**4. Risk assessment on the example of Tsumkwe**

#### **4.1 Regulatory assessment**

This criterion mirrors the degree of impact that official bodies and authorities overseeing electrification have on a mini-grid. The transition to preferably RE based off-grid solutions indeed requires strong policy support [3, 9, 18] and as investments in off-grid solutions are largely driven by regulatory policies [5], the importance becomes apparent.

For the sake of comprehensibility, the criterion is divided into two factors. The primary factor assesses the effectiveness, stability, and predictability of political institutions. Particular attention is paid to the alignment of local bodies and the population with a mini-grid project. Therefore, the attitude of local mayors towards the electrification project is rated and the support of the local population is measured. Moreover, the community's crime rate is considered, as this poses the risk of ongoing conflicts with potentially negative impacts on an electrification project. Another key determinant in the evaluation of the regulatory framework is the degree of transparency, accountability, and process reliability of the various institutions involved. Simply put the extent to which local bodies take action to signal their accountability for their policy decisions and their outcomes. This area is captured by the secondary factor. Obvious conflicts of interest are one of the things that have to be taken into account. This requires critical scrutiny when analyzing the organizational structure of the mini-network. Further, generally unbiased enforcement of contracts and respect for the rule of law add to this.

#### *4.1.1 Primary factor*

It is essential to accelerate the deployment of solutions that provide Namibian rural areas decentrally with access to RE in order to, ultimately, facilitate the country's development. That mini-grids are acknowledged as a valid option for energy generation by the government is highlighted in the Renewable Energy Policy, outlining "( … ) while some regions of Namibia are most optimally served through grid-connected, utility-scale renewables, other locations are well-suited to being powered by off-grid applications. Both approaches are complementary in nature and neither grid extension (with renewables integration) nor off-grid systems by themselves can provide a solution in isolation." [19]. Despite this, the regulatory framework in Namibia that addresses off-grid electrification, the OGEMP, shows a number of deficiencies.

The document fails to provide a plan for a possible grid expansion. Nonetheless, this is an essential piece of information, not least because mini-grids have been abandoned in recent years by the time a village was connected to the national grid [18], which certainly yields uncertainty amongst investors. Thus, policies are required that define rules for the further persistence of mini-grids and preferably ensure investors that mini-grids are retained and continued to be used to sell generated electricity to the grid after the grid is extended [20]. That is already underlined by the first Policy Statement (P1) of the National Energy Policy, which declares to "create opportunities for mini- and micro-generators to feed into the national grid and off-grid mini-grid networks." [12]. Moreover, in the latest version of the OGEMP, the government provides a rough time frame for planned grid connections in certain municipalities. Although this could reduce uncertainty and

## *Advancing Off-Grid Electrification by Uncovering the Holistic Risk Landscape Using… DOI: http://dx.doi.org/10.5772/intechopen.98040*

encourage investments in communities that have no perspective of being connected to the grid (such as Tsumkwe), uncertainty remains in pre-grid areas. Consequently, a comprehensive policy in that regard is yet missing. The OGEMP secondly misses the chance to explicitly present off-grid possibilities, such as mini-grid or stand-alone systems, although including clear and transparent information on the different solutions for off-grid energy generation, potentially reduces barriers to market entry. Lastly, the focus within the OGEMP is almost exclusively placed on an 'energy shop approach'. According to this approach, private households, businesses and institutions gain access to energy technologies through these shops, which are planned to be established in "reasonable distances" – corresponding to 10 km to 30 km [21]. Energy shop owners are also supposed to consult their customers regarding funding, assist by hiring technicians when needed and they are ultimately the ones who do not only receive loan payments, but also pursue missing or late payments [21]. Yet the document does not address a conceivable reluctance of storeowners to sell energy products, opting instead for the "over their heads" strategy. Past observation has demonstrated that owners do not necessarily stock up on energy equipment, in part because of a lack of capital. Moreover, in reality, very few energy stores have sufficient expertise in subsidies and relevant application mechanism [22]. Overall, there is a lack of policies, frameworks or even institutions specifically related to mini-grids, although the country convinces with a very transparent regulatory framework especially in the context of renewable energies [23]. This leads to a final rating of 3 (see **Table 2**).

