Proposed Rural Energy Services Company (RESCO) Model to scale-up Rural Energy

Earlier blog 'Poor Rural Energy access & delivery inspite 'High Need' and 'High Willingness to Pay' discussed the key issues in raising a scalable delivery model for Rural Energy/Electricity. This blog propose a potential model to attend to this cause. All discussions on the model are invited with broad objective to engage with right stakeholders to pilot a workable solution. The growing interest in Rural Franchisees could provide such an opportunity. 

A Rural Energy Services Company (RESCO) model is an exploratory institutional framework which will manage risks via a systematic analysis of information from various stakeholders in order to fulfill the energy needs of the rural consumers and the requirements of financial viability for all the participants in the energy supply chain.  This model complements the basic functionalities of energy services companies (that currently operate in either government or private sectors) with elements which are essential to the success of integrated last mile energy delivery to rural localities. Some of the features of the RESCO model, its functions and benefits to the rural energy economy are as follows:

Proposed Rural Energy Services Co. (RESCO) model (Source: pManifold & IFMR Trust)

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.

Leveraging Customer Perspective for a stronger Onsite, Local Due-Diligence in Pre-Bid phase

Consumer centricity has returned or finding its way into most of the businesses in emerging economy like India. Consumer 'needs' and 'willingness to pay' for good quality products and services is driving a whole new era of competition. It first started in luxury industry with high economy class consumers, where there was established 'willingness to pay' for better services and then slowly start penetrating into other sectors and also lower economic classes and raising their 'aspirations'. These phenomenon is creating a whole new market and driving innovations from bottom-to-top. The aviation, telecom (mobile and internet) and various other industries has seen this Consumer cycle. India's Power Distribution sector has begin its journey of enabling 'diversity' and adding more 'choices' to its electricity customers. Like other sectors, the cycle first began with high volume or developed consumers through 'top-down' innovation like 'Open Access' and now we have started hearing of 'bottom-up' innovation like 'Pre-paid metering', 'Net-metering' and 'Distributed Generation based Distributed Franchisee (DGBDF)'.

The to-be leaders in the Power Distribution space will soon have to learn this change that is sweeping the country and include the end-consumers into the designing and co-creation of solutions and soon also accept equally the urban and rural consumer mix to drive bottom-top innovation. The new saga is to forgo or overcome references like BPL, APL, agri (or rural), tariff subsidies and free power, but start innovating scalable ventures to meet the needs and challenge. Grameen Micro Financing model first innovated at Bangladesh is now widely accepted and MFI is a very big and fast growing industry with strong developing linkages to the main streamline capital industry through various derivatives.

Remember this all begins with a 3 letter word - KYC i.e. 'Know Your Customer'. Its an important phase after you are done with Market Analysis through KYM i.e. 'Know Your Markets'. KYC should be a pre-cursor for high confidence KYI i.e. 'Know Your Investments'.

Our recent discussions with prospective bidders for Distribution Franchisee tenders in 9 districts of Madhya Pradesh (MP) was full of encouragement for our recently conducted 'Customer Satisfaction study for Electric Utilities' in those regions.

• Most companies easily perceived our work's importance to operating  Distribution Franchisee post the bid win for regular (internal & external) benchmarking of Customer Satisfaction to evaluate and better prioritize their system investments and efforts.
• Almost all experienced companies in running Distribution extended the applicability of our Customer Satisfaction research also to the pre-bidding phase. They found it will add an important perspective to their already on-ground technical due-diligence and help them validate their assumptions on Capex and Opex plans for bidding. 

Rural Franchisees - Could they become pilot ground to raise next level of Distribution services?

A recent publication from Prayas on 'Rajiv Gandhi Rural Electrification Program - Urgent need for mid-course correction' gave a very good overview of RGGVY program, its features and progress. Some key observations made:

1. Total 1.1 lakhs Rural Franchisees in India (detailed distribution given below)
• This covers only 19% of total villages in the country including both the RGGVY and non-RGGVY villages 
• Only 38% RGGVY villages are covered under Franchisees, when all are supposed to have mandatory Rural Franchisees
• 95% of total Rural Franchisees are Revenue Collection based Franchisees
• Bihar, Gujarat (91%), Haryana (91%), Karnataka (73%), Nagaland, UP and West Bengal have above national average (i.e. 19%) Rural Franchisees in RGGVY villages
  
2. Rs. 26000 cr. already spent in last 6 years since 2005 and estimated another same amount to be spent (totaling to Rs. 52000 cr.) for coverage of RGGVY original targets of 100% village electrification and 2.34 cr. rural BPL household connections.
• Since 2005, 96562 villages have been electrified raising the level of ‘village electrification ’ from 74% to 91%. (Total villages in India is ~6 lacs, out of which 1.25 lacs did not have access to electricity in 2005)
• Since 2005, 1.75 crores rural households are given new connections raising the level of ‘rural household electrification’ from 43% to 56%. (Total # of rural households in India is ~14.5 crores, out of which 7.8 crores did not have access to electricity in 2005)
  
3. By estimate of investment, of order Rs. 52000 cr., RGGVY scheme is comparable to R-APDRP scheme of GoI. 

State-wise Rural Franchisee distribution in India (Source: MoP website)

Power Distribution Franchisee - Evolution from Rural to Urban and back to Rural

The Power Distribution Franchisee (DF) model is a precursor for privatization of distribution business in India. Under the model, the state retains ownership of the distribution asset and only leases O&M for defined contract period. On account of heavy capex already laid by the Government and its desire to keep its influence on this major portfolio, DF model will be the next generation model before the sector will start seeing full privatization.

The idea of DF first originated from Rural Electrification with the need of a low cost local agency to manage billing and collection at remote villages. Now that model remains no longer economically viable because of shortage of power directed to rural feeders. Then the shift of DF model application from Rural to Urban happened with piloting of new emerged Input Franchisee model for urban cities with heavy ATC losses. The selection of urban cities for DF model is driven by they having:

1. steady demand loads
2. relatively better collection efficiency, 
3. less subsidized customers 
4. good power supply
5. political will and attention