evaluation of private operated isolated mini grids in rural tanzania1235555/fulltext01.pdf ·...

Bachelor of Science Thesis KTH School of Industrial Engineering and

Management Energy Technology EGI-2018TRITA-ITM-EX 2018:431SE-100 44 STOCKHOLM

Evaluation of private operated isolated mini grids in rural Tanzania

Clara Andrén Carl Mailer

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Bachelor of Science Thesis EGI-2018TRITA-ITM-EX 2018:431 Evaluation of private operated

isolated mini grids in rural Tanzania

Clara Andrén Carl Mailer

Approved

2018-06-08

Examiner

Peter Hagström

Supervisor

Anders Malmquist Commissioner Contact person

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Abstract In Tanzania approximately 15 % of the population have access to electricity, a resource critical to a socio-economic development. To reach the governmental goal of becoming a middle-income country (defined as a GNI per capita between 1,006 USD and 3,955 USD) by 2025 the rate of electrification needs to be greater than the 3 % growth rate of the population.

To reach the 67 % of the population living in remote areas establishments of isolated, mini grids are crucial in reaching the goal. However, whom to operate, distribute and transmit the energy needs to be determined. The focus of the report is on two operation models, utility and private sector based. The role of private actors is important, but they are at the same time facing challenges in establishing feasible grids and are dependent on subsidies, public funding and grants. The fully state-owned power utility TANESCO is today charging significantly lower tariffs than the private actors, much regulated by the political agenda even though it results in revenues not covering the costs.

This thesis intends to investigate to role of private actors in Tanzania, the challenges faced and differences in costs charged to end consumer compared to the ones charged by TANESCO. Furthermore, the thesis aims in analysing the economic value provided by the two ways of operating the isolated grids.

In order to answer the questions above, interviews with four private companies of similar size have been conducted and data have been gathered. In addition, useful insights from the Energy Department of the Swedish Embassy of Dar es Salaam have been of great importance in analysing the data in relation to the energy situation in Tanzania. The results presented are divided in several subcategories covering costs, subsidies, reliability and promoting the local economy.

The report concludes that the private actors, in general, are charging a tariff ten times higher than TANESCO. Regarding connection fees the roles are reversed and TANESCO are the ones charging the highest. Due to different business models and sales strategies, motives are not as strong for TANESCO as for private actors to sustain reliable electricity and in actively promoting a socio-economic development resulting in growing demand. The choice in using renewable energy or fossil fuel are also conducted to be of importance when establishing an isolated mini grid. In a short-term perspective fossil fuel technology are cheaper but in a long-term, renewables are both more economic and environmental sustainable.

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Sammanfattning I Tanzania har cirka 15% av befolkningen tillgång till elektricitet, en resurs som är kritisk för socio-ekonomisk utveckling. För att nå det inhemska målet att bli ett medelinkomst-land (definierat som en GNI per capita mellan 1,006 USD och 3,955 USD) tills år 2025 måste elektrifieringsgraden ha en tillväxt som är större än den treprocentiga befolkningsökningen varje år.

Att nå de 67 % av befolkningen som bor på landsbygden och långt bort från befintlig infrastruktur är kritiskt för att uppnå målet. Vem som ska driva, distribuera och transportera energin återstår att se. Rapporten fokuserar på två affärsmodeller, statlig drift och privata aktörer. Just de privata aktörerna spelar en viktig roll men de stöter samtidigt på många utmaningar för att etablera isolerade elnät och är beroende av bistånd, statliga bidrag och andra anslag för att kunna gå runt. Det statligt ägda energidistributionsbolaget TANESCO har idag signifikant lägre eltariffer än de privata aktörerna och är kraftigt lagstyrda av den politiska agendan trots att det resulterar i att man inte kan täcka sina driftskostnader.

Denna rapport ämnar undersöka rollen för de privata aktörerna i Tanzania, utmaningarna de möter och skillnaderna i de priser som åläggs slutkonsumenterna i jämförelse med TANESCO. Rapporten avser ytterligare att undersöka det ekonomiska värde som skapas av de två sätten att driva isolerade elnät i landet.

För att kunna besvara de ovan nämnda frågorna har det genomförts intervjuer med fyra privata företag av liknande storlek varpå data sedan har samlats in. Utöver detta har information från den svenska ambassaden i Dar es Salaam bidragit positivt till att utvärdera energisituationen i Tanzania. Resultaten är uppdelade i flera underkategorier, elkostnader, bidragsanvändning, tillgänglighet och bidrag till utvecklingen av den lokala ekonomin.

Rapporten kan konstatera att de privata aktörerna i allmänhet har en eltariff som är ungefär tio gånger så hög som TANESCO. När det kommer till anslutningsavgifterna är rollerna ombytta och TANESCO har den högsta avgiften. På grund av olika affärsmodeller och försäljningsstrategier så är motivet inte så stort för TANESCO som för de privata aktörerna att erbjuda hållbar och ständigt tillgänglig el samt att aktivt arbeta för ekonomisk utveckling på landsbygden vilket på sikt kommer öka efterfrågan. Valet av att använda förnybara energikällor eller fossila bränslen är också viktig att ta hänsyn till när man ska etablera ett isolerat elnät. På kort sikt kan de fossila bränslena vara billiga men det är ofta på längre sikt som de förnybara energikällorna blir hållbara både ekonomiskt såväl som miljömässigt.

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Acknowledgement We would like to thank SIDA, the Swedish International Development Cooperation Agency, for granting us the Minor Field Study Scholarship which made this bachelor thesis possible along with Katie Zmijewski at the MFS-office at KTH. We are truly grateful for having had the opportunity of doing the project on site in Tanzania. Although it has been a demanding environment very unlike the one at home, the experiences have been enriching and we have truly gained new insights that will last a lifetime.

There are many people that have helped us one the way, both with guidance and information about the subject, transportation, accommodation and local knowledge. First and foremost, we would like to show our gratitude to Jörgen Eriksson at The Swedish Embassy in Dar es Salaam for insightful meetings, mediating crucial contacts and for showing interest in the project in a very early stage. We would also like to thank Mats Leksell for useful information about how to get around in Dar Es Salaam and for support in the MFS application process. Furthermore, we are grateful to Karen-Emilie Asla at the Nordic school for arranging safe accommodation and our roommate Nikoline Gustafsson for all the time we spent together, both during rainy and sunny days and her experiences of the city. We are also grateful to our supervisor Anders Malmquist for supporting us during the whole process with great insights and comments.

Clara Andrén and Carl Mailer

Stockholm, 2018-06-01

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Table of Contents Abstract.......................................................................................................................................................... 3

Sammanfattning ............................................................................................................................................ 4

Acknowledgement ........................................................................................................................................ 5

Figures ............................................................................................................................................................ 8

Tables ............................................................................................................................................................. 8

Nomenclature ............................................................................................................................................... 9

1 Introduction ........................................................................................................................................ 10

2 Problem & Purpose ........................................................................................................................... 11

3 Methodology ....................................................................................................................................... 12

4 Limitations .......................................................................................................................................... 13

5 Literature study .................................................................................................................................. 14

5.1 About Tanzania ........................................................................................................................ 14

5.1.1 Demographics ................................................................................................................. 14

5.1.2 Political background ....................................................................................................... 14

5.2 Definition of a mini grid ......................................................................................................... 15

5.2.1 Solar energy ...................................................................................................................... 16

5.2.2 Hydropower ..................................................................................................................... 16

5.2.3 Fossil fuel ......................................................................................................................... 17

5.2.4 Biomass ............................................................................................................................ 17

5.2.5 Wind turbine .................................................................................................................... 18

5.2.6 Mini grids in Tanzania .................................................................................................... 18

5.3 Tanzanian energy sector .......................................................................................................... 19

5.3.1 TANESCO ...................................................................................................................... 20

5.3.2 The Energy and Water Utilities Regulatory Authority .............................................. 21

5.3.3 Rural Electrification Agency ......................................................................................... 21

5.3.4 Rural Energy Fund.......................................................................................................... 21

5.3.5 Financial aid ..................................................................................................................... 22

5.3.6 Private sector ................................................................................................................... 22

5.3.7 End consumer ................................................................................................................. 23

5.4 Operation models .................................................................................................................... 23

5.4.1 Utility based model ......................................................................................................... 24

5.4.2 Private sector based ........................................................................................................ 24

5.5 Price setting of mini grid electricity ....................................................................................... 25

5.6 The Tanzanian perspective & SPP framework .................................................................... 26

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5.6.1 Tariff structure for TANESCO .................................................................................... 27

5.6.2 Tariff structure for a SPP with TANESCO-owned distribution ............................. 27

5.6.3 Tariff structure for a SPP with direct sales to end-consumers ................................. 28

5.6.4 Summary of tariffs in Tanzania ..................................................................................... 28

5.7 Consumption behaviour and demand perspective.............................................................. 29

5.7.1 Issues in establishing the demand................................................................................. 29

5.7.2 Survey-based approach to establish demand .............................................................. 30

5.7.3 Rural dependency on fossil fuel and biomass for energy .......................................... 30

5.7.4 Consumption of lighting ................................................................................................ 31

5.8 Consumption in comparison with income ........................................................................... 31

6 Results.................................................................................................................................................. 32

6.1 Tariff levels ............................................................................................................................... 32

6.2 Connection fees ........................................................................................................................ 33

6.3 Subsidies .................................................................................................................................... 33

6.3.1 Subsidies per investment................................................................................................ 33

