3Q 2018 Off-grid and Mini-grid Market Outlook

3Q 2018 FRONTIER POWER MARKET OUTLOOK

EXECUTIVE SUMMARY

Microgrids and decentralized renewables are slowly moving from the fringes to the mainstream, marked by new first-of-their-kind projects, business models and policy programs. India is making rapid progress on its goals to expand electricity access to all, albeit mostly by extending the main grid.

  • Microgrids: Fewer new microgrid projects were announced last quarter than in 1Q 2018, but the ones that were launched cover an increasingly wide range of applications. It is not just remote areas and islands, but also projects aimed to boost the efficiency of gas-fired power plants or to integrate power from utility-scale wind and solar farms. Both Aggreko and Sterling & Wilson have introduced new turnkey microgrid offerings combining solar, storage and fossil fuels, bringing new scale and expertise to the vendor universe.
  • Fuel cells: The market for fuel cells in remote power applications has also seen an injection of fresh momentum, led by Bloom Energy’s filing for an IPO. There was record deployment in 2017, mostly in North America and Asia.
  • India claims that 100% of its villages are now served with electricity, and the pace of household electrification has quadrupled in 2018. However, the government is unlikely to reach its (already postponed) target of 100% electricity access for all households by March 2019. A new subsidy scheme for off-grid solar will struggle to attract investors. Nonetheless, India will play a leading role in expanding electricity access.
  • Energy access: Bloomberg NEF expects the world will spend some $162 billion on building new power lines, microgrids and solar home systems for energy access between 2018 to 2030, but this is less than half of the amount needed for universal access. Solar home systems and microgrids will play a major role in East Africa and West Africa respectively. Grid extension will be the main option for access in the rest of Africa.

BY THE NUMBERS

  • $162 billion investment on electricity access through 2030
  • $2.8 billion Development bank financing for energy announced in 2Q 2018
  • 100,000 solar home systems that Off-Grid Electric and EDF will distribute in Cote d’Ivoire

Figure 1

HIGHLIGHTS

LONG-TERM ENERGY ACCESS OUTLOOK

Some $162 billion will be spent on electricity access through 2030, but this number needs to more than double for electricity to reach everyone on the planet. Bloomberg NEF’s recently published report titled Powering the Last Billion maps out an integrated view on universal electricity access, quantifying the roles that the main grid, microgrids and solar home systems can play. The grid will continue to be the solution of choice for those living near it already, or where power demand is high. Decentralized energy from community-level grids and small solar kits will however bring first-time electricity to more people than the grid every year from the mid-2020s onwards.

These findings are driven primarily by economics. At a quick glance, microgrids and solar home systems appear expensive when compared to power from the grid. But, extending the grid to connect new users already costs between $266-2,100 per household. Where households can afford large appliances, such an investment may make sense. However, with household consumption for most bottom of the pyramid families likely to stay below 200kWh per year, such a large upfront investment can bring the effective cost of electricity to as much as $1/kWh. At this price point, both microgrids and solar home systems bundled with super-efficient appliances are cheaper than extending the grid.

Figure 2

Unlike traditional ‘poles and wires’, both solar home systems and microgrids are likely to get cheaper in future as solar modules and lithium ion batteries will drop 37% and 54% between today and 2025, respectively. The main areas of innovation for off-grid energy companies, however, will not be technological, but in distribution, demand management and the extent to which they leverage connectivity, data and overlaps with other sectors such as agriculture. Some current trends highlight the opportunities: * Additional day-time load can reduce the average cost of electricity in a rural microgrid by 18%, mostly because it allows capturing more solar energy. Midday loads such as water pumping, cooling, agricultural processing or small industry is more likely to be income-generating than residential evening loads which are costlier to meet.
* Small solar home systems provide a limited range of services, but are affordable and popular with consumers. In East Africa, we estimate that kits consisting of several lights and basic appliances have reached a market penetration of about 10%, but have barely made inroads in other regions. By 2030, some 72 million households may use them, reached through both formal and informal channels.

This leadership position will mean East Africa will become one of the largest markets for solar home systems, with total capital spend exceeding that on grid extensions. Microgrids are expected to play a larger role in Western Africa, where some governments are developing ambitious roll-out plans. In South Asia and the rest of Africa, the grid will maintain a more dominant role.

