DIRECTIONS IN DEVELOPMENT Energy and Mining From the Bottom Up How Small Power Producers and Mini-Grids Can Deliver Electrification and Renewable Energy in Africa Bernard Tenenbaum, Chris Greacen, Tilak Siyambalapitiya, and James Knuckles From the Bottom Up DIRECTIONS IN DEVELOPMENT Energy and Mining From the Bottom Up How Small Power Producers and Mini-Grids Can Deliver Electrification and Renewable Energy in Africa Bernard Tenenbaum, Chris Greacen, Tilak Siyambalapitiya, and James Knuckles © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 17 16 15 14 This work is a product of the staff of The World Bank with external contributions. Note that The World Bank does not necessarily own each component of the content included in the work. 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The World Bank shall not be liable for any content or error in this translation. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected]. ISBN (paper): 978-1-4648-0093-1 ISBN (electronic): 978-1-4648-0111-2 DOI: 10.1596/978-1-4648-0093-1 Cover image: NASA Earth Observatory image by Robert Simmon, using Suomi NPP VIIRS data provided courtesy of Chris Elvidge (NOAA National Geophysical Data Center). Suomi NPP is the result of a part- nership between NASA, NOAA, and the Department of Defense. Image retrieved from NASA’s “Visible Earth” website: http://visibleearth.nasa.gov/view.php?id=79765. Cover design: Debra Naylor, Naylor Design, Inc. Library of Congress Cataloging-in-Publication Data Tenenbaum, Bernard William, author. From the bottom up : how small power producers and mini-grids can deliver electrification and renewable energy in Africa / Bernard Tenenbaum, Chris Greacen, Tilak Siyambalapitiya, and James Knuckles. pages cm. – (Directions in development) ISBN 978-1-4648-0093-1 (alk. paper) – ISBN 978-1-4648-0111-2 1. Rural electrification—Africa. 2. Rural electrification–Economic aspects—Africa. 3. Small power production facilities—Africa. 4. Distributed generation of electric power—Africa. 5. Remote area power supply systems—Africa. I. Greacen, Chris. II. Siyambalapitiya, Tilak. III. Knuckles, James. IV. World Bank. V. Title. VI. Series: Directions in development (Washington, D.C.) HD9688.A352T46 2014 333.7932096—dc23 2013043831 From the Bottom Up • http://dx.doi.org/10.1596/978-1-4648-0093-1 Contents Foreword xiii Acknowledgments xv About the Authors xix Abbreviations xxi Overview 1 The Centralized and Decentralized Tracks to Electrification 1 What Are Small Power Producers and Distributors? 2 Regulating SPPs 3 Regulating Main-Grid-Connected SPPs 6 Regulating SPPs and Mini-Grids That Sell to Retail Customers 10 Preparing for the Arrival of the Main Grid 13 From Broad Strategy to Ground-Level Implementation 16 Chapter 1 Introduction 19 Abstract 19 Africa’s Two-Track Approach to Rural Electrification 19 Our Purpose and Approach 20 What Are the Typical Starting Conditions in Africa? 21 Whose Regulatory Decisions? 22 Acknowledging Controversies and Understanding Different Vocabularies 23 Regulation: The Problem or One Part of the Solution? 24 Two Other Important Success Factors 25 Organization of the Guide 26 Chapter Highlights 28 Notes 28 References 30 Chapter 2 Small Power Producers, Small Power Distributors, and Electrification: Concepts and Examples 31 Abstract 31 What Are Small Power Producers? 31 From the Bottom Up • http://dx.doi.org/10.1596/978-1-4648-0093-1 v vi Contents The Four Main Types of Grid and Off-Grid SPPs in Africa 35 Combinations of Cases 39 Purchases As Well As Sales 40 Mini-Grids and SPPs: A Clarification 43 Which Types of SPPs Are Likely to Achieve Commercial Viability? Some Early Evidence from Tanzania 45 What Are SPDs? 50 Electrification: What Is It and How Can It Be Measured? 