Missing The Sunshine – Mini Grids in India

Even as the solar story develops in India, there is a part of the sector that has quietly been working and making an impact in its own way. Yes, Mini Grids and even micro grids, in the limited opportunities they have had in the country, have made a strong case for themselves. Serving areas that usually had no grid or very poor central grid access, these are the areas that have been a playground for mini and micro grids. Working in terrain that is almost invariably inhospitable, in conditions that can be extreme, and serving relatively small markets, the mini grid case for India offers some great learnings. Be it on the impact of connectivity, the buying ability of consumers and willingness to pay for quality energy access, besides dependable power to village level enterprises, the companies that have worked in this space need to be heard too.

Three recurring points made by multiple MGO’s (Mini Grid operators) stood out. They provide much more dependable power than the central grid in areas they serve, their T&D (Transmission and distribution) losses are way lower, and of course, they generate some much needed employment in these far flung areas.”

As always, for supplying something as essential as energy, the mini-grids are up against the government. The official viewpoint remains connecting everyone to the central grid. The logic being that central grid power is cheaper for end consumers, making a case for equal access as a right. That perhaps explains why even as global DRE (decentralized renewable energy systems, as most mini or micro grids come under) systems have experienced a three-fold increase from under 2 GW in 2008 to over 6.5 GW in 2017, the cumulative achievement of off-grid solar systems under government programmes in India accounted to just 762 MW, out of this, 104 MWp capacity of off-grid solar PV systems was added in 2017-18. Mini grids would be a further subset of this. Common consensus seems to indicate about 350 private sector mini-grids (above 10 kW capacity) operating in the country. Most of the mini-grids installed by the private sector have been in Uttar Pradesh and Bihar. The story in India can be much better. While India officially has a target of 24X7 power for all by 2022, (with power access for all pretty much achieved in 2019), the road to 24X7 power is very rocky.

Saurabh Marda, Co-founder and Managing Director, Freyr Energy has a very clear view on this. “Although the official rural electrification rates as per census data is quite high (90% +), the definition of electrification does not capture aspects like reliability and quality. Instead a village is deemed electrified if a minimum of 10% of the households per village have access to government provided metered wiring. To achieve 100% electrification, the government and non-government entities will have to work together. Under its two flagship energy access schemes called the Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY) and SAUBHAGYA, the government targeted 100 per cent electrification. Under DDUGJY-RE, Ministry of Power has sanctioned 921 projects to electrify 1,21,225 un-electrified villages, intensive electrification of 5,92,979 partially electrified villages and provide free electricity connections to 397.45 lakh BPL rural households.” He, along with other industry players, make a strong case for better targeting of energy subsidies to this sector too, rather than a one size fits all approach has been seen for fossil fuel subsidies like Kerosene.

The high cost argument against mini-grids doesn’t impress most players. Besides the obvious issue with state discoms and their financial mess, which slows down investments needed to make grid power reach quality levels, there are other costs and benefits with mini-grids that stand ignored.

Ramnath Vaidyanathan, CEO, WiSH Energy says that “Extending the distribution grid to rural areas will become costly, especially since the population is sparse and geographically distributed. It requires a minimum investment of Rs 30 lakh per kilometre (km) of line added. In addition, operations and maintenance costs need to be factored in. Thus, if the nearest distribution point to a rural area is, say, 5 km away, we are looking at Rs 1.5 crore just to bring the main grid power to a single point at the village, besides the cost of connecting to individual households.

Unless sufficient revenue is generated to break even, there is a high chance that the government may lose significant amounts of money. Aside from the financial burden, the quality of power is also affected when the main grid is extended. Power losses go up with increasing distance of transmission and distribution, and unavailability of power or “blackouts” can happen frequently. From a logistical perspective as well, extending the main grid into remote areas poses several challenges such as availability of large tracts of non-agricultural land over which the towers and lines can pass.

The government’s involvement in microgrids should be in the form of policies, subsidies, financing schemes, tariffs and regulations.”

While making a strong footing on the support of mini grids, Evan Mertens, Co-Founder, Rural Spark, a company with global operations in the space, concurs. “Globally governments and academics have realised that the centralized energy networks are outdated and do not match the current and future requirements. The focus of most global governments is now on growing a smarter and more locally supported energy network in which (sustainable) supply, storage and demand are matched on a local level.