Figure 3

INDIA RACES TO UNIVERSAL ELECTRIFICATION FAST, BUT BEHIND SCHEDULE

In April 2018, India officially announced that every village in the country is now served with electricity. However, only a small section of the population and a few public buildings actually gained access to electricity, with millions of households remaining unserved. India now aims to achieve electricity access for all the households in the country by the end of March 20191, three months later than the initial deadline of December 2018.

Figure 4

Progress on reaching all households has more than quadrupled since the launch of the Saubhagya scheme. However, with the current rate of electrification, India will still be behind the adjusted target in March 2019, only weeks before the current government’s term expires. More than 3 million households need to be connected every single quarter beyond July 2018 in order to achieve the goal.

This scheme however doesn’t consider reliability of power supply. There are still two towns in India facing more than 12 hours of power outage and nine towns facing outage of between four to 12 hours per day on average in June 2018 according to Urban Jyoti Abhiyaan which monitors power supply status in urban areas. The power quality in the rural areas is considered to be even poorer.

India’s cabinet committee on economic affairs approved the third phase of the off-grid solar program on June 62. This aims to accelerate growth in India’s smallest PV segment but even the modest target of 118MW off-grid capacity by 2020 is unlikely be met. The program consists of two components: * 100MW of microgrids provide electricity to public buildings which are excluded from the Saubhagya scheme. * 18MW of off-grid solar lighting including 2.5 million study lamps and 0.3 million street lights. These will be installed primarily in the North Eastern part of India.

Although the government will provide around 33% of the $290 million budget for the scheme as a direct subsidy for microgrids, developers are unlikely to line up just yet as the revenue stream remains unclear. In spite of the huge potential, off-grid solar will continue to lag behind grid extensions and utility and commercial-scale solar projects both in terms of scale and momentum.

FUNDAMENTALS

Weakening currencies and stabilizing oil and diesel prices have made it harder for emerging market buyers to justify alternatives to fossil-fueled distributed power generation since March. Shipments of both solar PV modules and diesel power generators declined in the most recent data. Developers seeking to benefit from development finance are also facing a smaller pot, as we tracked just $2.8 billion in energy commitments from leading development banks this quarter.

SOLAR CELLS AND MODULES SHIPMENT FROM CHINA

Figure 5

Solar shipments from China to non-OECD countries tapered off in March after a strong start into the year, ending the first quarter 3% lower than in 2017. Total sales during 1Q 2018 were $1.75 billion, the second highest in a quarter in the last three years. India remained the most significant buyer for Chinese solar modules, accounting for 52% of total PV imports to non-OECD countries, followed by Brazil and the United Arab Emirates (UAE). Latin America, buoyed by Brazil and Argentina, and the Middle East, driven by the UAE and Morocco had strong sales. Sub-Saharan Africa continued its strong performance seen in recent months. The largest solar markets in Africa, South Africa and Kenya continued to decline with shipments well below their monthly averages since 2015. Namibia showed an uptick towards the end of the quarter.

DIESEL GENERATOR SALES

Diesel generator sales to non-OECD countries averaged $274 million per quarter in 2017, down some 3.6% from 2016. This marks the seventh consecutive year that diesel generator shipments have decreased in dollar terms, with capacity the lowest it has been since 2009. Imports in Sub-Saharan Africa during the last quarter of 2017 saw a slight increase. However, it was still the lowest quarter outside of 2017, implying that efforts to improve power supply in the region may be gradually coming to fruition. Southeast Asia’s diesel generator imports in 2017 were the highest since data start in 2008.

Figure 6

Southeast Asian construction boom drives back-up power demand

While many Southeast Asian nations have historically relied on diesel generators to electrify off-grid areas or function as backup to unreliable grid connections, the region’s fast-growing building stock is now also driving a surge in demand for back-up power. Cambodia, Indonesia, Myanmar, the Philippines and Vietnam all had some of the highest diesel generator imports in recent years. However, imports of larger capacity diesel generators with more than 375 kVA fell between 10-25% in these four countries in 2017. Across the region, gensets of less than 375kVA proliferated while higher capacity sets saw stagnating or declining market share, indicating demand is mainly coming from small and medium enterprises. The 2017 GDP growth for these four economies was between 5.1% and 6.8%, and construction output rose by 9.5% in Indonesia and 12.3% in Vietnam.

