Although the spotlight has mainly been on grid-connected renewable energy development, the development of off-grid renewables is also taking place, albeit at a slow pace. Off-grid solutions such as microgrids are increasingly being implemented as the means to provide sustainable and affordable electricity to the vast sections of the population that is yet to be connected to the grid, especially in areas with difficult terrain. Key players in the off-grid segment discuss the current status of the segment, the key issues, possible solutions and the roadmap for the future…
Is there adequate focus on the development of off-grid renewables? What have been the highs and lows in terms of policy and market developments for this segment?
The off-grid renewables sector had not received much attention until recently, be it from the government or project developers. As a consequence, the policy and regulatory environment has remained uncertain. During this time, OMC built many PV power plants and minigrid power distribution networks. From a legal standpoint, rural power generation and distribution were always allowed under the Electricity Act, but there were no specific regulations in place for either generation or distribution, resulting in confusion at the local level. There were also no clearly defined standards and specifications for the public distribution network. Information was scattered and had to be collated from the Deendayal Upadhyaya Gram Jyoti Yojana inspection templates, guidelines for service connections from relevant sections of the Central Electricity Authority regulations, etc.
Off-grid renewables are now coming into their own, with increasing recognition of their utility in providing energy access in a difficult power distribution environment, especially in rural India. Several policy and regulatory developments indicate progress in the right direction, but much remains to be done. With the release of the Uttar Pradesh Minigrid Policy in March 2016 and the corresponding regulations by the Uttar Pradesh Electricity Regulatory Commission less than a month later, the policy and regulatory aspects in the state have crystallised for the better. Companies like OMC now have a clear licence to operate, with several options outlined for investment protection. Grid arrival is clearly defined as are standards relating to minigrids. It is also expected that a national minigrid policy will be released later this year. The draft sets a target for 10,000 private minigrids totalling 500 MW. In India, such public backing from the top is critical.
We hope that these developments will address the thorny issue of access to capital for what is still seen as a segment that must prove its risk reward pay-off. Even companies that have developed self-sustaining, profitable business models require viability gap funding until they achieve scale and critical mass. This is one way to break out of the circular trap of financing being essential for scaling, and scale being essential to profitability and hence financability. Much work and many more initiatives are required to increase access to capital of any sort for off-grid energy companies.
Decentralised renewable energy (DRE) solutions are still seen by policymakers as the last option for providing electricity access. Grid electrification remains the primary focus of electrification plans. Having an unreliable and inadequate supply disproportionately impacts small livelihood, agriculture and business activities in rural areas where diesel and kerosene usage eat into the already low incomes. DRE should, therefore, be actively encouraged in all areas as a means to provide access to electricity as well as to increase its availability and reliability. Furthermore, DRE can complement grid supply, help reduce dependence on fossil fuels and diversify India’s energy portfolio while also meeting the objectives of development.
There is lack of clarity in the current state of, and future plans for, electrification in the states. The 24×7 “Power for All” plans developed by the states primarily focus on capacity addition to meet the growing demand of existing consumers, but there is little or no analysis on the existing nature of supply, and the unequal access to reliable electricity in rural and urban areas. There is a need for a more holistic bottom-up approach in the Power for All planning.
Moreover, it is critical to have:
- An assessment of the electricity demand for future developmental needs across sectors like health, education and housing, and a planning process at the district level that takes into account these factors and leverages the existing policies to achieve energy convergence across sectors.
- A critical role for decentralised renewable energy in plugging these gaps and developing a supportive ecosystem for it.
The ambitious renewable energy targets at the national level need to be translated into robust policies across sectors to encourage the development of renewable energy and ensure uptake. For this, a supportive ecosystem is needed for energy access including appropriate technology, grassroots entrepreneurs, affordable end-user and enterprise financing, and skills for installation and servicing.
There has been some progress, but some areas require continued efforts. Some very good policies have been outlined, particularly by the Uttar Pradesh government and the Ministry of New and Renewable Energy (MNRE), which provide greater clarity. We are excited about those. However, risk-tolerant financing remains an issue. Most off-grid companies are not profitable as yet and must achieve scale in order to be. To achieve scale, financing is required. However, financing is primarily available for profitable companies. More needs to be done to increase access to capital of any sort for off-grid energy companies.
With the global thrust on renewable energy, the Indian government too has been trying to promote the sector on a large scale. Back in 2003, the government had deregularised off-grid power generation and distribution to facilitate new and smaller companies. The same policy changes need to be done by the state governments too.
Framing a policy is one part; the other is its implementation on the ground. Even though subsidy policies are there, there is uncertainty over whether and when one would get it.
There are so many rules and regulations that are subject to interpretation and these pose a huge threat to any business. Power generation and distribution were de-regularised but nothing was done about tariffs. So, today all offgrid players are at the risk of being labelled non-compliant. Under these circumstances it is very difficult to raise funds for business.