While India has the opportunity to leap frog the outdated centralized solution, the government irresponsibly has not shown any intention to do so.”

Thus, even as players complain about a lack of clear policy for mini-grids, with the draft policy of 2016 the only document indicating government thinking on the issue, how mini-grids could save on massive transmission costs of providing power to all through the central grid is ignored.

Ramnath Vaidyanathan says that “The main challenge is a lack of clarity with regard to microgrid policies at the central and state level. For instance, under the Saubhagya scheme, utilities are encouraged to take the grid to the last mile, while at the same time, there is a push for decentralised distributed generation and microgrids for village electrification. If a project developer invests in a microgrid to provide electricity to a community disconnected from the grid, what happens when the larger grid eventually reaches that community? This has discouraged many companies from pursuing microgrids in remote areas as they are unsure of the stability of their investment.”

It’s an issue that roils virtually every developer we spoke to. Kunal Amitabh, Vice-President: Social Energy Access, Boond Engineering & Development (P) Ltd stressed on the same too, and pointed out that not only is policy clarity important, it is the precursor to solve other key requirements for the sector, be it access to finance, or a defined commitment like they have done for overall power. One reason, why most mini-grids are concentrated in Bihar and Uttar Pradesh, two of the few states to actually have guidelines for mini-grids.

On top of the cloudy policy signals is perhaps the biggest bugbear for the sectori.e. financing. Be it for developers or the ESCO’s as they are called, and right down to the end consumer in a village, mini-grids have a serious financing challenge. PAYG, or Pay as You Go, a successful model in Africa where consumers prepay through mobiles, has still not caught up in India, with low smartphone penetration and even lower internet access in rural areas. Even after all the noises about crumbling prices and zooming smartphone sales.

On the business side, as Vaidyanathan adds, “Aside from the regulatory challenges, the financial ecosystem for funding hybrid renewable projects and microgrids is still fairly nascent. Funding happens on a case-to-case basis, and there are not too many available options at this stage. However, we can expect this to change rapidly with the development of well-defined policies that will give confidence to financiers and investors on returns from such projects. The falling costs of renewable energy will also continue to influence greater adoption.”

This view finds ready support from Kunal Amitabh, who lists down why financing matters. “Raising patient long term social investment capital for the projects: it is important to find sources of funds for power plant, Micro Grid and some of the base loads together for viability of the plant from the very beginning. Renewable energy enterprises should be able to benefit from the same provisions the government has made for Small and Micro Enterprises (SMEs). This includes being eligible for the Credit Guarantee Scheme, under which SMEs can avail an unsecured loan from any nationalized bank.The real big challenge is to find capital for Micro enterprises, even for very profitable investments like the replacement of diesel engines with electric motors. Most of the villagers don’t have avenues to find capital.”

Key Highlights of the Draft Mini Grid Policy

The draft national policy has indicated a target to achieve deployment of at least 10,000 RE based micro and mini grid projects across the country with a minimum installed RE capacity of 500 MW in next 5 years (taking average size as 50 kW). Further, the ministry highlights how the Electricity Act, 2003 (Eighth provision of Section 14) exempts ESCOs (Energy Service Companies) from the mandatory licensing requirement for distribution of electricity in notified rural areas and eligible areas as may be defined under the relevant policy of the State. Because of the absence of license, State Electricity Regulatory Commission (SERC) do not have mandate to govern the tariff, and so private ESCOs can charge the consumers on a mutually-agreed term. In the Pay-as-you-go model for household services, ESCOs may define an upper bound on the amount of electricity that one household is allowed to contract. This model is preferred by ESCOs as it instills discipline, offers considerable flexibility, and provides an insight to ESCOs on cash flows from households. Post-paid model comes with concerns on cost of meters and potential high risk of payment default, and hence currently less common among ESCOs. Power or Fixed tariff depends on the anticipated power use, which in turn determines the maximum power made available for households (on Watt basis). In such a mechanism, households are offered a fixed package for powering combinations of appliances such as a certain number of lights, a mobile char ging point, a fan, TV etc. The householdlevel consumption may be regulated/ limited through instruments such as timer, load limiter etc. Every package has a fixed tariff and is collected at regular intervals (monthly or weekly). Such a tariff mechanism is less capital and operation intensive (with no meters and resultant no metering / billing requirements), easy to control and offers multiple advantages – limits peak consumption, avoids overloading and helps ensures access to electricity for all households. Appliance-level energy efficiency (Ex: use of LEDs, efficient fans etc.) is generally built in to packages itself by the ESCOs thus optimizing the system size and improving the price competitiveness. The controlled nature of power tariff models also brings certainty on demand, allows for easy matching with supply and offers revenue certainty. Thus, power-based or take-or-pay tariff models are considered better for high fixed-cost solutions such as PV based mini grids, than energy-based tariff models. Such models however, may limit the access to high capacity usage and offer less flexibility on consumption. While some micro grids/mini grids may start smaller but the norm under this policy is 200 W per household if demanded. In case a household wants less, it is their choice and it is up to the mini grid to offer higher than 200W.