RETAIL DIESEL PRICES

In June, retail diesel prices across South and Southeast Asia declined for the first time since January, driven by the weakening of Brent crude prices. The retail diesel market reacted to the news that members of the Organization of the Petroleum Exporting Countries (OPEC) agreed to increase their total output by about 1% of the global oil production to address the recent price increases3. Lower or more stable diesel fuel prices tend to make buyers more hesitant to commit to capital expenditure to cut the cost of diesel power generators.

Figure 7

FOREIGN EXCHANGE RATES

South Africa’s Rand slumped against the U.S. dollar by 9% from the beginning of the year through June 26 due to the country’s widening current-account deficit, slow economic growth, and growing inflation pressure4. Uganda’s Shilling has also lost 5% to the U.S. dollar since April. Other African currencies have been relatively stable in 2Q 2018.

In Asia, the Pakistani Rupee was the region’s worst-performing currency in 1H 2018, after having undergone three devaluations since December amid a worsening economy5. Poor performing currencies lead to a higher cost of purchasing imported energy equipment and of debt, if an energy service provider borrows money in U.S. dollars and receives revenue based on these currencies.

Figure 8

Figure 9

DEVELOPMENT BANK FINANCING FOR ENERGY PROJECTS

Development banks approved some $2.8 billion in loans, funds, grants and guarantees in 2Q 20186. This is a $0.5 billion decrease from the prior quarter. Power generation accounted for two-thirds of the funds on the back of several big-ticket loans for the construction of natural gas and solar generation facilities. Less than 10% of the total was allocated to grid extensions, a stark contrast to the first quarter. Some $134 million was directed towards off-grid energy access, a 350% increase over the first quarter of 2018. Bangladesh was again one of the primary recipients of development bank financing, with $555 million, including $500 million for a combined cycle gas turbine power plant. Turkey, an OECD member, received $855 million, with $600 million going to the expansion of a gas storage facility. India received $435 million, including $300 million to follow up on its highly successful LED and energy efficiency program. Nigeria saw just $1.5 million of financing this quarter, after announcing $486 million in financing in the prior quarter. Kenya received $223 million, which included $180 million intended to mobilize private sector funding.

Figure 10

POLICY

Nigeria and Togo moved to institutionalize distributed solar in their development plans this quarter, while South Africa withdrew, at the last minute, a set of rules designed to punish users of rooftop solar.

South Africa puts anti-rooftop solar policy on hold

On May 26, South Africa’s National Energy Regulator (NERSA) withdrew the proposed rules to regulate the market for individuals and organizations using embedded power generation with less than 1MW7. The rule intended to create a database to identify those who were living off the grid completely or partially in order to levy fees on them. Another showdown is likely as NERSA mentioned that it will redraft the proposal.

Nigeria selects solar-hybrid provider for education facilities

On April 25, Nigeria’s Rural Electrification Agency (REA) started implementing the Energizing Education Program by signing an agreement with METKA Power West Africa, a solar EPC firm. The program aims to provide uninterrupted power supply to 37 universities and seven teaching hospitals in the country with solar-hybrids of a total generation capacity of 90MW.

METKA Power will be in charge of four projects with a total capacity of 7.5MW in 20188. REA leads this program together with another initiative to build over 10,000 community microgrids launched in 2017, which received a $350 million loan commitment from the World Bank9. As of the end of June, REA had not called for proposals for this project.

Togo launches 2030 electrification plan

Another West African country, Togo, has launched its electrification strategy, an initiative by the government and African Development Bank, which will include grid extension to nearly 1,000 communities, off-grid solar kits distribution, and 60 solar “mini-plants” in the next 12 years10. The government aims to reach universal electricity access by 2030, and the new program will require a budget of 1,000 billion CFA francs ($1.7 billion). Pay-as-you-go companies including BBOXX and Greenlight Planet are already present in the Togolese energy access market, which also attracts utilities such as EDF and Engie to participate in upcoming tenders. See 2Q 2018 Off-grid and Mini-grid Market Outlook for more details of electricity access activities by the major utilities’ and oil companies.