As for the legal basis for the generation, distribution and sale of electricity, Namibia has already introduced a transparent licensing process, which takes about 60 days to be completed. In comparison, the process takes 90 days in Kenya [24]. As stated in the Namibian Electricity Act, an electricity generation license is not required for projects of 500 kVA or less, which reduces development costs and thus, attracts investors. A streamlined licensing framework for off-grid systems is not yet available, which potentially "reduce[s] the regulatory process involved in obtaining licenses or permits, reducing costs for off-grid operators" [25].

Apart from the national circumstances, other predominant conditions in Tsumkwe are included in the assessment that feed into the primary factor. For example, the relatively low crime rate and the affirmative attitude of the settlement mayor towards the mini-grid systems, which both affect the evaluation positively. The Tsumkwe community was partially involved in the planning and deployment phases of the mini-grid. Local employment for the construction was particularly important to establish a sense of ownership of the infrastructure. In addition,


**Table 2.** *Regulatory Framework scoring.* educational campaigns were arranged that focused specifically on informing the community about the project itself, how to maintain the stoves/solar water heater, and about energy efficiency. This included several informative flyers that educated residents on how to save money through energy-efficient practices, among other things [13]. Despite these efforts, the community was not engaged in the course of setting tariffs, which however is essential to ensure a sustainable management of the plant. Considering all this, the overall risk score of the primary factor is 2.33 (see **Table 2**).

#### *4.1.2 Secondary factor*

Moderately well documented are non-financial instruments, such as technical standards or grid codes for off-grid systems, which supposedly strengthens the emergence of IPPs by providing transparent information on market requirements. There is a continuing lack of guidelines in this context, which are directed not only at private investors, but also at the REDs by means of providing training material on the installation and maintenance of mini-grids. This can be seen in the case of Tsumkwe. During the time the mini-grid was owned by the RC, it has not been operated as designed and not been maintained at all [15]. Once the takeover was planned, NamPower and other REDs have been immensely reluctant to inherit the responsibility for the operation and management of mini-grids, due to the "lack of viability, relevant expertise, and regulatory uncertainty" [22]. As a consequence, the mini-grid is still not effectively taken care of [15, 26]. This reflects the insufficient involvement of the government in promoting and supporting off-grid systems as well as the persistent challenges between entities at the state and local levels.

Overall, the secondary factor performs slightly better. This can be traced back to the exceptional transparency of regulatory processes, apart from what has been described above. Deductions are made for the just moderate respect for the rule of law, experienced in Tsumkwe [15]. This generally leads to a result for secondary factor score of 2.0. Since the primary factor is weighted at 75 percent and the secondary factor at 25 percent, the final score is 2.25, indicating a rather low risk level.

#### **4.2 Economic assessment**

The economic score is derived by analyzing the purchasing power of the local population (retail score) and the diversity of the regional economic sectors (commercial score).

Both scores are averaged to generate the final economic score. To obtain the retail score, the per capita income of the locality is utilized. Hence, the average monthly income per person is compared to the corresponding average income level of a comparison group. The comparison group is usually dictated by the region. The variety and diversity of the pillars upon which the local economy relies is another critical determinant of the economic score and is illustrated by the commercial score. An economy that relies on different industries is able to withstand crises in one or more sectors of its economy, making its overall economic performance less volatile. Concentration in solely one sector is consequently perceived as a negative. Accordingly, in the case of rural mini-grids, a high share of agricultural activities results in a negative score. Because of this reasoning, the share of agricultural business is taken into consideration for the overall local economic performance. A higher share results in a higher risk for the mini-grid.

It is safe to say that an economically viable mini-grid operation is currently hardly possible in the case of Tsumkwe. Based on a conducted Levelized Cost of Energy (LCoE) calculation, which is backed by assumptions derived from findings of a research stay in 2019, the total costs for generating electricity in Tsumkwe

*Advancing Off-Grid Electrification by Uncovering the Holistic Risk Landscape Using… DOI: http://dx.doi.org/10.5772/intechopen.98040*

amount to approximately 2.2 NAD/kWh. Revenues, on the other side, are 2.4 NAD/ kWh when assuming a share of 80% private households and 20% commercial customers. This leads to a negative profit margin of 0.2 NAD/kWh, indicating a low profitability for potential investors (see **Table 3**).

The risk assessment itself is based on the two dimension outlined above, which are the income level as well as the economic diversification, which underlines the importance of engaging commercial customers.


