Mini-grids in Myanmar with Richard Harrison (Smart Power Myanmar)
In this episode, we speak with Richard Harrison from Smart Power Myanmar.
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Show notes and related resources
(0:55) Richard's background and prior work in Myanmar
(2:30) Introduction to Myanmar, its geographical, economic, and political background
(8:05) Myanmar's electricity sector, progress in recent years, and electrification targets
(11:40) Smart Power Myanmar's approach to accelerating electrification in Myanmar
(13:55) Smart Power Myanmar's strategic focus and identified barriers to electrification
(18:12) Approaches to providing commercial and consumer financing adopted by Smart Power Myanmar - equipment financing facility and the Energy Impact Fund
(21:35) The origins of Smart Power Myanmar, and how the organisation came about
(26:30) Overview of the Decentralised Energy Report for Myanmar
(32:10) Minigrid operators, ESCOs, funding and subsidies for minigrids in Myanmar, and progress to date
(35:45) Hydro minigrids in Myanmar
(37:45) The integration potential between private minigrids and the public national grid
(40:30) Productive Energy Use in minigrids, and the need for consumer financing solutions to support Productive Energy Use
(44:50) Examples of productive energy users who have benefited from Energy Impact Funds
(48:05) The impact of COVID-19 in Myanmar and for the energy sector
(49:20) Recommended books: Hariri's Homo Deus, Richard Rhodes' Energy: A Human History, Gretchen Bakke's The Grid
(51:00) Goals and hopes for electrification the next 5 years
Transcribed by Isaac Ward Fine
Distributing Solar: Richard, welcome to Distributing Solar. It's great to have you here.
Richard: Thank you very much. It's a pleasure to be here.
Distributing Solar: You are currently CEO of Smart Power, Myanmar and living and working in Yangon, but originally, if I'm not mistaken, from the UK. How did you find your way to Myanmar and specifically to working in the energy sector?
Richard: Well, I've been living in Myanmar now for almost 10 years in different capacities, working in Myanmar and and working in the development space, traveling between the private and the public sectors. The transition from working in a nonprofit environment, which is where I began in public health, helping to start one of the first HIV prevention programs in the country, supporting tuberculosis compliance programs and setting up a large network of private general practitioners, which is today the largest network of GPS in the country, gave me a deep understanding of how this country functions and what its challenges are. And over the years, I have transitioned into different roles, expanding, the work I've been doing, in development.
I became the country director for a large NGO in Myanmar called Pact. And so my career in Myanmar has spanned 10 years, but has really transitioned a huge number of different sectors. As I've sort of been following, the sectors or the impact areas that I personally believe will have the largest positive net impact on the lives of average, households in Myanmar.
Distributing Solar: Great, and to begin with, can you start by setting the scene and tell us more about Myanmar as a country from an economic and political standpoint, and also more about its overall energy system.
Richard: Myanmar is a country with a similar population to the UK, something in the region of, somewhere between 50 and 60 million people.
And it's broadly covering a large swath of Southeast Asia all the way from the Himalayas in the North, all the way down to almost the bottom of Thailand where the two countries share a border all the way down on the Andaman sea. So it's a very large country and geographically very diverse.
You have a really mountainous area that spans the outskirts of the country. The southern and western sides of the country are, there's thousands of kilometers of coastline. And in the center that you have, what's often called the dry zone and the Delta area which are the sort of flatter areas where you have the bulk of the country's agriculture taking place.
You also have a very, very diverse population. There are dozens of ethnic groups. You have a dominant ethnic group, the Bamar, who generally occupied the center of the country, and then lots and lots of different languages and dialects that span all the way from Rakhine state all the way around the edge back down through the Eastern side of the country through Laos and China.
So you have, you have this incredibly diverse country. It's really a complicated country to manage. and of course has a very, very long history, a very diverse history. And sadly, in the last 40 or 50 years, also a history of conflict on many different fronts.
And so the country is in the process of a longstanding peace negotiation process, which continues to this day and will probably continue for some time. So it's a country that has many different facets and that makes it quite a challenging place to work because in order to solve development problems here, you have to be quite adapted to understanding the local context. You have to be able to work with state governments as well as district or authorities at a very, very large scale across the whole country. And of course, all about a stitch together with the current political structures at the union level or the center where there are, as you know, all sorts of different relationships that have to be managed.
So you have a complex geopolitical environment to work in here. Politically and economically, of course, Myanmar is emerging from a very, very long period of economic stagnation and since about 2013, 2014 has made extraordinary steps to try to unlock the economy and open the economy up.