MICROGRIDS

Indonesia and the Philippines both inaugurated innovative renewables based microgrids last quarter, in a sign that the region may slowly be warming to their potential for island grids. ABB, Siemens and Aggreko all made news last quarter with innovative approaches to using microgrid technologies to boost gas-fired power generation, new business models and pilot projects for grid-embedded microgrids.

Figure 11 shows that the number of new projects dropped from 16 in 1Q 2018 to 11 in 2Q, totaling 104 MW in power generation capacity (excluding five projects which did not disclose size). Australia dominated the activity in 2Q, with four projects across a range of applications such as gas-fired power plant optimization and island power. No new projects were announced in China, which accounted for the ramp-up in project activity in 2Q 2017.

Figure 11

Table 1 shows selected microgrid projects announced or completed between April 11 and July 2 2018.

Table 1

Indonesia and Philippines launch first-of-their-kind microgrids

Indonesia and Philippines, the two most populous Southeast Asian island nations, aim to reach 100% electrification by 2020 and 202211 from 92% and 91% respectively at the end of 2016. With many communities reachable only by boat, microgrids are ideally suited to provide 24/7 power for isolated island communities.

In June, Akuo Energy inaugurated three renewables-based microgrids on remote islands with a total of 460 homes in Indonesia’s East Kalimantan region. The communities used to rely on diesel generators, forcing them to use power only for limited time period during the day12. The microgrids lower the cost of electricity and extend operating hours by combining a total of 1.2MW PV, 2.1MWh of battery storage and diesel generators.

In the Philippines, Solar Philippines said it will spend $15 million to develop isolated microgrids at 10 locations across the country13. The company inaugurated a utility-scale microgrid consisting of 2MW PV, 2MW diesel generator, and 2MWh lithium ion batteries in Mindoro Island in March14. Shell is also advancing 20 rural microgrids for communities in Palawan Island, although this engagement seems to be purely philanthropic15. Shell started backing microgrid companies including Husk Power and GI Energy in early 2018.

These new assets may highlight the energy cost saving potential and reliability improvement, which could convince the governments to undertake the necessary reforms to allow private IPPs to serve. We expect additional projects to move ahead in the coming months. We expect Southeast Asia to spend $14 billion to reach almost universal electricity access by 2030, and these two countries will reach about 75% of their off-grid population with mostly microgrids.

STAND-ALONE SYSTEMS

Off-grid solar systems are now an integral part of the development finance toolkit in the energy sector, with more governments in Africa incorporating specific targets for solar home systems. Grid-tied rooftop solar has historically been neglected as it can be too small for energy teams and not impactful enough for social policy. A few recent deals suggest this is about to change.

OFF-GRID SOLAR BECOMING DEVELOPMENT FINANCE MAINSTREAM

The pay-as-you-go solar home system business started with tinkering entrepreneurs, was scaled with impact and donor funds, and it is now becoming a significant component of mainstream development financing and government programs. On June 15, 2018, the African Development announced it will partially guarantee a local currency debt facility issued by three private banks to Zola EDF Côte d’Ivoire (ZECI), a joint venture of Off-Grid Electric and EDF. The facility will finance about 100,000 solar home systems to as many households.

The Democratic Republic of Congo has gone further yet and signed a contract with BBOXX, a pay-go startup, under its ‘Energie pour Tous’ initiative. BBOXX will receive an import tax exemption on solar equipment, and claims its activities will reach 2.5 million of the nation’s 62 million off-grid households by 2020, according to a press release. The project resembles an initiative in Rwanda, where Ignite Power has agreed to serve 250,000 households with solar home systems.

COMMERCIAL AND INDUSTRIAL SOLAR

PV projects for medium-sized clients in South Asia, and to a smaller extent, Africa are starting to receive more specialized debt financing. On May 31, 2018 India’s Azure Roof Power announced it had secured a $135 million line of credit led by IFC16. The deal marked the largest debt round in India’s rooftop market, which has slowed down in late 2017 and early 2018 after strong growth. IFC has played a leading role financing the sector, having invested $15 million in Azure’s competitor Cleanmax in late 2017.