52 Defining Electrification as Connections 52 Defining Electrification as Needs Served 53 The Traditional Electrification Ladder Approach and Its Weaknesses 53 Measuring Electrification by Its Attributes 55 Measuring Electrification: From Theory to Practice 57 Notes 60 References 62 Chapter 3 The Regulation of Small Power Producers and Mini-Grids: An Overview 65 Abstract 65 What Is Regulation? 65 Three Types of Regulatory Decisions That Affect SPPs 66 The Importance of Regulatory Process 67 Light-Handed Regulation: When It Works and When It Doesn’t 69 To Regulate or Deregulate? A Specific Example 72 Who Should Regulate SPPs and Mini-Grids? 75 Notes 81 References 82 Chapter 4 Regulatory Processes and Approvals: Who Approves What, When, and How? 85 Abstract 85 The Key Approvals Required: Electricity Sector–Specific versus General Approvals 86 A Successful Example: The Regulatory Process in Sri Lanka 88 Should Resale of Provisional Approvals, Final Permits, or Licenses Be Allowed? 97 Licensing: Does the SPP Have a Legal Right to Exist? 101 Recommended Characteristics of a Good Regulatory Review and Approval System 104 Notes 114 References 116 From the Bottom Up • http://dx.doi.org/10.1596/978-1-4648-0093-1 Contents vii Chapter 5 The Regulatory Treatment of Subsidies, Carbon Credits, and Advance Payments 119 Abstract 119 Types and Sources of Subsidies Available to SPPs and Their Customers 119 Regulating Subsidies: The Key Recommendation 121 Subsidies for Connection Charges and Costs 122 Cross-Subsidies in Tariffs 137 Revenues Earned from Carbon Credits through the Clean Development Mechanism or Other Carbon Credit Programs 141 Advance Payments to Close the Equity Gap 147 Notes 149 References 152 Chapter 6 Regulatory Decisions for Grid-Connected Small Power Producers 155 Abstract 155 Comparing the Purchase Agreements of SPPs and Independent Producers 156 Should the Power-Purchase Agreement Include a “Deemed Energy” Clause? 162 Tariffs for Backup Power Purchased by the SPP 170 Should the SPP Have the Option of Not Entering a Backup Capacity Contract? 176 Notes 177 References 178 Chapter 7 Grid-Connected SPPs: Creating Workable Feed-In Tariffs 179 Abstract 179 What Are Feed-In Tariffs? 179 The Two Principal Methods for Setting FITs in Developing Countries 180 Local Currency versus Hard Currency 187 Major FIT Implementation Questions and Issues 188 Who Should Pay the Extra Costs of FITs? 198 Donor Top-Ups of FITs 201 Walking Up the Renewable Energy Supply Curve: A Recommended Strategy 202 Notes 207 References 209 Chapter 8 The Technical and Economic Rules Governing Grid-Integration Interconnections and Operations 213 Abstract 213 Basic Terms and Concepts 213 From the Bottom Up • http://dx.doi.org/10.1596/978-1-4648-0093-1 viii Contents Standardizing the Process for SPPs to Interconnect to a National or Regional Grid 214 Scope of the Engineering Standards for Interconnection 216 Paying for Interconnection Costs 217 Successful Integration of SPPs into the Grid: Technical and Commercial Requirements 223 Factors to Consider When Connecting to an Isolated Mini-Grid with Existing Diesel Generators 229 Notes 235 References 237 Chapter 9 Regulatory Decisions for Small Power Producers Serving Retail Customers: Tariffs and Quality of Service 239 Abstract 239 Setting Retail Tariff Levels: Concepts and Cases 240 Cost-Reflective Tariffs for Isolated SPPs: How Can the Cost-Revenue Gap Be Closed? 245 What Can a Regulator Do to Promote the Commercial Viability of Isolated Mini-Grids? 255 Tariff Levels for Community-Owned SPPs 259 Setting Tariff Structures: Concepts and Cases 262 Should Tariffs Be Prepaid or Postpaid? 269 Alternatives to Setting Retail Tariffs on a Case-by-Case Basis 271