In Nigeria and Kenya, many small to medium farms and rural grain-milling businesses are not connected to the national electricity grid. They still use petrol or diesel generators for power. Energy, agriculture and development researchers Temilade Sesan, Lucy Baker and colleagues set out to discover how these agribusinesses could get electricity from renewable energy mini grids at a price that would make the mini grids commercially viable, affordable for the farmers, and able to provide an electricity supply for low-income rural households.
What are mini-grids and why are they important?
Mini grids are small networks that generate and distribute electricity. They are often powered by renewable sources, such as solar photovoltaics, hydro-electricity, or a mixture of diesel and solar power. The networks are sized to generate between 10 kilowatts and 10 megawatts of electricity for homes and businesses in a community. For example, one megawatt of electricity can power about 2,000 homes in Nigeria.
Mini grids generate far less electricity than national electricity grids, which typically generate thousands of megawatts. Yet, mini grids can deliver a very important supply of electricity in remote, rural areas where it is difficult or even impossible to connect to the national grid.
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Nigeria is one of the world’s top five countries with a national mini grid programme. It plans to install 2,700 mini grid projects by 2030. It is hoped this will be a more cost-effective way to reach the 40% of the country’s population currently without an electricity connection than extending the national grid.
In Kenya, more than 110 mini grids have been developed by the government and the private sector. A further 150 projects are under development.
How much do mini grids cost to set up and who typically pays?
The average cost of setting up a mini grid is US$1,400. In comparison, to extend the national grid by just 10 kilometres in Nigeria typically costs US$620,500. Only 33% of rural homes in Nigeria have electricity and in many cases, mini grids are the cheaper option for supplying electricity.
The costs involved in running a mini grid are broken down into capital expenditure and operating expenditure.
The capital expenditure is the cost of buying the equipment needed to generate electricity and distribute it to different small agribusinesses or homes, and the components needed for electricity connections.
The operating expenditure is all the costs of operating and maintaining the mini grid throughout the project’s lifetime.
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Costs are different depending on the size of the mini grid and its location. For example, it cost between US$160 and US$700 per connection at 12 mini grid sites that were constructed in Nigeria from 2020 to 2023. Each of these mini grids supplied between 50 and 800 customers.
This upfront cost is typically borne by governments or private investors, and often supported by public subsidies. Once a mini grid system has been set up, consumers pay for the electricity it generates. These payments, or tariffs, are expected to be enough to cover all the operating costs and also repay the project’s investors within 10 years.
This means that the tariffs can be too expensive for owners of small rural businesses, whose incomes are often quite low – unless access to electricity can boost their businesses and allow them to make more money.
Overall, rural mini grids across Africa have struggled to establish profitable business models. This is one of the reasons why we decided to research how rural mini grids could become commercially viable.
What improves the commercial viability of rural mini grids?
In our research, we interviewed the managers of 12 mini grid companies in Nigeria and Kenya to identify business models for mini grids that could deliver electricity to rural people and cover all their costs.
Courtesy Unico Uduka
Our research found as expected that the more energy rural agribusinesses use, the more payments can be made to the mini grids. These payments make the mini grids more commercially viable.
One potential solution is an “anchor load” – this is a number of rural businesses who will consistently use more electricity and who will therefore pay reliably. Having an anchor load means that energy developers get enough stable payments from agribusinesses to allow them to supply electricity to rural homes at affordable prices too.
However, one of the challenges is that if farms are not productive, they won’t have the funds to buy more electrical agricultural equipment and their electricity use won’t increase.
For this reason, private mini grid companies in Nigeria and Kenya tested a new business model. We discovered this model in our research. We named it the “KeyStarter” to differentiate it from previous models.
In the Nigerian case, the mini grid developer provided credit and agricultural inputs to agribusinesses so that they could grow more crops. These could then be processed using electricity-powered mills, meaning that the business used and paid for more electricity.
In Kenya, also using the KeyStarter business model, the mini grid developer set up access for rural farmers to extension services. The developer also offered quality feed for poultry farmers. This increased the farmers’ competitiveness and again, enabled them to pay for electricity and other inputs.
What needs to happen next?
The KeyStarter model presents an opportunity to reframe the way that agriculture intersects with energy. With this model in mind, our research suggests that smallholder farmers and other rural businesses that have historically been marginalised in electrification initiatives will start to benefit.
For this to happen at scale, private developers working on the ground need to be supported with enough public finance. Concerns have been discussed over possible inefficiencies in publicly owned mini grids. But our research found that relying too heavily on market forces may cause the projects to lose sight of the goal of sustainable access to electricity for rural people.
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A balance between market expansion and social inclusion is needed. The Kenyan government appears to be keen on promoting this balance in its Kenya Off-Grid Solar Access Project.
To make this happen, policies must be co-ordinated by the agriculture, energy, gender and transport sectors, so that they all work towards the same goal. At the same time, appropriately targeted subsidies are needed. In this way, mini grid schemes can contribute to lifting many rural dwellers out of poverty.
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