Problem

Before 2012, households and businesses near Njombe in southern Tanzania lacked access to a reliable supply of electricity. The Mufindi Tea and Coffee Company factory received electricity only intermittently from the national grid, relying on a backup generator during outages. Most households in the area were beyond the reach of the grid’s power lines, so they had no electricity at all. The Mufindi factory and plantation relied on local labor, but workers were leaving to seek employment in urban areas where they could live in electrified homes.

Solution

The Rift Valley Corporation—through its subsidiary Rift Valley Energy, Ltd.—decided to install the Mwenga Hydro and Rural Electrification Project, a hydropower mini-grid, to:

• Provide a reliable supply of electricity to the Mufindi factory and plantation
• Provide access to affordable electricity in surrounding villages, where tea/coffee plantation workers live
• Sell excess electricity to Tanzania Electric Supply Company Limited (TANESCO), the national utility, under Tanzania’s new small power producer (SPP) program.

Rift Valley Energy, Ltd. identified a potential hydropower site on land it owned about 50 km from the tea and coffee factory. Plans showed that the transmission line from the hydropower site to the factory would pass 17 unelectrified villages, many of whose residents worked at the tea/coffee plantations.

With support from the ACP-EU Energy Facility and Tanzania’s Rural Energy Agency, Rift Valley Energy, Ltd. installed a 4-MW hydropower generation facility, a mini-grid with an interconnection to the national grid and 140 km of distribution line. As of 2017, the project was delivering a total of 21.5 GWh of reliable, alternating current (AC) electricity to more than 2,200 rural customers, small businesses, the Mufindi factory, the tea/coffee plantation’s irrigation pumping stations and the national grid. As of November 2017, Rift Valley Energy, Ltd. is expanding the project into the nearby Kihansi Basin. The project will ultimately supply electricity to more than 6,000 rural customers in 30 villages across 200 km of distribution line.

Rift Valley Energy, Ltd. sells excess electricity to TANESCO under Tanzania’s SPP program, which allows SPPs to sell electricity to both the national utility and residential customers.

Business Model

Rift Valley Energy, Ltd. uses a business model that separates power generation from distribution, with each managed by a separate subsidiary. Mwenga Hydro, Ltd. manages power generation. The Rural Power Development Company, Rift Valley Energy, Ltd.’s rural distribution company, distributes electricity after purchasing it wholesale from Mwenga Hydro, Ltd.

Separating generation from distribution reduces the risk that financial losses from one side of the business will affect the other. In addition, with this model, donors were more willing to fund distribution than generation.

The Rural Power Development Company receives grants from the ACP-EU Energy Facility and Tanzania’s Rural Energy Agency to subsidize distribution costs. Rift Valley Energy, Ltd. expects to begin making a profit once it reaches 2,300 customers.

Innovation

The Mwenga Hydro and Rural Electrification project uses several innovative approaches to ensure a win-win scenario for project owners, rural communities, local businesses and the national utility.

Benefits for Owners, Utility and Rural Customers

The project benefits the Rift Valley Corporation, village residents, the Mufindi Tea and Coffee Company and the national utility. Reliable electricity makes the factory more efficient, and electrifying villages encourages plantation workers to stay in the region. Selling excess electricity to TANESCO, the national utility, helps subsidize low residential tariffs. TANESCO, in turn, can purchase wholesale electricity, as needed, from the mini-grid instead of investing in new capacity. Mwenga Hydro, Ltd. also provides valuable end-of-the-line voltage support that helps TANESCO serve the nearby town of Mafinga.

Affordable Electricity for Poor Households

Through grants and subsidies, the project keeps costs affordable for rural households. The average cost of a new connection to the mini-grid is $920, but support from the ACP-EU Energy Facility and Rural Energy Agency allows Rift Valley Energy, Ltd. to charge only $70 per connection.