Of course, everyone's aware of the transition to a democratic government a few years ago and that's being coupled with attempts to take baby steps to liberalize the economy, to improve the way that investment laws are written and deployed, the way the banking sector is governed and allowed to operate, to provide more opportunities for multinational companies to participate in Myanmar's economy, to employ people, to increase the labor force, to increase, the economic potential of the country.
All of those things have steadily added to the potential for Myanmar. They are very baby steps, and as I said earlier, there's a long, long way to go. The country has very significant developmental challenges in front of it, mainly because you have a country that has been starved of international finance and local finance for going on 50 years. But also you have a predominantly rural country.
The estimates range between 70 and 80% rural, which is very rare in the world today where most countries are predominantly becoming urbanized. You still have a very rural population here and rural villages in Myanmar really are seriously under developed.
Most have no access to reliable electricity. Most have no reliable access to safe water. And of course, the subsistence living at the rural level continues to be part and parcel of daily life and that is really talking about the vast majority of the population of the country. So you have a few urban centers that are really driving the national economy but the export markets remain well below that potential.
In terms of resources, it is well known that Myanmar is incredibly rich, has incredibly high potential, with significant gas reserves, significant oil reserves, a lumber, in terms of precious metals and rare metals. In terms of its agricultural base, Myanmar is incredibly rich. In fact, a hundred years ago, Myanmar was the world's largest rice exporter. It's supplied the world with rice. Today, rice exports are a fraction of that. So there is a huge amount of potential in the country that is beginning to get unlocked again and that presents us with a unique set of challenges and opportunities in the energy sector.
Distributing Solar: Fantastic. And can you tell us more than about the current state of the energy system, the rates of electrification across the country, and what are the real challenges facing the country as they try to move to a hundred percent electrification.
Richard: The story of Myanmar’s electricity sector really can be divided into two pieces. On the one hand, the Myanmar electricity sector is often described as working well below its potential. Just 50% of the country is connected to the grid and it is likely that eve, part of that is not in not involving full connections all the way down to the household level.
The best available estimates suggest that something like 26 million people do not have reliable access to electricity. We know that about 4 million households live off-grid and have absolutely no power and about two and a half million households are relying on expensive and polluting diesel or solar home systems which of course do not enable economic productivity, although they do provide other social, educational, benefits.
What we're seeing in Myanmar is an estimated 17% growth in demand per year. So you have this very significant growth in demand happening as the economy tries to take off and the new businesses are starting the drawdown of electricity is becoming more significant, particularly in urban areas, but there isn't a commensurate investment in generation capacity.
So you have a disconnect between the demand and the supply which is presenting the country, obviously, with a series of challenges and opportunities. The other side of the story that one could tell is that from a very low base, due to the last 50 years of the way that the country was being managed, that Myanmar has in fact done a great job in trying to come back from a very, very difficult situation where just a fraction of the country was electrified several years ago.
The new generation needed by 2030 is estimated at around 13 GigaWatts in order to meet this climbing demand. So the question that we need to be asking ourselves is, what is to be done about meeting that need and how do we address that? And where Smart Power really seeks to play a meaningful role is in helping to create a narrative for solving that particular problem.
And so we've spent a great deal of time and energy working with key players in the electrification sector in Myanmar, both on grid and off grid, it in order to better understand what is the right energy mix and how do we intervene in the most intelligent way to be able to get the country to a state where as many people are connected as possible. There was a place for off-grid electrification in Myanmar at a grand scale. But there's also a place for the grid to continue providing electrification. After all, you know, 60-70% of the country is already receiving electric electricity from hydroelectric power.
We're not necessarily arguing that the whole country should be solar powered. We're arguing that the right energy mix, for Myanmar’s context, to take us from 50% to 100%. gives us this incredible, almost once in a lifetime opportunity to get it right.
Distributing Solar: Great, and it seems as though Smart Power Myanmar's work is really focused in providing some of the research, the background work, the information to make that assessment and make that recommendation.
Can you tell us more about the type of work that's done by Smart Power of Myanmar and in particular how that has manifested in, for example, the Energy Impact Fund or the Applied Energy Lab.
Richard: The key to Smart Power Myanmar is that we don't work alone and we work in an ecosystem of key players. And our role is really to try to unify those players, whether they be in the private sector or the public sector, whether they be financing institutions or whether they be mini grid developers or village electrification committees or state-level ministers. We work with a very, very wide variety of groups who don't normally work together to solve this kind of problem.
