By Nikhil Jaisinghani, Co-founder, Mera Gao Power
The contemporary power sector is the world’s largest non-profit sector. In almost all cases, the costs to generate, transmit and distribute power, maintain equipment, provide customer service and collect revenue exceed the revenue generated. Governments finance both the shortfall plus the profit margins of the for-profit companies that do much of the work. As a percentage of the total cost to serve a customer, rural customers pay less than urban customers, pushing commercial discoms to target urban customers. This is particularly true in countries with significant rural and impoverished populations such as India and many of the countries in Sub-Saharan Africa.
Offgrid market in India
It would be an oversimplification to view rural India as homogenous. Demand for power, either through the grid or from private operators, varies by customer income, which itself is linked to how remote the customer’s community is. To better understand where the market for various levels of service lies, it is important to disaggregate rural India down into rural towns, villages and hamlets.
Rural towns typically have more than 1,000 households. Nearly all towns are connected to the national grid, though service is poor.
- Rural villages are typically 250 households or larger. The government’s recent grid expansion focus has been on villages with the goal of 100 per cent village electrification. This has still not been completed. However, electricity service to villages is worse than to towns, with power delivered only after 11 p.m. and before 5 a.m. and often not at all for weeks. To be considered electrified, only 10 per cent of village residents need to be connected to the grid.
- Rural hamlets are much smaller, more remote, poorer, and generally deprived of public services. The typical household income, as reported by customers to Mera Gao Power (MGP), is between Rs 16 and Rs 30 per person per day, depending on the season. Hamlets can be as small as 20 households but in rare cases are as large as a few hundred. Most hamlets that MGP has encountered have under-50 households. Hamlets are typically unelectrified in the region MGP works.
- The national grid has now reached every town and village in India. Service quality from the national grid varies, but with the distribution investments already made, it now makes sense for the government to invest further in improved operations and create incentives for discoms to provide more dependable power to rural customers.
Mini-grids and microgrids
Mini-grids and microgrids are two solutions that had previously been proposed for reaching rural hamlets in India. Mini-grids have an installed capacity of more than 10 kW while microgrids have an installed capacity of less than 10 kW.
Evidence to date, however, suggests that mini-grids cannot serve the off-grid market. Smart Power India (SPI), which has supported a number of mini-grid companies, has summarised its experience to date in a 2017 report, “Expanding Opportunities for Renewable Energy-Based Mini Grids in Rural India”. In this report, SPI found that mini-grids are commercially viable when there are 800 household customers along with an anchor commercial customer to be served. As these companies are unsubsidised, their fees are also high for customers, many of whom cannot afford even subsidised grid power. These necessary qualities of a mini-grid customer base do not match the off-grid market in India. The high tariffs and minimum customer requirements make them more relevant as supplemental sources of power in already electrified, higher-income towns.
Microgrids are tailored to the particular needs of rural hamlets, often pairing appropriate power packages with affordable tariffs. Like the early years of micro finance, commercial microgrid operations will require patient financing, entrepreneurial problem solving, and advocacy. The main challenges that microgrid companies face are related to facilitating financing, strengthening microgrid technology and ensuring efficient rural operations.
Financing challenges: Capital comes at a cost, unless that capital is in the form of public subsidies. Commercial bank financing of a coal-based power plant is not an art but a science. Project developers must have an EPC contractor, an O&M contractor, identified technology, an input supply agreement, a power purchase agreement, completed EIA and financial projections. Coal-based power plants’ unit economics are not great and often have a 15-year payback period. But with the above list of items checked off, a commercial bank will finance it. Why? Because coal-based power projects have been built for multiple decades, have known lifetimes, and have shown their ability to generate returns and repay loans over a 30-year operating period. It is the long history of coal-based power plants that allows for lower interest rates and long tenor loans.
