1/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORKS AND FINANCING ------ DIPL.-ING. NICO PETERSCHMIDT MANAGING DIRECTOR INENSUS GMBH
2/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING AGENDA 01 Definition of Micro-Utilities 02 Walking down the economies of scale curve 03 Transaction costs in Micro-Utilities 04 Financing along the Micro-Utility development timeline 05 Conclusions and recommendations ------ DIPL.-ING. NICO PETERSCHMIDT MANAGING DIRECTOR INENSUS GMBH
3/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING DEFINITION OF MICRO-UTILITIES Micro-Utilities: _ are often SMEs with limited financial resources _ Have besides financial interest intrinsic motivation to electrify rural areas _ Need innovative approaches to be successful _ Typically supply electricity to less than 5000 customers and generate revenues of below 1 M € ------ DIPL.-ING. NICO PETERSCHMIDT MANAGING DIRECTOR INENSUS GMBH
4/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING EXAMPLES FOR EXISTING MINI-/ MICRO-UTILITIES Company Name Unique selling proposition Development Stage Financing and ownership structure The Power Model adjusted to the framework in Large pilot villages American founders with the Philippines, Community connected, preparing new local investors/ Source Group Energizer Platform TM for replication in shareholders smaller sites Husk Power Franchising approach for 80 plants supplying Mainly impact investors gasification plants adjusted to electricity to 300 like Shell Foundation, Systems Indian conditions, entering into villages established Acumen Fund, LGT Africa Philanthropy, Bamboo Finance etc. INENSUS West PPP model adjusted to Senegalese Pilot village connected Joint Venture between framework, risk management model in 2010, replication in the INENSUS GmbH and Africa of MicroPowerEconomy, solar and 30 more villages CSI MATFORCE; Mezzanine small wind technology initiated from FMO for scale-up New demand side management publicly funded unknown Wireless approaches, adjusted to conditions projects, private Energy in Chile investments planned MFC Nyetaa Adjusted to conditions in Mali Currently preparing for Owner and Mali seven village Folkecenter, further connections investors unknown Sunlabob PPP model for micro-hydro systems Pilot system installed Equity from the owner, as in Laos in 2005 Triodos bank and FMO 2007 Energy for Village holds shares of the micro- Pilot system installed A medium size German utility just as the professional in Senegal utility is major Africa ------ DIPL.-ING. NICO PETERSCHMIDT company. shareholder MANAGING DIRECTOR INENSUS GMBH
5/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING WALKING DOWN THE ECONOMIES OF SCALE CURVE Foto: A Micro-Utility connects new customers
6/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING SMALLER GRIDS – DIFFERENT CHALLENGES Economies of scale effects National and large/medium private utilities in main-grids Cooperatives and small utilities Mini-Utility sector Power Source Group Micro-utility Husk Power sector Systems INENSUS Inofficial sector 10,000 1,000,000 10,000,000 1,000,000,000 100,000 100,000,000 kWh/year kWh/year kWh/year kWh/year kWh/year kWh/year Sales per site (logarithmic axis) ------ DIPL.-ING. NICO PETERSCHMIDT MANAGING DIRECTOR INENSUS GMBH
7/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING SMALLER GRIDS – DIFFERENT CHALLENGES Decreased economies of scale effects means increased challenges in: 1. Technical system stability due to higher concurrency 2. Prevention of conflicts arising due to intransparent community decision making structures 3. Revenue stabilization due to less divers income sources of customers 4. Increasing operation and transaction costs per kWh produced requires new management approaches ------ DIPL.-ING. NICO PETERSCHMIDT MANAGING DIRECTOR INENSUS GMBH
8/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING COST OF ELECTRICITY PER kWh – EXAMPLE INENSUS WEST AFRICA Targeted margin 0.09 € 1.20 € Transaction and head 1.00 € 0.42 € office 0.80 € Operation and 0.15 € Maintenance 0.60 € 0.12 € Diesel Fuel 0.40 € 0.40 € Depreciation and Interest 0.20 € - € 36% of tariff are transaction and head office costs Source: INENSUS West Africa ------ DIPL.-ING. NICO PETERSCHMIDT data indicative MANAGING DIRECTOR INENSUS GMBH