6.3.2 Distribution of subsidies ................................................................................................ 34

6.4 Availability ................................................................................................................................. 35

6.5 Promotion of local economic development......................................................................... 36

7 Discussion ........................................................................................................................................... 36

7.1 Sustainability analysis ............................................................................................................... 38

7.2 Sensitivity analysis .................................................................................................................... 39

8 Conclusion .......................................................................................................................................... 39

9 Future work ........................................................................................................................................ 41

10 Bibliography....................................................................................................................................... 42

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Figures Figure 1 Development of Access to electricity for Tanzania (World Bank 2018) ................................................................................. 15 Figure 2 Examples of usages for a mini grid ........................................................................................................................................ 16 Figure 3 Location of mini grids in Tanzania, note that there are only 107 mini grids on the map. Data is accurate as of February 2016. (Odarno, et al. 2017) .......................................................................................................................................................................... 19 Figure 4 Overview of actors involved in the electrical production and distribution system in Tanzania (Ministry of Energy and Minerals (MEM) 2013) .................................................................................................................................................................................... 20 Figure 5 Number of mini grids related to each operation model in Tanzania (Odarno, et al. 2017) ..................................................... 24 Figure 6 Tariff levels comparison between TANESCO and the private actors. The amount represents tariff level in TSh per kWh. This represents roughly a monthly consumption for a household per month (e.g. 1 kWh per month per household) ......................................... 32 Figure 7 A comparison of connection fees between TANESCO and the private actors......................................................................... 33 Figure 8 Comparison between the subsidy coverage of the private actors’ total investments ..................................................................... 33 Figure 9 Comparison of how subsidies are distributed on up-front investments versus on lowering the tariffs. ......................................... 34 Figure 10 Comparison of availability between TANESCO and the private actors. ............................................................................. 35

Tables Table 1 Tariff structure for TANESCO distributed electricity to both rural and urban customers. Tariff levels in question for mini grids are D1 and T1 which is marked in grey in the table. (Odarno, et al. 2017) ........................................................................................ 28 Table 2 Tariff structure under second-generation framework for SPP actors depending on energy source and capacity. (EWURA 2016) ............................................................................................................................................................................................................ 29 Table 3 Overview of which actors that are promoting economic development locally where the mini grids are located. .............................. 36

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Nomenclature

Abbreviations

ARE The Alliance for Rural Electrification

BOP Bottom of the Pyramid

CCM Chama Cha Mapinduzi (Ruling political party)

EPP Emergency Power Producer

EWURA Energy and Water Utility Regulatory Authority

FiT Feed-in-Tariff

GCF Green Climate Fund

IFC International Finance Corporation

IPP Independent Power Producer

KSh Kenyan Shilling

kW kilowatt

kWh kilowatt hour

LPG Liquified Petroleum Gas

MEM Ministry of Energy and Minerals

MW Megawatt

NGO Non-Governmental Organization

PPA Power Purchase Agreement

PV Photo Voltaic system

REA Rural Energy Agency

REF Rural Energy Fund

REFiT Renewable Energy Feed-in-Tariff

SHS Solar Home System

SIDA Swedish International Development Cooperation Agency

SPD Small Power Distributor

SPP Small Power Producer

SPPA Standardised Power Purchase Agreement

SPPT Standardised Power Purchase Tariff

TANESCO Tanzania Electric Supply Company

TSh Tanzanian Shilling

UNDP United Nations Development Program

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1 Introduction This research, conducted during the spring of 2018, is a Bachelor Thesis project under the School for Industrial Technique and Management at the Royal Institute of Technology (KTH), Stockholm Sweden. The study is conducted as a field study located in Dar es Salaam, Tanzania in the context as an MFS-project. The project is performed as a survey among private companies who operate isolated mini grids in the country and with the state-owned company TANESCO.

The report should give the reader a way to understand what success factors that are involved in establishing a mini grid in Tanzania and give perspectives on what business models that are viable in the Tanzanian energy market. Furthermore, there is a discussion involving the Tanzanian government and their energy policies which are part of an ambitious development strategy for the country and its people.

In Sub-Saharan as a whole, 43 % of the population have access to electricity and due to a high population growth, the total number without access is rising caused by a failing effort to accelerate the electrification rate. (IEA 2017)

Energy is seen as a major driver for socio-economic development and the state of electricity access has a critical role in the achievement of the Sustainable Development Goals (SDGs). In countries with low levels of electricity access, both grid and off-grid solutions are vital. But they must be supported by an enabling environment with right policies, regulations and incentives to being able to scale up and maintain a long-term sustainability to ensure economic growth. According to a report submitted by the IEA, it is concluded that energy must be more flexible and that renewables will play a bigger part in providing energy, especially to rural areas. (IEA 2017)

The importance of private-sector activity stressed by the UN program on Sustainable Energy for All, in combination with a growing market in enabling rural electricity offers attractive investment opportunities. The high penetration of diesel generators and other fossil fuels also demonstrates that African businesses and consumers are willing to pay for electricity. (Castellano, o.a. 2015)

The combination of economic, social and environmental sustainability is highly important to ensure increased access. The results in this report will base upon an economic perspective. To ensure a credible analysis and conclusion the actual electricity demand will also be discussed, covering the social perspective. As well as indirect effects depending on whom is to operate the grid and what is offered to the customers. The presence of private companies can in a long-term perspective enable economic growth for both parties. In combination of using renewable energy sources, not only electricity access will be increased but also a decreased environmental impact owing to less usage of fossil fuels.

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2 Problem & Purpose Due to the Tanzanian governmental prioritization of subsidizing the sole utility energy company, TANESCO, the private sector is being neglected in a long-term development within energy. This report aims in illustrating the private sector and what pricing is being offered in comparison to the pricing of TANESCO and why there are other factors than just the tariffs to be taken into consideration when comparing the utility-based model and the private companies.

Questions to be answered in the report;

• How does the electricity tariffs and fees differ between TANESCO and the private actors?

• What role do subsidies have in financing the establishment of a mini grid? • Can a private mini grid provide economical value to Tanzania despite having higher

tariffs than the state-owned distributor, TANESCO?

By answering the above questions, the report intends to clarify the tariff issue and its relation to future development of increased electricity access within Tanzania when it comes to the off-grid market.

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3 Methodology This research is about evaluating established private run mini grids in Tanzania. The project is conducted through a literature study of Tanzania, including information about operating models of mini grids and local policies in place in the country. Most of the information is collected through a field study in Tanzania and the city of Dar es Salaam specifically. There will be a comparison of a number of private actors’ business models and strategy in electrifying the Tanzanian countryside. The reason to conduct the project as a field study is because of the many influences of local regulations and stakeholders. Something that demands an in-place investigation to fully understand and get a full perspective.

The evaluation will take into account the economic aspects of the electricity pricing in the mini grids. The pricing consists of two parameters which is the price per used kWh and the connection fee paid to connect to the local distribution grid. The project aims to summarise these fees for a couple of private producers and distributors who have received financial aid from the Swedish Government through Swedish International Development Cooperation Agency (SIDA). Both parameters will be compared against each other and against TANESCO from which conclusions and discussions can be based. This is connected to the tariff structures presented in the Literature Study where TANESCO and the private actors are utilizing different tariff structures and the comparison should highlight differences between them.

Furthermore, the companies use of subsidies through foreign aid will be evaluated and compared with the amount received by TANESCO. This includes two dimensions that subsidies can cover. The initial investment cost of generation and the distribution or the variable operation costs. This is of interest to understand the dependency of subsidies and foreign aid when establishing a mini grid. The dependency can give a perspective on how the companies acquire capital and what effects this might have on the financing of the grids. As noted in the Literature Study (5.3.5), financial aid and subsidies are of importance to the private actors and TANESCO respectively. A comparison of the extent to which the actors use subsidies in their initial investments or ongoing is of interest to determine whether it could serve as a bottleneck for TANESCO or the private actors.

Finally, there will be a comparison of each actors’ availability to represent the quality perspective of operating a mini grid. This is also important when comparing with TANESCO due to the many electricity outages and financial issues that is described in the Literature Study (5.3.1).

The information mentioned above will be gathered by conducting interviews with private companies responsible for establishing and maintaining grids. The above-mentioned fees, tariffs and investment data will be derived directly from the interviews or estimated based on the companies’ costs and investments for establishing and maintaining the mini grids.

To be noted is that the companies will be kept confidential due to the direct competition of the actors. The data presented in the results will be anonymous where each actor could represent any of the asked companies without any connection whatsoever. Because of this it is not possible to deduct a single company based on this data.

The result of the comparisons mentioned above is to understand that the private solutions cannot just be compared on the tariff parameter and that there are more aspects to take into consideration. The results will be used in a discussion on whether private companies can provide more value than TANESCO when looking at more parameters than the electricity tariff.

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4 Limitations The research will take into account the different models of business as basis of establishing the mini grids. However, the project will take certain limitations into account where the focus will be on certain aspects of Tanzania’s energy system. The following limitations has been made to the project.

