Mutia Prabawati, thesis, Indonesia

Private sector-driven rural elctrification

Sustainability of Rural Electrification Projects: Case Study of Private Sector Intervention in Indonesia 

Indonesia has large publicly recognized potential of solar energy to assist the country’s effort to fulfill its rural energy demands with renewable energy, but the potential for private sector involvement in

this sector has received less attention. The thesis addresses this issue through investigating the technological and socio-economic sustainability potential of a rural electrification project initiated by a multi-national company called Akuo Energy. The project, which is located in three remote and relatively poor villages in East Kalimantan, aims to create a profitable market whilst increasing the community’s societal wealth through hybrid mini-grid technologies. In completing the case study, Mutia Prabawati did her field work for four months in Akuo Energy’s Indonesia office and projects sites in early 2016.

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Indonesia has large publicly recognized potential of solar energy to assist the country’s effort to fulfill its rural energy demands with renewable energy, but the potential for private sector involvement in this sector has received less attention, particularly in hybrid mini-grids. Hence, conducting a study specific to electricity provision through hybrid mini-grids by a private company is considered important in the Indonesian context.

An opportunity arose for conducting a case study when Akuo Energy Indonesia (AKEI) entered the process of obtaining a grant from Millennium Challenge Account - Indonesia (MCA-I) to build community-owned hybrid diesel-PV mini-grids with capacities under 3 MW in three remote villages in Berau Regency, East Kalimantan, i.e. Merabu, Long Beliu, and Teluk Sumbang. The project is expected to be a catalyst for higher living standards and economic growth. The facilities are expected to have 20-years operation life, with responsibilities of operation and maintenance lying in the hands of the local village community. A Special Purpose Vehicle (SPV), which will have the village community as the controlling shareholder, is to be created for each village to facilitate operation and maintenance activities.

The project is an example of a technological innovation which aims to create a profitable market whilst increasing the community’s societal wealth. To make the innovation sustainable in that dual sense, it is likely that the approach and outcomes that will be emphasized by the company will differ from the emphasis given by public providers or other types of non-profit organizations. According to Hekkert (2007), for a project to be profitable and societally sustainable, it needs to be supported by social elements, such as user practices, appropriate regulations, and well-developed industrial networks. Considering these issues, the main question for the case study research which was conducted in this thesis is:

Under what conditions does an off-grid rural PV electrification project initiated by the private sector have the potential to be profitable and societally sustainable in Indonesia?

The research objectives and questions demand a full picture of what is happening in the company as well as its surroundings. As there seemed to be no single analytical framework which could address the research question, an analytical framework was built which integrates key elements from three existing theoretical streams of literature: (i) process approaches to evaluate the execution of development projects; (ii) the innovation ecosystem approach to evaluate the ecosystem around the project from the company’s perspective; (iii) the technological innovation system (TIS) approach, to understand the Indonesian context pertaining to rural electrification which can affect the project by means of an analysis of innovation functions and supporting institutions in the sector

For obtaining the required information, a three and a half months’ internship was done from 1 February 2016 to 13 May 2016 in the company’s office in Bali, Indonesia. The information gathered include company’s plans and internal documents made available to the researcher. Additional information was gathered through observation while working alongside staff of the company. Openended interviews with national players were also conducted to understand the current Indonesian context of rural electrification. Most importantly, a two-week and a four-day site visit were conducted together with the company team to understand site conditions and interact with local communities.

Findings

While the energy sources used in the project are compatible with local resources, the research findings reveal that there appear to be deficiencies in AKEI’s effort to address the local needs in its technical design. The deficiencies are evident from the possible oversizing of the systems compared to existing information about Indonesia’s average rural electricity consumption. In regards to socioeconomic aspects, AKEI has made efforts to collect local information to be used as the basis of financial models, economic rate of return (ERR) calculations, and community organization design. Nevertheless, discrepancies between survey, site visit observation, capacity building plans, and ERR calculations are found, which indicates insufficient knowledge about local context and lack of attitude needed for developing projects for rural areas.

The actors considered to be within the project’s ecosystem include local government agencies, subcontractors, local NGOs, and SPVs. While no active resistance has been detected within the ecosystem, there are actors who have low levels of engagement with the project yet have the potential to assist and facilitate the project. Their passivity may hinder the knowledge exchange required by AKEI in bridging the knowledge gap in local and community development issues. Capacities of actors, particularly subcontractors and local human resources, appear to be subpar in relation to what is required to deliver a system which can live up to the 20-year design life. To increase the capacity of actors related to the project, additional financial resources are necessary because very little project budget had been allocated for this purpose. However, there seems to be a lack of accessible alternative funding resources which may be required to rectify the problems within the ecosystem. This could jeopardize the longevity of the system.

The issues encountered in the project’s ecosystem could be associated with Indonesia’s national rural electrification effort in which the project is embedded. The institutional framework is weak, and this is reflected in an unclear regulatory framework for private sector involvement. This in turn causes uncertainties in tariff determination and formation of community organizations, which consequently seem to cause reluctance of local agencies to participate in the project. Furthermore, financial instruments, such as incentives and subsidies, are not accessible to private sector actors. The unavailability of financial instruments tends to increase the risks related to rural electrification’s capital intensive technologies and customers’ low affluence. These aforesaid factors contribute to the lack of participation of private sector actors and low incentives to improve entrepreneurship quality, which is reflected in AKEI’s struggle to identify qualified subcontractors with relevant experience.

Strategy recommendations

There are no exact step-by-step guidelines on how to make these types of projects succeed. It is rather more important to find a fit between the implementing organization and the local context. Two main strategies are recommended to AKEI:

Strategy I: Strengthening and increasing the quality of the ecosystem through creating a tangible value for partners required by AKEI to attract their interest to the project. Another actor must be brought in should tangible values offered by AKEI fail to engage certain actors, e.g. local NGOs. The success of a collaborative effort depends on the partners’ ability, willingness, and likelihood to succeed (Adner, 2012).

Strategy II: Improvement of learning processes within the company. To provide a solution which best fits the communities, AKEI needs to learn about the local context and integrate this into its technical (e.g. related to system sizing) and non-technical (e.g. capacity building programs) design. It is imperative for AKEI and its staff to listen to the villagers rather than tell villagers of what would work best. Indeed not every villagers’ idea is feasible, but it will guide AKEI in understanding how the villagers think and ensure local commitment among the local communities to ensure sustainable functioning of the systems after the projects are handed over to them after construction.

Conclusion

Although hindrances are inevitable within as well as around the company, rural electrification projects initiated by a private company do have the potential to be sustainable. Sustainability of the initiative has higher odds to be attained if the initiating company is able to act not solely as an engineering company but also a facilitator to improve the livelihoods of the villagers. Facilitating in this sense does not mean doing everything itself, but bringing in partners with local knowledge who share the same goals.