Enabling private sector investment in microgrid-based rural electrification in developing countries: A review

Abstract

Access to electricity is widely recognized as an important factor for economic and social development. Low rates of access, particularly in remote rural areas in regions such as sub-Saharan Africa, South Asia, and Southeast Asia, have led developing nations and international organizations to set ambitious goals to expand the reach of electricity. Decentralized solutions such as microgrids have been proposed as cost effective solutions to reaching communities located far from central grid infrastructure. Lack of capital from public and donor sources has severely impeded achieving access goals, leading to calls for greater private sector participation in electrification activities. However, due to the high level of risk associated with decentralized electrification projects in low-income areas, marginal expected returns on investment, and a lack of clear and effective public policy, the private sector has not shown significant interest in participating in such projects. The purpose of this paper is to review barriers to private sector participation in decentralized electrification projects and to identify solutions that have been implemented and proposed to overcome these barriers. The barriers discussed include unsecure revenue streams, inability to finance projects, and long-term project risks such as grid encroachment. The range of interventions and business models reviewed include methods to secure reliable demand, subsidy models, risk guarantees, and different revenue models. This paper does not include an analysis of the effectiveness of the different interventions described. Future research should evaluate the relative costs and benefits of these interventions in order to provide robust policy guidance to decision makers in developing countries.