• Only distribution grids not connected to the national grid, so called off grids will be taken into account

• The grids are mini grids which is defined as grids with the producing power of less than 10 MW

o Includes the limitation to only Small Power Producers (SPP’s) and not Power Producing Agreements (PPA’s) and Independent Power Producers (IPP’s)

• The evaluation will be based on a selection of mini grids with similar conditions which includes but not limited to: grid size, number of consumers, location in Tanzania, energy source, business model

• The research will take into account the current situation in Tanzania, including current pricing and current energy distribution network and current economic and technical data

• The data is to the utmost extent based on Tanzania but can in some cases be based on similar countries of comparable size and development

• Natural disasters etc. is not included as factors in the research

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5 Literature study This section will provide with information about what has already been done in Tanzania regarding mini grids and a technical background, explaining what defines a mini grid. Also, an overview of the Tanzanian energy including the role of various stakeholders and electricity pricing.

5.1 About Tanzania

5.1.1 Demographics Tanzania is the largest country by area in East Africa. It consists of more than 120 ethnic groups and the total population is approximately 55 million. In 2016 the rural population was reported at 67 %. (Trading Economics 2016) The population of Tanzania is uneven distributed, where most live on the northern border and along the eastern coast. Based on that agriculture is the single largest employer, employing 65 % of the population it has an impact in population distribution. (Deloitte 2017). Places that are more fertile and where one with less efforts receive higher agricultural yield, are more attractive for example.

In 2007 the reported percentage of citizens below the world bank poverty line was 60 % and in the 2016 a significantly lower percentage was presented, 47 %. However, the population growth is estimated at 3 % meaning more people live in poverty today than in 2006. (The World Bank 2017) Furthermore, in total 15.5 % have access to electricity, correspondent number in rural areas is 4.03 %. (Trading Economics 2016) It has however trended upward over the last couple of years.

5.1.2 Political background The political evolution of Tanzania has been formed through the complications created by being a union of two parts. These are the mainland commonly known as Tanganyika and the semiautonomous islands of Zanzibar, where the political development has unfolded a bit differently. (Bertelsmann Stiftung 2018) Since the report is focused on the mainland, that is also what the political background will cover.

During the 1990s a multiparty system was peacefully established in mainland Tanzania and since then, the people party, Chama Cha Mapinduzi (CCM) has ruled with a firm majority. Before that, Tanzania for many years was governed with a socialist-oriented state model, which in later years have given way to a more capitalistic economy. (Bertelsmann Stiftung 2018)

The change in presidency in 2015 has on the other hand ushered a period of political transformation. The CCM has remained the strongest party but seen a trend of declination, partly due to high-level corruption allegations. The administration of the new president, John Magufuli, has taken steps in fighting corruption in public institutions and reoriented public expenditures toward development rather than government spending. (Deloitte 2017) These actions, among others could be part of the reasons why the economic growth rate is expected to average 6.2 % between 2017 and 2026. (Deloitte 2017) However, it is dependent on an increased infrastructure development and improved business environment.

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The Magufuli administration has however been accused of using authoritarian tendencies curtailing political opposition and undermining democratic procedures. (Bertelsmann Stiftung 2018) The macroeconomic performance however, has been satisfactory and is currently meeting the state’s goal of becoming a middle-income country by 2025. To be noted is that the majority of the population remains excluded from the macroeconomic improvements. This is an issue that mini grids partly can solve owing to economic development through electrification.

Figure 1 Development of Access to electricity for Tanzania (World Bank 2018)

5.2 Definition of a mini grid As by definition a mini grid is one or more electricity generators connected to a distribution network serving multiple customers, compared to small/big power producers that may purchase the resources from others. In some cases, mini grids are also capable of storing power during a certain amount of time. It can provide electricity at a local level by using isolated distribution networks and thereby accelerate access for those in remote rural communities that are missing of a grid connection. In general, mini grids are typical capable of providing higher levels of energy service than solar home system. A mini grid can operate as an isolated grid as well as being connected to a central grid.

The installed capacity of a mini grid varies between a few kilowatts and 10 MW, depending on its purpose. (Green Mini Grid 2017) There are examples of using it to electrify a whole village or another where you focused on a school or small hospital, examples of which can be seen in Figure 2 below.

Depending on the geographical conditions at the site for the mini grid, there are different techniques of electricity generators that will fit different well. Such as; solar, hydro, fossil fuel or wind turbines.

According to the World Bank mini grids hold a great promise for electrifying remote areas. In line with increased innovation and decreased manufacturing costs mini grids are a viable option in increasing level of electrification and boosting the economy in remote areas. (The World Bank 2016)

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Access to electricity (% of population)

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Figure 2 Examples of usages for a mini grid

5.2.1 Solar energy Solar panels that are used within mini grids are either Photovoltaic systems (PV) or Solar home systems (SHS), the number of homes that will be supported dictates which system to be used. (Solartown 2012) A standard SHS provides energy from 80 up to 320 W, enough to power a few light bulbs and power points for a radio, a fan or a mobile phone charger for a few hours a day. (Foundation Rural Energy Services 2017)The greater number of households in a village, the greater the benefit from a centralized photovoltaic production system rather than installing SHS on each home separately. On the other hand, SHS is a relative mature technique known by investors, in comparison to mini grids based on PV. (Actor 1 2018)

The technical system is based on solar cells where sunlight is used to produce electricity. A combination of multiple solar cells makes up a solar panel. The cells are made of semiconducting materials and when sunlight is absorbed by these material, the solar energy knock electrons loose from their atoms which allow the electrons to flow through the material and produce electricity. Once the solar panels have captured the electricity, they send it to an inverter to make it ready for usage in a home or to store in a solar battery.

Lifetimes are about 25-30 years for the PV system, 5-10 years for the batteries and inverters. (Energysage 2016) Even though increased innovation might decrease the today high costs of solar panels it might not affect other components such as batteries and inverters in the same quick way. (Odarno, et al. 2017). Owing to the great amount of solar radiation in Tanzania this reflects on good potential for solar energy conversion throughout the region. (Hammar 2011)

5.2.2 Hydropower Hydropower is electrical power harnessed by water wheels or turbines from the potential energy of falling water (e.g. waterfalls) or the kinetic energy of running water. With that in mind it is very site dependent as it requires specific flow and volume conditions. A mini grid supported by hydro power generates up to a few MW which can support a home, farm, or a community. (Renewable Energy World 2016) The energy produced is very much dependent on head height and flow

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regimes and also on whether they are operating during rainy season or not. Also, some only operate seasonal and others operate perennial which are affected by the dry seasons causing lower generation.

It is a mature technology which has been used all over the world over the past 30 years (Wiemann, Rollan och Glania 2011), an underlying factor of why they are robust and durable with a lifespan of 40-100 years.

There are two ways of having them installed, either as run-of river plants or with reservoirs, building reservoirs accompanies higher initial costs. The distance from the water source to the load centre have a big impact. The greater distance between the generation and consumers to the point of mini grid, the more infrastructure is required and by that greater costs. Several mappings on small hydro resources in Tanzania shows that most potential lies within the southern highlands, the north (Kilimanjaro) and the west. (The World Bank 2017)

5.2.3 Fossil fuel Fossil fuel mini grid technologies are often fuelled by diesel, gasoline and natural gas. The technology is often easy to procure and since it is a mature technology many technicians know how to operate and maintain the systems. The systems are often inexpensive to procure and relocate and can quickly be started or stopped based on fluctuations in demand. (Odarno, et al. 2017) By combining diesel-generating sets with renewable energy mini grids they can be used as standby facilities owing to its great flexibility.

The expected lifespan is 10-15 years, by that shorter than mini grids based on renewable resources as mentioned above. The dependency on imported fuel is a key factor when planning the logistics for its use in remote areas. The effect of raised forecasts in fossil fuel price will have a challenging impact on the usage of fossil fuel technology, due to increased production costs. (Setyawan 2005)

5.2.4 Biomass In a biomass mini grid there are several types of technologies that can be used, such as; biofuel, biogas, biomass gasification and solid biomass direct combustion. Regardless of the choice of technique the key factors in ensuring effective and economic operation are the quality and the right amount of biomass resources. Distance to the resource have a big impact, by that it is site dependent. (Sharma och Verma 2012)

The technology is mature and robust and running costs are relatively low. In addition, its utilization factor is higher than those of diesel and hydro, a reason of why it is a popular technique in underdeveloped regions. Furthermore, the technique has a big availability in size range, easy to match dependent on site specific load. On the other hand, fuel supply and preparation can be challenging due to adequate infrastructure.

An established biomass mini grid has an expected lifespan of 20-30 years if properly maintained. (Government of India, Ministry of new and renewable energy u.d.)

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5.2.5 Wind turbine Small wind turbines are normally installed on top of tall towers, operating at around 10 meters altitude and are generating up to 50 kW. The location of wind power is site dependent due to the dependency on wind resources, whereas minimum 5 m/s is recommended as feasible for energy extraction. (Carbon Trust 2008) Due to intermittency in wind during the day, storage and back-up generators are often used to ensure the energy supply.

The usage of small scale wind power supplying smaller villages is not as mature as other technologies based on renewable energy sources. Therefore, initial costs are higher. (Odarno, et al. 2017) However, the development within the technology is moving forward and small-scale converters adapted for lower speed levels are being introduced meaning it could be found of interest for remote decentralized smaller villages not always with wind resources above the recommendation level.

