Solar PV Microgrid Costs in Indonesia

Original Article: Benchmarking Solar PV Microgrid Costs in Indonesia

Rural electrification is a big challenge not only in Indonesia but throughout the world. Currently, there is not a single technology and/or business model of rural electrification that can be called a wild success. Of course, there are success stories in many regions around the world. A proper electrification of a community is a complex matter involving not only the technology and business model but many localised variables. Issues such as social behaviours, economic activities, income level and frequency, growth potential, geophysical features, all play important roles in determining how a particular community need to be electrified currently and in the future.

Indonesia’s largest challenge in electrifying 100% of its population goes beyond its 17,500 islands. Of course the archipelagic nature of the country account for much of the difficulties. But a close second is the distribution of its population. Many of the legal boundaries of its smallest administrative government unit, villages (Desa in Indonesian), have less than 25 households. Other villages have very uneven concentrations of households within its geographical boundaries.

Indonesia’s national electrification plan, called Program indonesia Terang (Bright Indonesia Program) announced in May of 2016, aims to electrify 97% of Indonesia’s population by 2019. While the implementation of this program is still unclear, a clear government target provide opportunities for the private sector. There is a long way ahead to implement this program the right way. Least of all, the Indonesian government will need to determine a level of service requirement to be able to call a village as electrified.

Without fanfare, the Directorate General of New and Renewable Energy and Energy Conservation has been providing funds to build micro hydro and solar PV based mini grids throughout Indonesia since 2012. Between 2012 and 2015, over 450 solar PV minigrids were tendered and installed. The total capacity of the solar panels installed is roughly 13MWp. The requirements of these minigrids are quite comprehensive. They include the distribution network and household connections including energy limiters, street lighting on utility company standard poles, medium voltage transformers when needed, sizable battery requirements and various other specifications.

Many of the sites under this program were very remote where most of the components have to be brought in by manual labor. Even my team members and I, who were inspecting and surveying the recently commissioned sites, had difficulties reaching the locations. Through a GIZ contract, we visited about 200 sites in 2013 and 2014 and another project in 2015 visited an additional 80+ sites. The social aspects of the local culture, the community’s behaviors and economic activities are often much more interesting than the technical aspects of the systems.

Information from these sites, in addition to other sources, means that there is a baseline that can be established based on the implementation of these minigrids. The nominal average cost of the turn-key installation of the solar PV sites commissioned between 2012 and 2015 is US$8.27/Wp. Remembering that the location of these sites are quite heavily skewed toward difficult remote areas, it is surprisingly reasonable.

Using this baseline, if one was to properly install additional solar PV minigrids in the near future, how much would it cost? Let’s assume that the government’s requirements will still be followed. This means that the solar PV minigrids will need to have utility approved poles, distribution cables and household connections, street lighting on the poles, medium voltage transformer on larger systems, and many other requirements. On this basis alone, our estimation is that for sites that have moderate difficulties, it should cost between US$6.50/Wp to US9/Wp. This will already include the contractor’s margin.

Remembering that for commercial mini grids, a long-term approach must be taken and the components used must have a low levelized cost of energy even if the initial capex is higher. In addition, regular monitoring and O&M costs must be taken into account. This means that the use of Li-ion batteries or advanced lead acid batteries or other storage technologies will be considered. Using the same requirements as the previous government standards but with the lifetime of the system being 15 years, the additional upfront costs to maintain the system will affect the capex. Accounting for the total lifetime cost for 15 years, we estimate that the systems should cost between US$10/Wp to US$14/Wp.

Assuming that the project sponsors will require funding from lenders and investors and possibly development agencies, additional costs to meet the administration requirements will also need to be accounted for. These costs may include comprehensive Detailed Engineering Designs, Environment Impact Assessments, Social and Gender issue surveys, comprehensive feasibility studies, and many others. When the additional costs are accounted for, then the total cost for a well-researched solar PV minigrid that are well maintained for 15 years should be about US$12/Wp to US$16/Wp.

One of the key benchmark is the US$8.27/Wp average cost of a turn-key solar PV minigrid project paid by the Indonesian government between 2012 through 2015 (a total of 460 sites and 13MWp).

We also need to remember that the sites where these projects are located are skewed heavily toward difficult to very difficult sites. Without the outliers, it is expected that the cost will be even lower. In 2015, the average cost of all the systems installed and commissioned that year was around US$6.50/Wp. However, it needs to be understood that these systems do not require a guaranteed 15 year lifetime, or comprehensive studies (social and gender impact, economic activities and social behaviours among others). Adding these requirements will add to the capital expenses which will have a large impact on the cost of energy production over the lifetime of the system.

But let’s look at the implications of the capital expenses to how much it will cost to produce the usable energy. I will break down the different major cost components and amortize them over an assumed lifetime of 15 years. The following costs will have already included the premium for delivering and installing the systems in a moderately remote location.

At 3.5kWh/kWp net usable energy, an average solar PV system without storage and distribution network should produced approximately 17,000kWh/kWp over its 15 year lifetime. If the system’s initial cost was US$1,200/kWp and it’s amortized over the 17,000kWh/kWp then it means the system’s energy will cost around US$0.07/kWh (before discounting).

After adding the appropriate amount of storage to fully utilize the full amount of the usable energy, using Li-ion technologies, an additional US$0.19/kWh need to be added. This assumes a $800/kWh capex cost, 6,000 lifetime cycles (15 year lifetime) and an 80% utilization ratio.

Additional costs of the distribution network and the household connections vary wildly depending on the density distribution of the homes within the community. Assuming a fairly high density distribution, a capital expense of about $125,000 can be expected for a 40kWp system. This cost was found to be fairly linear as the system size scales up. After amortizing this expense over a 15 year lifetime, an additional US$0.18/kWh need to be added to the system’s total cost of energy produced.

Another set of costs that need to be added to the system is project development. This includes site surveys, various studies such as feasibility study, economic activity assessment, social and gender impact and others. The cost for these studies do not scale very well. While smaller communities, and therefore smaller system sizes will require less time in performing the studies, there are fixed costs that are unavoidable. The estimate for this cost when assuming a minimum project size of 25kWp is an additional US$0.05/kWh.

This means, that in addition to the total capital expenses that range between $12/Wp to $16/Wp, another consideration that needs to be looked at is the total system cost of energy production. In the future I will publish a total system Levelized Cost of Energy, but for the moment, it’s enough to estimate that a well designed solar PV based minigrid system will require about US$0.50/kWh. In most cases this is already competitive with the total ownership cost of a diesel generator in a moderately remote location.

With the right planning, implementing the correct technology and business model for Indonesia’s currently unelectrified communities can be done through the private sector. Given that some of the inherent risks of rural area electrification can be covered by the government, there are financially interesting propositions for project developers. The key is that the communities have different needs, and only by understanding them we can provide sustainable electrification technologies and business models.

It just might be possible to electrify Indonesia’s dark areas and get them to be bright at night and do them while providing financially attractive framework and regulatory conditions. It is up to both the Indonesian government and the private sector to work together and develop the right landscape for electrifying 97% of Indonesia’s population by 2019.