Two sides of a coin: Assessing trade-offs between reliability and profit in mini grids and the policy implications for subsidies

Abstract

Universal access to electricity is an important milestone featured in countries development plans. It is well understood within the energy practitioner and research communities that to reach this milestone, distributed energy resources, especially mini grids, are to play a crucial role as they represent a least cost alternative to reach most rural communities. The success of mini grids though is highly reliant on favorable policies, particularly regulations pertaining to tariffs (i.e., electricity rates). In this research, we use Tanzania as a case study to investigate the likely consequences of grid and mini grid tariff equalization regulation which ignores the fact that the tariff charged on the grid is highly subsidized compared to mini grid tariffs that must be cost reflective for mini grid utilities to be financially sustainable. We recognize that a private mini grid operator has an obligation to make profits for the investors. Because of this, they have two critical yet divergent operating points from which to choose: (1) serving 100% of the demand at all times, potentially incurring operating losses during some periods and (2) partially serving the demand to maximize returns, potentially compromising customer satisfaction. Using an empirically-informed model of a mini grid sized to minimize net present cost that supplies power to 500 customers, we quantify the cost of reliability between these two key operating points and trace the curve relating profit and reliability, for two types of load scenarios: fixed loads and fixed plus flexible loads. We found that profit is optimized at a reliability of 92.3% and 86.0% for systems that meet fixed loads and fixed plus flexible loads respectively. This reduced reliability can have crucial implications on the viability of mini grids for providing electricity access, as customer dissatisfaction and profits may erode. We show that under the policy of tariff equalization between the centralized grid and mini grids, the latter is challenged to survive and therefore the communities which are being served through mini grids may experience de-electrification, which would represent a huge regression with regards to meeting the United Nations Sustainable Development Goal 7 (SDG7) of universal electricity access.