Due to a small wind power market in Africa, costs are generally higher due to it cannot take advantage of economics-of-scale as for example Egypt that is more developed within the segment. The need for ancillary infrastructure is a key factor when calculating the costs. (Mukasa, o.a. 2013)

There are found to be promising wind conditions (>5 m/s) in hot-spots in the highland of central Tanzania along with indications of good wind in South-East Tanzania. (Hammar 2011)

5.2.6 Mini grids in Tanzania The first electricity in Tanzania, in colonial days, were provided by mini grids that were developed due to the need of providing power to the mining industry in remote regions. At this point, the government of Tanzania and faith-based organizations were the main developers of mini grids. (Katyega, Estomih och Odarno 2016)

In 2016 a report conducted by the world resource institute, stated there were 109 mini grids registered in Tanzania located in 21 regions that supply over 184,000 customers which stands for about 0.3 % of the population. (Odarno, et al. 2017) (The World Bank 2016) These grids have a total installed capacity of 157.7 MW, where 16 of these mini grids are connected to the national grid and the rest operate as isolated mini grids. Of the registered mini grids, 19 are running on fossil fuels, 25 are biomass, 49 are hydro, 13 are solar and 3 are hybrid, no registered wind turbines. (Odarno, et al. 2017) Below, in Figure 3, there is a map visualising the locations of many of the above mentioned mini grids.

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Figure 3 Location of mini grids in Tanzania, note that there are only 107 mini grids on the map. Data is accurate as of February

2016. (Odarno, et al. 2017)

5.3 Tanzanian energy sector The energy sector in Tanzania is represented by several stakeholders, the ones presented in this section are those that have an impact in the analysis that is being conducted in this report. The Ministry of Energy and Minerals (MEM) is the way in which the government formulates its energy policy and by that the Ministry is overall responsible of the ones mentioned below. An overview and plan of the actors mentioned can be found in Figure 4 before the start of the next section.

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Figure 4 Overview of actors involved in the electrical production and distribution system in Tanzania (Ministry of Energy and

Minerals (MEM) 2013)

5.3.1 TANESCO Before 1992, Tanzania Electric Supply Company (TANESCO), a vertically integrated, fully state-owned power utility, has been the sole company responsible for generation, transmission and distribution. Due to the drought-induced electricity crisis in 1992 the government lifted TANESCO’s monopoly in power generation with the intention to attract private sector investments to supplement the TANESCO-owned generation capacity. (Forbes 2000) Today the company still remain as the sole licensed party in distribution activities and it is the main company which owns and operates downstream power sector. Even though it purchases electricity generated by a number of players such as; Independent Power Producers (IPP), Emergency Power Producer (EPP) and later on also Small Power Producers (SPP). Due to its dependency of liquid fuel and a culture of non-payment electricity users who see no incentive to pay due to poor service, the utility is facing financial problems. The reason of struggling to meet its financial obligations are also based on the rising costs in changing generation mix along with tariffs approved by The Energy and Water Utilities Regulatory Authority (EWURA), not truly reflecting the costs of generation, transmission and distribution. (Odarno, et al. 2017)

The energy generation system mainly consists of hydro and thermal energy. The dependency on hydropower have a big impact in the times of drought when the energy cannot be ascertained. Together with lack of control of the frequency in the main grid, reasons in why the company is seriously affected by power outages, causing losses in business for the Tanzanian population connected to the grid. The company is responsible of the transmission and also faces problems with transmissions losses, approximately 20 % of electricity is lost before it reaches the end consumer. (Matyelele Msyani 2013)

Furthermore, the company is heavily regulated by the Tanzanian government, an act to ensure affordability in tariffs. Due to being fully state-owned all cash flows are made through the public treasury, thus the usage of public subsidies/grant on investment in new technology or extended grid are difficult to derive.

Ministry of Energy and Minerals

Energy and Water Utilities Regulatory AuthorityPolicy Direction

Reg

ulat

ions

Rural Energy Agency (REA) TANESCO Imports Independent Power

Producers (IPP)

Co-funding, capacity building, pre-investment support

Stand-Alone Systems Service

Providers

Stand-Alone Systems

Customers

Small Power Producers/ Mini grids

Service ProvidersTANESCO Distribution

Retail Grid and Mini grid Customers

Standardised Power Purchase

Agreement

Enforcements

SPPA, PPAS & Bulk Tariff Approval, Licensing

Retail Tariff Approval

Customer Complaints

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5.3.2 The Energy and Water Utilities Regulatory Authority EWURA is an autonomous multi-sectoral regulator of the energy sector in Tanzania. It is responsible of the economic and technical regulation of electricity, petroleum, natural gas and water sectors. The functions of EWURA include promoting effective competition and economic efficiency, safeguarding the interests of consumers and promoting the availability of regulated services to all consumers including disadvantaged consumers in rural areas. Based on that, the authority is also responsible of reviewing tariffs. (EWURA 2017) All decisions made by the agency are with regards to quality, safety, health and environment.

The authority has proven to be an effective partner through its standardized regulations for small power projects and mini grids by considering the interest of both the national utility and private developers. (Odarno, et al. 2017)

5.3.3 Rural Electrification Agency All projects under 10 MW are under the purview of the Rural Energy Agency (REA), operational since 2007. The purpose is to promote and facilitate rural energy development in collaboration with the private sector, non-governmental organizations, community-based organizations and government agencies. (REA 2018) The role of REA is to complement the MEM and TANESCO, in terms of focusing on the development in comparison of being a commercial entity. (Lutengano Mwakaesya 2016) The REA works closely with EWURA when conducting regulatory frameworks.

In addition, REA in some cases also establish mini grids in rural areas and stands for all initial investments. In a later phase, consigns the responsible of operation, distribution and generation to TANESCO. This results in lower connection fees applied, making it more affordable for the end consumer to use the service.

Despite the REA functions of promoting and reviewing, the United Nations Industrial Development Organization states that the lack of in-sufficient in–country technical capacity to install, operate and maintain the systems. In addition, adequate access to finance these projects to scale is a great obstacle in the development. (Jervina 2017)

5.3.4 Rural Energy Fund To tackle this, contributions from stakeholders and other investors are required to realize the projects. In 2005 the Rural Energy Fund (REF) was established, that now lies under the REA. REF is raising funds, matching grants, performance grants and provides resources for technical training and assistance e.g. Since 2008 the fund has financed the completion or initiation of 17 mini grid projects and by finding donors, funded another 25 mini grids. (Odarno, et al. 2017)

To make sure the disbursement of grants to developers from the fund is properly executed based on pre-conditions set by the board, the REF is using a trust agent to monitor the process. Currently, the trust agent is the CRDB Bank. (REA 2018)

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5.3.5 Financial aid The dependency on aid in Tanzania has been a constant feature of economic development ever since the end of colonial times. The dependency has however changed over time due to historical phases of social and economic development, it is however considered as something critical. (Wuyts, Mushi och Kida 2016) In case of withdrawal of support, negative implications on the fiscal accounts are a potential risk, resulting in decreased development and growth rate. (Deloitte 2017)

Mini grid projects often rely on subsidies, money granted by state or public body. These grants come from a wide range of sources including international development agencies, private individuals and financial aid from partnerships with other countries. Dependent on funder, there are different requirements that need to be met by the recipient. In cases when aid is a part of the funding, it’s mainly through funds and not directly from the aid donor. For example; the Swedish Embassy in Tanzania enables some aid through the Africa Enterprise Challenge Fund, a development institution focusing on creating sustainable incomes in rural and marginalized communities in Africa, that distributes money in further funding processes. (Eriksson 2016) Commercial resources on the other hand often find financing rural electrification to be risky due to the bankability of the projects. Which is the ability of a project to sustain itself on its stream of revenue. Which is very hard to predict for mini grid developers because of that they have numerous customers compared to independent power producer projects, connected to the grid, that signs with the utility as one customer and not numerous. (INENSUS 2016) It can be difficult for a project to demonstrate that expenses will be recovered and therefore investors might not be keen in providing funds. The main motivation for private entrepreneurs are building profitable energy business, whereas the government aims at increased economic activity within the regions. (Bhattacharyya 2016).

In the end of 2016 the United Nations Green Climate Fund (GCF) announced an anchor investment of USD 80 million for renewable energy access in Africa with focus on Tanzania among four other countries. The project concerned will include international participants as well as national agencies to make sure the project is anchored nationally. (Tanzania Invest 2016) An important aspect since some argue that unintended consequences of some of the donor interventions might be holding Tanzania back from further development and democratic consolidations. (Stewart 2013)

5.3.6 Private sector The need to include the private sector in the energy development is a key factor for the government to realise the goal of increased energy access for the whole Tanzanian population. (Business Sweden 2017)

The Alliance for Rural Electrification (ARE) is one of several examples of associations promoting international business and a decentralised renewable energy industry aiming for best practices. In Tanzania there are 28 companies that are members in the alliance, with varied technology focus and business models. It is a foundation for cooperation and further development within the segment, to learn from each other is a key aspect. (Alliance for Rural Electrification 2018)

Through the International Finance Corporation (IFC) the five-year “Tanzania Mini-Grid Program” was established in 2015. In 2016 it launched a mini grid information portal, aiming to improve the access to information for private mini-grid developers. The co-leader of the IFC work states “there

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is a lack of information on mini grids, so people don’t know where to go” where he aims at less established private actors. (Brent 2016)

Investment in new technologies by private sector is also an important factor in developing the energy market, even if they are not near commercialisation. The initiatives can help to move early innovations from the laboratory to commercial solutions. (IRENA 2016) In the long term resulting in declined investment costs in mini grids, beneficial for all segments within the energy sector.

