The Solar Mini-Grid Appraisal
A government is appraising a 2 MW solar mini-grid for an off-grid district of 8,000 households. Capital cost is Tk 320 million, with Tk 80 million in annual operating costs. The tariff is set at Tk 12 per kWh, and expected sales are 3.2 million kWh per year. Connection charges yield Tk 15 million annually. The grid would displace diesel generation costing households an estimated Tk 18 per kWh. The project life is 20 years, with a 10% discount rate. A diesel backup and battery replacement costing Tk 60 million is needed in year 10. Land is government-owned but has an alternative use valued at Tk 5 million per year. The government asks whether the project is worthwhile on economic grounds.
1. Compute the financial and economic viability indicators, and explain why they differ.
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Financial flows. Revenue = tariff (3.2m × 12 = Tk 38.4m) + connection charges (Tk 15m) = Tk 53.4m. Operating cost = Tk 80m. Net financial flow is negative Tk 26.6m per year before the year-10 replacement. On a purely financial basis the project is unviable: it cannot cover operating costs from tariff revenue.
Economic flows. Benefits include avoided diesel cost: 3.2m kWh × Tk 18 = Tk 57.6m, plus connection revenue if treated as a real resource transfer, plus any health and productivity gains not monetised here. Economic operating cost is Tk 80m plus the land opportunity cost of Tk 5m = Tk 85m. Net economic benefit is roughly 57.6 − 85 = negative Tk 27.4m before counting unmonetised benefits. The year-10 replacement of Tk 60m should be discounted at year 10.
Why they differ. Financial analysis uses actual tariffs and transfers; economic analysis uses shadow prices and includes externalities and opportunity costs. Here the tariff of Tk 12 is below the diesel alternative of Tk 18, so consumers gain but the utility loses. The gap signals a need for subsidy or a tariff review, not necessarily rejection.
Indicative NPV. Discounting a negative annual flow of about Tk 27m for 20 years at 10% gives roughly −Tk 230m, plus the discounted replacement cost, before monetised social benefits. The project is not viable on the figures given unless additional benefits or subsidies are counted.
2. The government wants to proceed for equity reasons. Advise on the conditions under which proceeding could still be justified.
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Proceeding can be justified only if the analysis is reframed honestly.
- Quantify unmonetised benefits. Education hours gained, health clinic operation, enterprise creation, and reduced kerosene use should be estimated, even roughly, and added to the economic case. If these exceed the gap, the project passes.
- Recognise the subsidy explicitly. A transparent operating subsidy (say Tk 30m per year) is preferable to hidden losses. It should appear in the budget and be justified as a distributional transfer.
- Redesign to lower cost. A smaller 1 MW first phase, or a tariff closer to willingness to pay, may close the gap. Explore productive-use customers (irrigation, milling) to raise sales above 3.2 million kWh.
- Protect the investment. Require an operations contract with performance targets, a maintenance fund for the year-10 replacement, and a tariff-indexation rule.
- Set a decision rule. Proceed only if the economic NPV including monetised social benefits is non-negative, or if the distributional gain per taka of subsidy is acceptable relative to alternatives such as grid extension.
The judgement is that equity is a legitimate objective, but it must be priced and disclosed, not used to override arithmetic silently.