The Northern state of Uttar Pradesh was described as dazzling cities surrounded by an inky black sea, in an Economist article titled “Out of the Gloom” in 2013. The vast gap of access to energy in India is symptomatic of the gap between these islands of prosperity amongst seas of paucity (Dreze and Sen, 2013), where conservative estimates suggest that 300 million people do not have access to reliable energy. The Government, at both the Central and State level, is trying to bridge this gap. During the presentation of the annual budget for 2017, the Indian Government has promised complete electrification by 1st May 2018, allocating over 48 billion rupees, or approximately US$ 750 million, towards electrifying rural villages in India.
In contrast to Government-led intervention, in the densely populated states of Uttar Pradesh and Bihar, a number of ‘Impact Enterprises’ have used market-based solutions to bridge the gap for the ‘Base of the Pyramid’ (BoP) through renewable energy. They range from those that provide lighting products, including Solar Home Systems, to small-scale Direct Current (DC) pico-grids to larger Alternating Current (AC) mini-grids. Each solution is relevant to a different aspect of the energy access ladder.
The distinction between DC and AC systems is critical, as DC systems are considerably lower in terms of capital cost, but have a limit in terms of the steps on the energy ladder that can be covered. The AC systems can support smaller appliances, and can also support loads such as refrigerators, irrigation pumps and motors used by smaller enterprises; they could also be connected to provide energy to the grid in the future. In a broader sense, DC and AC systems can be distinguished as addressing consumptive and productive loads, although there is an argument to be made that lighting can also trigger longer hours of retail or production.
In 2017, the Uttar Pradesh Government released the first Micro-grid Policy adopted by a state in India, in recognition of the importance of these Impact Enterprises in providing access to energy. However, all the approaches to providing energy face key structural problems, specifically relating to technology. As the capital expenditure across systems is considerable, the Impact Enterprises must rely on mechanisms to finance the systems up-front. In practice, the ability to collect money from customers over extended time periods is crucial, and therefore the Impact Enterprises are operationally similar to microfinance institutions. In areas where they operate, this already represents a significant change in behavior, and can only be facilitated if the customer is actively choosing to continue with the service.
Herein lies both the premise and the promise of Impact Enterprises. To be successful, they must approach the ‘Base of the Pyramid’ market as empowered consumers with the power of choice, rather than as beneficiaries or voters. The customers of these Impact Enterprises typically pay between 3 to 5 times for energy on a per unit (per kWH) basis that consumers in urban India. Yet they choose to because it is either of better quality or lower cost than what they have had access to so far. However, there is a limit to the ability to pay for services, and the most successful Impact Enterprises are able to offer a segment of the population a service designed specifically to address their needs cost-effectively.
Take for instance the case of Mera Gao Power, an Impact Enterprise that provides basic energy services to over 20,000 households in Uttar Pradesh. Implementing a low-cost DC system to connect village hamlets of fewer than 100 households at a cost of under US$1,000, Mera Gao Power is able to provide reliable lighting and mobile-phone charging for US$1 per household per week. This would be considered an entry-level service on the energy ladder, but must not be discounted because of this. The provision of these services represents significant saving of over 50% of energy and lighting expenditure at a household level, according to the NSSO statistics in 2010.
Given the scale and level of isolation of these relatively small village hamlets, they would be low on the priority for connection to the grid, and also represent prohibitive cost. For example, the cost of extending the grid by 2 kilometers has been estimated at US$5,000, according to Government estimates. These are also sunlikely to be addressed by the AC-based mini-grid providers, as the costs associated with connecting a small household load implies an extended payback period. Further, the costs of facilitating technologies such as batteries add exponential costs to system, as do metering systems at a household level.
Mera Gao Power has been able to effectively work within these constraints to provide the first-step on the energy-access ladder at a price-point that is affordable to customers. Working with IIX, Mera Gao Power has just raised US$2.5 million to grow the business By 2020, Mera Gao Power plans to extend the services to over 65,000 households in Uttar Pradesh and Bihar, representing significant scale in addressing a basic need of an underserved population. Their paying customers are in the best position to judge their success or failure on delivering on their promises.
IIX has been working closely with Impact Enterprises across multiple geographies that work across the spectrum of energy access, helping them raise investment capital for growth. Most recently, IIX worked with Mera Gao Power to raise $2.5 million to extend their coverage by over 55,000 households from the current level of 15,000 households. This puts Mera Gao Power in a select group of impact enterprises that have been able to provide access to basic needs in underserved markets at scale.
In the future, IIX expects that the more successful models will start to translate to other underserved markets that continue to suffer from unreliable yet expensive energy. These include the generation of energy in island archipelagoes of Indonesia and the Philippines, and most recently in rapidly developing countries such as Myanmar. Myanmar presents an incredibly interesting challenge, as it benefits from a number of technology leapfrogs that have enabled energy access elsewhere, specifically the high penetration of smart phones and mobile network coverage. With these enabling technologies, customers will continue to be empowered to decide which solutions address their needs and aspirations.
References:
- Out of the Gloom (2013). Accessed from http://www.economist.com/news/asia/21582043-villagers-enjoy-sunlight-after-dark-out-gloom
- An Uncertain Glory, Dreze, J. and Sen, A. (2013)
- http://mospi.nic.in/sites/default/files/publication_reports/Report_no558_rou68_30june14.pdf
- https://www.apeasternpower.com/framework/skins/EPDCL_SKIN/Pdfs/Leftmenu/SLCharges.pdf
- Cheap illumination’s benefits in remote areas may be limited (2017). Accessed from http://www.economist.com/news/science-and-technology/21722156-does-light-equal-enlightenment-cheap-illuminations-benefits-remote-areas-may