And what we try to do is to unify that. The key to that is really understanding the context that we're working in. So research and data are incredibly important to our mission and indeed to being able to provide the right kind of advice to government, being able to provide the right kind of advice and de-risking solutions to investors, but also to make careful decisions about practical things.
Like, where do you site your grid? And that really needs to be evidence-based. So, yes to your question, research and data are at the center of the way that we think and the way that we act. What we felt was an opportunity that hadn't been met yet was to try to size the potential scale of the off grid market.
If we were to better understand the potential market size, this was all theory, we would be able to inform the government about where it could be heading in terms of decentralized energy. We could also go to investors and clearly point to them, this is the potential scale we could be talking about and this is the kind of investment that's required.
So our role, we see as both informing and influencing how, how decisions are made in-country, but also trying to attract that finance from outside. Not only finance but of course also external players who may wish to be power producers in the country.
Distributing Solar: And what are the barriers holding back a faster pace of electrification in Myanmar. And where does Smart Power Myanmar focus its efforts in regards to overcoming these barriers?
Richard: So the overarching strategy that Smart Power Myanmar has taken over the two years since we were established has been to clearly delineate what the key barriers and strategic imperatives are for electrification in Myanmar. On the mini grid side, we identified the key barriers as including the high cost of development and the small project size, the lack of productive use and the tendency towards inefficient operations and the need for improved central planning and improvements around the ways that subsidies are designed for maximum impact and maximum sustainable business viability.
On the grid extension side, really a need for greater expertise in helping to enable the right kinds of policies and developing long term plans that matched the reality of Myanmar’s population and its geographies. And of course it's available financing for that scale up.
And finally, lack of private sector market participation and competition and accountability. So these are the six key barriers that we've identified. And, from that, we developed a list of what we would argue are the most important strategic imperatives: reducing costs, increasing plant utilization, improving the way that procurement is done, particularly in the mini grid market, as a way to reduce costs, finding ways and developing mechanisms to reduce risks and encourage private sector participation and look at ways in which subsidies can be better designed for the long term.
On the grid extension side, looking at continuing tariff restructuring. Tariffs need to be cost reflective and more equitably spread. Government did take very positive steps in that regard, in the second half of 2019 with a significant tariff increase, the first in many years. Next, regulatory reforms, a separate regulatory agency might help to develop regulations that would enable private investment in the energy sector to take place.
Also, quality procurement, open, transparent, best value procurement from private sector companies using international best practice. A more provocative, strategic imperatives that we've put forward for discussion has been also ways in which we could potentially look at unbundling and liberalizing the energy market in the long term.
And covering the whole energy sector, access to finance, remains one of the biggest problems and biggest barriers, all the way from the ability of mini grid companies to be able to access affordable commercial bank financing on reasonable terms, to consumers and consumer ability to be able to access affordable finance for inputs, but also for upgrades and conversions of their existing diesel powered machinery.
So in order to address these barriers and, and to find effective ways to be able to solve for these strategic imperatives, Smart Power Myanmar has established a kind of a three pronged approach. One is to focus on influence and thought leadership to help create a narrative that spans the off-grid space and the on-grid space.
Second is to invest significantly in data and business intelligence, both to make sense of available data but also to analyze that data and produce insights that decision makers and investors can use. And this includes, for example, mapping all the existing infrastructure in Myanmar and economic potential in Myanmar and overlaying that with agricultural productivity in different areas, for example.
None of this information is available in one place, and this is something that Smart Power is taking a role in with others. Thirdly, and this is probably one of the areas where we're most significantly involved at the moment is in financial services and technical services and in financial services, providing innovative solutions, or perhaps even taking proven, commercial financing solutions but transplanting them in new ways for new asset classes in Myanmar.
Distributing Solar: Could you speak more about the work Smart Power Myanmar has done with financing, which as you mentioned is a critical part of accelerating the rates of electrification.
Richard: Two examples of that. One is an equipment financing facility that Smart Power designed and established last half of 2019. It is a $13.5 million equipment financing facility with commercial banks in Myanmar, commercial banks that had never provided equipment financing for this type of asset class before.
And this has enabled mini grid developers to access cash flow to be able to build sites before they get paid at the end of the construction period. So this helps to speed up project development and it increases the likelihood that developers are able to build projects simultaneously.
A second example I would give you is the Energy Impact Fund, which Smart Power set up in 2018 and activated in early 2019 to provide consumer financing for connections so that households could connect to the grid, remembering that 20% of the financing for mini grids has to come from communities.
