Scale and Sustainability: Toward a Public-Private Paradigm in Powering India

"Mini-grids powered by decentralised renewable energy (DRE), and operated by distributed energy service companies (DESCOs), which provide a utility-like service on a for-profit basis, can offer a long-term solution for the underserved, which can expand rapidly and easily along with demand. DRE-powered mini-grids are quickly deployed and reasonably priced. Furthermore, if done in the right way, such mini-grids can be integrated with the main grid at a later date. Equally significant, DRE power is environmentally cleaner than coal – or diesel-generated alternatives."

Executive Summary

Current plans to provide “Power for All” in India via the country’s utility or distribution companies (known as discoms), through main-grid extension and utility-scale generation projects, are largely polluting, slow to build, and expensive. The central utility grid is 70% coal-powered, and the proportion of fossil fuels is still expected to be greater than 50% of the energy mix in 2040, despite high targets for renewable-energy generation capacity and heavy investment in it. 

Grid power projects and extension, such as laying high-voltage transmission lines, take years from conception to completion, incurring enormous time-linked opportunity costs for underserved communities, in addition to the already extremely high capital costs of such infrastructure. However, the weakest link in the power value chain is distribution. This challenge 

is ultimately political and economic in nature, since with few exceptions discoms are chronic loss-makers and perpetually stressed financially. Providing power for all under the existing paradigm will therefore be a drawn-out and hugely expensive enterprise, despite the successes of existing government electrification programmes.

Mini-grids powered by decentralised renewable energy (DRE), and operated by distributed energy service companies (DESCOs), which provide a utility-like service on a for-pro t basis, can offer a long-term, solution for the underserved, which can expand rapidly and easily along with demand. DRE-powered mini-grids are quickly deployed and reasonably priced. Furthermore, if done in the right way, such mini-grids can be integrated with the main grid at a later date. Equally significant, DRE power is environmentally cleaner than coal – or diesel-generated alternatives. 

Mini-grids and DESCO business models, particularly those based on solar photovoltaic (PV) cells with battery storage, have largely met with success in eld tests, providing both reliable and significantly cleaner power than the hundreds of thousands of diesel generators that provide electricity across many rural villages. DESCOs give households a “grid experience” unmatched by localised solar home systems (SHS), in addition to providing household and commercial customers with economic opportunities for energy-intensive appliance upgrades. 

DESCO-operated mini-grids are not yet viable on a purely commercial basis, due to high up-front capital expenditures, low levels of initial effective demand, and high levels of uncertainty among investors as to the sector’s long-term viability. Chief among the risks for mini-grid operators and investors in India is the arrival of the central utility grid to a mini-grid-serviced area – often via low-voltage distribution lines, at high cost and incurring significant network losses. Given the extremely low discom tariffs, these grid extensions – even though they often provide unpredictable and insu fficient power – are highly disruptive to DESCO project economics, despite clear customer preferences for more reliable services. 

Investors see other risks in the mini-grid model, sometimes erroneously. REEEP’s investigations revealed significant concerns connected to customer behaviour, particularly theft and non-payment, but these issues have largely been overcome by operators. 

Electrical power is a political issue in India, as it is in most countries. Power is subsidised, and likely will be for a great many years to come. There have been encouraging signs in 2016 and 2017 of government interest in DRE mini-grids, both at state level, with the ground-breaking release of the first state mini-grid policy in Uttar Pradesh, and at the central government level, with movement towards a national mini-grid policy. Indeed, just prior to publication of this report the Modi Government announced a plan to electrify every household in India by 2019. 

The $2.5b plan, known as Saubhagya, is both ambitious and risky, dependent as it is upon a blend of public and private financing, but relying largely on public or quasi-public institutions to deploy and maintain. It will also likely test the limits of the government in overcoming structural economic and physical barriers, as this report will show. But current incentive schemes are sub-optimal, the procedures for securing them are unclear and lack transparency, and it is unknown whether they will be available at the scale required for mini-grids to make a significant impact on the “Power for All” challenge. 

Ultimately, the sector will require long-term cooperation between the public and private sectors in order to render DESCO-model mini-grid deployments viable at scale and attract sufficient amounts of domestic and international investment. Such cooperation is sensible and to be expected, given the characteristics of the rural electrification space. 

An important consideration for securing funding is that international development cooperation agencies, development financing institutions (DFIs) and multilateral development banks (MDBs) have expressed interest in supporting climate-smart energy access in India. DRE mini-grids offer precisely this kind of power. DFIs and MDBs could contribute actively and effectively to the development of a collaborative public-private approach via targeted investments in projects and financial instruments. 

Such investments could include pilot projects on protocols for grid arrival and interactivity; innovative financial instruments to nationally standardise and securitise infrastructure-class distribution assets; targeted support for off-take and end-users; and insurance mechanisms to cover asset transfers, and improved feed-in tariffs and service fees to ensure long-term revenue security, depending on the model. 

The importance of such investments in India is immense, given the role of energy access in economic development and well- being. The value for the climate would also be considerable: by REEEP estimates, a long-term (15-year) electrification of 15,500 “mini-grid ready” villages in the states of Bihar and Uttar Pradesh alone would meet the electricity needs of 36.5 million people and mitigate over 122 million tonnes of carbon dioxide equivalent (CO2e) emissions, while reducing local particulate-matter pollution from diesel and kerosene combustion. This has important implications for climate-linked DFIs as a potential source of funding for DRE mini-grids.

 

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Year: 

2017

Author: 

John Tkacik, James Smith