5.3.7 End consumer The end-consumer in this report is referred to as the people receiving and buying the generated power distributed from the mini grid. More specifically, the Tanzanian population living in remote regions not able to a connection to the national grid. Therefore, to obtain electricity they are dependent on the development on mini grids. Considered the poor economic situation of the people in Tanzania the socio-economic concept of “Bottom of the pyramid” (BOP) will be referred to in this report. A concept that group the vast segment of poor citizens constituting an invisible and unserved market blocked by challenging barriers that prevent them from realising potential. (Financial Times 2017)

5.4 Operation models A key factor for success in mini grid systems is the local institutional arrangement determining who invests, develops, owns and operates the systems. Based on how it differs it is classified in different operational models. The World Bank, United Nations Development Program (UNDP) and many others often use typologies based on ownership, proving it is a dominant and decisive element. The one to be responsible for long term operation and management is often closely linked to the ownership. (Wiemann, Rollan och Glania 2011)

Depending on variables such as where in the world, socio-economic conditions and regulatory environment there are four different operation models being implemented in spread parts of the world. However, the success of a specific implementation will be dependent on the context. In general, an operator acts both as a generator and distributor. (Safdar 2017) In Figure 5 the number of mini grids related to each operation model is presented.

The four main-operation models are:

• Utility based • Private sector based • Community based • Hybrid based, a combination of the three models mentioned above. No official examples

in Tanzania and will not be discussed further on. In addition, there are several examples of faith-based isolated mini grids in Tanzania. However, community operated along with faith-based projects are not able to accomplish economics of scale in the same way as utility or private operated mini grids. Thus, it will not be covered in this report due to its lack in a long-term impact on electrifying the rural areas within Tanzania.

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Figure 5 Number of mini grids related to each operation model in Tanzania (Odarno, et al. 2017)

5.4.1 Utility based model If the operation model is utility based it means the national or regional electricity utility is responsible for the grid. In terms of Tanzania, TANESCO becomes the operator according to this model. According to the World Bank, utilities are the most common operators on rural electrification in developing countries. (The World Bank 2008) Stated based on the advantage in experience, financial resources and supply in spare parts meaning possibilities in extensive maintenance services. Also, the advantage of economics of scope and scale and opportunities to find funding.

Another aspect is the liberalization in energy market that has taken place in many developing countries. Considering more and more established actors and downward pressure on prices, the utility must cater the needs of market forces. However, the low-cost efficiency in TANESCO is a big challenge in terms of meeting the needs in a sustainable way.

Utilities are often closely connected to government and driven by political agendas. By that, initial financing and subsidies are often easier to procure (compared to private sector). On the other hand, there could be a risk in realising the political agenda due to visions not reflecting all aspects of the business. The governmental influence in TANESCO is a main reason in the financial problems the company are facing. Causing a conflict in making profit and answering to political vision and promises. (Eriksson 2016)

In Tanzania, the tariffs are uniform to all retail consumers who purchase electricity from TANESCO, independent on whether it is from the main grid or an isolated mini grid. (Odarno, et al. 2017) A more detailed presentation of the tariff structure in section 2.6.1 in this report.

5.4.2 Private sector based If private sector based the actor is responsible for building, managing and operating the mini-grid, including payments and various services. The establishment of REF in Tanzania have eased the process in finding grants, loan guarantees and donors. However, there are still needs of

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improvements to ease the processes. (Actor 2 2018) The overall improvement in technology, innovations in finance and development of management platforms has increased the focus on the private sector and its role in the development in mini grids. (IRENA 2016) In Tanzania private companies establishing mini grids (<10 MW) is referred to SPPs, where a further description of the SPP system is presented in section 2.6.3 in this report.

A private-sector model may look differently depending on the ownership of the grid and type of contracts with utility and end consumers. In comparison to utility operated, private sector operated mini grids are often more efficient in providing electricity, based on its dependency on following an economic logic and assuring its revenues, making profit. However, the capacity in private sector operated mini grids is likely to be lower. (Safdar 2017) Variables such as system location and scale, revenues based on income profiles, population density, mobile connection and potential end consumers in rural areas have a big impact in whether the private sector decides to involve in a project. (Actor 1 2018)

There are several examples in developing countries where small private companies have local interest in providing electricity to a village. (Alliance for Rural Electrification 2018) By that, an added motivation to involve in something long term. On the other hand, smaller companies tend to have limited technical skills and financial resources to supply the project.

One example of a private project is by a producer using solar-battery-solar hybrids systems to supply reliable and affordable electricity to rural Tanzanian citizens. In 2016 it launched a mini grid on the Lake Victoria island of Ukara. In close connection with the launch, the chairperson of the Bwisya Village Power Committee, the largest village in Ukara, said that they acknowledge the fact that the producer is a private company and they charge real cost for the provided services. In relation to the better quality of resources compared to the ones used before, the cost is significantly lower. (Energy 4 impact 2016)

A main issue for many operators is that electricity revenues alone are not able in covering the costs. Thus, private mini grid developers have turned to alternative sources of revenue and are for example selling appliances to villagers, an act that results in increased sales in electricity. (Actor 1 2018) Furthermore, private companies often use the strategy of offering a business case in selling the electricity to villagers rather than just offering a connection. A strategy resulting in economic growth and later on growth in electricity demand, beneficial for both parties. (Actor 3 2018)

To finance a private operated project, a combination of private equity, debt and received subsidies are applied.

5.5 Price setting of mini grid electricity To run and maintain a mini grid it is important to get a source of income to pay for the maintenance and the further investments needed when expanding the grid. The income has to come from cost-reflective tariffs to be viable and attractive for possible investors and other stakeholders. (Weston, et al. 2016)

In a review of best practices for mini grids the success of a grid is described as often based upon cooperation between the involved consumers. It is often important that the consumers use their individual allotted levels of consumption without overdrawing. (Schnitzer, et al. 2014) The set tariffs of the electricity must also have a smooth collection system to ensure a steady cash flow for

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the operator. This ensures that the operator does not have to put too much hassle into the collection of money. (Actor 1 2018)

Another key aspect according to the above mentioned best-practice report is the importance of subsidies for the producers and distributors. This can drive the levels of tariffs down and make electricity more affordable and accessible to the consumers while maintaining the operator’s revenue.

Furthermore, a report by the World Bank, evaluating case studies for rural energy in Africa (Hosier, et al. 2017) emphasises the importance of concessions when establishing a rural electricity business. A concession is described as an arrangement where a firm obtains the right from a government under conditions of significant market power. A concession is thus a device that can be used to create competition for a market when competition in the market is not operating. (Kerf, et al. 1998) This essentially means that the government grants a private company to initiate a monopoly in the requested area but also having to conform with energy regulations.

The World Bank report, mentioned above, also stresses the importance of the government conforming with the agreed concession and paying the tariffs outstanding to the private actor.

In the six cases described by the World Bank, there has been successes in engaging local investors and reaching some consumer but none of the cases managed to attract international investors due to the limited and uncertain return of investment and continued to be local projects. As earlier described, subsidies, grants and concessions can play a major role in pushing companies and investors into actually going through with the projects and have a necessary return on capital. (Hosier, et al. 2017) (Odarno, et al. 2017) (Castellano, o.a. 2015)

5.6 The Tanzanian perspective & SPP framework Switching to a Tanzanian perspective, the development of energy infrastructure was a key segment of Tanzania’s Development Plan 2011-16 and in Tanzania’s Vision 2025. (African Development Bank Group 2015) In the beginning of the millennium, key policies and legislation was established along with a regulatory authority, EWURA. (African Development Bank Group 2015). From these instruments a policy regarding small rural power producers was established as part of the Electricity Act and Rural Energy Act. This policy is known as the Small Power Producers Regulation or SPP Regulation.

A Small Power Producer (SPP) produces energy independently from TANESCO and can sell their power to TANESCO into the national grid, to isolated grids through Small Power Distributors (SPDs) and/or directly to the rural communities. A SPP is defined and set apart from an Independent Power Producer (IPP) with the definition that it should produce less than 10 MW in total regardless of the energy source and location. The mini grid operators will therefore essentially be acting as both a SPP and an SPD. (Actor 1 2018)

With the SPP Regulation/Framework the Tanzanian government aims to promote small producers connected to the national grid, smaller distribution grids and isolated distribution grids. The SPP framework uses Feed-in-Tariffs (FiTs) (Moner-Girona, o.a. 2016) which is called Standardised Power Purchase Tariffs (SPPTs) in Tanzania. These are used as an encouragement for developing renewable energy in off-grids by providing reimbursement for establishing the rural mini grids.

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Along with the SPPTs there is also a Standardised Power Purchase Agreement (SPPA) that binds TANESCO into paying the SPPT for the duration of the SPPA. This has a function to reduce the risk for the producer and enabling the producer to determine whether the tariff and agreement income is enough to cover its investment since the payments are agreed with terms.

The way the actual SPPTs is determined is different depending on the distribution network which will be described in the following sub-sections.

5.6.1 Tariff structure for TANESCO The tariffs used by TANESCO for consumers connected to the national grid or one of the TANESCO-owned mini grids is determined and evaluated by EWURA. TANESCO can send a request for Regulatory Action where they propose an increase in the set tariffs. Something that they have done historically in order to cope with their cost of operations. The tariffs used by TANESCO is based on EWURA’s Tariff Application and Rate Rules. (EWURA 2018)

The actual tariffs are divided into different types of customers who get tariffs based on required voltage and amount of usage. This has resulted in six categories which includes: D1 (Domestic Low Usage, for low consumption users), T1a (General Use: Residential, Commercial and Public Lighting), T1b (General Use: Small Industries, Billboards, Communication Towers), T2 (Low Voltage), T3MV (Medium Voltage), T3HV (High Voltage, including Zanzibar). The six categories are handled individually where the tariffs consist of three parts: A service charge (TSh per month) which is not applied to the small consuming category, D1. An energy charge (TSh per kWh), applicable for all categories and a Demand Charge (TSh per kVA per month) which only applies to the T3 categories for requiring a high amount of voltage.