And oftentimes this amounts to about $250 per household, which is a very large amount for the average household in Myanmar. And so we've provided the Energy Impact Fund to be able to help cover those upfront costs and connect as quickly as they possibly can. But the Energy Impact Fund is also used for enterprises to be able to invest in upgrading their equipment and converting to electric motors, for example. And this could be used for things like agricultural processing, cold storage, potentially even irrigation solutions in the future.
This fund is only capitalized at $400,000. It was designed under our applied energy lab for experimental purposes to be able to prove how the application of consumer financing and enterprise financing would impact.
We now have enough evidence to be able to say it has a significant impact on the ability of consumers to be able to both connect and for enterprises to be able to reduce the cost of their businesses and increase income. And we're starting to see case after case where these simple upgrades have enabled both of those things to happen.
And what is unique about the Energy Impact Fund is that it is not a fund which we deploy directly to consumers. We work through the village electrification committees, so we work with existing structures at the community level which significantly increases buy-in and involvement of the whole community. It also significantly helps with decision making around how that financing should be structured, how it should be repaid.
This financing is currently interest-free to Smart Power, but what we do is we encourage the electrification committees to charge a small interest rate so that they can cover their own costs and time and have a little bit of an extra fund for themselves to deploy for supporting electrification in the community.
So we've seen this having a very significant impact in communities. The demand that we now have for that fund far exceeds the value of the fund, which presents us with a nice problem to have. But again, it just speaks to the high potential for providing affordable, accessible financing at scale in Myanmar.
Distributing Solar: Can you tell us about how Smart Power Myanmar came about as an organization?
Richard: Smart Power Myanmar is part of a large international non-profit agency in Myanmar called PACT. And PACT is an integrated development organization involved in many areas from microfinance to access to water and energy and health. But back in 2014 we started to notice that there were changes in the way that communities were spending their resources. One of the things that we have done for 20 years religiously has been to gather data from around 15,000 villages we operate in, basic amounts of data around expenses, funding flows for communities so that we can see what’s happening, so that we can spot trends.
What we started to notice was that energy spending had gone up around 20%, this is going back to about 2014. And we inquired a bit further and we understood cell phones had just arrived in Myanmar, so people wanted to charge their phones, and people were starting to invest in solar home systems that were coming in cheaply from China and Thailand. So they were spending more and more of their income on expenditures related to electrification or the use of electrification.
And in many places, these were villages with almost no other types of machinery that required electrification, other than agro-processing. I was the Country Director for PACT at the time. There was an entrepreneur called Bertrand Piccard who, with his colleagues, decided to fly the Solar Impulse around the world to demonstrate the potential power of solar. And luckily for us, Myanmar was on the map and they were landing in cities all around the world and they decided that one of their stops was going to be Mandalay.
And so on the 19th of March, 2015, Bertrand Piccard landed at Mandalay International Airport this incredible solar aircraft that did eventually make it all around the world. And they were sponsored by a group called ABB, a Swiss engineering company, who agreed to provide us with a small amount of innovation funding for electrification.
And partly inspired by the Solar Impulse and partly inspired by the data we were gathering from our communities, we thought let’s see if we can use this $40,000 in innovation funding to see if we can provide an alternative electricity solution to some villages. So we built solar charging stations, very rudimentary home-made solar charging stations in four communities that we worked in.
And these were relatively successful but very soon the grid came and made these solar charging stations defunct. But it inspired us to move into solar home systems so we developed a local solar home system enterprise. It was moderately successful but we quickly realized that what we were seeing was that what people really wanted was electricity to drive machines so that they could be more productive. They wanted their businesses to run with electricity and they couldn’t access electricity.
These were shop owners who wanted to run their fridges and freezers at reasonable costs. And we found thousands of shop owners who were turning their fridges off at night to save electricity, which partially defeats the object of having a freezer in the first place. We were coming across farmers who wanted to process their produce. We were coming across aquaculture programs in fishing villages that wanted to be able to store fish to get a higher price in the market. We were coming across community run lobster businesses that wanted to be able to gather and keep lobsters in oxygenated tanks so that, again, they could get a higher price in market. Case after case after case of people coming and saying ‘if we had electricity, this is what we would do with it’.
So we made a case to our foundation partner that we were interested in getting involved with mini grids, that we were interested in getting involved with electrification solutions in Myanmar. And our foundation partner, who was incredibly generous in supporting the establishment of an organization called Smart Power Myanmar to figure out how to solve these major problems, how to unify the energy conversation, the energy narrative, and the actions behind energy solutions. And that was two years ago. That’s essentially a long journey of how we established ourselves and how we are in quite a different place now but inspired by the same thing.
