Auctions as a potential mechanism to accelerate green mini-grids in Africa

This report uses insights from over 30 interviews with market experts and research of public literature

Abstract

This report was prepared by Oliver Wyman for the UK Department for International Development as part of its Green Mini-Grids (GMG) Africa programme and the wider UN Global Goal 7.

Using insights from +30 interviews with market experts and research of extensive public literature, the main objective of the report is to help inform discussions on the viability of auctions as a potential mechanism to support the sector scale up in Africa.

In addition, it presents recommendations that can maximise the suitability of the auction mechanism to accelerate the sector scale up and number of connections in Africa.

In summary, auctions can potentially be used as a mechanism. Key advantages include real price discovery, flexibility, contractual commitments and ability to result in lower prices. However, the mechanism will require public support and an investment framework that ensures that the key sector barriers are addressed.

The main barriers include the lack of specific regulations on tariffs and grid expansion, unproven business models and demand uncertainty. A combination of financial tools is needed to bridge the viability gap between the GMG costs and generated revenues and to support a scalable GMG business models (preferably a public-private hybrid).

Key recommendations include:

  • Pre-auction bidders workshops, simple prequalification criteria and fixed sites/clusters that can ensure scale

  • Initial focus on result based financing of standalone pilot auctions with long term contract tenures (+10 years)

  • Allow ancillary services and cost-reflective tariffs as well as set up a robust framework for impact of grid expansion

Citation

Oliver Wyman (2017) Auctions as a potential mechanism to accelerate green mini-grids in Africa. 138p

Auctions as a potential mechanism to accelerate green mini-grids in Africa

Published 1 September 2017