Can microgrids enable macro development?

Lusaka, Zambia - Standing in the bustling peri-urban settlement of Ngwerere, where nearly 1,000 Zambians live on the outskirts of Lusaka, you can see the power lines that follow the main road. But the residents here have never had access to grid electricity. That has not stopped enterprising business owners from setting up three video arcades and a movie theater, thanks to a 12-kilowatt solar array and battery bank installed by Standard Microgrid, which also provides power to grocery stores, hair salons, and nearly 100 homes.

Developers, donors, and customers are increasingly interested in the potential for microgrids to provide power to hundreds of millions of people who lack it, particularly in South Asia and sub-Saharan Africa. Grid infrastructure is expensive to construct and often subject to routine load-shedding and outages that can last for days or longer, harming homes, businesses, and public facilities. Increasingly popular solar home systems provide power for common uses such as lighting, mobile phone charging, and even refrigeration, but are insufficient for many commercial applications. Microgrids offer the right combination of affordability, reliability, and capacity to service areas that need more power than a home solar panel can provide, but do not have enough load density for the central grid. So investments in microgrids are on the rise, with over $250 million in public debt commitments in sub-Saharan Africa alone, set to leverage over $4 billion in total investment. At the same time, microgrids still face a number of barriers. Capital requirements are high and revenues per customer tend to be low, so most private projects require low-cost capital with loan durations of 10 to 15 years. Government policy does not always favor microgrids; for one thing, the same conditions that make communities attractive for microgrid expansion also make them attractive for the centralized grid, and government planners are typically not obliged to plan around private off-grid developers. So, in addition to the usual risks of investing in emerging economies, private developers risk stranding assets when centralized grids encroach. Nor is public ownership a panacea; community-owned and public microgrids often have similar issues concerning maintenance and long-run sustainability. Rigorous research on how to overcome these barriers is sorely lacking.

PLUGGING THE POWER GAP To help fill the gap, researchers from Duke University, the University of Massachusetts Amherst, and Carnegie Mellon University are partnering with private microgrid developers; CrossBoundary, a financial services firm with offices in Nairobi; and Energy4Impact, an NGO that helps to develop energy businesses; to evaluate the effects of various business model experiments in several dozen microgrids. The initiative is the Mini-Grid Innovation Lab, the first of its kind. One experiment involves offering low-cost financing for customers to take up appliances for home or business use—from televisions and speaker systems to refrigerators and hair clippers—inspired in part by research demonstrating latent demand for home appliances among rural consumers and similar state-sponsored efforts in the newly electrified rural United States in the 1930s. Unlocking latent demand could increase consumption and average revenue per user, the critical metric driving economic sustainability for microgrid operators. Another experiment evaluates the effects of subsidies on consumer choice, to see if developers might increase revenues by lowering the price for power. The first results from this study found that for every dollar that customers saved in prices, they spent $0.93 on increasing their energy consumption. That is, despite substantial price reductions, developers saw revenues fall by just 7 percent. Other interventions in progress will evaluate the effects of high-speed wireless internet, choosing between different metering technologies, and proactively connecting customers to the microgrid rather than waiting for households to sign up.

Results from the first experiment—market-rate loans for households and microenterprises to purchase appliances—also offer important insights. Among the nearly 2,000 customers in the program, about one in six bought at least one appliance, the most popular being televisions, refrigerators, speaker systems, and “decoders” set up to receive satellite television signals. Somewhat surprisingly, differences in income or wealth have little to do with the choice to buy appliances. Instead, prior electricity consumption has the largest impact, and having a bank account also helps. Among residential customers, larger households are more likely to purchase appliances, up to a point: The very largest households are less likely to do so. Among the households that buy new appliances, median consumption more than doubles immediately (see Figure 1), though the long-run response is more measured. The consumption pattern suggests households may initially use the new appliances heavily, scale back somewhat as they adjust to higher bills, and then eventually readjust to a “new normal” level of usage that is moderately higher than before the intervention.

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