Distributing Solar: And you published last year a fairly extensive report on decentralized energy in Myanmar, in which you note that decentralized energy solutions are not only the lowest cost option for Myanmar, but also the fastest route towards energy access for millions of people. Can you tell us more about the findings of the report and what for you were the key take-aways.
Richard: Our decentralized energy report, which was published in the middle of 2019, really said two things.
One, it said this is the size of the market. And the other, it said this is what needs to be done if you really want to fulfill that potential. So what was the size of the market that we estimated? Well, we worked with Roland Berger, the international consulting company, who conducted this study on our behalf.
And their estimation was that in the short term, which means in the next few years, the market could probably sustain no less than about 2,500 mini grids, which would impact about 2 million people. Well, they went further than that and they said that the true potential of the mini grid market could be somewhere between eight and 16,000. And they did say that 8,000 is probably more realistic than 16,000 because the further away you get from infrastructure, the more you're getting into places where solar home systems and other solutions might be more appropriate.
We also concluded in this report, we also wanted to find out, what's the economic argument for doing this? Clearly the world is starting to understand that decentralized energy is not only a nice thing to do, it actually makes economic sense, at least in theory. As we look to the cost of new technology, particularly storage and panels coming down and down and down, the potential for off-grid solutions to take off becomes higher.
Now, we're not quite at that point in Myanmar yet because of barriers that I'll come to later, but we do estimate that if you were to compare the cost of a connection to the grid with the cost of connecting a household to a mini grid, for example, that the cost theoretically is that 40% less if you include generation capacity calculations as well.
So we started to put forward in this decentralized energy report a vision for grid ready mini grid that would be a least cost long term solution for at least 8,000 mini grids over the next 10, 15 years. We also estimated that if we went that route and if decentralized energy solutions were possible, that could lead to something in the region of $250 million in GDP growth for the country and add 50,000 jobs in the off grid sector.
This helped us to go to government, it helped us to go to others and to coalesce people's understanding about the size of the market. This isn't about building 20 or 50 mini grids as pilots, this is about building thousands of mini grids that are going to become a reality.
The next step being how do you co-exist between the mini grids and the grid? That’s a question that we need to address because at this particular juncture these two spaces, the on-grid space and the off-grid space are actually being managed separately in the country.
One by the Ministry of Energy and Electricity, and the other by the Ministry of Agriculture. The second piece of our report was to say, well, okay, it's not enough for us to talk about what the potential is. We also need to talk about how do we get that, what is needed in order to get to that point? And so we identified, what, what the main barriers are and we identified what Smart Power would be to these interventions.
The main barriers we categorize into financial, technical, institutional categories, and in the off grid space. We concluded that the major problems that we need to figure out how to solve include the cost of development being way too high and how do we increase project size? How do we get economies of scale to play in our favor?
Secondly, we identified that the lack of productive use of electrification, sometimes due to oversizing poor site selection, inefficient plant utilization rates was going to be a limiter on successful mini grid development. It is only when we start seeing successful mini grid business models, viable business models that we're going to see an uptick in players coming to the table to want to invest in them.
It’s a hard business. The payback periods are quite long and the upfront costs are quite high so it's not an easy undertaking by any stretch of the imagination. But the problems of productive use floated quite significantly to the top of our list of problems because in the electrification sector almost no investment is being put into the problems of developing value chains and productive use for micro and small businesses.
So this is a very critical piece of the puzzle. How to solve for the connection between newly available electrification with private sector mini grids who are in Myanmar’s case, highly subsidized.
Distributing Solar: And if we focus on the mini grid operators, you mentioned that it's a very difficult business at the moment. The cost is still relatively high financing is a challenge and the payback periods all incredibly long.
Who are the current mini grid operators who are working in the space? And you also mentioned the role of subsidies. Can you tell us more about who are deploying these mini grid solutions and what the financial incentives are for them?
Richard: The mini grid sector here has been supported significantly over the last couple of years by the World bank funding part of the national electrification plan for off grid and approximately $20-25 million has been made available to grow the mini grid space. That has been implemented by the Department of Rural Development under the Ministry of Agriculture in Myanmar. And it is probably one of the unsung success stories, I think, of the mini grid sector globally, where in just about 18 months they have successfully signed 95 contracts for mini grid projects around the country in quite diverse areas all the way from the North to the South of the country, from the West of the East.
