Rationale for Mini Grids in India-II

Satya Prakash Choubey, Director (Program Implementation), Smart Power India

Emergence of mini-grids 
Small local grids operating in parallel to the distribution network have been in vogue in urban and peri-urban settings in energy deficit regions since decades^[1]. Diesel genset operators selling power in the evenings based on light, fan and TV points in energy deficient habitations were quite common in the 1980s until early 90s. With improvement of the power supply scenario in the 1990s, these local grids went out of business. However, rural power supply scenario did not improve. Private players came up in many rural areas to meet household electricity needs, especially in the evenings through renewable energy based micro grids in rural areas^[2]. Bad quality of grid supply, unavailability of supply, fall in RE technology costs, building up of knowhow on RE technologies and their implementation, support from donors and acknowledgement of the State on the difficulty (financial and technical) of extending the grid to remote locations and non-remunerative loads have been the drivers for mini grids^[3]. Poor financial condition of the erstwhile SEBs and later the DISCOMs coupled with increased levels of disposable income in better off villages and fulfilling the aspirational needs of the rural population also contributed to emergence of this sector.

What is a mini-grid?

Mini-grids are electricity distribution systems comprising generation sources (e.g. solar panels, biogas plant), and a distribution network to deliver power to customers. A typical rural mini-grid distribution network extends 1-2 km from the plant, allowing it to service 100-140 households, 50-60 shops, and a mix of productive users.  

Benefits and constraints of mini-grids
Mini-grids provide capacity for both domestic appliances and local businesses, and have the potential to become the most powerful technological approach for accelerated rural electrification. Mini-grids also offer an optimal solution for utilizing localized renewable energy resources. Many locations offer excellent natural conditions for the use of solar photovoltaic (PV), wind, or small hydro power. In recent years, renewable energy technologies (RETs) have evolved dramatically, in terms of prices, efficiency, and reliability.  Today, conservative calculations of life-cycle costs show that RE based mini-grids are usually the most competitive technical solution.

To realise the above potential, mini-grids have to demonstrate to both existing and prospective electricity consumers that they offer these tangible benefits over alternative (possibly cheaper) energy sources such as kerosene lamps, diesel generators, solar home systems, rechargeable batteries, and the government grid. The drivers of customer satisfaction—and hence their willingness to pay for a mini-grid connection—are described in Box 1, which constitutes the “customer service mantra” for mini-grid developers.

Why Customers Choose Mini-grids

· Quality and reliability of power. Mini-grids must ensure dependable uninterrupted service, at a voltage sufficient to run customers' appliances · Packages tailored to local needs. A variety of package options with a range of tariffs, load levels, and timings will satisfy customers that they are paying for what they need · Responsive customer service. Agents available to resolve technical problems, assist with package changes, and spread information about promotions will maintain high customer engagement and perceptions of dependability · Investment in local community. ESCOs support access to appliances for customers—both household and commercial—channels investment into the local community

 Regarding limitations of mini grids, technical constraints of technologies like loads and their usage patterns are a big limitation. Also, per unit rates of electricity are generally higher than what the grid offers and this also acts as a barrier for communities to pay for the services. Finally, mini grids, like other electricity initiatives in the power sector have to function in the existing regulatory framework and this sometimes limits the extent of benefits that they can offer to communities.

Business models for mini grids
Business models of mini grids vary according to their ownership, which also is dependent on existing regulatory frameworks. In the context of rural electrification in India DISCOMs or entrepreneurs or village institutions can own, manage, operate and/or maintain the systems. Based on ownership, business models[4] could be:

1. Community based – in this model local communities own, manage, operate and maintain mini grids through an institution that they develop. Such projects usually receive external funding and assistance in design and installation. Once the mini grid is installed, the community institution collects tariff runs the project.

Community-based ownership models are common in developing countries where private companies and utilities lack the capacity or incentive to electrify remote communities. In remote rural areas, where tariffs won’t cover investment costs, community-based ownership may be the only option.

2. Entrepreneur based – this is typically a private-sector based model in which a private investor pays to construct, operate and maintain the mini-grid. Funding often comes from private equity and commercial loans. Involving the private sector in mini grid development can be challenging since small-scale, remote projects are not usually profitable. Creative approaches, however, can make mini grid investment financially attractive. Entrepreneurs use anchor load approach, community clustering approach and private-private partnerships to implement successful projects. 

3. DISCOM based – DISCOMs can also own mini-grids in much the same way as their own distribution network, but on a smaller scale. In some such models, the DISCOM contracts with local firms to manage parts of the project, say like billing and collection[5]. DISCOM based mini-grid projects often use subsidies to keep tariffs affordable in remote communities. 

4. Hybrid model - in this model, some combination of the three principal actors—communities, entrepreneurs and DISCOMs —collaborate to implement and manage mini grid projects. Though difficult to operationalize, they can sometimes be the only option for rural electrification.

The need for demand generation

To be financially sustainable in the long run, the energy service companies (ESCOs) running the mini grids need to focus not only on meeting the village’s existing power demand but also on building additional demand for power by supporting the development of local micro enterprises based on the electricity of the mini grid. For each segment the electricity demand will change over a period of time post setting up a mini grid. The existing electricity demand changes with introduction of EEAs, efficient motors, and more opportunities in the form of new micro enterprise development. Over a period of time the electricity consumption scenario may again change due to higher aspiration of the customers or new usage of electricity by customers, or establishment of new enterprises or introduction of a new customer segment. Therefore, the ESCO should periodically revisit the electricity demand for each of their mini grid customer segments and conduct a review of the electricity demand in a village using the DES survey tool. This will improve the load acquisition by an ESCO and contribute to improving their revenue.

Such a strategy is a win-win for both the ESCO and the community as the development of micro enterprises translates into higher economic development of the village and increased demand for electricity from the mini grids resulting in higher revenues and profit.

(This is the concluding part of the article on mini grids. The first part was featured in the earlier issue of the newsletter) 

[1] Living with Load Shedding, Vol 15, Issue No. 24-25, Economic and Political Weekly, 14 June 1980

[2] Bhattacharyya, S.C., 2012a. Energy Access programmes and sustainable development: a critical review and analysis, Energy for Sustainable Development, Energy for sustainable development, Volume 163, pp. 260-271

[3]Tongia, Rahul. 2018. Microgrids in India: Myths, Misunderstandings, and the Need for Proper Accounting, Brookings India, pp 5

[4] https://www.usaid.gov/energy/mini-grids/ownership/models

[5] Similar models called franchisee has been explored in India, with mixed success