The village of Tanjung Batu Laut seems to grow out of a mangrove swamp on an island off the coast of Malaysian Borneo. The houses, propped up over the water on stilts, are cobbled together from old plywood, corrugated steel, and rusted chicken wire. But walk inland and you reach a clearing covered with an array of a hundred solar panels mounted atop bright new metal frames. Thick cables transmit power from the panels into a sturdy building with new doors and windows. Step inside and the heavy humidity gives way to cool, dry air. Fluorescent lights illuminate a row of steel cabinets holding flashing lights and computer displays.

The building is the control center for a small, two-year-old power-generating facility that provides electricity to the approximately 200 people in the village. Computers manage power coming from the solar panels and from diesel generators, storing some of it in large lead-acid batteries and dispatching the rest to meet the growing local demand. Before the tiny plant was installed, the village had no access to reliable electricity, though a few families had small diesel generators. Now all the residents have virtually unlimited power 24 hours a day.

Many of the corrugated-steel roofs in the village incongruously bear television satellite dishes. Some homes, with sagging roofs and crude holes in the walls for windows, contain flat-screen televisions, ceiling fans, power-hungry appliances like irons and rice cookers, and devices that need to run day and night, like freezers. On a Saturday afternoon this summer, kids roamed around with cool wedges of watermelon they’d bought from Tenggiri Bawal, the owner of a tiny store located off one of the most unstable parts of the elevated wooden walkways that link the houses. Three days before, she’d taken delivery of a refrigerator, where she now keeps watermelon, sodas, and other goods. Bawal smiled as the children clustered outside her store and said, in her limited English, “Business is good.”

Worldwide, one and a half billion people lack electricity, most of them rural dwellers. (In India, for example, 268 million people are without electricity in rural areas, but only 21 million in cities.) The International Energy Agency says the type of power plant installed at Batu Laut, known as a hybrid microgrid, will be essential to bringing power to many of them. That’s because connecting a remote community to the conventional power grid, with its large, centralized plants, is expensive and can take more than a decade. In some cases, geography and economics may never permit access to the grid. Hybrid microgrids can provide dependable electricity by intelligently combining power from multiple local sources, and building them is far cheaper and faster than extending the grid to the areas where most of the people without electricity live.

Optimal Power Solutions (OPS), the Australian company that designed the microgrid at Batu Laut, is doubling its installations this year throughout Southeast Asia and India. And several other companies, including industrial giants like GE and ABB, are developing and selling similar technology (see “Microgrid Keeps the Power Local, Cheap, and Reliable”).

The reality, however, is far more complicated. Some early microgrids have run into problems, and the electricity they provide is more expensive than that from central power grids in the city—in some cases nearly 10 times as expensive. The technology involved in microgrids, and the systems used to operate and maintain them, will need to improve significantly if they are to bring reliable power to hundreds of millions of people.

“The forecast by the International Energy Agency and other groups is that in 20 years, we’ll still have a billion and a half people without electricity,” says ­Daniel Kammen, a professor of energy at the University of California, Berkeley, and an advisor for the United Nations’ Sustainable Energy for All program. “Microgrids provide an opportunity to think about a really new model of how to bring energy services to off-grid communities. The question is, will this just be a cute development thing? Or will it become part of mainstream economics?”

Power Hungry

It’s hard to overstate the importance of electricity for economic and social development. Cooling fans make classrooms more conducive to learning, and lights enable students to read and do homework at night. Refrigerators keep food and vaccines from going bad. A steady supply of electricity can fuel economic development, often starting with modest examples of expanded commerce like Bawal’s store. As people make money from such ventures, they can afford more electricity that makes more ambitious projects possible, setting up a cycle of increasing wealth; it’s a pattern that economists have documented in country after country. Over the longer term, giving companies access to abundant, reliable, affordable power makes it possible to develop a robust manufacturing sector with such facilities as chip fabs and automotive plants. In the quest to achieve the UN’s sustainable-development goals, Secretary-General Ban Ki-Moon has said, “clearly the most important tool will be energy.”

Delivering that energy will require some alternative to the conventional grid technology: the IEA estimates that more than two-thirds of rural dwellers who lack electricity today will need power from some sort of distributed source, either microgrids or stand-alone power systems for individual households, because they are far away from the grid or live in a geographically inaccessible area (see “In the Developing World, Solar Is Cheaper than Fossil Fuels”).

“Some parts of interior Malaysia cannot be connected to the grid—they don’t have roads. So microgrids are the only solution,” says Ramdan Baba, the head of Malaysia’s rural electrification programs, speaking from the 23rd floor of a towering office building in a sprawling government district near Kuala Lumpur. The government calculated, for example, that connecting one cluster of villages 130 kilometers from the nearest power line would cost 250 million Malaysian ringgits, or about $80 million. “It’s a huge amount of money just to electrify 10 villages with a total of 800 inhabitants,” he says. “A microgrid would only cost about 92 million ringgits [$30 million] and provide a reliable 24-hour supply of electricity.”