And of those, about 40 or 45, I think, currently are operational. This is no mean feat in 18 months to go through the procurement process, to attract for the very first time private Myanmar companies, to take advantage of subsidies that are being offered.
Now the subsidy scheme is structured differently from the way it has been in other countries. The subsidies are quite high at 60% but it's interestingly structured. The 60% comes from government but the remaining 40% is split evenly between contributions from the power companies, the ESCOs, as we call them, the electricity supply companies. and the communities themselves.
So the communities put up 20% of the financing towards the development of the mini grid. And what this has done is it's given the courage to ESCOs. Many of them are engineering companies or they're companies that have been involved in other forms of business, but they've seen this opportunity to get engaged with electrification and with infrastructure and that has resulted in the growth of about a dozen companies that are focusing on developing out an off grid market.
Some of them are developing more projects than others. So you probably have four or five of these ESCOs that are producing sizable numbers of mini grids. Few others are developing just a few get comfortable with the work and to establish a base. It is quite likely that, over time, the number of mini grid companies will settle to a few that we'll be developing the majority of mini grids in Myanmar.
But what we're seeing over the last 18 months is this establishment of this strong foundation of increasingly experienced mini grid operators who understand how to deploy technology and already within the space of 18 months, they are experimenting with new ways of solving problems through technology.
For example, we're starting to see a shift from analog meters to smart meters so that the developers can themselves better understand what's happening at the community level, even at the household level, so that they can plan better for their supply of energy to those communities.
Distributing Solar: And the hundred or so mini grids that you’ve mentioned which have been contracted in the last 18 months is within the context of over 4,000 mini grids that currently exist in Myanmar which, as you note in your decentralized energy report, almost 3,000 of which are diesel powered but also a further 1,600 that are powered by hydro or biomass. Can you tell us a bit more about these hydro mini grids and how they are being operated at this moment.
Richard: The hydro mini grid environment in Myanmar has a very long and rich history. There are probably thousands of mini hydro projects in Myanmar. Nobody has counted them in their entirety.
The locations of every single one of them is not known. bMany of them developed during a period where there was conflict in the country and political discord and so they developed out of a need to be able to provide electricity to their communities. And many of them have become actually quite substantial community projects.
Some of them are, in fact, profit-making and are starting to invest in themselves. But this is a separate set of initiatives from the current government led scheme. Although what we're seeing is the beginnings of, perhaps, exploration into providing financing to some of those hydro companies, there's a need to homogenize the way that hydro companies and other ESCOs in this space are able to collect data so that plant performance is known. Otherwise it becomes very difficult for the decision makers who have to sign checks to be able to understand exactly what the story is.
So, one of the things that is happening now in the hydro space is increasing attempts to better understand the performance of those hydro plants. But also, of course, how do they better position themselves for financing from external parties who actually do require data to be able to make decisions.
Distributing Solar: You've mentioned the challenge between the on grid and the off grid sector of electricity and how that has to come together in the future.
How is Smart Power Myanmar positioning itself or encouraging and making recommendations for that integration between the mini grid systems that we've talked about and the grid extension of the national grid. How do you envisage that potential for the two grids to interact?
Richard: Firstly it's essential to talk about the energy mix and I think Smart Power's approach to this is to say, first of all, let's not have a polarized conversation about it's going to be all solar on one side and it's going to be all the grid on the other. We need to be having a sophisticated and balanced conversation which takes into account all of these possibilities.And that enables us to bring different stakeholders to the table.
One of the areas that we're intervening on quite significantly at the moment is by creating a very significant financing facility for last mile connections for the 5,000 odd villages in Myanmar that are within sight of the national grid, but cannot connect due to a very high upfront last mile connection charges.
And the second area that we're intervening in is ensuring that the data that we're able to generate from mapping work and from gathering other economic data from around the country helps us to understand exactly where the grid is going to be able to extend to within all reason because we know where the substations are, we all know where the extent of the infrastructure can go to. And that will help us to clearly define the citing opportunities for decentralized electricity opportunities.
That in turn helps us to get to the point where we're able to talk about the regulations that are needed to be in place for grid ready mini grids, where you could have a mini grid that feeds back into the grid at some point in the future.
So by having this more sophisticated conversation, where we're not just talking about mini grids that are afraid to build close to the grid because they fear that at one point in the future they're going to get taken over by the grid, they already understand where the grid is going to get to so their investments are safe and their investors are more confident to invest. That conversation in turn is happening at a national level, as opposed to happening in separate places.
