The business model of MICRO POWER ECONOMY DIRECTORY. INENSUS GmbH The business model

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1 INENSUS GmbH TITEL 2011 DIRECTORY 01 The business model of 01 The business model of Micro Power Economy is a strategic tool to establish a market for economically and ecologically viable electrification of rural areas which are situated far off the national grid. Besides realizing new and attractive investment options for private and institutional investors, the approach strives for overcoming poverty through implementation of modern infrastructure and fostering of economic cycles in rural areas. The utilization of renewable energy sources leads to the reduction of greenhouse gas emissions and the dependency on imported fossil fuel. In order to achieve above mentioned aims and make rural electrification an interesting investment, the Micro Power Economy approach is designed as a risk management tool. On the one hand it eliminates main risks of rural electrification, on the other hand the remaining risks can be actively managed through application of the three core components of the Micro Power Economy model: The business model A The constellation of stakeholders B The Tariff and Accounting model C The Load ma nagement and Accounting Unit (LAU) Figure 01 The constellation of stakeholders A Status Quo B Innovation Figure 02 The Tariff and Accounting model A Status Quo B Innovation Figure 03 Figure 04 Loadmanagement and Accounting Unit A Status Quo B Innovation Figure 05 Outlook Contact / Address S. 01

2 INENSUS GmbH TITEL 2011 DIRECTORY 01 The business model of 01 The business model of Micro Power Economy is a strategic tool to establish a market for economically and ecologically viable electrification of rural areas which are situated far off the national grid. Besides realizing new and attractive investment options for private and institutional investors, the approach strives for overcoming poverty through implementation of modern infrastructure and fostering of economic cycles in rural areas. The utilization of renewable energy sources leads to the reduction of greenhouse gas emissions and the dependency on imported fossil fuel. In order to achieve above mentioned aims and make rural electrification an interesting investment, the Micro Power Economy approach is designed as a risk management tool. On the one hand it eliminates main risks of rural electrification, on the other hand the remaining risks can be actively managed through application of the three core components of the Micro Power Economy model: The business model A The constellation of stakeholders B The Tariff and Accounting model C The Load ma nagement and Accounting Unit (LAU) Figure 01 The constellation of stakeholders A Status Quo B Innovation Figure 02 The Tariff and Accounting model A Status Quo B Innovation Figure 03 Figure 04 Loadmanagement and Accounting Unit A Status Quo B Innovation Figure 05 Outlook Contact / Address S. 01

3 01 THE BUSINESS MODEL OF THE BUSINESS MODEL 01 THE BUSINESS MODEL OF THE BUSINESS MODEL Figure 01 A The constellation of stakeholders is designed to have complementing interests as well as related tasks of all stakeholders involved. All stakeholders profit from economic growth of the villages and therefore economic growth will be driven by all parties involved. B The tariff and accounting model guarantees reliability of planning for all stakeholders. The electricity block is the core element of this module. It is used to establish an energy trading system which stabilizes the economic cycles within the village. E.g., in times of inability to pay, a customer may sell electricity blocks that have been already ordered to a customer who has short-term demand of electricity. C The Load Management and Accounting Unit (LAU) combines metering and limitation of energy, limitation of power as well as demand side management (disconnection of certain users in case of overload, switching on deferrable loads like water pumps when free renewable capacity is available) based on grid frequency resulting in stable and reliable system operation. Figure 01 The Micro Power Economy business model consists of three components which are interlinked with each other. B Accounting Model Reliability of planning for all stakeholders through electricity block trading A Constellation of stakeholders Fostering growth through concerted aims and actions C Load Management and Accounting Unit (LAU) Technical device to stabilize the grid and facilitate prepaid electricity block trading S. 02 S.01 S. 03