To decrease household wiring costs, the project subsidizes the cost of ready-boards, which are pre-fabricated wiring systems consisting of light switches and several outlets. Rift Valley Energy, Ltd. purchases ready-boards for $45 each and sells them to retail customers for $14. Household meters are also affordable. Prepaid D1 (single-phase) meters cost about $55, while T1 (three-phase) meters cost about $130.

Customers who consume very little energy pay a low subsidized tariff. Rural customers who use less than 50 kWh of electricity per month pay $0.03 per kWh (D1 tariff). More than 80 percent of Mwenga Hydro, Ltd.’s customers use less than 50 kWh per month; they account for 20 percent of the retail power sold. Households using more than 50 kWh per month pay the unsubsidized T1 tariff, $0.13 per kWh. T1 customers use an average of 135 kWh per month, while D1 customers use an average of only 16 kWh. Blending the two rates yields a unit price close to the wholesale price paid by TANESCO.

Ability to Purchase Electricity from Grid if Necessary

If Mwenga Hydro Ltd.’s generation plant has a breakdown, Rift Valley Energy, Ltd. can purchase power from TANESCO while it makes repairs. On the other hand, the mini-grid can operate as a power island when the national grid is down. This flexibility increases the reliability of the electricity supply.

Flexible Pre-Paid Metering System

The project uses flexible pre-paid metering to keep transaction costs low. Customers can purchase scratch cards from vendors throughout the region or use mobile-money equivalents like M-Pesa. In traditional payment systems, bill collectors must travel to dispersed households to collect payment. Rural customers who work in the fields during the day are difficult to reach. Using flexible pre-paid metering keeps Mwenga Hydro, Ltd. transaction costs low, benefiting customers who use small amounts of electricity.

Responsiveness

Mwenga Hydro, Ltd. connects new customers within three days of receiving a connection fee. New customers value this responsiveness, especially compared to the long wait times for connecting to the national grid.

Tariffs Equivalent to Those of National Utility

Rift Valley Energy, Ltd. sets household tariffs at a level similar to that of TANESCO’s retail tariffs. The decision to charge “national” tariffs simplified the regulatory approval process by reducing the risk of political opposition. Customers served by the Mwenga Hydro, Ltd. mini-grid have unrestricted access to reliable electricity at tariffs equivalent to TANESCO’s, so the utility doesn’t face pressure to extend the grid to the region.

Challenges

The project overcame challenges in design, resource assessment, permitting and construction. Currently, Rift Valley Energy, Ltd. is working to overcome operations challenges.

Resource Assessment

Before installing the hydropower plant, Rift Valley Energy, Ltd. commissioned two feasibility studies. Once the project began, however, it became clear that the studies had over-estimated available water flows. Proper design requires accurate, long-term, site-specific hydrological data.

Permitting and Land Acquisition

Land acquisition and permitting proved difficult and time-consuming. Rift Valley Energy, Ltd. had to secure more than 30 permits, licenses or agreements. Many delays occurred as a result of the company being the first developer to go through this process.

Construction Delays and Cost Overruns

Implementing the project in remote southern Tanzania required more effort, time and resources than initially expected. Rift Valley Energy, Ltd.’s nearby operating base and experience operating in similar environments helped. The project faced construction delays, however, and costs exceeded budgeted amounts.

Poor Payment Performance from TANESCO

Mwenga Hydro Ltd.’s single biggest challenge is TANESCO’s erratic payment performance. As of September 2016, TANESCO owed Mwenga Hydro, Ltd. $1.3 million for electricity supplied by the mini-grid to the national utility. Lack of payment has strained Rift Valley Energy, Ltd.’s cash flows, making it difficult to meet the project’s commercial loan repayment obligations. Mwenga Hydro, Ltd. has encouraged development partners to implement guarantee facilities.

Lessons Learned

Medium- to large-scale hydropower mini-grid projects require a serious developer who knows how to implement rural infrastructure projects in the region. Additionally, projects must allocate time for approvals and permissions.

Flexible business models can help mini-grid operators adapt to unexpected setbacks, such as when an anchor customer, like a national utility, fails to make timely payments.