Smart Incentives for Mini-Grids through Retail Tariff and Subsidy Design: A Guide for Policymakers

Clean energy mini-grids are receiving increasing attention as a cost-effective means to deliver energy access and achieve climate change commitments. However, the economics of mini-grids in developing countries remains challenging, as mini-grids often have high upfront capital and operational costs and tend to serve a lower-revenue customer base. How tariff and subsidy policies are designed has become a central factor in determining the viability of private sector participation in scaling deployment of mini grids as an effective energy access solution. The LEDS GP African mini-Grid Community of Practice (AMG-CoP) is exploring effective ways to accelerate the development of mini-grids to achieve national and global goals on energy access and to stimulate private sector investment. The AMG-CoP examined a range of possible policies that governments could adopt to provide smart incentives for private operators to build and expand mini-grids, focusing on policies for retail electricity tariffs and the design of subsidy programs, and explored considerations related to different policy options drawing from member country experience and insights. This paper focuses on the key building blocks of mini-grid tariff and subsidy. Companion case studies may be developed in cooperation with AMG-CoP members, and additional work products will be developed in consultation with the AMG-CoP.