The last mile electrification financing facility that we're developing is, potentially, going to be the first in its asset class here in Myanmar. And it will potentially enable us to work through village committees, initially in about 100 or perhaps 200 sites but moving into thousands of sites where the connection fees are somewhere between $500 and $700 per household for that last mile connection to the grid.
Distributing Solar: You started speaking about productive energy use and it would be great to discuss that in greater length. Smart Power Myanmar has done a lot of work in looking at consumer financing and how you can potentially use microfinancing measures to support the adoption and increasing the use of energy within the residential, but also the commercial sector. Can you speak more about the productive energies potential, not just in making the commercial viability of these mini grids better but also in improving livelihoods and improving development.
Richard: I think one of the greatest insights from the Africa mini grid programs, which have a longer history then the Myanmar mini grid programs have, and I think one of the biggest insights that came out from The Rocky Mountain Institute (RMI) a few years ago was that one of the single most important drivers of underperformance in many grids was the lack of investment in productive use.
And I think that is a warning for all of us that you cannot just invest on the supply side. It's not enough to build it and expect that they will come. There are estimates that suggest that by increasing productive use in active mini grid communities, it can decrease the cost of electricity by 30%.
And there are at least a dozen successful productive use enterprise solutions that I've seen that have demonstrated payback in less than a year. So the investment in productive use and enterprise development is not just a nice thing to do. It's actually an essential thing to do. It's the way that communities will grow their local GDP. It's the way that they connect to the value chain in more meaningful ways.
For us, we set up the applied energy lab to do a couple of things. Rather than say right, we're just going to do productive use, let's just provide funding through our energy impact fund to communities and hope that they become more productive, what we did was we set ourselves a series of hypotheses to test so that we could better understand the changes that we would see in the future based on different scenarios.
The key hypothesis was that by providing affordable financing to an enterprise with the proper guidance that we would see a cost decrease and we would see incomes rise. Very simple hypothesis, but very important to not assume that that's going to happen. And so we're currently testing that and some of our early research in our consumer financing and appliance financing, technical notes that have been published in our website, have shown that we are starting to see significant increases in income growth at the single enterprise level.
We haven't yet been able to track whether that has other demonstrable impacts on the local economy or on other households. That's research that will come subsequently. But also what is happening with appliances. If we provide appliances at affordable cost, if we increase their accessibility in communities in ways that can be sustained over time, does that impact electricity usage and therefore profitability of the plant itself?
So we're testing different hypotheses under our applied energy lab to better understand how this impacts not only the viability of the plant, but of course, a productive use of electricity within the community.
The challenge always with productive use is that it's extremely expensive because you're dealing with thousands of villages, potentially. You're also dealing with a largely agro- processing sector, that's what most communities are focused on. It's sesame or it's a green gram and so on and so forth. But all of those crops need to be processed in some way. So how do you increase the processing power? How do you increase the productive use? How do you increase irrigation potential? It all requires investment and all of that requires a value chain to justify that investment.
So this is where this world becomes very closely connected to the world of international development. And of course investments being made by the country itself in stimulating small enterprises, in making it easier for enterprises to access finance.
Distributing Solar: Smart Power Myanmar provided a number of articles that really bring to life the impact that access to finance has for small enterprises. Could you speak about some of these business owners that have benefited from zero interest or low interest funds and how have you been tracking the impact of finances on their businesses?
Richard: We have been tracing key business owners in different places to be able to see what happens to their businesses over time. And one of those business owners is a young man by the name of U Aye Soe and he is an entrepreneur who lives in a place called Kalama Kaung. And this is a village which is on an Island in the southern Tanintharyi Region of Myanmar, Kanti Island. And it's run by one of our ESCO mini grid partners, a company by the name of Techno Hill. And for the last 18 months or so, we've been tracking U Aye Soe’s business because this island was one of the first to be electrified under the subsidy program in Myanmar, and with particular interest to a couple of strategic imperatives.
One was, how do businesses like U Aye Soe’s business increase plant utilization rates and what happens to U Aye Soe’s business in its own right? And what we found was that, over a period of several months, after providing him with consumer financing, his earnings went up from about $140 to just over $210.
We also looked at his monthly energy bills. His energy bills were mostly coming from a very large diesel generator on the island that was the only way that the village could obtain electricity before. He was paying about $23 a month, which is a huge amount of money in Myanmar. after converting his electricity bill per month, it's $6.50. So that's a 70% reduction in his energy bills. At the same time, his average number of customers per day went up from about 13 to about 22.
