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Distribution of Mini-Grids

Tanzania has at least 109 mini-grids, with installed capacity of 157.7 MW (exact figures are not known, because some small systems may not have registered). They serve about 184,000 customers. Sixteen of these plants are connected to the national grid; the remaining 93 operate as isolated mini-grids. Not all the installed capacity goes to customer connections; some is sold to the national utility, the Tanzania Electric Supply Company (TANESCO).

Hydro is the most common technology (49 mini-grids), although the 19 fossil fuel systems account for 93 percent of customer connections and almost half of total installed capacity. Tanzania has 25 biomass mini-grids; and 13 solar mini-grids (10 of them small donor-funded, community-owned demonstration projects). There are no wind mini-grids in Tanzania.

The number and installed capacity of mini-grids in Tanzania has nearly doubled since 2008, when the government introduced the small power producers (SPP) framework. Fifty-two mini-grids were commissioned between 2008 and 2016 and more than 67 MW of new capacity installed.

The Policy and Regulatory Framework

The first-generation feed-in tariff favored hydro and biomass plants, because it failed to recognize cost differences of different technologies. Some investors signed agreements with TANESCO to build solar and wind mini-grids, but they were not built, because the feed-in tariffs did not reflect the costs of solar and wind generation.

In 2015 the national utility regulator revised the 2008 SPP framework in a way that helps support solar and wind mini-grids and encourages greater participation by the private sector. Drawing on lessons from the first-generation framework, the Energy and Water Utilities Regulatory Authority (EWURA) introduced a more flexible tariff-setting system that differentiates between fixed feed-in tariffs (according to size category) for hydro and biomass and introduced a competitive bidding process for solar and wind plants larger than 1 MW. Smaller wind and solar producers that want to sell to TANESCO are not subject to competitive bidding. Despite the new framework, as of 2016 no solar or wind agreements had been implemented.

Three other important changes were also made to encourage private sector participation in the mini-grid market:

• SPPs now receive the same payment for electricity whether they sell to isolated grids owned by the national utility or to the main grid (formerly, producers that sold power to isolated mini-grids received lower feed-in tariffs once they connected to the main grid).
• The eligible project size was reduced from 1,000 kW to 100 kW, enabling smaller producers to sell to TANESCO.
• The price of the feed-in tariff is now pegged to the U.S. dollar. The change benefits mini-grid sponsors and developers that raise debt finance in dollars but can have negative implications for TANESCO, which now must absorb the cost of inflation.

Ownership and Operational Models

Mini-grid owners and operators in Tanzania include the national utility, private commercial entities, faith-based organizations, and communities. Fossil fuel mini-grids owned and run by TANESCO all operate on the utility model. The same nationwide tariffs that TANESCO charges its grid-connected costumers apply to its mini-grid customers. Private entities usually sell power to TANESCO and to retail customers. Mini-grids developed by faith-based organizations have been successful operationally, but few are financially self-sufficient. Community models have had mixed success.

Planning and Financing Mini-Grid Development

Acquiring clearances and registrations from multiple institutions in the project development process is cumbersome and can slow project development. The SPP framework streamlined the licensing and tariff-setting procedures with the national energy regulator, but the planning process for mini-grids remains complicated. A typical mini-grid project may involve up to 13 steps from inception to commissioning. Clearances and decision-making processes involve multiple institutions outside the energy sector; some regulatory procedures (such as obtaining environmental clearances) can require many months. Streamlining regulatory clearance procedures that lie outside the purview of the energy sector will be important to ensure a smooth planning process for mini-grids.

Securing financing for mini-grid development is challenging, partly because of the inherent weaknesses of mini-grid financial models and partly because of risk perceptions. The government, supported by development partners, has created financial mechanisms to address bottlenecks in the project development process. Under the World Bank–supported Tanzania Energy Development and Access Project (TEDAP), the Tanzania Rural Energy Agency (REA) offered matching and performance grants to mini-grid projects. The World Bank also established a $23 million credit line to the government-owned Tanzania Investment Bank for on-lending to local commercial banks as 15-year loans. Although a few projects have used this arrangement to fund construction, most developers have been unable to access these loans. Other international donors have supported mini-grid development activities through the Tanzanian government, but developers remain wary of the unknown risks of investing in mini-grids.

Local commercial banks have been hesitant to offer credit facilities to local mini-grid developers. Most mini-grid developers in Tanzania that obtained local finance were foreign-owned businesses. Commercial banks cite the limited availability of funds and the poor quality of documentation submitted by local developers as reasons for not extending credit to local actors. Bank financing is likely to remain limited unless financial risk guarantees are provided.

Impact on Development

Anecdotal evidence from five case studies suggests that mini-grids are improving the lives of rural people. In one project, support from an Italian NGO, paired with electricity from the mini-grid, contributed to the start of several new enterprises, including sunflower oil pressing, mechanical workshops, poultry farming, and fruit processing. Financing from savings and credit cooperative societies (SACCOs) and village community banks enabled residents to develop small and medium-size enterprises, contributing to sustained demand for electricity and rural development. Improved lighting and electricity services helped rural residents start small businesses, increased access information (including market prices) via information and communication technologies, and improved social services provided by schools and clinics.

Recommendations

Five recommendations emerge from this report:

• Build up knowledge about mini-grid experiences. Understanding what makes mini-grids succeed (or fail) can be extremely helpful to countries across Sub-Saharan Africa. Committing resources to understanding these dynamics would be valuable.

• Make information about mini-grids available to relevant actors. The national utility regulator, the REA, and other relevant authorities should continue efforts to make relevant information available to developers and project sponsors. Information on energy resources (quality, abundance, location); funding sources; and mini-grid operational performance would be useful. The REA could establish and maintain a comprehensive database of mini-grids, which could be hosted on Tanzania’s Mini-Grid Information Portal.

• Simplify the mini-grid planning process and improve coordination. The benefits of streamlined licensing and tariff-setting procedures should not be undermined by cumbersome clearance and permit processes outside of the energy sector. The REA, TANESCO, and the Ministry of Energy and Minerals could work together to ensure that these steps in the planning process do not hinder progress. One option to consider would be shifting responsibility for site selection, initial studies, and clearances to the REA and TANESCO and inviting developers to build, own, and operate mini-grids. Alternatively, the REA and TANESCO could develop mini-grids themselves and lease them to the private sector.

• Build capacity, particularly locally. Mini-grid developers need to be able to develop and submit bankable proposals and implement mini-grid projects successfully. Capacity building is also key to the success of the competitive bidding arrangement under the small power production framework.
• Understand the development impacts of mini-grids. Most of the information on the socioeconomic impacts of mini-grids in Tanzania is anecdotal. More systematic qualitative and quantitative studies would help inform rural development programs and energy access strategies. Research on the impact of different business models and financing interventions would be useful.