Adding his bit to the financing challenge, Evan Mertens adds that “During the five years we have been active in India we have seen a decrease of funding available for distributed energy solutions. Smart local energy solutions are regarded as temporary and CSR initiatives instead of a key spill towards the energy network of the future.”

Thanks to the fact that mini-grids till now have been seen more as a last resort, enough data on their actual success on the ground is still missing. This was confirmed by Saurabh Marda too. “A variety of stakeholders engage with mini grid initiatives. These include governments (state and central), multinational companies, start-ups, non-governmental organizations, large philanthropic organizations, corporate social responsibility department of companies. In India, only a couple of organizations have gone beyond the pilot stage and hence it is difficult to define the success rate of microgrids. Although some of the pilot models work in principle, it still seems to be challenging to create, scale and replicate projects that have a positive social impact and that are economically viable in the long term.

Challenges include transportation costs, access to remote areas, financial viability (due to small size and scale), strategic and operational measures, collections, security and safety are some of the issues that hamper any microgrid project. Most solar microgrids supply energy to street lights and mobile charging (to name a few) but does not have the capacity to handle the aspirational needs of the villagers. In some cases, after a microgrid has been set-up, villages begin receiving free grid power from utilities.”

Of course, private sector involvement has only meant greater efficiency in meeting these challenges. Kunal Amitabh adds that “Red tapism, Sustainability of business models is impacted by market distortions, such as kerosene subsidies or any other such subsidies, which need to be adequately considered when promoting off-grid renewable energy.”

Of course, all of these issues ignore the biggest problem with mini-grids. Their size. The government is always looking at a one size fits all solution, something that necessarily entails scale. A pocket powered by a mini-grid somewhere in a thinly populated district, is just the sort of impact that is easy to ignore. . The government continues to look for large projects to solve problems, both for their visibility and impact. That goes against the very basis of mini-grids.

Vaidyanathan agrees and said that, “Over the last decade, the regulatory focus in India has been on large, utility-scale renewable energy and capacity addition.” However he is hopeful that based on their interactions with the MNRE, a better policy and system will be in place within the next two years.

He further suggests that “microgrids hold the key to enabling rural India with sustainable and reliable power. Islandised microgrids are a prevalent and proven model across the world. For rural India, these are ideal, as communities tend to be spread across large areas, and therefore localized systems are likely to work better. In addition, solar power mini and microgrids are easy to maintain and can be scaled up to cover a larger population. With some investment in storage capacity, these can be made more sustainable, and provide power to rural India.” (For even smaller grids, or Nano Grids, don’t miss our interview with Dr. Sebastian Groh, of SOLShare)

However, Evan Mertens is not so hopeful, for now and said that, “Only when all stakeholders realise that a smarter more local energy solution is required we expect the market for mini/micro grids to pick up. For now Rural Spark sees most demand for its solutions in Sub-Sahara countries in Africa.”