So you almost doubled the number of customers and by customers I mean the number of motorcycles that he was repairing. He's a motorcycle mechanic. He owns a motorcycle workshop. Established the business 10 years ago. So the message from him to us was that through this investment and through the access to being able to convert his machinery, which has welding machines, he's got carpentry machines, all part of his business, we've transformed his business. We've transformed his ability and he's now looking at establishing new business line in addition to what he's doing at the moment. So the quote that we put at the end of this story that we'll be publishing shortly, this is directly from him.
He says, “This is the next level of lifestyle. I can do whatever I want with electricity.” And it's just this pure message of potential from this young man. I think he's in his mid twenties. And he is seeing a future where he's no longer restricted by access to energy, he's actually able to grow his business.
He's traveling for the first time, he's hoping to send his future kids to school outside of the village, outside of the island which in his context is a big thing.
Distributing Solar: We're recording this interview in May, 2020 where countries across the world are all now severely impacted by the effects of Covid-19. How has that pandemic affected Myanmar and in particular the solar industry and the participants you've been working with.
Richard: Whilst we have luckily so far avoided a significant number of casualties from COVID-19, the economic impact is going to be very severe because the country has still followed public health guidance around lockdowns and restricting economic activity.
What we've seen is the communities that have mini grids have been able to continue to pay their bills and are continuing to be able to operate despite the difficulties. Again, the jury is still out and the evidence needs to be gathered about what happens over the long term.
But in these early months of this pandemic, there has been some positive ability for communities to continue to be able to access electricity. Many of the private developers themselves have generously reduced their tariffs and provided discounts, other initiatives to try to make life easier for communities.
So again, the private sector collaborating with customers in ways that hopefully produce a positive end results on our side. I think that what we're going to see in Myanmar is proof that more communities need more sustainable solutions to be more resilient going forward.
Distributing Solar: And as we draw our conversation to a close, do you have any books you would recommend to our listeners or that have influenced your thinking about the offered sector?
I think one of the books that I found most inspiring is Harari’s Homo Deus talking about the human condition because it makes you feel a bit more generous towards the planet. But specifically in the energy sector, I think there are two books that I would highly recommend that anybody interested in this sector read if they haven't already.
One is a more scientific view of how energy has grown with the development of humankind with lots of facts and context and clarity and talks about energy and agriculture, energy and health and energy and the development of society. And that is Energy, A Human History by Richard Rhodes.
Another book I enjoy from back in 2016 that really helped me a huge amount was Gretchen Bakke’s The Grid which, again, really talks about how do we reimagine the grid. And what I like about that book is that Gretchen Bakke is a cultural anthropologist so she comes at the problem of electrification with a lens on United States by describing the largest machine in the world, and how do you bring a variety of players together to be able to change how that machine works for tomorrow's world. And I found that the style and the approach of that book is really inspiring, particularly for those who are interested in the future of decentralized energy.
Distributing Solar: And finally, what you think the off-grid sector will look like in the next five years or more broadly, what your hopes are for Myanmar’s electrification over the next five years.
Richard: I think over the next five years, if we're able to gather the required data and we're able to attract a sufficient amount of investment capacity for some of the larger financing facilities, I see no reason why Myanmar could not significantly increase the number of mini grids that are built, to several hundred.
I think that over the next few years, what we would like to get to is that magic number of 2,500, because we start to get to a critical mass of mini grids that provides confidence to the larger investors who typically wouldn't want to come into Myanmar unless they're looking at investment values of $50 million plus.
So we do need to be getting up to scale. So I would hope to say in the next five years that we are starting to approach the scale that would significantly increase confidence in the country to invest. So I'm very optimistic. I'm optimistic that the cost of developing projects in Myanmar will come down as the global costs come down.
I have high hopes that we will see, in the next five years, set of regulations that enable feed in tariffs so that mini grids can potentially, feed their energy back into the grid. But I also see very positive developments over the next five years in connecting the unconnected on the grid side. There are millions of customers who, again, are within sight of the grid and cannot reach the grid because of the last mile financing challenges.
So in the next five years, I really sincerely hope that we're able to make headway with connecting as many of the 26 million people who don't have reliable access to power at prices that they can afford. And I think that, over the next five years, we will make a lot of headway in that regard.
Distributing Solar: Great. Well, thank you so much, Richard. You've been incredibly generous with your time and it's been great to hear your insights. Thank you for joining us on Distributing Solar.
Richard: Great pleasure to be here.