearly demand:

Source: RES4MED

Village Power envisages the creation of an incipient local

spot market model for electricity purchases, based on the

following categories of players:

• Prosumers, who own and operate small generation

(diesel gen set, PV system), and have spare capacity;

a typical Prosumer can be a local entrepreneur or

retailer

• Consumers, who buy their electricity and pay

primarily via mobile devices

• A Market SPV, a local entity, that can be shaped in

the form of public private partnership with utilities

incumbents, municipalities and private actors.

Market SPV is in charge of:

o Finance to Prosumers for installing new

generation capacity (conventional + RES)

o Settlement of electricity flows and metering

o Operation and expansion of village’s small

distribution grid

Potential stakeholders interested in building private public

partnerships are national generation companies, TSOs and

DSOs, regional governments, NGOs, development banks, LIFIs

and MFIs. Institutional investors looking for corporate social

responsibility ventures are also included.

Risk factors

Village Power is subject to the following risk factors:

• High specific country risk when assessing cost of

capital and returns

• Reliance on fuel (diesel) prices for LCOE (Levelized

Cost of Electricity) modeling; existence of subsidies

and impact of government regulation may generate

high volatility

• Exit option: no liquid markets for assets, negotiation

on ad hoc basis

Population (million) 44 49

% rural areas 75% 69%

% no electricity access 75% 80%

% mobile cellular subscriptions 70% 55%

Electricity generation (GWh) 7849 5302

% from Renewable sources 67% 49%

% from Diesel Generation Sets >18% 15-18%

# Power outages (monthly) 6.3 8.9

Retail electricity prices (EUR/kWh) 0.12 0.23

ELECTRICITY MARKET MICROFINANCE FOR VILLAGE POWER

• Involvement of different stakeholders at many

levels: necessity to harmonize operational and

arbitration procedures

Business Model

Market SPV will grant loans to Prosumers in order to increase

their generation capacity, preferably but not exclusively for

RES projects, and in line with existing incentives. No collateral

is envisaged for these funds. Debt repayments will be

corresponded in cash according to agreed schedule. Metering

systems for new generation will be installed by Market SPV.

Market SPV will build and/or expand the distribution network

within the community (a proxy is given by the extension of

street lights, they will be limited networks with no

operational complexity), consistently with the steady

deployment of new generation. A fee (around 3% of

purchased electricity) will be paid by Consumers. Distribution

assets will be sold as upside to incumbent national TSO/DSOs

as they steadily cover the territory (in Kenya for instance

overall coverage is planned by 2030)

Prosumers will charge Consumers for their electricity

purchases. Prices will be set according to consumption

patterns in size and time (baseload and peakload,

seasonality) and with an upper cap. Prepaid contracts will be

available in phone charging centers and will be managed via

text messaging, or via internet, when available. Prosumers, as

members of a community, will be entitled to access credit

according to co-liability frameworks with peers. Capacity

deployment schedules, personalized instalments and

technical assistance will be also provided by Market SPV.

Scalability

Village Power can be scaled-up successfully thanks to the

positive effects of word of mouth and learning economies.

Example: Funds Deployment Model for Hybrid PV + Diesel

200 villages

5 years tenor

LCOE 310 € MW/h

50% of installed

capacity financed

The Market SPV can create local branches or subsidiaries to

enter specific regions or area, and to stipulate framework

agreements with mobile networks. We expect a wider

acceptance of the financing scheme in the median years, with

a stabilization effect and progressive market saturation

afterwards, due to the concurrent rural electrification process

led by utilities incumbents.

Our Fund

Geography: Kenya and Tanzania

• Possible extension to other countries

Full Equity commitment: EUR 25 million

• Institutional Investors

• Quality Minority (25%) in Market SPV

• Anti-dilution provisions

Minimum Investment

• 10 kWp installed capacity (PV)

• 100 kW installed capacity (other RES)

• Minimum 45 kW new diesel gen set

Target IRR: 15%

Management Fee: 2.5%

Term: 10 years

Social Impact

Village Power will generate positive and durable impacts for

communities involved:

• Access to a more reliable, differentiated supply of

electricity; reduction of dependence on fossil fuels;

curtailing of power outages

• Reduction of costs of generated electricity in terms

of LCOE (depending on technology mix)

• Positive environmental impact; possibility to link the

venture to CO2 reduction scheme

• Creation of jobs and dissemination of technical

know-how

• Potential synergies with TSO/DSOs incumbents for

future connections to the power grid

References

− World Bank, Country Data

− “Centralized vs. distributed power generation in

developing countries: what's smarter?” Marco

Raganella, RES4MED

− “Tariff structure for sustainable electrification in

Africa”KEMA

− “Rural Electrification in Kenya”, Zachary Ayieko, REA

Village Power

Microfinance Fund

GenCo

TSO / DSO

Dev. Bank

Other Inv.

MARKET SPV

(PPP)

~ 25% (Full Equity)

~ 7

5%

(Eq

uity

+ D

eb

t)

Prosumer

Consumer

Distribution

Metering

FinancingBuild Own

Operate

Electricity PriceFee on purchased

electricity

ELECTRICITY MARKET MICROFINANCE FOR VILLAGE POWER

0

5

10

15

20

25

30

-500

0

500

1,000

1,500

2,000

1 2 3 4 5 6 7 8 9 10

Funds Flows Oustanding Debt Villages

M