Saurabh Marda, leans on data to make his own point. “According to GlobalData, the global microgrids market registered a market value of $15bn in 2017 and is projected to reach $30bn in 2022. In 2017, Americas represented the largest market for microgrids; registering a value of $9bn. The region is expected to continue leading the market, due to the early adoption of microgrid technology in the US and its continued application for grid support. The Asia-Pacific is expected to grow quickest with a CAGR of 18% during the forecast period. The demand for microgrids within the region stems from the need to alleviate basic conditions and support the strong demand for electricity. China and India are two significant Asian markets by value, although other countries such as Japan, Australia, Indonesia, and other Island nations are promoting microgrids.

In India, there is still a lot of work to be done but with the government projecting that all villages are electrified, there is a huge gap between work that needs to be done, work that is being done, and work that is not even being planned.”

So what’s the business model that has worked, so far? Ramnath Vaidyanathan, clarifies that “Most of the microgrid projects executed by us have been for captive consumption and on a CAPEX basis i.e. the customer pays for and owns the microgrid in entirety. Where the customer does not want to own the asset, we partner with asset management companies who purchase the technology from us and sell power to the customer at a decided tariff. Currently, microgrids cannot replace the grid in India in terms of costs but with the rapidly increasing cost of grid power and the strain on the government to continue subsidising the grid, microgrids will become the preferred alternative in the years to come.”

On the flip side, Rural Spark, according to Evan Mertens, “gives the control and ownership to the users, making them independent. Moreover, our solutions are modular and allow for an entrepreneur to make an additional income, which justifies the investment. The customers can pay the product on a weekly basis due to the integrated pay as you go solution”.

Saurabh Marda points out that “Freyr is not in the private sector of microgrids where we collect money from individuals, however, we setup microgrids under government contract or tendersunder the BOOT model (Build, Own, Operate and Transfer) where our responsibility is to collect a nominal amount per household on an annualized basis.

Yes, the unit rate of electricity is higher than grid power but this is a reliable source of power versus the grid power that is cheaper but is available intermittently.”

Boond’s Kunal Amitabh rounds off the many models with their “prepaid set up and smart metering technology. Interestingly there isn’t resistance as despite operating in grid connected areas, our microgrids have customers who are willing to pay for our quality and reliability. Also if you compare monthly electricity billing, ours are less but definitely if you compare it with Rs/kWh basis it is higherthan the main grid. Village level enterprises, who usually are forced to invest in diesel gensets to cover for erratic grid power hold particularly high potential”.

An unexpected fallout of the scenario for mini grids is the fact that a significant number of existing mini-grids (especially in Uttar Pradesh) rely on telecom towers to serve as their base load customers. While providing consistent demand and financial support, there is always the risk that this model will eventually end up diverting the mini-grid away from its original mandate to provide energy access to the truly deprived. Some experts also indicate that where subsidies are involved, it is effectively subsidizing private sector telecom firms.

So what do our experts foresee in the future? Vaidyanathan sees a huge potential in the market. “Currently, there are approximately 300 million people or approximately 60 million households that do not have access to electricity. A single household requires a minimum of approximately 0.5-1 kW, which gives us a basic requirement of 60,000 MW that can be provided by microgrids. This is before we even take into account existing domestic and industrial consumers who will voluntarily opt out of the grid and use a captive microgrid to get cheaper and more reliable power. At a very conservative cost of Rs 4-5 crore per MW, we are looking at an immediate market potential of at least Rs 300,000 crore.”

However, Saurabh Marda has a different take on the market and said that, “Reports claim that India has allocated $740 million (Rs 5000 crore) for village electrification in its 2017-18 budget. It was an increase by 8.6 percent to $835 million for Ministry of New and Renewable Energy (MNRE). India has set a target to build at least 10,000 microgrids and mini-grids using renewable technology across the country by 2021 with a total of 500 MW capacity under its National Microgrid Policy. Presently, most funding is from CSR initiatives, foundations and private sector. For example, in September 2018, the Rockefeller Foundation announced it will invest $20 million to expand energy access in rural India over the next three years.” Experts outside the sector concur, pointing out to the opportunities that will emerge from demand and customer aggregation, as solar power reaches grid parity in more and more areas. Even at a higher cost of minigrids, the comparison with captive power generation makes a strong case, especially after taking into account the cutback on fuel imports it could support. As India slips up on its broader solar targets, the industry will be hoping that the government will finally get around to seeing the potential here too, and give them the sort of support they deserve.