**Table 3.**

*Profitability analysis (estimation).*

#### *4.2.1 Village income level*

The village income level of Tsumkwe lies at around 4880 NAD monthly per household, which was elicited during a research trip in 2020. The land is not fertile enough to engage in subsistence or even commercial farming, thus the largest portion of household in the Otjozondjupa Region report salaries or wages as their main source of income [27]. The income is set in relation with the average income level in Otjozondjupa region as of 8317 NAD per household per month [28]. This ratio as of 58.3% corresponds to a risk sub-score of 3.5 (see **Table 4**).


**Table 4***.*

*Income score.*

#### *4.2.2 The importance of commercial customers*

The electricity tariff for commercial customers is higher, than for private households. Further, commercial customers, as a standard, consume electricity mainly during the daytime, while the consumption of private households peaks in the morning and in the evening. The mini-grid operator benefits from higher daytime utilization of the solar mini-grid, since providing power directly from PV panels equals zero marginal costs. Batteries represent fixed costs, but are depreciated with each discharge. Diesel generators have high variable costs driven by fuel prices. Thus, for the operator, adding daytime demand reduces the overall levelized cost of electricity. Midday loads, as stated above, are more likely to consist of income-generating activities such as, for example, cold storage, processing of agricultural products or running small workshops. Evening loads are more likely to be residential. Having productive-use customers can, therefore, benefit residential customers, since the midday utilization lowers the overall price of electricity. In other words, the existence of more commercial customers, who buy power at zero

marginal cost during the day, will lower the price for the electricity residential customers pay at night. In the case of Tsumkwe, however, the share of residential customers contributes the most to the revenues of the mini-grid. This leads to the assumption that the scarceness of commercial customers (among other factors) potentially causes the situation illustrated in the beginning.

The level of productive use in a local economy is, therefore, a crucial determinant for the economic score within the SRMP. A mini-grid that serves customers in the field of productive use can achieve a stable overall economic performance at lower prices for both commercial and retail customers. As a result, isolated concentration on the residential sector or a high share of household or residential activities lead to a negative assessment. Based on this, the share of residential customers feeds into the assessment – a higher share leads to higher risk for the mini-grid. Besides, the share of anchor customers revenues compared to the total revenues of the mini-grid is used for measuring the commercial strength. Anchor customer are, for example, larger enterprises or public institutions. The utilization profile of an anchor customer is rated as both stable and safe due to its high creditworthiness. A higher share of anchor customers to total commercial customers contributes to a lower risk for the mini-grid (**Table 5**).


#### **Table 5***.*

*Economic diversification.*

In the case of Tsumkwe, the anchor customers are the police station, lodge, hospital and schools, contributing roughly 22% of the mini-grid's revenues as commercial customers. Together with the low share of existent commercial customers, an overall commercial score is derived [6]. The relatively high residential usage of 75% and the low share of anchor customers among commercial customers of 22%, combined with a medium average income level in Tsumkwe, ultimately lead to a moderate economic score of 3.75 (**Table 6**).


**Table 6***.*

*Economic score components.*

### **4.3 Technological assessment**

The technology score is intended to provide conclusions concerning the reliability and resource efficiency of the system. Therefore, the maintenance cost and the

### *Advancing Off-Grid Electrification by Uncovering the Holistic Risk Landscape Using… DOI: http://dx.doi.org/10.5772/intechopen.98040*

share of renewable energy are both chosen to measure how much attention is paid to providing a robust and reliable technology frame and to measure the resource efficiency of a mini-grid. The maintenance cost is put in relation to the investment, while the share of renewable energy is calculated by the energy generated annually from renewable sources compared to the total energy generated each year. However, any additional source, especially based on renewable energy, results in all probability in inefficient supply structures and additional sources of technical error. If that is the case, the value would be adjusted.