Additionally, there are charges for the initial installation and connection of a consumer to the national grid, ranging from 100,000 TSh up to 1,000,000 TSh depending on location and type of connection that the consumer is requesting. This has been described as the connection fee which the private companies also use when they are connecting consumers to the mini grids.

5.6.2 Tariff structure for a SPP with TANESCO-owned distribution When a SPP is connected to the national grid or a mini grid owned by TANESCO there is a fixed tariff that TANESCO is required to reimburse the SPP for each kWh produced and sold to the consumers.

The exact tariffs differ depending on if the wholesale of electricity is to the main national grid or to an isolated mini-grid owned by TANESCO. The SPP Framework has been in use since 2008 and has been established in two different generations where the second was a revised version released in 2015. (Odarno, et al. 2017) The first-generation tariff depended on who the distributor of the power was. If TANESCO were the buyer, the tariffs were based on the avoided cost for the company, basically how much it would have costed TANESCO to produce the equivalent unit of electricity. The tariff was revised yearly and was subject to a price ceiling and floor. The tariffs for the main grid were also adjusted depending on season (wet and dry).

This way of calculating tariffs was completely neutral towards what energy source to be used. This disfavoured solar and wind projects who has higher costs upfront and would need a higher tariff to cover the initial investments. (Odarno, et al. 2017)

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This was however changed in the revision in 2015 where specific Renewable Energy Feed-in-Tariffs (REFiTs) which covers hydro, biomass, wind and solar was introduced to make it more beneficial to invest in renewable energy. The tariffs are now also fixed for the entire duration of the SPPA instead of being yearly revised, providing a stability and makes it easier to estimate the business case for each investment. (Odarno, et al. 2017)

5.6.3 Tariff structure for a SPP with direct sales to end-consumers If the Small Power Producer sells directly to end consumers or through Small Power Distributors (SPDs) the SPP can determine the tariff themselves so that it provides a reasonable return on capital. The tariff structure of an SPP producing less than 1 MW can be arranged freely or be set as the national uniform tariff imposed on TANESCO and described in the previous section. However, the SPPs and SPDs are required to submit the proposed tariffs to EWURA for approval before charging for the electricity. A measure that ensures that no unreasonable tariffs are set which might affect the consumers negatively. This is not necessary for the very small power producers (less than 100 kW) who has more freedom in setting their retail tariffs and less obligations when it comes to registering the grid but also is more limited in being able to accumulate big profits due to the small size of the production.

5.6.4 Summary of tariffs in Tanzania The tariff structure for mini grids within Tanzania depends on different aspects such as who manages the distribution net, who are the producer and what is produced as described in the sections above. A summary of the used tariff systems and the latest tariffs used are described in the tables below along with what scenario each tariff table is applicable to.

Table 1 Tariff structure for TANESCO distributed electricity to both rural and urban customers. Tariff levels in question for mini grids are D1 and T1 which is marked in grey in the table. (Odarno, et al. 2017)

Tariff Description Service Charge

(TSh/Month)

Energy Charge

(TSh/kWh)

Demand Charge

(TSh/kW/Month)

D1 Low voltage (230V) consumption of less than 75 kWh 0 100 0

T1 Low voltage (230V-400V) consumption of more than 75kWh 5,520 306 0

T2

Low voltage (400V) demand of less than 500 kW per month, consumption of more than 7’500 kWh

14,223 205 15,504

T3 MV Medium-voltage supply at 11/33 kV, demand of more than 500 kW per month, consumption in kWh

16,769 163 13,200

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T3 HV High-voltage supply at 132/220 kV, demand in kW per month, consumption in kWh

0 159 16,550

Table 2 Tariff structure under second-generation framework for SPP actors depending on energy source and capacity. (EWURA 2016)

5.7 Consumption behaviour and demand perspective The pricing of the electricity does also have to be evaluated against a demand for electricity and energy. The following section will describe how to establish an energy demand for the rural population in Tanzania.

5.7.1 Issues in establishing the demand For socio-economic development, electricity access has proven to be an important component and there are multiple benefits of gaining access to it according to an evidence paper by Michael Greenstone. (Greenstone 2014)

Greenstone also touches another important aspect when it comes to establishing mini grids. He describes the issue in determining how big the demand for electricity actually is in rural areas where it historically never has been present. The reality according to Greenstone is that these areas has an exceptionally low willingness (or ability) to pay. The gap between the costs and consumptions of a national grid and the rural consumers is often very big which has resulted in a paradox where being in proximity of the national grid does not necessary mean that consumers will have access to electricity. Studies has shown that in Africa, one in six of consumers without electricity is located

Technology Installed Capacity

Less than 100 kW 100 kW – 1,000 kW 1,000 kW – 10,000 kW

Biomass Not subject to the rules set by EWURA. Small Power Producers who sell to a distribution network must obtain letter of intent, power purchase agreement and interconnection agreement. Standardized purchase tariffs (SPPTs) and small power purchase agreements (SPPAs) is applied to very small power producers unless EWURA creates a specific tariff.

SPPT; applicable tariff depends on size of plant

Hydro

Solar

Feed-in tariffs determined by EWURA

OR

500 kW biomass tariff + 5 %/15 % if connected to isolated mini grid

Tariffs determined through competitive bidding

Wind

Feed-in tariffs determined by EWURA

OR

500 kW biomass tariff + 5 %/15 % if connected to isolated mini grid

Tariffs determined through competitive bidding

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in direct proximity with the actual grid. In Tanzania as many as 50 % living “under the grid” is not connected to it. (Attia and Shirley 2017)

The reasons could be different but connection charges and unwillingness from governments to meet the needs for the rural population has been identified as likely possible drivers for the situations. (Attia and Shirley 2017)

Mini grids could have the potential to bridge this gap, providing a more flexible alternative, enabling the rural population to get access to cheaper energy. The described gap between supply and demand creates a need to understand the demand and consumer-perspective further.

There are multiple issues in estimating a consumer demand for rural areas in developing countries.

(Greenstone 2014) Examples could be: imperfect information, price dispersion, heterogeneous preferences and corruption in many developing countries which also is the case in Tanzania. (Consumer Protection Department: Fair Competition Commission 2012)

Another perspective is the reliability of the electricity and as previously described in this report, there are reliability issues within Tanzania and power cuts are frequent. Reliability and quality assurance of receiving what is paid for is worth something to the consumers in Tanzania. The willingness to pay is higher if the electricity quality is better and more reliable and lower if the price increases and quality remains poor. (Townsend 2000) It is therefore not easy to determine an actual demand of the electricity theoretically where instead many researchers try a different approach that is described in the next section.

5.7.2 Survey-based approach to establish demand To determine the electricity demand in developing countries, surveys has been done on the field with the direct users of the electricity. A survey conducted in multiple Indian states concludes that an important driver of satisfaction is the availability of energy during the day. (Aklin, et al. 2016)

A market intelligence study of lighting demand conducted in Tanzania itself (GreenMax Capital Advisors 2013) concludes that the average per capita income of a BOP consumer is 245,550 TSh (USD 105)1 per year. The BOP population is representative for the areas where mini grids are viable, rural and peri-urban areas. The income is used primarily on food, lightning and water expenses followed by education and healthcare. Rural households have on average no surplus disposable income and needs all their income to satisfy the basic needs.

5.7.3 Rural dependency on fossil fuel and biomass for energy Energy needs for households in Tanzania is typically covered with different types of energy for different uses. (Maliti and Mnenwa 2011) Kerosene and to some extent electricity is the main source when it comes to lighting, something that is described more closely below. Cooking, which is another major consumer of energy for a rural family, is also supplied by kerosene and in some cases by charcoal. (Karekezi, Kimani and Onguru 2008) Kerosene is therefore an important energy source used in many applications but a study by Research on Poverty Alleviation (Maliti and Mnenwa 2011) found that most households uses a mix of energy and avoids depending on just one source of energy. LPG (Liquified Petroleum Gas) which is a further refined petroleum-based 1 1 USD = 2,256,4 TSh according to the last 90 days-average at xe.com (Currency Converter)

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energy source (Oryx Energies 2018), concluded to only be used by non-poor households and is therefore not very common in rural areas and is not of interest for this report.

5.7.4 Consumption of lighting Lighting is seen as the primarily area of use when getting access to electricity. It demands a very small amount of energy, with devices commonly using just a couple of watts. (Lenz and Peters 2017)

The alternative lighting source used are mostly small lamps powered by kerosene with smaller alternatives such as candles and battery powered LED torches and to a small extent solar lighting. (GreenMax Capital Advisors 2013) Many of the solutions are expensive, short-lived and could also pose as health hazards for its users. The market intelligence survey done by GreenMax and mentioned in section 2.7.2 can also conclude that even though kerosene prices are much lower than the electricity prices the life cycle cost for kerosene products are much higher due to the recurring cost of fuels and devices. The problem according to the report is awareness of the products and solutions, lack off distribution and that the consumers want to avoid the upfront cost of renewable alternatives. However, a majority of the surveyed are positive to buy e.g. solar powered lighting if financing is offered.

