Navigant Research Blog

Power For The 20 Percent

Peter Asmus — August 21, 2013

According to the World Bank, people worldwide spend about $37 billion annually on kerosene for lighting, biomass (typically wood or charcoal) used in open fires, and polluting traditional stoves for cooking.  These inefficient energy pathways not only cost too much, but they also impose severe health risks on indigenous populations and increase carbon emissions contributing to global climate change.

It’s estimated that more than one-fifth of humankind lacks modern energy services.  While the cost of providing universal access to the electricity grid, or to decentralized electrification systems, would be in the tens of billions of dollars annually, these “costs” also represent potential revenues for vendors of smart grid and microgrid enabling technologies, such as distributed generation, energy storage, smart inverters and smart meters.  The United Nations has made the goal of universal energy access a major priority, viewing the development of microgrids as a key enabling technology.

The International Energy Agency (IEA) estimates that the annual cost of achieving universal energy access throughout the world would be approximately $48 billion.  Under a base case scenario, the gap between expected costs and available (primarily public sector) funding is $34 billion annually.  The majority of this latter figure represents household lights and cell phone chargers.  However, more than 10% of this total represents vendor revenues in the remote microgrid space, if private investment, policy reforms and technology advances can be marshaled to meet market demand.  This is double the market for traditional utility grid expansion in the developing world.

By comparison, Navigant Research estimates in a forthcoming report that the size of today’s entire remote microgrid market is approximately $3 billion, but the scope of that revenue includes substantial project portfolios in both North America and Europe.

Local Goods

Can vendors respond to this challenge while still turning a profit? The jury is still out.  To date, it appears that private sector models are providing the best results, both for vendors and the consumers being served.

While rural cooperatives in Alaska have proven that publicly owned utilities can successfully deploy remote microgrids, the experience in the rest of the world with the cooperative business model has been less inspiring.  This approach has been deployed in Bangladesh and Nepal with some success, but in India – probably the largest market for remote microgrids in the world – such endeavors have largely failed.

In contrast, the energy service company (ESCO) model, whereby a private company owns, installs and operates the remote microgrid and provides energy services to consumers, is, with certain caveats, looking like the most promising path forward.  This model has found success in countries such as Zambia, Kenya, Sri Lanka, and the Dominican Republic.  There appears to be a growing consensus, however, that 3 megawatts (MW) of electrical capacity is the minimum size to make these private sector projects work.

A few caveats on private sector models.  They often require either a clear regulatory framework or long-term subsidies (or the elimination of existing subsidies for incumbent technologies).  A review of existing remote microgrids in the developing world indicates that success for remote microgrid business models ultimately rests in designing creative ways to generate income for the local communities being served.  In other words, business models must serve not only the entity that builds, develops, or owns the infrastructure, but also the end users – in the form of less costly or reliable energy, local jobs, quality of life – in other words, the basics that citizens of the First World view as their birthright.

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