4 02 THE BUSINESS MODEL OF THE CONSTELLATION OF STAKEHOLDERS Status Quo 02 THE BUSINESS MODEL OF THE CONSTELLATION OF STAKEHOLDERS Innovation The constellation of stakeholders Status Quo Up to now mainly two different operating models have been applied in off-grid village electrification. Applying the Single Operator Model, a single operator establishes an usually highly subsidized mini-grid with a power plant and sells electricity to the villagers. As a consequence, the operator gains a lot of political power through his monopoly in the village. In case of conflicts the operator will make use of this power which might provoke disagreements or even vandalism within the village population. This can be avoided applying the Cooperative Model where the village community is in charge of financing, installing and operating the mini-grid and power station. However, usually technical expertise to run the complex technology is not sufficient within the village population. At the end neither of the two models provides for scalability potential as usually neither additional subsidies nor additional capital from the villagers are available for system extension. The constellation of stakeholders Innovation The Micro Power Economy overcomes the weaknesses of the above mentioned operator models and incorporates their strengths. It is market and demand driven to make sure that those who create infrastructure and those who use it meet at eye level. The basis of the constellation is the village population. A partnering Micro Finance Institution (MFI) provides micro credits for the villagers to be invested in productive and income generating activities fostering economic growth and entrepreneurialism in the village. The villagers found a Village Power Committee which signs an agreement with the power system operator who also operates the mini-grid during the starting phase. The committee will take over the mini-grid operation as soon as enough technical expertise is gathered resulting in legal unbundling of power generation and distribution. The mini-grid operator (village power committee) purchases electricity from the power station operator (external investor) and sells it to the villagers. Therefore, it makes sense to use available public subsidies for mini-grid infrastructure and other fixed assets ( foundations, power house) that are owned and/or operated by the village power committee and will remain in the village. To prevent market distortion it is important to make sure that no subsidies are handed out to the power station operator. If subsidies are not available the village community might invest into the fixed infrastructure itself. Once the risk reducing effect of the Micro Power Economy model is proven banks are more likely to support the villages. The operator of the power station owns all movable assets such as solar modules, small wind turbines, batteries, power electronics, diesel gensets. The contract between the mini-grid operator and the power station operator is valid 6 months and covers the amounts, the quality as well as the prices of energy and power to be supplied. After 6 months it will be renewed based on the economic situation in the village which is likely to constantly improve. The power system operator is enabled to adapt the power station setup according to the current power demand. In case of disagreements, the power station operator can be replaced by a new operator. The period of 6 months is a compromise between the short term planning requirements of developing communities and the need for planning security of the power station operator. Using this constellation a market for electricity in mini-grids is created instead of keeping a natural monopoly for the external investor. This is how conflicts that usually occur in monopoly situations can be solved on a market driven basis without using vandalism and violence. Jobs will be created locally in terms of technology suppliers, crafts workshops and merchants. The MFI audits the accountings of the mini-grid operator to inhibit corruption and fraud. Mini-grid operator and power station operator jointly present their project to the respective authorities ( electrification authority/regulating body, etc.) for the approval of proposed electricity tariffs. This procedure avoids any allegation of randomly set or unfair tariffs charged by the power station operator. The mini-grid will be connected to the national electricity grid once power demand has reached a certain level making the connection economically feasible. The existing power station can either be used as a decentralized peak power station or the components are taken to a new village where the cycle starts from the beginning. S. 04 S. 05

5 02 THE BUSINESS MODEL OF THE CONSTELLATION OF STAKEHOLDERS Figure THE BUSINESS MODEL OF THE CONSTELLATION OF STAKEHOLDERS Figure 02 All stakeholders within the Micro Power Economy approach have concerted, complementing aims and interests. Subsidies used to set-up the midi-grid. Subsidies will only be used for fixed assets which are installed in the village. S. 06 S. 07