Baba says the government is likely to meet its goal of bringing electricity to 95 percent of the population in Malaysian Borneo by the end of the year (at the start of the project two years ago, 25 percent of that population had no electricity). The technology’s success so far has led the government to up the ante. In a bid to bring power to even harder-to-reach areas and electrify 99 percent of Malaysian Borneo, it’s planning to increase microgrid installations by 2015.

Now Malaysia’s less-well-off neighbor, Indonesia, and other parts of Southeast Asia are starting to use these systems as well. India has experimented with microgrids; its government is considering how the technology could be used more widely in rural areas and to shore up the notoriously unreliable urban grid (see “How Power Outages in India May One Day Be Avoided”). In the poorest countries, like Bangladesh, where almost 60 percent of the population lacks electricity, governments and outside funders are currently more interested in smaller-scale sources of power, such as solar-powered lanterns and cell-phone chargers or small solar panels mounted on individual homes. The same is true for African countries such as Kenya, where 84 percent of the population lacks power. Yet solar lanterns fail to bring many of the benefits of a local power network. Microgrids, the IEA concludes in its measured language, “are a competitive solution in rural areas, and can allow for future demand growth.”

If the experience in Malaysia is any indication, however, the rollout of the systems could be slow and inefficient, in part because governments and utilities can be leery of new technology. At Batu Laut, the government required OPS to install 600 kilowatts of standby diesel generation capacity, even though the microgrid was designed for a peak load of just 200 kilowatts, because officials weren’t sure it would work as advertised. The story may turn out to be similar in India. “It’s still a new concept,” says Himanshu Gupta, a consultant to the government planning commission in India. “The bureaucrats don’t know anything about microgrids.”

Moldy Solar Panels

Located in a remote part of northeast Borneo, not far from a deep, cliff-obscured basin that wasn’t discovered by outsiders until the 1950s, the village of Kalabakan had no proper paved road until a few years ago, and residents made do with a couple of hours of electricity at night. Three years ago, the Malaysian government funded a microgrid there, and power demand skyrocketed; new customers include a pair of sawmills that service the local logging industry. Unlike its slightly newer counterpart in Batu Laut, however, the microgrid in Kalabakan is already returning to the jungle.

“This place is falling apart,” says Ritesh Lutchman, a senior manager at OPS, as he drives onto the grounds of the microgrid power plant. The asphalt road, although it’s only a few years old, is deeply gouged and buckling, a victim of Malaysia’s soft soil and heavy rains. The solar panels are covered with a thin layer of mold, decreasing power output. Tropical growth is nearly as high as one solar array; in one place it is starting to block the sun. A local utility worker who helps maintain the power station can’t find the key to the control room and has to pick the lock with a screwdriver. Inside, it’s hot because an automatic cooling fan has failed. Lutchman suspects that the heat could be damaging the expensive equipment, shortening its life.

Worse, half the microgrid isn’t even getting power. Because the output of its diesel generators wasn’t synchronized, only one generator can run at a time, and one can’t provide enough electricity to power both of the distribution networks that deliver electricity. Lutchman didn’t know about the problem because, days before, local workers had disconnected the data hub that was the only communication link between the microgrid and OPS. The workers were using it to surf the Web, something Lutchman learned about only when OPS got a large bill.

The trouble at Kalabakan reflects a deeper problem: there is no practical model in place for maintaining and operating a microgrid. The government pays for the system; companies such as OPS design it, install it, and keep it working during a two-year warranty period; and then, in the case of Malaysia, they turn over control to the local utility, which is what happened at Kalabakan. While OPS still monitors the microgrids it has installed, after the first two years it is no longer paid to maintain them.

The utilities aren’t set up for microgrids, Lutchman says: “Sometimes the utility will call in someone who understands generators, but he doesn’t understand how they connect to the rest of the system.” The current partial power outage happened after a diesel generator was taken offline for a regularly scheduled overhaul. When it was reconnected, its voltage output wasn’t adjusted to fall within the specifications of the microgrid’s automatic control system. Fixing that is a simple adjustment, Lutchman says, but one the local utility workers didn’t know to make. The utilities didn’t even ask for the microgrids, he says. They were just given them, without the training they would need to maintain them.

The World Bank recently issued a report that warns of some of the challenges. Pepukaye Bardouille, a senior operations officer at the agency’s International Finance Corporation, says her group is “excited” about microgrids, but they’re “trying to inject a dose of realism.” Bardouille explains, “What tends to happen is a few examples are touted as a solution on the basis of technology or just cost. But ways to deliver the technology and maintain it are actually so much a part of the solution that if those things aren’t dealt with, it’s just not sustainable.”

