Thursday, September 8, 2011

Poor Rural Energy access & delivery inspite 'High Need' and 'High Willingness to Pay'

The term rural electrification conjures up a variety of images - from Shah Rukh Khan dramatically generating hydro-electricity in the Bollywood film ‘Swades’ to the more mundane government schemes extending distribution infrastructure to far flung villages in India. But for all the efforts invested in this idea and the buzz which it generates, it is sobering that there has been no substantial change in the status-quo of a typical Indian village chosen at random.

The remoteness and scattered topology of many villages makes electification via grid accessibility a non-viable option for them. Even in cases where the government has been able to extend  the national grid, difficulties with O&M, billing, collection, high Aggregate Technical and Commercial (AT&C) losses and poorly targeted subsidies causes a net loss to utilities which is a barrier to their ability to sustainably and continuously serve the rural areas. The poor quality of supply and services in addition to misleading political promises tends to further reduce people’s participation in the process resulting in abuse of the infrastructure. This failed last mile distribution has limited the benefits of private distributed generation (biomass, solar, hydro, wind etc.) to villagers, since utilities do not have financial incentives to serve the rural feeders with high costing power.  Ironically lower affordability by rural users is the most cited concern, despite the fact that they pay much more for energy usage than their urban counterparts.

A low-income rural household without electricity connection consumes on average 2-3 litres of kerosene per month for lighting, the cost of which escalates further if kerosene cannot be procured via the public distribution system. This scenario has given rise to a large market for local Diesel Genset (DG) operators, with usually 2 of them serving around 300 households. They supply 5 hours of power per day for a single 8W CFL bulb per household at a bartered rate of 2 litres of kerosene or Rs. 50 per month. Each household therefore pays Rs. 26 per month (when paid in terms of 2 litres public distribution system sold kerosene), equivalent to Rs. 22 per unit of electricity (kWh), which is at-least five times the rate paid by a grid connected user. The DG operator’s running expense comes out to be Rs. 20 per consumer per month for which he gets Rs. 50. DG distribution, other than its cost economics and environmental effects, is a good delivery model on account of its portability, easy access to fuel, reliable supply, flexible payment options and local ownership.

A similar market has evolved for rent-based diesel operated irrigation pumps, in order to meet the needs of the off-grid farmers. It costs a farmer Rs.60 per hour to rent a DG pump set, equivalent to Rs. 17 per kWh, with irrigation accounting to almost 20 – 50% of his overall production cost. An alternative reliable and lower cost power supply would definitely provide much needed relief. However there are other supply and demand constraints operating in parallel which would need to be overcome in order  to allow farmers to avail sizable benefits from lower cost electricity such as:
1.      poor price discovery due to absence of organized market linkages such as local mandi, warehouse and cold storage facilities
2.      lack of flexible and low-rate financing options due to absence of organized local financial institutions such as easy loans against harvest during low market rates

In a limited or no power scenario, the rural producers lose out on value of having local produce based industries. The rural industrial landscape thereby remains limited to consumption based industries like small workshops, saw mills, and a few small-scale agro mills (flour, dehusking and oil expelling), incurring high cost of DG energy from Rs. 11-13 per kWh. A missing sizeable base load because of low economic activities and highly volatile and seasonal industries (including agriculture) creates challenges in setting and viably running a decentralized power plant. If technology and strategy innovation could match power demands at any point of time, the rural energy sector provides a sizeable opportunity for village level generation and distribution. An integrated planning (potentially with longer investment horizon) would be needed to address rural energy interlinkage with other infrastructural and governance domains to meet its very objective to improve socio-economic conditions of villages.

There is ongoing debate, if competition is good for the power sector -whether electricity is a ‘merit good’ (and hence in need of more government ownership) or a ‘commodity’ (which should be subject to a more open-market mechanism). In midst of this, delicensing of generation and distribution for rural areas, multiple distribution licensees and open access under ‘Electricity Act 2003’ and complementary generation to aid Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) under new Decentralized Distributed Generation (DDG) guidelines are encouraging. However, full potential benefits of these schemes for rural areas have remained untapped because of varied interpretations by different state nodal agencies and utilities. It is unclear ‘if’ and ‘how’ a private generator can use existing grid and metering infrastructure to meet additional demands of rural consumers under open access through differential tariff, when it’s a known fact that utility cannot meet these requirements and customers are already incurring higher cost on diesel. With grid continuing to be the link for longer viability of rural DDGs, good Public Private Partnership (PPP) remains the key to evolve a sustaining rural energy model.

The last few years have seen a rush of new entrants into the rural energy sector with solutions ranging from energy efficiency products (such as energy efficient cooking stoves, solar lamps, treadle irrigation pumps, hand cranked torches etc) to larger scale generation technologies (comprising of biomass gasification, solar, wind and hydro) and services-based models (like the rural feeder input franchisees for the state utility boards). Each of these fragmented supply chains is facing steep barriers in terms of time, money and effort to understand rural energy needs for correct demand estimation and extending independent distribution and servicing channels.

There is a need to integrate these fragmented energy supply chains to take advantage of  the economies of scale and scope in order to increase the reliability and affordability of solutions. While core competencies in providing technology solutions will always remain, it is equally important to find appropriate target recipient through bottom up analysis. With technology oriented mindset, the quality of measurements and surveys required for selecting and sizing an appropriate solution to match rural needs, tend to get compromised, risking project viability and people’s participation.

There seems a need to put efforts in two parallel directions to strengthen existing energy supply chains. First a village level Energy Enterprise that will offer one-stop services to meet various rural energy needs, a model with ownership that could be replicated for effective end mile delivery in sync with existing energy players. Secondly, a Backend that could provide specialized skills and share the fixed cost of these local Energy Enterprises. Rural Energy Services Company (RESCO) is one such proposed framework that aims to become a scalable franchisee service-provider model that responds to the energy preferences of its rural clients to enhance their socio-economic status.

The above note was prepared by the author and his colleagues while working at IFMR Trust and his stay in Bihar's Araria district for 3 months (Jun-Sep 2009) to study closely the gaps in rural electrification to be able to support raise a scalable model. The model proposed by the author was named RESCO. It has no copyrights, and interested parties are invited to take up learning and put to implementation.

Post by: Rahul Bagdia @ pManifold


  1. These are higher than solar power costs. What have you observed with respect to penetration of power generation through solar. Solar can still meet the 5 hours of power supply which diesel is providing them today

  2. Yes, you are right. But in diesel case they have to pay piece-meal i.e some Rs. 30 per month for 1x8W CFL bulb for 4-5 hours in the evening and that is affordable to them.

    Solar capex, proper after-service and right delivery model still remain the issues. If Solar could give them:

    1. a robust product (in generation units on-demand) like Diesel Genset
    2. at the similar price range (or even with right financial product with DG equivalent downpayment and EMIs same as Opex on diesel),

    then there is a big market awaiting.

    Rahul Bagdia @ pManifold (Blog author)