6 03 THE BUSINESS MODEL OF Status Quo 03 THE BUSINESS MODEL OF Innovation The Tariff and Accounting model Status Quo In existing electrification schemes usually flat rates are applied to avoid costs for metering devices. A flat rate refers to a pricing structure that charges a single fixed fee regardless of electricity usage within small power limits. A flat rate model has two severe disadvantages. Productive use of electricity ( operation of sewing machines, saws, drills, etc. ) cannot be realized due to the limitation of power. However, this would be necessary to foster the economic cycle within the village, increase economic power and therefore increase electricity demand which is needed for profitable operation of the power station. With flat rates usually only consumptive use of electricity is fostered which does not result in sustainable development of the village. The second disadvantage of flat rate models is the lack of incentives and encouragement for efficient electricity usage (e.g. switching off lights at bright daylight) since the price stays constant regardless of the amount of electricity consumed. As a consequence, the power station will be overloaded frequently resulting in accelerated battery aging, increased fuel consumption and complete breakdowns. Therefore, power station operation will soon be economically unviable. In addition to that, the users fix their monthly/weekly expenditures for electricity for a long period of time when ordering at flat rates. However, the users might not always be able to pay the fixed amounts. The Tariff and Accounting model Innovation The Micro Power Economy overcomes these disadvantages introducing an electricity trading system. The core element of this system is the electricity block as a trading unit. The electricity block consists of a power limit (in Watts) and an energy limit (in Watt hours) which can be used up within a well defined period of time. As an example the electricity block can cover a power limit of 50 W and energy of 6 kwh which can be consumed within one week. Thanks to the adaptation of the power station to site-specific con traints and the respective electricity demand of the village within a contract period of 6 months (refer to constellation of stakeholders), the electricity block can be supplied for relatively low prices. Even today the application of renewable energy from wind and solar results in lower tariffs compared to conventional methods ( diesel gensets). Electricity blocks can be combined by the users to increase the available power or energy. In the picture below an example is shown with three electricity blocks ordered adding up to a power of 150 W (3 x 50 W) and energy of 6 kwh (3 x 2 kwh) to be consumed within one week. Whenever the customer has short-term demand exceeding the ordered amount, more costly extra power/energy can be ordered. The price of the extra power/energy reflects the higher wear of the battery and/or the higher fuel consumption. After a period of six months, when the contract between mini-grid operator and power station operator expires, the users may adapt the number of electricity blocks ordered to their present energy demand and financial situation. The mini-grid operator sums up all single electricity blocks ordered and places an order of the total demand with the power station operator. As the electricity blocks are paid regularly the mini-grid operator can provide a constant cash flow to the power station operator. The power station operator adapts the power and energy capacity of the power station according to the number of electricity blocks ordered. An electricity block market within the village could be introduced to level out payment problems on the one hand and additional power demand on the other hand. In case of payment problems a single user may sell some of the purchased electricity blocks for the remaining time of the contract on this market. Single users requiring more energy/power than ordered at the start of the contract may purchase available electricity blocks on this market (instead of buying more expensive extra power as described above) for prices that are generated on a supply and demand basis. S. 08 S. 09

7 03 THE BUSINESS MODEL OF Figure THE BUSINESS MODEL OF Figure 03 Figure 03 The tariff and accounting model of the Micro Power Economy. Electricity users order electricity blocks to cover their basic load. Whenever they have shortterm demand exceeding the ordered power the users can increase the available power using extra power / energy at higher rates. Pictures from Sine Moussa Abdou INENSUS Electricity block maximum power 50 W Weekly energy 2 kwh for 1.40 Euro Whenever the energy of the electricity blocks is used up extra power / energy can be used also to extend the duration of electricity usage. Extra Power 0.9 Euro / kwh People in charge The president of the village power committee (left) and the village electrician (right) have a close look at the wind turbine of the power station operator. Negotiations between the power station operator and the village power committee on eye level are the basis for good long term cooperation. Extra Energy 0.9 Euro / kwh S. 10 S. 11

8 03 HE BUSINESS MODEL OF T Figure HE BUSINESS MODEL OF T Figure 03 Figure 03 Electricity block maximum power 50 W The tariff and accounting model of the Micro Power Economy. Electricity users order electricity blocks to cover their basic load. Whenever they have shortterm demand exceeding the ordered power the users can increase the available power using extra power / energy at higher rates. Weekly energy 2 kwh for 1.40 Euro Micro Power Meter An INENSUS employee installs a Loadmanagementand Accounting-Unit which is called Micro Power Smart Meter by the users. Whenever the energy of the electricity blocks is used up extra power / energy can be used also to extend the duration of electricity usage. Combining three single phase household connections in one unit and being placed in public the device effectively prevents theft of electricity. Extra Power 0.9 Euro / kwh Extra Energy 0.9 Euro / kwh Hybrid power system Hybrid Power System with 5 kw wind turbine, 5 kw PV system, 11 kva genset, 2500 Ah, 48 V battery system and power electronics. S. 10 The power station operator owns only the movable and modular system components and therefore is free to scale the system size to exactly the village s power and energy demand adding or taking away components. Thanks to the linear cost structure the tariffs can stay the same. S. 11

9 03 THE BUSINESS MODEL OF Figure THE BUSINESS MODEL OF Figure 03 Figure 03 The tariff and accounting model of the Micro Power Economy. Electricity users order electricity blocks to cover their basic load. Whenever they have shortterm demand exceeding the ordered power the users can increase the available power using extra power / energy at higher rates. Monitoring campaign Children of a Senegalese village are waiting for electrification while wind and solar data for system design is being recorded on the hill. Electricity block maximum power 50 W Weekly energy 2 kwh for 1.40 Euro Whenever the energy of the electricity blocks is used up extra power / energy can be used also to extend the duration of electricity usage. Extra Power 0.9 Euro / kwh Extra Energy 0.9 Euro / kwh S. 10 S. 11

