Guest Articles

Wednesday
January 27
2021

Seth Silverman / Tom Chaplin

Minigrids and Cold Storage Are a Match Made in Sustainable Development Heaven – So What’s Keeping Them Apart?

The minigrid sector faces a perpetual dilemma. Most rural minigrid customers are households and small shops for whom electricity is particularly valuable in the evenings. Yet most rural minigrids under development are primarily solar-powered, generating electricity during the day. This requires them to store unused power generated during the daytime in batteries, and to complement this power with other sources of energy – usually a diesel generator – to provide readily dispatchable power during times of peak demand. This divergent pattern of power generation and demand for electricity means that minigrids often have excess production in times of low demand.  If a minigrid’s batteries are already fully charged while the sun is still shining, minigrids must engage in what is called “curtailment,” intentionally reducing electricity production – a waste of clean energy in environments that are woefully underpowered.

When designing their minigrids, developers try to minimize capital expenditure – particularly in battery storage – and balance the role that a diesel generator plays in meeting customers’ energy demands. But to make this business model work, minigrids also need a substantial demand center for electricity (an “anchor”) to which they can sell power, especially when there is a surplus. However, it is far less helpful if this anchor needs continuous power (like a telecom tower does), as that requires further investment in battery storage. An anchor that can be served whenever power is available – which is known as a “dispatchable load,” since its demand for electricity can be served when there is surplus production – is therefore a kind of holy grail for minigrid developers.

 

The Link Between Cold Storage and Minigrids

At Factor[e] Ventures, a team of impact venture builders dedicated to turning challenges in energy, agriculture, mobility and waste into de-carbonized solutions for emerging and frontier markets, we work with both minigrid developers and innovative cold storage technology providers. One such cold storage provider is our portfolio company Inspira Farms, which uses an “ice battery” (AKA thermal storage) to cool farm produce even when electricity isn’t continuously available. With thermal storage, a cold room can serve as both an anchor and a dispatchable load for a remote renewable minigrid.

If you model (as we did) the impact of such a pairing on the investment case for a rural community minigrid that charges customers a standard tariff, it is truly impressive: Project internal rates of return (IRRs) of 15% are achievable. That’s significant given that, currently, low single-digit IRRs are common for minigrid projects in Africa.

Even better, cold storage capacity is desperately needed in the region. It’s the best way to reduce post-harvest loss, which can be occur at rates of 40% of what is grown (or even higher) in agricultural value chains in developing markets. While the developed world has 200 m3 per 1,000 people of refrigerated storage capacity, in the developing world it is 19m3. Even more dramatic (though not a direct comparison), in Kenya and Nigeria it is less than 3m3 per urban resident; if it accounted for the whole population that rate would be even lower. Increasing cooling capacity at the “first mile” is extremely impactful: The closer to the farm that the temperature of produce is lowered, the bigger the impact on its shelf-life. 

Expanding cold storage capacity and reducing produce loss rates would, in turn, increase household income among the farmers who live in the communities served by remote minigrids. Their livelihoods and fortunes are closely tied to agriculture. Households that experience an income boost are then more likely to buy appliances that further increase their demand for electricity: a virtuous cycle. 

 

Overcoming Obstacles to Cold Storage/Minigrid Synergy 

All of this makes combining cold storage with solar community minigrids a multiple-win no-brainer, right? So why isn’t it happening?

First, the increase in demand that boosts minigrid revenues must be concentrated at those times when energy is cheapest to produce – otherwise it’s wasted. And that doesn’t happen on its own: Inspira Farms is able to do this, thanks to its clever use of thermal storage technology, but most cold storage providers cannot. Second, the power needs to be much cheaper for the cooling business than it is for the minigrid’s household customers. Regular utilities often provide lower energy prices to commercial and industrial customers, but this requires analysis and negotiation that mingrid developers don’t yet typically conduct, so they tend to have a single tariff rate for all customers. Third, this sort of partnership requires a minigrid provider, a cold room operator and an agribusiness that are trading produce all in the same geography, but these industries are still too nascent in Africa for this to be common. And putting a project together that involves these partners is complex, filled with logistical pitfalls and the challenge of aligning the incentives of all those involved. Here are three ways those challenges can be addressed:

1. Pricing electricity to incentivize alignment with generation through time-of-use tariffs: Imagine farmers coming in from their field in the afternoon, loading up a cold room with tons of French beans that have been soaking up the sun all day. The cold room needs to remove the “field heat” and lower the temperature of this produce quickly, so the cold storage unit switches into overdrive just as the sun is setting in a rural community. This is the exact opposite of the type of scenario that benefits a remote solar minigrid.

