Hybrid Model

Given the pros and cons for each business model, a combination of the above three business models could become an effective local institutional arrangement for renewable energy mini-grids. For example, a utility or a private company can own and develop a renewable energy mini-grid system, while a community-based organization can manage the day-to-day operation of the system, and the utility or the private company can provide technical back-up and management advice. 

In Peru, for example, a solar PV/diesel hybrid system was set up with donor funding, and the community-based organization manages the system. However, given the limited technical and business skills of the community organization, the system is not operated on a financially viable basis. The distribution utility, on the other hand, is not interested in such a small system. An ESMAP study recommended that the distribution utility could own the renewable energy hybrid system and provide technical back-up, while the community organization would be responsible for on-site basic maintenance and administrative duties. For more, link to the Peru case study.

A similar concept was proposed for the UNDP biomass gasification mini-grid systems in China.    One of the barriers to the development of commercially-viable projects for village or rural community applications is that village leaders do not possess the technical skills and financial resources to develop these projects on their own.  

One solution to this problem is to provide organizational, technical and financial support to the local leaders to promote the project development process.  The other approach is to provide incentives to a private rural energy service company (RESCO) that would sell systems to villages using a co-investment approach.  The RESCO invests as a minority owner in the project, and it helps the village owner/entity obtain financing to leverage their investment funds.

The RESCO would need to invest initially to develop the technical, marketing and financing skills necessary to develop the village power projects.  In addition, it would train the village operating staff, and provide long-term technical support.

The co-investment approach should make selling systems easier, as the village leaders would see the market-making company assuming an important share of the technical and business risks.  Because the RESCO has a long-term interest in supporting its projects, it will need to develop ways to do this cost-effectively.  In addition, a RESCO would have an incentive to pursue long-term cost reductions, improved access to financing, system installation risk reduction, training, technical support and information sharing.

The RESCO would generate financial returns in two ways.  Their primary revenue sources would be fees for providing systems engineering and construction management services and markup on the installed systems cost.  There would also be annual service fees for on-going technical support and training.  The secondary revenue stream would be the long-term economic returns from the investments made into the village energy supply companies. 

With this approach the financial returns to RESCO are not strongly tied to the project economics.  Rather they are reflective of the markups that can be gained by providing the technical and financial services needed to develop these projects.  The incremental capital investment gets financed over the project life and does not significantly impact the electricity cost.    The villages can be satisfied with a relatively low return on investment because of the other social and economic benefits that the project brings.  However, the RESCO can achieve a significantly higher return on investment such that private sector investors can be attracted.

This RESCO approach can also be utilized under a regional concession approach, in which RESCO could bid to have rights to specific regional markets.