In 2011, the existing diesel-based mini-grid in Tsumkwe was upgraded with a 202 kWp solar PV plant and a 1.93 MWh lead-acid battery system [15]. After some years of operation, the battery storage and PV panels were extended to 3.08 MWh and 303 kWp, respectively, which made it the largest off-grid electricity supply system in Namibia. Besides the open-space PV generator and its inverters, the hybrid mini-grid has a diesel generator set to enable a 24-hour, uninterrupted electricity supply for the settlement. The diesel genset has a rated output of 300 kVA corresponding to a true power of 240 kW. As for the distribution side, the mini-grid in Tsumkwe consists of an 11-kV three-phase distribution grid separated into an essential and a non-essential line. This structure allows the consumers connected to the essential line - that is the water pumping station and the clinic - to be given priority in the event of a power or energy shortage. Zongwe et al. (2017) indicate the average daily electricity consumption in Tsumkwe to be about 2 MWh/d [15], which was confirmed during the first field trip within the research project in 2019. In the same period, PV production amounted to 1,618 kWh/d. The diesel genset contributed some 581 kWh/d of electricity, which corresponds to an average running time of about 2.4 hours per day. Hence, PV reached a share of approx. 69% of the total electricity generation in the mentioned period, which indicates an economically optimized mini-grid design: a renewable energy fraction of 60% was identified as cost-optimal for hybrid mini-grids in a publication of IRENA [29]1 . Overall, the general technical design of the mini-grid conforms very well to the present energy situation in Tsumkwe.

However, the research trips have also shown severe lack of maintenance. For example, the PV modules were covered by a thick layer of dust, significantly reducing the solar yield [26]. One PV module was even damaged because of a stone chip, which caused a hot spot. As such damage is very likely to lead to module failure and thus failure of the entire PV string, the research team had to circumvent the defective module. Moreover, the PV inverters were found to be heavily contaminated with dust, which impairs heat dissipation. The resulting overheating in turn reduces inverter performance and the overall lifetime of the system. [23] Besides these defects, the lead acid battery banks have proven to be the weakest part of the Tsumkwe mini-grid. Five defective battery cells were identified during a research trip. Since these battery cells were already short-circuiting due to electrode sludging and thus endangered the entire battery system, they had to be removed from the battery banks immediately. In early 2021, furthermore, the CENORED operations team detected that an inverter was defective and that the continuity of power supply was being affected. The request for support from CENORED Management to the research project team in Germany provided evidence that no replacement process is implemented.

The SRMP scheme combines the low maintenance level in terms of investment costs of 6% together with a share of 50% renewable energy in an initial score of 4 (see **Table 7**).

<sup>1</sup> It is expected that the cost-optimal RE fraction may rise to 90% by 2025 as the costs of storage and control devices continue to fall.


#### **Table 7***.*

*Technology score: Initial score.*


#### **Table 8***.*

*Technology score: adjustments.*

In a second step, the technology score is adjusted if there are special technological risks in place (see **Table 8**). In case of the Tsumkwe mini-grid, the missing procurement process for spare parts leads to a negative adjustment by one score, resulting in a final technology score of 5.

### **4.4 Financial assessment**

The finance score is measured in two steps. First, two quantitative tables are used to obtain an initial score by applying a scoring grid. The initial score is based on a calculation of the average of the percentage of debt and the cost of debt over the last three years and can be improved in the case of a positive adjustment and worsened by a negative one. In this way, financial flexibility and independence is assessed by the amount of net debt as a percentage of total capital and interest expense as a percentage of revenue. The baseline can be changed by a positive or negative adjustment. The baseline could improve by one grade if a grant is awarded to finance the mini-grid. A grant in all probability affects the flexibility of a mini-grid in a positive way and allows the mini-grid's management to operate without financial pressure from investors for extended periods of distress. On the other hand, this must not lead to moral hazard or encourage development that disregards necessary structural investments. To cover this characteristic, the involvement of private investors is being examined. A private investor can be regarded as extremely relevant in order to avoid that profitability targets are undervalued. Therefore, a negative adjustment occurs if no share of a private investor is retained.

The financial score is calculated by combining quantitative and qualitative aspects. The proportion of debt and the cost of debt determine the initial quantitative score. Due to the fact that in the case of Tsumkwe no debt capital was used to finance the mini-grid, the scoring starts with the value of 1 (**Table 9**).

The initial score can be changed through two adjustments, which are qualitative aspects in terms of independence and efficient management based on the funding. Major emphasis is therefore placed on grant funding and private sector participation.


*Advancing Off-Grid Electrification by Uncovering the Holistic Risk Landscape Using… DOI: http://dx.doi.org/10.5772/intechopen.98040*

#### **Table 9.**

*Finance initial score: assignment.*

Experience shows that a grant reduces the willingness of management to use financial resources efficiently - as demonstrated by the failure of socialist systems in the past. As a result, funding by a grant leads to an increase of the risk score by +1.