With thermal storage, a cold room can bulk up on cooling potential during the day, but it needs an incentive to do so. That incentive could consist of cheaper power aligned with the time of day when it is cheapest for a minigrid to produce (and most likely to be wasted) – i.e.: time-of-use tariffs. This pricing structure is used successfully around the world to modify the energy consumption patterns of utility customers, and it could be applied equally well to this circumstance. But there is a downside for minigrids: Lowering their tariffs to incentivize daytime consumption reduces their IRR gains. For instance, reducing prices from $0.58/kWh to $0.25/kWh would knock 5% off their IRR.

2. Competing with low-cost panels by offering a cheaper option through commercial tariffs: For cold storage operators, energy decisions come down to cost. To tempt them to even install their systems on a minigrid – let alone shift their power demand across the day – the cost of energy to the cold storage unit must be low enough to motivate them to change from the default (i.e.: on-grid) energy source, and to avoid more straightforward alternatives (like self-contained, self-powered off-grid units). This is because cold storage providers perceive that there’s added complexity and uncertainty in relying on a remote minigrid. Even when they eschew the default option of building a cold storage unit on the grid and trucking produce from diffuse rural farm sources to that storage room, they still need to be persuaded that they will be better off purchasing reliable, affordable power from a minigrid rather than financing their own dedicated solar or other power generation asset.

To that end, a pricing model that is mutually beneficial for all parties must be agreed upon upfront. In building our model for these scenarios, simply applying a time-of-use tariff without also establishing a commercial tariff rate, as described above, results in an average tariff of $0.45/kWh for the cold storage operator. This could already be a problem: We heard from the market that for tariffs above $0.35/kWh, cold storage operators will start to consider standalone distributed energy systems – a threshold price that minigrid operators might balk at. In our model, if a commercial tariff rate is layered onto a time-of-use tariff rate to produce an average tariff of $0.35/kWh – low enough to dissuade cold storage operators from installing their own power solutions – a further 3-5% comes off the minigrid operator’s IRR. This means that the 15% IRR gains that look theoretically achievable in our model at first blush are more likely to result in “only” 3-4% IRR for the minigrid operator. For most minigrid operators, however, 3-4% IRR would still represent substantial IRR gains (a doubling in some cases), which would be worth the extra effort involved in negotiating lower tariffs for cold storage providers, and in coordinating with a cold storage company and an agricultural trader.

3. Battling complexity and inertia by matching minigrid projects and cold storage development in the same place at the same time: Our modeling shows that with the right pricing structure, a project could still be not just viable but attractive. But there is an additional challenge: bringing a minigrid developer, a cold storage operator (with the right technology) and an agricultural trader together in the same place at the same time. This is no small task. We know: We tried it during our recent program, supported by the Rockefeller Foundation, which aimed to identify exciting ag-energy opportunities in sub-Saharan Africa. Unfortunately, matching all three players proved to be an elusive goal within the time constraints of our program. 

Both the cold storage industry and the minigrid sector in Africa are nascent, so there are relatively few potential partners and commissioned sites operating today. Agribusinesses need to be persuaded to operate their cold rooms off-grid, where such activities have traditionally been unfeasible and where operations are more difficult. There isn’t a wide array of matchmaking opportunities and, in our experience, agribusinesses were reluctant to partner with minigrid operators – even when our program offered them a substantial discount as we strove to demonstrate this concept.

 

What does the future hold for cold storage/minigrid partnerships?

We believe this opportunity is exciting, but our modeling and practical experience shows why it is also not straightforward. Attractive-looking theoretical demand profiles do not automatically translate into knock-out IRR impacts. 

But the challenges are surmountable. Good data is needed, along with thoughtful analysis and agreement on pricing, before tackling practical obstacles and logistics. Larger-scale efforts to promote this pairing – with integrated regional planning backed by public and philanthropic subsidies, and technical assistance to help get the ball rolling – can help overcome the obstacles and unlock the potential of cold storage/minigrid partnerships.

If you’re a minigrid developer, or if you care about boosting the income-generating capacity of rural energy projects, consider this potential and reach out to us to discuss what we found in our modeling exercise: We’d be happy to share the details of the different scenarios we explored. While these will only give you a theoretical view of what’s possible, we hope that this potential inspires you to give these partnerships a try in the real world. If you do, please tell us how it goes.

 

Seth Silverman is a Principal and Tom Chaplin is Project Manager at Factor[e] Ventures.

 

Photo courtesy of Ministry of Environment – Rwanda.

 


 

 

Categories
Agriculture, Energy, Entrepreneurship
Tags
agribusiness, agriculture, business development, energy access, minigrids, renewable energy, rural development, solar power