In Pakistan, JS Bank has introduced a partnership with PV manufacturer Nizam Energy to finance customer orders of up to 10 million Pakistani rupees ($82,476)17. The relatively small size per customer indicates that solar as an on-site power generation source is becoming mainstream in Pakistan, where the power grid is notoriously strained. The nation imported some $56 million of PV equipment from China in 1Q 2018, even though only one utility-scale project is currently under construction.

Solar-focused niche lender SunFunder also closed a $1.2 million facility with Questworks, a Kenyan solar developer focusing on commercial and industrial projects.

FUEL CELLS DOWN, BUT STILL NOT OUT

The market for fuel cells in remote and backup power applications has seen an unexpected level of news flow in 2Q 2018, both on capital markets but also in deployment.

GenCell Energy, an Israel-based startup, on July 2, 2018 announced a deal with telecom integrator Adrian Kenya to install its recently announced power solution at 800 telecom towers in Kenya. The company previously announced it can deliver power at $0.5/kWh in an off-grid setting, using ammonia as a fuel stock. A day later, the Australian Renewable Energy Agency provided an A$1.5 million grant for a hydrogen microgrid in Western Australia.

The previous month, Germany’s SFC Energy raised 4.2 million euros via a private equity placement to finance further growth of its fuel cell business. The company signed a distribution agreement for China in April.

Bloom Energy, a U.S.-based fuel-cell provider that has raised close to $1.1 billion, filed for an IPO on June 12, 2018. The prospectus showed its revenue had grown 80% to $375 million in 2017, and losses shrank from $336 million in 2016 to $281 million in 2017. It also shows that Bloom has reduced the manufacturing cost of its 100kW product by 24% between 1Q 2016 to 1Q 2018.

Fuel cells have long had a notable presence in remote power systems, but growth has been slow. In 2017, some 650MW were deployed globally, mostly in North America and Asia. New project closures have slowed in 2017, and the total market is expected to shrink slightly this year before picking up again in 2019.

Figure 13


1 Government of India, Ministry of Power, “Objectives of Saubhagya Yojana”, February 8, 2018

2 Government of India, Press Information Bureau, “Cabinet approves Continuation of Off-grid and Decentralized Solar PV Applications Program - Phase III” June 6, 2018

3 The New York Times, “OPEC, After Bolstering Prices, Considers Ramping Up Oil Production”, June 22, 2018

4 Bloomberg, “Rand Is Losing Out to Some of the Most Volatile EM Currencies”, June 27, 2018

5 Bloomberg, “Pakistan Devalues Its Currency for Third Time Since December”, June 11, 2018

6 Refers to World Bank, Asian Development Bank, African Development Bank, FMO, IFC

7 National Energy Regulator of South Africa, “Withdrawal of consultation paper on the draft rules for registration of small-scale embedded generators published on 26 April 2018”, June 15, 2018

8 Rural Electrification Agency, “REA to implement Energising Education program”, April 25, 2018

9 Rural Electrification Agency, “World Bank loan aims to catalyze private investment in Nigerian energy“, April 20, 2018

10 PHYSORG, “Togo launches new energy scheme with focus on renewables”, June 27, 2018

11 UNTV, “Duterte admin targets 100% electrification in 2022”, March 14, 2018

12 Akuo Energy, “Akuo Energy has commissioned its first three mini-grids powered by renewable energy”, June 14, 2018

13 Devdiscourse, “Solar Philippines to put $15 million in microgrid projects”, June 14, 2018

14 Electrek, “Tesla Powerpacks power up new microgrid to stop outages in town in the Philippines”, March 21, 2018

15 Manila Bulletin, “Shell advancing 20 micro-grid ventures in Palawan”, May 27, 2018

16 Azure Roof Power, “Azure Roof Power Announces US$ 135 Million Financing”, May 31, 2018

17 JS Bank, “JS Bank Partners With Nizam Energy For JS Smart Roshni – Solar Panel Financing Solution”, May 24, 2018