How do you provide a service when neither the provider nor the customer has a good sense of the demand? This is one of the main challenges facing the off-grid energy industry in Myanmar, a country where less than 40 percent of the population currently has access to modern energy services.
By comparison, sizing a solar system for a home or business that already has power is straightforward. It is simply a matter of getting meter readings for the past year to determine how much energy the customer typically uses and when.
There are also several market failures that further distort demand for energy in Myanmar, as well as in other countries that are struggling to expand access to electricity. In particular, the high upfront cost of connecting to a mini-grid (typically $150 to $200), or to the national grid, for that matter (typically more than $500 per household), can be a major impediment for households and small businesses.
Other challenges include the upfront costs of home appliances and commercial and industrial equipment, which allow individuals and small businesses to make the most of their energy access and raise revenues for mini-grid operators.
Lack of access to financial services is therefore one of the biggest impediments preventing access to energy, productive use of energy once people gain access, and increases in economic opportunity broadly.
Lack of access to energy and financial services in turn has resulted in stunted economic development, as communities that rely primarily on subsistence agriculture have been unable to engage in higher value-adding activities. For example, many communities in western Myanmar produce peanuts, but without access to energy they are unable to produce oil, which is a ubiquitous higher value product.
In some ways this reflects the overall challenge that the solar industry has faced since the beginning due to the high upfront cost of installation. Just as this problem has largely been solved through the creation of the Power Purchase Agreement and other financing approaches, so will the barriers that prevent people in frontier markets from gaining access to solar energy.
Pact has worked on rural electrification in Myanmar since 2015, with the support of ABB, Chevron and Shell. Building on 20 years of experience providing affordable financing and integrated development solutions to 15,000 rural communities in Myanmar, Pact Myanmar established the Ahlin Yaung (“light” in Myanmar language) energy program, incorporating a capital fund for energy financing. Through Ahlin Yaung, Pact helped villages establish Village Development Committees and associated Village Development Funds, and then provided capital to local communities, who in turn make smaller loans to households.
The Village Development Fund retains the interest to put toward other community development, and returns the principal to Pact so it can loan these funds out to other communities. This system has three major benefits: It helps strengthen community ownership, provides much-needed capital for village-managed financing, and provides revolving capital for Pact to expand energy financing beyond the end of grant periods.
We’ve recently started taking two new approaches to overcome these challenges: increasing usage of existing mini-grids by financing connections and energy-efficient appliances, and supporting the development of small businesses that require energy by financing equipment for them to start the business and providing business planning assistance.
These efforts have primarily taken place in southern Myanmar’s Tanintharyi region, where Techno-Hill Engineering built a solar hybrid mini-grid in 2017. The World Bank indirectly provided financial support for the mini-grid project through a loan to the government of Myanmar. Pact has also been conducting assessments in other communities throughout Myanmar to gain additional insights.
Overcoming demand distortions
As part of our Ahlin Yaung project, Pact has recently begun helping individual households connect to mini-grids. In Tanintharyi, Pact has provided loans for 260 households in six villages to connect to the mini-grid, providing 1,481 people with access to electricity.
The total cost for these connections was $55,342, or about $200 per connection. Pact provided loans for a duration of six to nine months, covering 54 percent of the total costs. Individual households covered the remainder, in some instances obtaining loans through the Village Development Fund and Village Development Committee that Pact helped establish.
We recently conducted a small-scale survey of three villages served by an energy services company (ESCO) called Pro Engineering. The mini-grids operated by Pro Engineering were built under the Myanmar Department of Rural Development’s (DRD) subsidy scheme supported by a loan from the World Bank and technical assistance from GIZ.
We found that even after approximately a year of operation, not all of the households in the community served by these mini-grids were connected. In one instance, fewer than 60 percent of households had connected. The initial cost for connecting to the mini-grid in these villages is approximately $145, an amount that can be difficult for families whose monthly income is well below this and seasonal.
Stimulating new markets
Residents of these villages identified several businesses they would like to start with electricity, including oil milling to produce peanut oil, welding, rice grinding to produce flour and weaving-sewing businesses. While some of these activities already exist and are powered with diesel generators, access to electricity is enabling the creation of new ones and the transition from diesel, which saves businesses money and time.