5.8 Consumption in comparison with income Based on data from a Tanzanian Household Budget Survey 2007 (National Bureau of Statistics 2007) an average household consumes about 16.6 litres of Kerosene per year which represents about 20,000 – 28,000 TSh per year (USD 8.86–12.41). This means that by using kerosene a household will only use 23 % of its purchasing power to cover their need of energy. A Kenyan study (van Acker, et al. 2014) found that the monthly average spent on kerosene in Muhuru close to the Tanzanian border was 399.28 KSh (Kenyan Shillings) (USD 4.65) per month, amounting to USD 55,8 per year. The survey also established that the inhabitants spent their income on battery replacements, candles and recharge of their mobile phones. The total energy expenditure, including kerosene, candles, batteries and recharging was 933.14 KSh (USD 10.86) per month which the study chose as a possible subscription fee for connecting to the proposed local mini grid.

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6 Results This section visualises the results based on the conducted interviews and are divided into multiple sections. All figures represent an economic comparison between the private actors (anonymised) and TANESCO. The private actors interviewed do all have a PV-based grid with diesel generators as a backup which makes a comparison viable between them. Since there is concluded in the literature study that solar is one of the more expensive solutions for renewable energy it should be taken into account that the results presented below holds what could be called a worst-case scenario and that off-grid solutions with other energy sources could potentially be more affordable to run, resulting in lower tariffs, fees, investments etc.

In some cases, there will be multiple data from a single actor, something that will be explained in the comments below each figure. The discussion which follows this section will cover the comparison and make conclusions based upon it. Thus, it should be used as a reference while reviewing the discussion.

6.1 Tariff levels

Figure 6 Tariff levels comparison between TANESCO and the private actors. The amount represents tariff level in TSh per kWh.

This represents roughly a monthly consumption for a household per month (e.g. 1 kWh per month per household)

To be concluded is that the electricity tariffs used by TANESCO (marked in a dark blue) is significantly lower than those of the private actors. This could be motivated in a number of ways. Partly there is an internal cross-subsidy within TANESCO and a governmental agenda of keeping low electricity prices which does not reflect or match the operative costs. The tariffs for TANESCO is divided in two categories D1 and T1 which has been described in the literature study. The tariffs used by the private actors (marked in bright blue) is based upon their operative costs and do differ based on multiple factors such as grid size, procurement pricing, transmission and generation layout. One of the actors also has a separate tariff for different times of the day. This is motivated by the storage costs of energy since the night time energy needs to be stored after being collected during daytime when the sun shines.

100 306

9 900

3 000

6 000

3 2502 300

TANESCOD1

TANESCOT1

Actor 1 Actor 2 Day Actor 2Night

Actor 3 Actor 4Tarif

fs in

Tan

zani

an S

hillin

gs

(TSh

)

Tariffs

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6.2 Connection fees

Figure 7 A comparison of connection fees between TANESCO and the private actors.

The connection fees, defined as the initial fee paid when connecting to the local transmission grid, shows a different perspective in comparison to the tariffs (Figure 6). It can be concluded that the connection fees (Figure 7) used by TANESCO is multiple times higher than those of the private actors which is the direct opposite of the tariffs. Regarding TANESCO, the fees is for rural connections and with different fees depending on distance from the transmission grid. A higher distance results in a higher connection fee due to material needs. The private actors describe their connection fees as far more symbolic than commercially viable. Partly, there is a reason to have a small connection fee to ensure that they can be relied on paying their future electricity bills. The other main reason of having a low connection fee is to minimize the obstacle of connecting to the grid and ensure that possible customers have the ability to invest and connect.

6.3 Subsidies

6.3.1 Subsidies per investment

Figure 8 Comparison between the subsidy coverage of the private actors’ total investments

What can be deducted from the above charts in Figure 8 is how much of the actor’s investments are covered by subsidies. As can be seen from the private actors, subsidies are a substantial part of the investments. This essentially means that without subsidies, many projects will be unfeasible to

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complete and will not have enough return of capital. Since obtaining subsidies becomes a substantial part of the financing, the complexity of these processes can take a lot of the grid operators time. Multiple of the interviewed companies reveals that they abstain from trying to obtain some of the available funding because of time-consuming processes and uncertainty of actually receiving any money in agreed time or even at all.

6.3.2 Distribution of subsidies

Figure 9 Comparison of how subsidies are distributed on up-front investments versus on lowering the tariffs.

To be noted is that there in some grants are disclaimers that the funds provided should cover the variable costs. This makes it possible for the company to lower the tariff. This is on a case-by-case basis, but the absolute majority of the funding received is used to go through with the up-front investment.

The above charts presented in Figure 9 are visualising how the subsidies and grants received by the private actors are distributed into the organisation. As seen above the absolute majority of the subsidies is used to cover the up-front investments. This could partly be explained by the high initial costs of investing in PV-systems. As explained in section 6.1, the tariffs should be covered fully by revenue from the customers of the grids which motivates the above distribution.

The distribution for TANESCO has not been possible to deduct since there is partly no official information to get hold of and that there is a lack of consensus within the actual company whether there are quality issues at all. Furthermore, there is an issue with cross-subsidising from the public treasury which makes the investments hard to follow. An assumption to be made is that TANESCO to a larger extent needs to cover its operational costs with subsidies. This because of the tariffs being lower than the operational costs.

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6.4 Availability

Figure 10 Comparison of availability between TANESCO and the private actors.

The value for TANESCO is estimated based upon data from the IPP Songas. They have a real availability of about 94 % and are working closely with TANESCO. Songas is regarded by themselves as the most reliable power producer except for the hydropower and they estimate that TANESCO’s thermal power plants has a slightly lower availability than themselves. (Mngodo and Whittaker 2017) To be noted is that Songas is using gas turbines as a power source and are connected to the national grid but that the energy source is comparable to those used in the TANESCO-owned isolated mini grids.

The availability of a grid is defined as the amount of up-time of the grid. The remaining percentage is the downtime of the grid which could be because of planned maintenance or when there is a fault in the system that needs to be corrected. In the comparison shown in Figure 10, TANESCO shows a lower availability and therefore has more downtime than the private actors. As has been described in the literature study, TANESCO has multiple issues with organisation and financials which could result in a much less reliable grid. The private actors have a relatively high availability which can be deducted from having a relatively stable source of energy in the form of solar and diesel. This, together with using high quality products that is maintained more regularly than in the case of TANESCO. The availability aspects can be valued economically since the end users value reliability and a continuous supply of electricity.

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6.5 Promotion of local economic development Table 3 Overview of which actors that are promoting economic development locally where the mini grids are located.

The table above shows which actors that are actively engaged in promoting economic development through their mini grids and by providing services apart from distributing electricity. All of the interviewed private actors claim to have a financing service to be able to buy appliances apart from lamps such as fans, radio, TV and fridges. Some of the actors also engage into the local economy by providing equipment to local millers, farmers, fishermen and shop owners where the equipment is boosting their revenue and also the local economy as a whole.

When it comes to TANESCO it can be determined that providing extra services is not part of their duty as a state-owned power utility. It is also not necessary for them since they have a functioning business model in the urban areas. The private actors rely on their extra services to get additional revenue and to increase the electric consumption in the mini grids which continuously drives the local demand.

7 Discussion The tariff levels for the private companies evaluated in the report can be concluded from the result to be considerably higher than at TANESCO. This has multiple reasons based on the discussions had with the private actors and the aid-givers. As described in the literature, the tariffs used for the national grid and TANESCO is directly established by the regulatory authority EWURA which has established a low price-level for what some might say are political reasons. Since electrification has been identified as a key part in achieving economic growth, it has been made very accessible by the Tanzanian government. They have shown reluctance in raising the tariff and as described previously, the current tariff is not covering the operative variable costs of TANESCO. An increased tariff is seen as losing political points for the sitting government and increasing the risk of losing the ruling power at the next election.

The private companies’ tariffs are in most cases set to reflect the actual variable costs of the grids where the customer revenue should cover these. Motivated by keeping the company viable and having a sustainable business case are the primary reasons for having the higher pricing level. This is also possible due to the small sizes of the grid which as described gives them the ability to establish their own tariff levels without having to seek approval from EWURA, something that is seen as essential for many of the businesses.

A result that is more to the advantage of the private companies is the connection fees paid by the customers when connecting to the local grid. Most private companies are not using a connection

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fee at all and some are having a low symbolic one to ensure the payment capability of the customer. The high connection fees of TANESCO can provide an obstacle for many rural customers who cannot afford the high initial costs, and therefore neglect the opportunity. As described in the literature there are many cases where the national grid is in very close proximity of villages but where they cannot connect due to the connection fees. If the villagers take the investment and do pay the high connection fee they will get access to the cheap tariffs of TANESCO. However, due to the low consumption of a typical household, 1 kWh per month, (Actor 3 2018) the payback time of the connection fee becomes very long, in some cases even longer than the lifetime of the equipment. This gives a clear advantage to the private actors who avoids imposing the uptime costs on the consumer. It can be argued that the lower tariffs of TANESCO gives incitements for the consumers to choose them as the provider but as mentioned in this section, a high connection fee can result in that money saved by lower tariffs will fail to repay the high connection fee. In this case there is a payback period that as previously mentioned is longer than the equipment lifetime and that it therefore could be a reason to prefer the private actors when the consumption is as low as it is.