9/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING THE TRANSACTION COST LEVER High transaction cost lead to high electricity prices resulting in: 1. Electricity price elasticity challenge 2. Conflicts with Regulatory Authorities 3. Conflicts with willingness / ability to pay ------ DIPL.-ING. NICO PETERSCHMIDT MANAGING DIRECTOR INENSUS GMBH
10/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING TRANSACTION COSTS IN MICRO-UTILITIES Foto: Wind-Solar-Diesel hybrid power system with battery storage for village power supply designed and operated by INENSUS West Africa
11/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING TRANSACTION COSTS Nation. authorities/ministries 1. Implementation period defined by Public Partner vs. Nation. fiscal policy duration to acquire permissions National framework level 2. No coverage of foreign exchange risk 5. Expensive CDM Int. Public Partners / application procedure cannot Donors Foreign be covered by 3. Low tariffs vs. costs for investment acquisition of permissions; grants 4. Equity needs to cost of permission acquisition guarantors be spent when must often be neglected in CDM / UNFCCC available vs. tariff calculation according to permissions need regulatory authorities unpredictable 7. Implementation 8. Taxation duration period defined by scheme in dev. Public Partners vs. countries often 6. CDM only applicable due diligence not transparent with large scale projects duration of banks to SMEs in PoA approach International support structure level Micro-Utility Equity investors (SME) 10. Long and 9. Low total amount expensive due of capital required diligence processes and low tariffs vs. 11. MFIs often expect high immediate high effort to acquire benefits from cooperation with micro- a loan utilities and are not prepared to invest into new markets without donor support MFIs Banks Project implementation level ------ DIPL.-ING. NICO PETERSCHMIDT MANAGING DIRECTOR INENSUS GMBH
12/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING FINANCING ALONG THE MICRO-UTILITY DEVELOPMENT TIMELINE 12/21 INENSUS HISTORY Foto: Happy electricity customers of a Micro-Utility
13/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING FINANCING ALONG THE MICRO-UTILITY DEVELOPMENT TIMELINE Year 1 Year 2 Year 3 Year 4 Year 5 Development of Select Political Company Model Operation, Maintenance Growth Using the political Scale-up Replica- adj. model village frame- foundation implemen- Monitoring of dem. framework for tion work and tation Due Diligence for replication replication financing Installation Cashflow : Breakeven Core equity 6: 300 k € … 10 M€ Core equity 1: Core equity 2: Core equity 3: Core equity 4: Core equity 5: Equity from impact investors, 20 k € … 100 k€ 30 k € … 150 k€ 100 k € … 500 k€ 30 k € … 150 k€ 20 k € … 50 k€ loans from development banks, etc. 0.5 M € … 10 M€ Financing gap Business Plan and PPP money or subsidies for pilot phase PPP money or subsidies development for scale-up subsidy ------ DIPL.-ING. NICO PETERSCHMIDT MANAGING DIRECTOR INENSUS GMBH
14/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING CONCLUSIONS AND RECOMMENDATIONS Foto: Before the Micro-Utility takes over
15/16 CHALLENGES IN SCALING OF MICRO-UTILITIES OPERATION, LEGAL FRAMEWORK AND FINANCING CONCLUSIONS AND RECOMMENDATIONS _ Transaction costs and related long project preparation durations are the main barriers for Micro-Utility scale-up _ Two approaches could overcome the transaction cost challenge: 1. BOTTOM-UP: Financing instruments could be set up supporting the company foundation and scale-up preparation phase where most of the transaction costs occur. The financing instruments should be a mixture of grants and early stage long term investments , preferably equity. Long term loans should be available in local currency for reasonable interest to reduce the foreign exchange risk of the micro- utility. 2. TOP-DOWN: Transaction costs can be reduced by coordinating constraints of support instruments, financing instruments and the legal framework of the respective country. Country specific private sector electrification programs involving a number of financing and support instruments adjusted to each other might be established. A mixture of both approaches might solve the problem. IRENA, UN Foundation, etc. could play a central role in the coordination process. ------ DIPL.-ING. NICO PETERSCHMIDT MANAGING DIRECTOR INENSUS GMBH
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