10 03 THE BUSINESS MODEL OF Figure THE BUSINESS MODEL OF Figure 04 Number of electricity blocks ordered can be increased or decreased every six months Electricity user 01 Electricity user 02 To be made available by power station operator Power station operator 05 New blocks Electricity blocks ordered after 6 months KWH Electricity user 03 Electricity user 04 Electricity blocks can be traded between rural citizens EURO Trade Figure 04 Every six months the power station operator adapts the power and energy capacity of the power plant according to the total number of electricity blocks ordered. He receives a constant cash flow for selling the electricity blocks for the upcoming six months. Within these six months electricity blocks can be traded within the village. S. 12 S. 13

11 04 THE BUSINESS MODEL OF THE LOAD MANAGEMENT AND ACCOUNTING UNIT (LAU) Status Quo 04 THE BUSINESS MODEL OF THE LOAD MANAGEMENT AND ACCOUNTING UNIT (LAU) Innovation The Load Management and Accounting Unit (LAU) Status Quo Power and energy capacities of mini-grids are usually very limited for economical reasons. When exceeding these limits the entire power station breaks down and needs to be restarted manually. To avoid this, so called load limiters are often used in mini-grids with flat rates limiting the available power for a single user (regarding the economic effects refer to tariff and accounting model). The total power capacity of the installed power system is only utilized completely when all users draw the maximum current which usually does not occur. The Load Management and Accounting Unit ( LAU ) Innovation The Load Management and Accounting Unit ( LAU ) overcomes the above mentioned technical limitations supplying high power demands of single users if required in order to allow them running electric machines for productive use. Yet, the LAU is used to limit the total power used by all users according to the limitations of the capacities of the power station with a load shedding approach. The communication between the power station and the LAUs ( which are installed at the households ) is realized through grid frequency measurements. If the power demand in the mini-grid exceeds the power that is available from the power station, the grid frequency drops. As soon as it falls below a certain value, certain users will be disconnected by the LAU. This could either take place by random choice or by parameterization of different user priorities. Lowest priority users will be disconnected first by random choice until power demand and supply are balanced. Users of highest priority such as medical station will not get disconnected. Likewise, grid frequency rises whenever there is surplus power available within the mini-grid. In this case, deferrable loads like water pumps filling a water tank will be automatically activated by the LAU. Besides stabilizing the mini-grid through active load management, the LAU combines a prepayment meter and house connection in a single housing. The users can charge balance to their LAU accounts as well as check the current account status using a chip card. This also facilitates the electricity block trading. The upfront cash flow of electricity prepayments leads to a further increase of planning security for the mini-grid and power station operator. Through combination of the above mentioned functions as well as the integration of either 3 single phase or 1 three phase connections in one housing, the LAU is a cost effective element which is necessary for the successful realization of the Micro Power Economy. Installation of the LAU in public prevents theft of electricity. Figure 05 Load Management and Accounting Unit. Balance can be charged utilizing a chip card. The display shows the current balance. S. 14 S. 15

12 05 THE BUSINESS MODEL OF OUTLOOK 05 THE BUSINESS MODEL OF OUTLOOK 05 OUTLOOK Taking into consideration economy of scale effects, the Micro Power Economy approach will be economically viable with an electricity price acceptable for the electricity users and an Internal Return Rate of % on the equity invested into the power stations, if a number of approx. 50 villages of 800 inhabitants each is reached. In this scenario it is assumed that the power demand in the villages will grow by 8 % per year. In Senegal, where the Micro Power Economy is currently being established as a pilot project, there are more than non-electrified villages offering a large market potential. The pilot project has been realized within a Privat- Public- Partnership between INENSUS GmbH, MATFORCE Compagnie Sahelienne d Industries ( privat partners ) and the Deutsche Gesellschaft für Internationale Zusammenarbeit GIZ GmbH ( public partner ). A total number of 1.4 billion people is currently without access to modern electricity according to the International Energy Agency ( IEA). S. 16 S. 17

13 05 THE BUSINESS MODEL OF OUTLOOK 05 THE BUSINESS MODEL OF OUTLOOK In Africa, which is the continent with the least energy consumption, 4 out of 5 people who do not have access to electricity live in rural areas. These numbers illustrate the enormous potential of a successful implementation of the Micro Power Economy approach. Online presence: S. 18 S. 19

14 Electrification according to the Micro Power Economy model means development options for rural citizens and fair profits for investors. INENSUS GmbH Am Stollen 19D Goslar Germany T +49 (5321) F +49 (5321) vertrieb@inensus.com S. 20