An issue connected with this fact is the way that the governments calculate the electrification rate. The national grid does not have to be connected to a single end user to be counted as a connection and therefore it can be perfectly fine for TANESCO to establish the national grid even though very few actually connects to the grid.

A stakeholder that also is part of the electrification process is REA who provides connections at a significantly cheaper rate than TANESCO and is more of an alternative to the private companies. To be noted is that as soon as the connection is made, the customer has to rely on electricity from TANESCO which has been concluded in the results holds an abysmal alternative in terms of quality.

Despite high tariffs applied by private companies in comparison to TANESCO, quality aspects have a big impact in the willingness to pay. Measurements in availability is one of several aspects to take into account. Private companies are dependent on its electricity revenues and a good reputation to increase the existing numbers of connections to make profit. Of all actors approached, all declared an availability exceeding 96 %, which can be obtained by regular maintenance, technical skills in designing the grids and a good overview of load balance. Furthermore, applying a sales strategy where the private company offers a business case for shop owners rather than only a connection to create incentives in buying the service will result in not only getting access to electricity but opportunities in economic growth and a long term social impact. On the other hand, that is not part of the mission of TANESCO as a state electricity supplier. Thus, an interesting aspect owing to surplus value when private companies engage in electrifying rural areas.

However, tariffs are often the only aspects discussed which results in deceptive conclusions despite the surplus value of private actors. To reach the governmental goals of becoming a middle-income country, access to electricity alone is not enough to reach the goal. The solution lies within a combination of economic, social and environmental sustainability. The presence of private companies in villages nurtures a sustainable business climate, by supporting and educating in operating small-scale businesses. The expansion of business and switch in manual to electrified tools results in increased electricity demand. However, that imposes a responsibility on the producer to expand the installed capacity in the grid along with increasing demand. On the other hand, as mentioned above, there is an unwillingness for the companies to grow above a certain

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level due to the regulations. This creates a paradox which hinders the economies of scale that is seen as important by the private companies to maintain an economically viable business.

What energy resource to be used in the mini grid will in some cases reflect the costs applied. The mini grids established by TANESCO are all run by fossil fuels, an established and mature technology. But it is also subject of being affected by fluctuations in fuel price which might come to affect the already critical profitability in the grids. The private companies covered by this report are all using solar based energy, and some use a diesel generator as a backup. Overall, the choice of solar results in a somewhat expensive initial cost but enables minimum maintenance and is easy to scale when demand grows. The independency on fuel results in one less aspect needed to add to the variable costs while on the same time eases long term financial budgeting. Not to forget is the opportunity cost involved when end consumers are switching from firewood, kerosene, LPG to a grid connection. It involves an economic threshold but will in a long-term result in lower life cycle costs due to less technical failures, fuel costs e.g. In addition, there are health benefits in the switch, there is strong evidence linking exposure to combustion products and negative health effects. (Lam, o.a. 2012)

Other renewable resources in mini grids may very well be a viable option but are more site dependent than solar in terms of the geographic conditions of Tanzania. However, operators of these are facing the same challenges as the ones mentioned in this report. Furthermore, the choice in using renewable energy resources where possible is not only long term economically beneficial for all parties but will also contribute in reaching the SDG goal 7 of “Affordable and modern energy for all”.

The obvious perks of private actors are however challenged due to the dependency on subsidies and a major bottleneck in constructing new private mini grids. Many actors experience it to be problematic in engaging in the governmental processes of receiving grants and there is a clear loss in confidence in the processes. There are even examples of signed contracts, but no money received, which could be fatal for a smaller company. Due to different business models, TANESCO in comparison to private actors, the need of subsidies is not as obvious for TANESCO due to cash flows through public treasury. On the other hand, due to TANESCO’s financial problems and big amount of debt further investments in grids are subject to being challenged. If they cannot afford it by themselves it is obvious that the capital comes from elsewhere and whether it is from international aid or cross subsidies in the public treasury. The conclusion is that there is always a dependency on external parties since internal capital is not enough. In a long term, there is a risk that other parts of the public consumption will suffer if the problematics of receiving subsidies and grants experienced by private actors are not clarified.

7.1 Sustainability analysis In the perspective of a sustainable development the results of promoting private actors in the Tanzanian energy sector needs to be done with caution due to the fact that all of the interviewees in this report are of European origin. To ensure a sustainable development actions need to be firmly established on a local level to foster a business climate where locals are involved and not only hired as manpower. Thus, an economic development relies on not only access to electricity but for the population of Tanzania to be engaged in the energy sector and development. The service of the private actors when enabling products such as refrigerators and lamps is in one perspective prospering the local business climate, for example selling cold drinks or longer opening hours that

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increases revenues for business owners. On the other hand, they promote a behaviour of increased consumption, positive in terms of increased electricity revenues but it also demands more resources (fuel if a fossil mini grid or more solar panels if it is based on solar energy e.g.), negative in an environmental perspective. To make sure the consumption doesn’t get out of control, it is important that private actors take responsibility and make sure the power usage is efficient from the beginning and not make the same mistake as the industrial countries once did resulting in the critical environmental situation of today. Private actors are however more likely to use renewable energy sources in the electricity generation in comparison to TANESCO, more expensive up-front investment costs but in a long-term a self-sufficient technology. However, the lack of local knowledge about the new techniques (solar, wind, hydro) needs to be considered. It is obvious there is a difficult balance in increasing electricity access in Tanzania along with making sure the development is locally anchored.

7.2 Sensitivity analysis The results and discussion mentioned in the previous section of the study is limited by multiple accounts. Some of them are mentioned in the limitations section but there are also other aspects to keep in mind while reviewing this study.

Firstly, there are a small amount of companies interviewed due to the qualitative aspect of the report. This gives the study a narrow perspective that could be improved by conducting more interviews and try to diversify the energy sources and grid sizes of the interviewees. When looking at the off-grid situation, there has been a majority of solar-based companies which might skew the results. Solar does for example have a higher investment cost which might increase the necessary tariffs and the need for grants and subsidies.

Furthermore, the interviewees are highly biased in promoting their company and why their business model is superior to the one at TANESCO. This can sometimes give a subjective view of the industry and which problems it is facing.

There is also a low reliability in data received from TANESCO which creates uncertainty in the analysis of their tariffs, fees and reliability data. The numbers received from TANESCO officials might not give a valid perspective on the actual real data which could affect the overall analysis.

8 Conclusion The study has resulted in multiple conclusions regarding the questions that was asked in the Problem Purpose section.

Firstly, it has been observed to be a difference in tariff setting between TANESCO and the small private actors. The tariffs are conclusively higher for the private actors than for TANESCO. This in because of multiple reasons such as a governmental agenda of keeping low prices, cross subsidies within TANESCO and the need for the private actors to cover their operational costs.

Secondly, it can be deducted that subsidies play an important role in establishing mini grids. Especially the upfront investment when establishing the grids is to a large part financed by external support through subsidies and grants from the Tanzanian government, foreign aid and other funds.

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The main conclusion from this statement is that the more complicated subsidy application and processes become, the less likely the actors are to actually try to apply for them. The issue of getting a grant would in some cases most likely be a put off for potential new mini grid actors and investors who wants to avoid putting their own equity at risk.

Thirdly, there can be concluded that the high tariff levels of the private actor do not give a full picture of their business models. As explained in the results and discussion, there are other perspectives to keep in mind such as connection fees, grid reliability, customer service and local economic development. All the perspectives together give reasons to believe that the private actors offer more socio-economic value to the end rural customers and should be promoted by the local government and foreign aid to a greater extent. Based on the results that private actors distribute the majority of subsidies on up-front investments rather on tariffs is an indication of that the end consumer, despite low income, are able of paying the higher tariffs applied and that there is no need in subsidising the tariffs to make people connect. A conclusion that contradicts the governmental motivated tariffs applied by TANESCO.

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9 Future work The report concludes a difference in tariffs and fees applied by TANESCO and the private actors and that subsidies have a role in the establishment of a mini grid. The bottleneck in an accelerating mini grid market lies within the problematics of receiving grants and public funding due to low reliability in signed contracts and complicated processes. Future work within this area would suitably focus on mapping the processes of subsidies within Tanzania on a detailed level to find the main causes for the bottlenecks. Thus, it would create a basis in streamlining the processes and enhancing the possibilities of further investments and establishments of mini grids to increase the rate of electricity access.

There is also a need to better understand the demand-side of the equation and conduct a more thorough study of the consumer demand for electricity. There are multiple studies today mentioning the demand for energy in terms of lighting and cooking, but they usually do not cover the potential demand of i.e. fans, radio, TV, fridges etc. These appliances constitute an important part of the interviewed actor’s business offering as well as giving the rural population new possibilities in a number of ways.

Furthermore, while gathering the results for this report it is concluded to be a low reliability in the data regarding TANESCO, both technical and financial. To conduct a fully reliable comparison it would be of need to find the true costs of the TANESCO generation, transmission and distribution. There have been signs of EY (formerly Ernst & Young) conducting a report on the financials of TANESCO. If published it would be of use to understand the strategy in pricing and the long-term sustainability of the company. A comparison based on reliable data would make the analysis more trustworthy in realizing the true role of TANESCO. In addition, an important tool for private actors to base their strategy upon. Based on the situation today, private actors as well as end consumers have very little awareness of what the prices applied by TANESCO corresponds to. It is also a transparency issue regarding the planning and overall electrification strategy from TANESCO which creates issues in understanding where they are going to next. This uncertainty can put off many companies and possible investors who expect to get a reasonable return on capital.

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