Off-Grid Power: A Realistic and Viable Option for India?

With strong government support of off-grid development, India could meet its access goals quicker.
Published: Wed 12 Aug 2015

More than one-quarter of India’s population (about 311 million), mostly located in poorer rural areas, are still without grid power. The promise of reliable electricity through centralized infrastructure and systems will probably remain a pipe dream for some time to come as most electricity utilities suffer financial strife and the impracticability of grid connecting remote areas. The expansion of transmission lines involves a great deal of money and time, both of which India does not possess.  

Under current forecasts on grid expansion, as many as 75 million households in India will still be off-grid in 2024 -- only a 5% improvement from the current level. It is clear that a more cost-effective and quicker solution to the energy crisis is needed.

Off-grid power, based on smaller-scale renewable energy sources such as solar, biomass and small-scale hydropower, offers a viable solution which will meet the challenges of network resilience, flexibility and environmental and health issues.

Off-grid makes economic sense

In remote areas, where geographically difficult terrain makes grid extension a challenge, it makes more economic sense to focus instead on off-grid solutions using renewable energy sources for electricity generation and distribution. The country certainly has abundant resources to meet the needs of and cater to off-grid power. Increasingly, off-grid power is being recognised as the way forward and these solutions are drawing power from solar, wind, biomass or diesel plants, or even a combination of these.

The business opportunity for off-grid is significant. A report by the World Resources Institute and the Centre for Development Finance estimates it at US$2.1 billion annually. A representative says that even if off-grid systems have 20% penetration, the installation base would be more than 7,000MW. The overall consumption from these grids would be more than 10 billion units. This will entail setting up a huge number of installations, because individual ones will be small. It is a relatively untapped market and should be attractive for new entrants.

Overcoming off-grid challenges

For off-grid development to work in India, the country needs a clear direction through entrepreneurial activity and private sector investment in order to overcome a number of challenges which include:

1.High costs-The investment on off-grid plants is considerable due to the need for battery backup for solar photovoltaic mini grids. Shruti Mahajan Deorah, Co-author of Prospects for Electricity Access in Rural India using Solar Photo-Voltaic based Mini-Grid Systems, says that private companies have to set up poles and wires. The remoteness of the areas where the plants are located adds to logistics costs. Ensuring maintenance funds, primarily funds to replace the battery every five to seven years will be essential.

2.Low government subsidy-Many feel that the government’s subsidy of 30% is insufficient.  

3.Obtaining finance- Finance is a problem despite the subsidy. Many companies cannot offer the guarantees and securities required to get loans. There is also a shortage of grant funds for training and capacity building of villagers. This is an opportunity for the government to facilitate soft loans at concessional rates. Some suggest that the ideal mix would be 30% subsidy, 50% soft loan and only 20% investment by the entrepreneur.

4.Underground cables-Laying underground cables calls for local authority permission which can be difficult to get when the cable cuts across highways or through villages.

5.Investor uncertainty over steady revenue stream-Heavy investment in installation pushes up the price of the power supplied. Village residents, with their limited means, may not be able to afford these rates. This questions the long-term viability of the plant from the outset.  The uncertainty around tariff payment and the absence of large commercial loads in villages puts many investors off. Grid expansion also causes uncertainty as some of these projects take time to break even.

Overcoming off-grid challenges

While there are many challenges facing off-grid development, private microgrid companies are overcoming challenges innovatively.

For instance, OMC Power chooses its microgrid locations carefully. The company ensures that there are at least two telecom towers in the vicinity which will draw power regularly and be able to afford it. This guarantees load off-take and enables the firm to supply power to the community at a reasonably low rate. While the towers and any business establishments in the vicinity are linked by cable and provided with continuous power, the villagers receive their power in the form of prepaid packages. They are given LED lanterns or power boxes (called bijli box in local parlance) which work for six to eight hours after each charge. And they are charged only after prepayment. The box can run two LED lights and fans at a time, charge mobiles, etc. The model is sustainable and has the typical dynamics of an infrastructure project, which has a payback period of five to six years. Another company, Naturetech, has also opted for the prepaid route. With a loan from the National Bank for Agriculture and Rural Development under its Rural Innovation Fund, it has developed an SMS-based prepaid meter.

Karnataka-based Simpa Networks has gone one step further by creating community ownership of the solar microgrids it sets up. The firm provides power to rural customers, charging - apart from a small initial payment - Rs25 (US$0.392) a day for 28 months. Thereafter, customers become owners of the plant and do not pay anything further. The community is however in charge of its maintenance. Because there is a vested interest, no one tampers with the system either.

When it comes to investor uncertainty, private companies are suggesting a closer working relationship with the government. Some have even suggested government-funded microgrids with private firms playing a supportive role only. This would enable a micro-scale decentralised generation without having to worry about building distribution infrastructure. Some states like Chhattisgarh and West Bengal, and regions like Ladakh, have already gone that route. The Chhattisgarh State Renewable Energy Development Agency (CREDA), for instance, provides power from solar PV plants to 39,406 households in remote villages which are not covered by the central government's rural electrification scheme, the Rajiv Gandhi Grameen Vidyutikaran Yojana. But it is private companies, selected through competitive bidding, which have set up the plants as well as the distribution network. CREDA charges users a one-time fee of Rs300 and thereafter just Rs5 a month. "The distribution network has been installed in such a way that, in case these villages get connected to the conventional grid at some future stage, the same network can be used," says Sanjeev Jain, Chief Engineer, CREDA. "The power the solar plant produces will also go into the grid."

When it comes to gaining finance, a few microgrid companies are receiving substantial sums. Investors include the Asian Development Bank, USAID's Development Innovation Ventures, and the International Finance Corporation, amongst others.  But, to attract even more investors, a greater level of consolidation may be needed so that investors and lenders will be able to better-evaluate companies in the space.

Summit could be turning point

The India Off-Grid Summit 2015, to be held on 19 August, may well offer a turning point for microgrid development. The event is aimed at convening and galvanizing the off-grid and decentralized renewable energy business community, according to Krishnan Pallassana, India Director, The Climate Group which will be hosting the event. The event has been organized in partnership with the Ministry of New and Renewable Energy (MNRE), Government of India, Clean Energy Access Network (CLEAN) and South Asia Network for Clean Energy (STANCE). The event will be bringing together business enterprises and leaders from the off-grid energy sector, financing institutions, investors, think tanks and government representatives.

It is evident that through innovation, private investment, and strong government support, off-grid power development has the potential to be a large contributor towards India’s ambitious (and probably unrealistic) electricity access goals.  

Further reading

The Climate Group-The Business Case For Off-Grid Energy in India [pdf]
The World Bank-Power for all: electricity access challenge in India