On the other hand, private sector participation enhances independence from political decisions and encourages efficient management of resources. A private investor can be regarded as vital to avoid underestimation of the profitability targets. Therefore, the risk score increases by +1 if no private investor is involved in the mini-grid project.

In the case of Tsumkwe, there is neither a grant, as explained in the introduction, nor a private investor with commercial objectives. This leads to an increase of the risk score by +2 (see **Table 10**), resulting in a total financial risk score of 2.0, which indicates an overall moderate level of risk.


**Table 10.**

*Finance adjustment.*

#### **4.5 Educational assessment**

This criterion is perceived as an assessment of management's ability and willingness to coordinate, communicate, and implement educational goals in order to maintain continuous economic performance and mitigate technical failures. The assessment considers only quantitative data, i.e., no qualitative adjustments are made. Ultimately, it is imperative that the management of a mini-grid is able to actively manage and contribute to technical quality through a planned educational policy. The quality of educational efforts is evaluated by the number of educational activities and the cost of educational activities compared to the total cost on average over the last three years.

When new technologies are adopted, as in the case of Tsumkwe, the shift from a diesel-only generator to a solar PV-diesel hybrid mini-grid system demands a significant amount of training for various groups of people to achieve better technical proficiency due to emerging productive use cases among the community [23, 30]. In fact, in order to operate an economic viable mini-grid system, productive use

cases and the commercial usage of electricity produced are urgently needed, thus the engagement of the local community is a key aspect that needs to be considered already in the planning and development phase. In addition, a better understanding of electricity generation and use can potentially encourage people to replace inefficient equipment, both helping to save electricity costs in the long run and stabilizing the system. A series of training/education activities should therefore accompany every mini-grid project by default. In the case of Tsumkwe, the community was indeed involved and employed in the construction of the mini-grid. In addition, educational campaigns have been organized, focusing particularly on informing the community about the project itself, maintenance of stoves or solar water heater, as well as energy efficiency. This was done by distributing several flyers that provided information on how to save money through energy efficient measures, among other things [31, 32]. However, it now became apparent that the approach was not successful or rather not sufficient. Based on the results of a research trip to Tsumkwe in 2020, relatively few community members were aware that their prepaid electricity payments contained charges for service, maintenance, as well as a levy for government agencies. The remaining respondents were convinced that they were only paying for electricity, or indicated that they did not know what they were in fact paying for [23]. A field trip to a neighboring village, which was already conducted in 2016, presented similar results. A considerable number of people was unaware of solar energy and what it entails. Solely business people and those who already installed small solar panels on their rooftop were sufficiently informed [33]. This shows that the design of an educational component within the management of minigrid systems is essential for the sustainability and the durability of the mini-grid system. As the case of Tsumkwe illustrated, this is not done by distributing informative material, but rather through direct contact with the community members, joint discussion about tariff considerations and training offerings.

From a technical point of view, regular preventive maintenance, which can only be accomplished with a trained team, ensures the optimized operation of a minigrid and thus, enhances its technical sustainability. Apart from the educational requirements for community members, education and training of operating personnel is consequently essential to ensure the (economic) lifespan of the equipment for better service. At best, the responsible personnel is recruited locally. When the mini-grid system in Tsumkwe was expanded in 2011, two of twelve battery banks were obviously not properly connected to the other batteries. As a result, some of the additional battery capacity was unavailable. The fact that this problem was not identified until a research trip in 2019 clearly demonstrates the lack of knowledge and experience in operating off-grid power systems in the analyzed community.

The level of education proved to be a weak point within the five dimensions examined in the case of Tsumkwe. Based on our impression by a fact finding mission trip in July 2019 only one education measure per year was reported upon. Related to revenues expenses for education can be seen around 5% (**Table 11**). Due to the fact that in the municipality only very few educational measures were carried out that were useful in any way, combined with today's very low level of awareness regarding electricity among the population and poorly maintained facilities, this results in a value of 5 (**Table 12**), indicting a high risk level.



*Advancing Off-Grid Electrification by Uncovering the Holistic Risk Landscape Using… DOI: http://dx.doi.org/10.5772/intechopen.98040*

#### **Table 12.** *Education: Scoring grid.*