What are the key challenges faced by off-grid companies? How can government policies be made more conducive to the off-grid business environment?
Rohit Chandra and Sarraju Narasinga Rao
Access to capital tops the list of challenges in this segment. The second is the development of policies and regulations in individual states, within the ambit of a national policy and regulatory framework that provides some uniformity and predictability across states. This is essential for the evolution of off-grid renewables into being an industry segment in its own right with pertinent support systems and infrastructure.
Another challenge is the series of hurdles that must be crossed for executing a project. Land acquisition, land-use conversion, road permits for materials, clearances from several different government departments, right-of-way procedures to cross national and state highways and railway lines – each is time and resource intensive. We are hopeful that the well-conceived policies for off-grid renewables will also incorporate single-window clearances for such projects.
For any enterprise to thrive, a number of factors contribute to ensuring an enabling environment suited to growth and sustainability. These factors can range from suitable forms of enterprise financing, the availability of an appropriate technology-trained workforce and conducive policies. Together these are called the “ecosystem” factors. By virtue of the challenging locations and customer segments they cater to, off-grid energy enterprises operate in difficult environments and underdeveloped ecosystems. Grassroots-level enterprises spend enormous resources on building the ecosystem or work in its absence, leading to stagnant growth or unsustainable operations. The government should create the right policies that help enterprises access affordable finance. In addition, integrated planning for the Power for All programme should consider all factors such as improved transparency in electrification, creation of the right incentives for local manufacturers to thrive and designing a conducive technologically innovative environment for decentralised renewable energy to flourish.
We have to remember that the power sector is not a purely commercial sector. Typically, distribution and often transmission, and nearly always power procurement are done by the government. The only market segments where there is private sector participation are component supply and power generation. Off-grid energy companies are not only entities working with ultra-poor households, but are also private sector integrated companies that must be able to conduct everything from generation to distribution profitably. This is a massive challenge and will require patience from investors as companies work to unlock the incredible potential of off-grid markets.
- Lack of clarity on rules and regulations: Even after being audited by one of the top five audit companies in the world, we were served a notice and fined because we did not pay tax on share subscription. We were not aware of this state prerogative. Our company is registered in Delhi but has its operations in Bihar.
- Off-grid companies have to start from zero: The whole burden of power generation, transmission and distribution is theirs. And on top of it, there is the responsibility for the safety and security of its customers. All this adds up to a huge cost. Say, a private company has set up a robust and long-lasting distribution network at a huge cost, but there is no guarantee that the government will not expand the central grid to that area. Due to non-cooperation between the government and private players, this uncertainty always remains a huge risk. Many of our power plants were shifted or shut down because at some point, the much-cheaper grid-connected electricity reached there.
- Availability of funds: Except for the uncertain subsidies by the government, even banks are reluctant to provide debt to start-ups or small companies. All our funds (grant, equity, debt) come from outside India. The Reserve Bank of India came up with the CGTMSE policy wherein the nationalised banks were to provide collateral-free loans to promote small entrepreneurs in rural areas. But this has not been implemented on the ground.
- Without government support and cooperation, no company can scale up or last long. So the burden is now on the government to bridge this gap and be more supportive.
What is the investor perception on the success of the microgrid model in India? What are the risks associated with promoting this model as well as the positives?
Rohit Chandra and Sarraju Narasinga Rao
Many investors still view the segment as being high risk, low return. This is partly because there are not enough success stories on the ground and not enough off-grid companies that have demonstrated viability, sustainability and profitability. There is an urgent need for more companies that can coalesce this segment. This is clearly an infrastructure sector with commensurate payback periods, and requires investors who are comfortable with a long-term outlook.
The Ministry of New and Renewable Energy targets to deploy at least 10,000 renewable energy-based micro- and minigrid projects across the country with a minimum installed renewable capacity of 500 MW in the next five years (taking the average size as 50 kW).
Microgrids are inherently complex as energy service systems. Apart from being technically complicated in catering to the varying needs of users, the players also need to have a deep understanding of the community for establishing a scalable financial and operational energy service system. Hence, the effort needed to cater to the specific needs of each site is a time- and resource-consuming activity, which can weigh heavily on companies looking to sustainably scale up microgrid systems.
For a sustainable microgrid operation, some factors have to be kept in mind. These include:
- The importance of community cohesion that facilitates easier collection.
- The model for the collection of user charges for ensuring the financial viability of a project.
- The availability of an anchor load or a fixed commercial load for ensuring a minimum collection of user charges.
- The ability of the electricity provided to positively impact the income levels of the recipient households.
- An effective long-term exit strategy for handing over the ownership of the microgrid to the community.