However, residents reported financial difficulties that prevented them from buying equipment, as well as a need to understand the economics. This is despite the fact that, according to our assessment, all three of these villages have very strong communal structures for governance (Village Development Committees) and investment (Village Development Funds), with high levels of communal participation, which indicates that there is a need for further support to stimulate new markets.
In the south of Myanmar, we have begun testing a few ways to solve these challenges, by helping small businesses identify ways they can productively use energy and access finance to pay for equipment. After working with villages on the island of Khan Ti, in Tanintharyi, to establish a development fund and committee to manage it, Pact provided proposal-writing training to community members interested in starting businesses. Khan Ti is served by a mini-grid that provides electricity to 300 households, several community buildings and small businesses.
The Village Development Committee evaluated proposals with Pact’s support and selected a commercial fishing business’ idea to purchase deep freezers for preserving their catch. Pact provided about $1,475 to the Village Development Committee, which loaned these funds to the fishing business for two years with a 0.5 percent annual interest rate. Since this was a pilot, the Village Development Fund will retain the seed capital.
The commercial freezer business has been a great success. During the first four months of operations, February to May 2018, the fishermen generated a net income of about $50 per month after repaying their loans and electric bill. Much of this income came from renting additional space in the freezers to other fishing businesses, allowing them to store their catch before transporting it to the town market, where they can sell at a higher price.
“Shell believes that access to reliable, safe and affordable energy is key to sustainable socioeconomic development. It has been very rewarding to see how our work with Pact in Myanmar has enabled people to use energy in ways that increased their income, helped children study more, and improved their quality of life – all while they manage their own financing. It’s also been great to see the evolution of Pact’s work on energy in Myanmar.” –Yasuko Yoshida, Country Chair, Shell Myanmar
We’re now exploring how to rapidly scale up financing and technical assistance to ensure that everyone who wants to connect to a mini-grid and can afford to pay for electricity has the opportunity to do so, and to provide assistance to the many entrepreneurial people in Myanmar who want to start new businesses that will use electricity, but need a loan and some advice to get started. We believe this will significantly increase the viability of mini-grid economics, while increasing opportunities for the Myanmar people to improve their livelihoods.
Identifying and preparing the customer base
We are currently working to scale-up these efforts through the Smart Power Myanmar platform, which Pact launched in May with financial support from The Rockefeller Foundation, and globally through Pact’s signature program, Energy for Prosperity. Smart Power Myanmar, whose Founding Members include The Rockefeller Foundation, The World Bank, USAID and Yoma Strategic Holdings (a conglomerate that focuses on Myanmar), now provides an integrated country platform through which we can do more to support new mini-grid development.
By working with ESCOs to more accurately assess both existing and potential demand for electricity, and by working with communities to prepare for mini-grid arrival, we can further speed up the time from commissioning to profitability for the ESCOs, This will enable greater investment in the sector while accelerating improvements in people’s livelihoods that result from the ability to engage in higher value-add activities, which require electricity.
“Availability of electricity does not automatically translate into economic development. Smart Power Myanmar is established to provide best-in-class support in predicting and stimulating energy demand for productive use and converging economic and energy investments.” –Pariphan Uawithya, Associate Director, The Rockefeller Foundation
Since the mini-grid was installed in Khan Ti, 14 small businesses have started operations, ranging from tea shops to electronic equipment retailers. Individual households report that more than 100 home appliances are now in use, particularly rice cookers and small refrigerators. While there has been some organic uptick in demand for energy, during the installation stage, Techno-Hill was also very involved in supporting development of small businesses that use energy.
Based on what we see in other projects, and from a scalability perspective, ESCOs may not always be willing or able to provide this assistance, so we are focused on finding long-term solutions for supporting small businesses that can use energy for economically productive activities.
As our work within the energy sector evolves, we will continue to partner with the many talented people – within government, from the international development community, and the private sector – who seek to create opportunities for rural communities in Myanmar to prosper.
Matthew Cullinen is a senior director at Pact, where he leads the Energy for Prosperity program. Richard Harrison is CEO of Smart Power Myanmar, an integrated country platform hosted by Pact with financial support from The Rockefeller Foundation.
This article first appeared in the Alliance for Rural Electrification’s June newsletter.