CHALLENGES AND SUCCESSFUL MODELS OF PRIVATE SECTOR MICRO-UTILITIES DIPL.-ING. NICO PETERSCHMIDT MANAGING DIRECTOR INENSUS GMBH 1/20

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Jeremy Vincent Hardy
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2 2/20 AGENDA 01 Best practice Micro-Utility business models 02 Overcoming classic Micro-Utility challenges 03 Overcoming the financing gap 04 Technology application strategies

3 3/20 DEFINITION OF MICRO-UTILITIES Micro-Utilities: _ are often SMEs with limited financial resources _ Have besides financial interest intrinsic motivation to electrify rural areas _ Need innovative approaches to be successful _ Typically supply electricity to less than 5000 customers and generate revenues of below 1 M per system

electrify rural areas _ Need innovative approaches to be successful _ Typically

4 4/20 BEST PRACTICE MICRO-UTILITY BUSINESS MODELS Foto: A Micro-Utility connects new customers

5 5/20 WORLD MAP OF BEST PRACTICE MICRO-UTILITIES PRESENTED HERE Husk Power Systems INENSUS The Power Source Group

6 6/20 THE POWER SOURCE GROUP HUSK POWER SYSTEMS - INENSUS

7 7/20 BEST PRACTICE MODELS AND THEIR CHARACTERISTIC MARKETS _Country of first appl. _Regulatory framework _Availability of subsidies _Lives touched The Power Source Group Husk Power Systems INENSUS The Philippines India Senegal Regulated environment with subsidies Subsidy per kwh supplied to end customer Electrification outside of national regulation Investment subsidy Concession, regulated tariff Intern. invest. subs./ local scheme in prep. Approx. 30,000 Approx. 200,000 Approx. 6,000 _LCOE 0.26 /kwh to 0.4 /kwh to be decreased by subsidies 0.1 /kwh to >2.0 /kwh depending on user behaviour From 0.6 to 1.2 /kwh depending on transaction costs

environment with subsidies Subsidy per kwh supplied to end customer Electrification outside of national regulation Investment subsidy Concession, regulated

8 8/20 BEST PRACTICE MODELS AND THEIR CHARACTERISTIC MARKETS The Power Source Group Husk Power Systems INENSUS _Targeted system sizes >1,000,000 kwh per year; >0.5 MW installed capacity >30,000 kwh per year; >30 kw installed capacity 20,000 to 500,000 kwh per year; >20 kw installed capacity _Energy sources: Diesel with renewable offset (solar PV, biomass gasification) 100% biomass (preferably rice husk) gasification 80% wind-solar, 20% diesel, battery storage _Availability of supply: 24 h per day, well trained local staff 6-12 h per day depending on franchisee 24 h per day, fully automatic operation

5 MW installed capacity >30,000 kwh per year; >30 kw installed capacity 20,000 to 500,000 kwh per year; >20 kw installed capacity _Energy sources:

9 9/20 OVERCOMING CLASSIC MICRO UTILITY CHALLENGES

10 10,000 kwh/year 100,000 kwh/year 1,000,000 kwh/year 10,000,000 kwh/year 100,000,000 kwh/year 1,000,000,000 kwh/year Economies of scale effects 10/20 SMALLER GRIDS DIFFERENT CHALLENGES National and large/medium private utilities in main-grids Cooperatives and small utilities Mini-Utility sector Micro-utility sector Inofficial sector INENSUS Husk Power Systems Power Source Group Sales per site (logarithmic axis)

large/medium private utilities in main-grids Cooperatives and small utilities Mini-Utility sector

11 11/20 SMALLER GRIDS DIFFERENT CHALLENGES Decreased economies of scale effects means increased challenges in: 1. Technical system stability due to higher concurrency 2. Prevention of conflicts arising due to intransparent community decision making structures 3. Revenue stabilization due to less divers income sources of customers 4. Increasing operation and transaction costs per kwh produced require new management approaches

Prevention of conflicts arising due to intransparent community decision making structures 3.

12 12/20 MANAGING COMPLEXITY / TRANSACTION COSTS Nation. authorities/ministries 1. Implementation period defined by Public Partner vs. duration to acquire permissions Nation. fiscal policy National framework level Int. Public Partners / Donors 7. Implementation period defined by Public Partners vs. due diligence duration of banks 5. Expensive CDM application procedure cannot be covered by grants CDM / UNFCCC 6. CDM only applicable with large scale projects in PoA approach 2. No coverage of foreign exchange risk Foreign investment guarantors 8. Taxation scheme in dev. countries often not transparent to SMEs 3. Low tariffs vs. costs for acquisition of permissions; cost of permission acquisition must often be neglected in tariff calculation according to regulatory authorities 4. Equity needs to be spent when available vs. permissions need unpredictable duration International support structure level Banks 9. Low total amount of capital required and low tariffs vs. high effort to acquire a loan Micro-Utility (SME) 11. MFIs often expect high immediate benefits from cooperation with microutilities and are not prepared to invest into new markets without donor support 10. Long and expensive due diligence processes MFIs Equity investors Project implementation level

Expensive CDM application procedure cannot be covered by grants CDM / UNFCCC 6. CDM only applicable with large scale projects in PoA approach 2.