- A well-planned and comprehensive sustainability strategy in case of the arrival of the central grid.
- Capacity building within the community to oversee the safety and maintenance of the microgrid.
With no actionable frameworks in place and no clarity in electrification plans, the central grid reaching a site is seen as a threat. However, the community would benefit from cheaper power and the microgrid could act as a complement to the main grid. Should microgrids be installed in areas that then receive grid access, the local discoms could collaborate with the owners of solar plants to reach last-mile end-users. There needs to be a policy shift that enables local discoms to view the solar plant as a franchise, complementing their efforts to provide electricity to end-users. Making way for grid-integrated minigrids with backup and storage is the future. Discoms can look at solar energy providers as collaborators for last-mile voltage drops, helping them reach their goal of providing predictable energy supply to end-users, especially in areas that are traditionally hard to reach.
The success of a microgrid, therefore, depends on a web of policy interactions engaging all the stakeholders involved in the process, including financing, pricing, technology use and transfer, labour and land use, and community participation. For the successful take-off of a project and its long-term sustainability, the presence of the right ecosystem factors is a must. Policymakers as well as investors should take a more holistic approach to micorgrids, one that is based on a detailed understanding of the needs of the community and its dynamics, ensures the presence of a complete supply chain, and strengthens the local ecosystem for off-grid electrification activities.
Investors are still excited about the market and the potential of the approach, but success is perhaps the wrong word. We, at Mera Gao Power, have found solutions to many of the challenges, but unless we hit commercial benchmarks, it would be wrong to call them successes. Most investors in India do not seem to have an appetite for this market and most of the money coming into the segment, whether in India or Africa, is from Europe and the US.
Investors’ perception about microgrid models does not seem to be very bright. This is not due to the model, but the environment in which the companies operate. A microgrid company has to invest in the complete value chain, from power generation to distribution, which adds to the cost, and the payback is long and uncertain. Since this is a new sector, there are not many successful case studies.
The risks with off-grid models are:
- What will happen when grid access reaches the place where the microgrid has been set up. It may result in huge financial losses since the private off-grid companies have to pay for the transmission and distribution networks.
- Being non-compliant with any local rules/regulations that varies from place to place.
The positives would be:
- This is a more efficient and advanced model. A huge amount of money is spent on building infrastructure to transmit power from one place to another and it also leads to power losses and that adds to the cost. Off-grid power generation minimises transmission costs and losses.
- Strategically as well, the off-grid model is better.
What progress has your company made in the past year? How do you see the future of this segment and what are your plans for it?
Rohit Chandra and Sarraju Narasinga Rao
OMC added 41 new plants to its portfolio in early 2015. With a fleet of 60 plants across several districts in Uttar Pradesh, OMC is perfectly poised to become a “friendly neighbourhood utility” with minigrids, which would resemble the EB distribution network on a smaller scale, distributing electricity from the solar power plant to homes, shops, schools, hospitals, banks, microenterprises and workshops. Today, OMC has a cumulative solar photovoltaic capacity of 2.4 MW across eight districts in Uttar Pradesh. In addition to powering 116 telecom towers with a commensurate reduction in their diesel usage, OMC has approximately 7,500 community customers.
In the medium term, our initial aim is to roll out 250 plants. OMC will support about 25,000 rural enterprises and power 125,000 rural households, benefiting more than half a million people. We will generate up to 21 GWh of clean solar electricity per year from an installed capacity of 16 MWp and this is just the beginning.
In the past year, SELCO India has reached out to 22,000 households, providing energy solutions through affordable financing to remote, rural, tribal and urban poor geographies. We have been working on creating DRE models for education, health, traditional livelihood, and reached out to 500 educational institutes and other organisations.
SELCO is optimistic about the future of this sector and aims to go far beyond just energy for lighting to also provide energy applications in other sectors including health and education. Currently, SELCO is exploring vulnerable geographies such as the Northeast. The north-eastern states are lagging behind on many of the Human Development Index parameters. Some of these are directly related to the lack of energy access and a supportive ecosystem that is required for the implementation of these models. SELCO would like to establish a process to start solving some of these issues.
India could set an example in the adoption of low-carbon pathways towards the twin goals of development and climate change mitigation through decentralised renewable energy solutions that are specifically targeted towards the underserved population across all sectors of energy, infrastructure, health and education, and the fostering of enabling conditions for livelihood generation and a better standard of living.
Over the past year, we have demonstrated the value of our updated processes and technology. We have gathered technical and commercial data to back our claim that we have a model that can be scaled up with financing. We are also hopeful about closing a round of funding in 2017, which will help us in achieving some of this potential.
We have been working on the design, manufacture and sales of solar systems for rural households, and on solar pumps integrated with the drip irrigation system.