Electrification in emerging countries - distributed or centralized energy?

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In previous blogs, I’ve referred to the different perspectives on energy held by countries that do have reliable electricity supply, compared to those that do not.  In my blogs on  disruption and new retail models, I spoke about the likelihood for new models to rise in mature energy markets, and in my most recent post on transactional theory, I explored the nature of the relationships between energy retailing companies and their customers.

But in countries where the primary energy priority is connecting more people to reliable electricity, the perspective towards energy is very different. To understand this perspective, it is necessary to first understand the extent of the electrification gap. According to the International Energy Agency (IEA), 1.2 billion people around the world do not have access to electricity. This includes:

·         635 million people in Sub-Saharan Africa;

·         237 million people in India;

·         49 million people in Indonesia.

The question of fuel mix within newly electrifying countries

An economy and a population without access to power provide both a human and an economic challenge for governments.  Health and mortality statistics are highly correlated to electricity supply, and it is conventionally held that installing around 100 MW of new generation capacity can add around $1bn to a country’s Gross Domestic Product.  As governments seek to improve the lives of its citizens and stimulate economic growth, creating opportunities to improve electricity supply is critical. For these reasons, ambitious cumulative targets that total more than 200 GW of new capacity by 2020 have been announced in the above countries.

Central to the planning of these electrification programmes is the issue of the target fuel mix. Conversations usually focus on whether utility-scale renewables and natural gas will be included in electrification programmes which, for retail pricing reasons, have tended to be skewed towards coal, at least during the early planning phases. 

But as distributed energy and battery storage develop at an increasingly rapid pace, some are asking whether these countries would choose centralized generation at all.  In recent travels to London, Asia, Europe and the US, I am hearing educated discussions around whether new platforms could be created in developing countries to leverage small-scale batteries and solar power and reduce the need for trunk networks and large-scale centralized generation.  It’s an interesting question, and one that requires compassion for both the intentions and ultimate aims of government, as well as the difficulties of implementing any large-scale, technologically ambitious infrastructure program.

Two conditions before countries can 'jump' to distributed generation

Whether emerging countries can 'jump a step' and avoid centralized generation depends on the satisfaction of two pre-conditions:

1.     The technology must be deployable on a large scale and able to meet the population’s changing needs

Governments have two priorities when increasing the percentages of electricity in a country. First, they want to create options for industry to locate and expand. Second, they need to connect existing households to electricity and be able to add new households that come as a consequence of the creation of industry. Centralized energy has a number of distinct and obvious advantages when it comes to scaleabilty of a system, and the creation of cities around industry. 

2.     The technology must be cost-effective and affordable for users

One of the key barriers to the takeup of distributed energy in developed markets is that it is not yet clear who will ultimately own and control the technology – retailers, network companies or new entrants? With the answer unclear, solutions around the affordable financial deployment of the infrastructure are still being perfected. Penetration will rise once these financing options are created, which we expect to take place in developed markets over the next two to three years. But it’s unlikely that workable solutions will be available to developing markets for some time.

Overcoming barriers to distributed energy will be challenging

Overcoming these issues to put in place a framework that allows a country to 'jump' from centralized to distributed energy will be difficult, to say the least.  Faced with these challenges, governments could be forgiven for deciding to instead take the somewhat well-worn path of offering sovereign-backed power purchase agreements to a pre-determined fuel mix of coal, utility scale renewables and gas fired generation. This option is technologically proven, financeable and scaleable as new industry is attracted by improved electricity access.

This logic only holds, however, for those markets where centralized industry is a priority, and where economics dictate conventional networked solutions.  There are immense possibilities at the edge of the grid for new technologies, and this is where attention will shift as the global electrification agenda achieves momentum.  For example, bringing electricity to more than 17,000 islands in Indonesia will require flexible and creative methods that embrace localized power solutions.  The example of solar also shows that, once large-scale deployment begins, costs of technology can reduce quickly, while demand increases in tandem. So while those countries just beginning their electrification journey may not start with distributed energy, it’s likely to play an enormous role in plugging the gaps. 

For those designing energy markets in these countries, my advice would be to begin with the end in mind.  Assuming that these technologies will arrive allows for the centralized system and fuel mix, network design and system balancing frameworks to be designed to avoid many of the problems now facing developed countries as these technologies enter systems never designed to handle them.  Perhaps this is the greatest opportunity that the developing countries have.  Perhaps this is where the generational 'jump' will truly occur.  

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