Microgrids and mini-grids do not have this track record. There are, therefore, three options available to these companies – avail of subsidies, raise sufficient equity to finance multiple decades of experience to the point where the commercial banks will be comfortable financing, and working on a completely new business model with the potential to repay capital investments over a much shorter period of time.
Public financing is the most viable path forward for innovative rural infrastructure companies such as mini and microgrids. Unfortunately, there is very little public financing of such grids anywhere in the world currently. Facilitating subsidies is something the government can do but not something enterprises can control.
The long game is the second option. This could result in commercial banks having sufficient experience by which to finance future projects or it could result in the government finally deciding to make subsidies available to trusted partners. Either way, a decade of equity is likely required. Investors must be very patient and company promoters must be effective fund-raisers. Further, the decade of experience begins when the finances are strong and thus project fundamentals should be very strong from very early on.
The third option alleviates the need for subsidies or a decade of experience; however, it requires a business model that turns the power sector upside down. While the power sector relies on massive public investment, this option would place no financial burden on the public sector, freeing up capital for other uses such as healthcare and education while not compromising on electrification goals. Clearly, if this were easy, it would have been done already. To succeed, these models would require risk-tolerant investors willing to spend money on business model development (not just infrastructure costs) and entrepreneurs with quirky, innovative ideas.
Technology strengthening: Microgrid technology must be low cost, able to provide promised services, withstand foggy winter conditions, and continue operating maintenance free for months at a time. By achieving a strong technology design, rural operations are simplified and service delivery to customers is improved, ensuring higher revenue generation.
Rural operations: As companies grow, more oversight is delegated to locally hired and trained staff. This staff must be able to identify problems before they escalate and be able to solve them quickly and effectively. The ability of staff to take on these tasks determines how successful a company will be in operating at scale. To be successful, microgrid companies must demonstrate their ability to develop simple, clear and effective operational processes, properly train staff on these processes, provide staff at various positions with tools to help them with their jobs, and put in place checks and oversight mechanisms for construction, maintenance, collection, customer service and branch-level management.
Current status
Unfortunately, few of the necessary support structures exist for microgrids today. MGP is one of the largest microgrid operators in the world and yet has struggled with financing since its inception. Without patient equity, companies such as MGP cannot invest in technological stress testing and design strengthening. Further, hiring top-notch talent to oversee complex operations cannot happen without equity for putting towards talent acquisition and salaries. Despite this, microgrid companies have developed fairly strong technologies, sometimes limited more by component suppliers than by microgrid design. LIB Solar has identified high-quality component manufacturers in foreign markets to import equipment into Liberia for its installations. Boond Engineering was successful in raising equity to finance an R&D team. In aggregate, the technical designs of microgrids being deployed appear robust enough for rapid scaling.
Rural operational expertise is perhaps the most critical requirement for commercial operations. MGP and LIB Solar have deployed micro finance type collection mechanisms to generate revenue and both train and retain electricians on staff to respond to technical issues in the field. Many microgrid companies must assemble their own MIS systems to support their field teams and simplify job responsibilities. LIB Solar and MGP have done this on small budgets, utilising founder time while Husk Power Systems funded its MIS system development through a grant. Yet, these companies have yet to prove their approach to operations can work at scale.
Indeed, most companies involved in the mini and microgrid space do so as project developers, building and transferring assets to the ultimate owners. Success for these companies comes by transferring the operational responsibilities to others, often the Indian government.
The path forward
The microgrid space has clear potential and a massive unserved, uncompetitive market. The lack of patient financing continues to hinder the sector. While there has been some project financing to support new grid expansion, there has been a complete lack of funding for process development. When they have invested, investors have failed to invest in the businesses, choosing instead to invest in infrastructure.
The microgrid segment needs a higher caliber cadre of investors, who see the long-term vision and promise and have the capital to support companies to achieve the potential. With real funding, high-quality talent can be directed towards solving these problems, unleashing growth and extending life-changing service to the millions of people living in off-grid hamlets in India today.