Ramdan Baba says his government is working on a new way to fund and maintain microgrids. The company that designs and installs the technology will be given a license to operate it and receive a guaranteed price for the power it produces; it will make a profit only if it can keep costs under control and keep the grid producing power for the length of the contract.

This summer at OPS’s Malaysia headquarters in Kuala Lumpur, the company’s engineers and managers were busy with phone calls, meetings with government officials, and last-minute calculations. The key issue was estimating the cost per kilowatt-hour of the electricity the microgrid produced, which would be key to establishing the price OPS and other companies would get paid. Too high and OPS would reap a windfall at the expense of the Malaysian government; too low and the company would be stuck maintaining a money-losing operation.

Battery Problems

Microgrids face another looming problem, this one technical. Solar panels and diesel generators can last for decades, but the batteries that make them possible fail much more quickly. “With a microgrid, you typically need an energy storage system that, with current technology, you have to replace every three or five or seven years. That’s a huge capital cost,” says Katherine Steel, an MIT-trained engineer who heads the World Bank’s Lighting Africa program. If replacement batteries are not in the budget, the effective lifetime of the microgrid is limited to only a few years.

According to OPS, lead-acid batteries keep the price of microgrids relatively high not only because they need to be replaced frequently but because they are so expensive that microgrid designers lean heavily on diesel generation to provide electricity through the night. It is cheaper to run diesel generators than to add enough solar panels and batteries to provide power around the clock. To overcome this problem, OPS is now testing a battery from Aquion, a Carnegie Mellon University spinout in Pittsburgh; it could nearly eliminate the need for diesel in microgrids, lowering emissions and greatly reducing operating costs.

“Microgrids still use a fair amount of diesel,” says Jay Whitacre, a Carnegie Mellon professor who invented Aquion’s technology. “The next step is to go to a situation where they have a diesel generator present, but they almost never are turned on. Our battery could allow that.” The Aquion batteries work much like the relatively long-lived lithium-ion batteries used in electric cars, which are much more expensive than lead-acid batteries. But the company’s technology uses far cheaper materials and is easier to manufacture, keeping costs competitive with the less durable batteries that are now widely used in microgrids (see “Building Cheap Batteries to Circumvent the Grid”). “Our battery will cost about as much as a high-quality lead-acid battery up front,” he says. “But that lead-acid battery is going to have to be kept cooler, and it’s going to have to be swapped out after a couple of thousand cycles. Ours will go way more than that—two or three times as long.”

The savings from cutting diesel consumption could be significant. The microgrid at Batu Laut is designed to get much of its power from diesel, but a system designed around cheaper batteries might need generators only for emergencies and long stretches of bad weather. Reducing battery costs and diesel consumption could lower the cost per kilowatt-hour from a dollar to as little as 40 cents.

Yet even that is higher than the price of electricity from the grid. The Malaysian government subsidizes microgrid electricity so that villagers pay something comparable to city rates, but it can’t keep doing that forever, in part because with each additional kilowatt-hour villagers consume, the cost of the subsidies goes up. In poorer countries like India, the high cost of microgrid power could be an even bigger obstacle to widespread deployment.

“For microgrids to be a leapfrogging technology like cell phones, they would have to offer equivalent or superior service to the grid at a lower cost,” Steel says. “But I think that’s a transition that still needs to take place, and I wouldn’t say that’s immediately around the corner.”

A more likely scenario is that microgrids and the conventional grid will complement each other. As the conventional grid expands from cities and as improved roads make communities less remote, extending the grid to them will make more economic sense. Where microgrids exist, many will eventually be absorbed into the larger power grid. At times of peak demand, utilities can call on electricity stored in microgrids’ batteries or use their diesel generators to provide a boost of power. If this happens, hybrid microgrids will make the existing grid far more resilient. Indeed, as battery costs decline, microgrids are an increasingly attractive option in cities where conventional grid power is unreliable; they could ensure that factories and other users have a dependable source of electricity.

These types of large infrastructure changes will take years and require significant investments. Meanwhile, though, microgrids have already begun to make a difference to some lives. Back at Batu Laut, the system continues to hum quietly along, and villagers are getting new ideas about how to use the electricity. One woman has acquired an embroidery machine and hopes to sell customized uniforms. The head of the village’s development committee is lobbying for a government grant to build a food-processing factory that would run on power from the microgrid. And now that the village has reliable electricity, the teachers for the local school are moving out of the city on the mainland to live on the island.

Kevin Bullis is MIT Technology Review’s senior editor for energy.