13 13/20 THE TRANSACTION COST LEVER High transaction cost lead to high electricity prices resulting in: 1. Electricity price elasticity challenge 2. Conflicts with Regulatory Authorities 3. Conflicts with willingness / ability to pay

Electricity price elasticity challenge 2.

14 14/20 STRATEGIES TO OVERCOME CLASSIC MICRO-UTILITY CHALLENGES _Techn. system stabilization _Reduction of community conflicts _Income stabilization _Transaction cost per kwh reduction The Power Source Group Flexible diesel genset capacity available to cover any load CRM with local personell on site (applic. only in large grids) Community Energizer Platform for productive electr. use Selection of large villages to reach scale Husk Power Systems Limit total available power bandwidth to below power plant capacity Franchise model: Local operation; Maintenance by prof. company Production of incense sticks from ash, husk purchased from local sources Working outside of regulatory framework INENSUS Primary control load management in meters, electr. block planning Grid owner = public partner; Power station /movables owner = priv. company Cooperation with MFI prov. loans for productive use of electricity Lean quality management procedures

with local personell on site (applic. only in large grids) Community Energizer Platform for productive electr.

15 15/20 OVERCOMING THE FINANCING GAP 15/21 INENSUS HISTORY Foto: Happy electricity customers of a Micro-Utility

16 16/20 FINANCING ALONG THE MICRO-UTILITY DEVELOPMENT TIMELINE Year 1 Year 2 Year 3 Year 4 Year 5 Development of adj. model Select village Political framework Company foundation and financing Model implementation Installation Operation, Maintenance Monitoring Due Diligence for replication Growth of dem. Using the political framework for replication Scale-up Replication Cashflow : Breakeven Core equity 6: 300 k 10 M Core equity 1: 20 k 100 k Core equity 2: 30 k 150 k Core equity 3: 100 k 500 k Financing gap Core equity 4: 30 k 150 k Core equity 5: 20 k 50 k Equity from impact investors, loans from development banks, etc. 0.5 M 10 M Business Plan and development subsidy PPP money or subsidies for pilot phase PPP money or subsidies for scale-up

Using the political framework for replication Scale-up Replication Cashflow : Breakeven Core equity 6: 300 k 10 M Core equity 1: 20 k 100 k Core equity 2: 30 k 150 k Core equity 3: 100 k

17 17/20 STRATEGIES TO OVERCOME THE FINANCING GAP The Power Source Group Husk Power Systems INENSUS _Model/techn. development and pilot phase Equity from company founders (from USA) Winning business plan awards in the US Equity from core business leveaged by subsidies from German institutions _Capital for initial scaling to profitability Impact investors Impact investors + grants Development bank + local equity in kind + grant _Capital for large scale replication Local equity investors + banks Franchisees + local banks + grants

leveaged by subsidies from German institutions _Capital for initial scaling to profitability Impact investors Impact investors +

18 18/20 TECHNOLOGY APPLICATION STRATEGY

19 19/20 APPLICATION OF TECHNOLOGY The Power Source Group Husk Power Systems INENSUS _Electricity production _Electricity distribution _Metering/ billing: Production plants from proven international manufacturers Medium and low voltage distribution system meeting international standards Invoicing according to readings from electromechanic meters Low cost gasification equipment from own R&D and manufacturing Sub-standard low voltage least cost distribution with bamboo poles and thin lines Own prepaid load limiter, power capacity is sold not kwh Int. brands of solar, wind and battery products, local constr. works Standard low voltage distribution system to be connected to national grid once available Own prepaid meter with load- and demandmanagement function

equipment from own R&D and manufacturing Sub-standard low voltage least cost distribution with bamboo poles and thin lines Own prepaid load limiter, power capacity is sold not kwh Int.

20 20/20 THANK YOU Presenter: Nico Peterschmidt INENSUS GmbH Am Stollen 19D Goslar Germany Tel +49 (5321) Fax +49 (5321)

MICRO POWER ECONOMY. Dakar, Senegal, November 14-16, 2011 THE BUSINESS MODEL FOR RURAL ELECTRIFICATION ------

MICRO POWER ECONOMY. Dakar, Senegal, November 14-16, 2011 THE BUSINESS MODEL FOR RURAL ELECTRIFICATION ------ 1/13 Dakar,14.11.2011 THE BUSINESS MODEL FOR RURAL ELECTRIFICATION MANAGING DIRECTOR INENSUS WEST AFRICA S.A.R.L. Dakar, Senegal, November 14-16, 2011 2/13 Dakar,14.11.2011 AGENDA 01 The Challenges for