Guidebook: Smart Incentives for Mini-Grids through Retail Tariff and Subsidy Design
Clean energy mini-grids are receiving increasing attention as a cost-effective means to deliver energy access, increase resilience and achieve climate change commitments under the Paris Agreement.
However, the economics of mini-grids in developing countries remains challenging. How tariff and subsidy policies are designed has become a central factor in determining the viability of private sector participation in scaling deployment of minigrids as an effective energy access solution.
This guidebook is a resource for policymakers seeking to accelerate the development of minigrids to achieve national and global climate and energy access goals and stimulate private investment in increasing electrification rates. The guide draws from and informs the Africa Minigrids Community of Practice (AMG-CoP) and examines a range of possible policies that governments could adopt (and have adopted) to provide smart incentives for private operators to build and expand mini-grids, with an in-depth look at policies for retail electricity tariffs and the design of subsidy programs.
Key takeaways include:
- Retail tariff policies: When setting retail tariff policies, policymakers must balance between the politics of tariff rates in different communities, developers who need to maintain viable business models and customers who want access to energy at a tariff that they can afford and are willing to pay.
- Subsidy policies: Subsidies can be delivered by either supplying certain elements to the developer directly, or by a financial transfer paid for inputs or outputs, generation or distribution outcomes, or on a capital or operational basis. The value of the subsidy should be high enough to ensure that the mini-grid operation is sustainable and profitable, but low enough to maximise the impact of limited subsidy resources.
This guidebook was made possible through support from the German Government’s International Climate Initiative Mobilizing Private Investment Program. The case study was compiled by Electric Capital Management, the Co-Chair of the LEDP GP Finance Working Group.
Read the report HERE.