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Business Today on OMC: Alternate current

Privately run microgrids provide power to large swathes of rural areas where electric supply is erratic or nonexistent. But they face formidable challenges.

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The beginnings: Selecting a site for setting up a power plant is crucial for OMC Power’s business. It is done on the basis of the presence of at least two telecom towers in the vicinity, in order to make the business model sustainable (Photo: Kishan Kumar)

Pradeep Singh, 37, owns one of the two gas stations at Attrouli village in Uttar Pradesh’s Hardoi district, 65 km north of Lucknow. Barely 30 per cent of the diesel he sells goes into vehicles; the rest is bought by village residents to run diesel generator (DG) sets for both household and agricultural needs. The village gets barely four to six hours of power on average a day from the grid, with 10 hours being the maximum it has ever got. “Yahaan bijli ka koi theek nahi hai (power supply here is very erratic),” he says. “We usually get power after 11 pm for a few hours, rarely during the day.”

So how does he operate his petrol and diesel pumps when there is no power? “If I didn’t have power during the day I’d have to turn away most of my customers,” he says. “None of them comes at night.” Earlier, he too used DG sets, spending an average of Rs 1,500 a day apart from their maintenance cost, but for the past year he no longer needs to. He now buys power from a private company, OMC Power, which has set up a mini power plant – called microgrid – in the village. He pays Rs 9,000 to Rs 10,000 per month depending on usage, with an additional amount of Rs 700 to Rs 800 as rent for the grid connection. This works out to Rs 23.41 per unit, but is still much cheaper than using DG sets. (In comparison, grid power, when available, costs a mere Rs 6.50 per unit.)

Rs 13,500-crore –  Approximate amount required for lighting 19,300 unelectrified villages, assuming each village is electrified using a 35 KW microgrid, with each costing about Rs 2 lakh/Kw.

A few blocks away in Janigaon village stands a branch of the Gramin Bank of Aryavart – a regional rural bank sponsored by Bank of India – which has not even bothered to acquire a grid connection but instead buys all its power from OMC Power. “Grid supply is never available during the bank’s working hours from 9 am to 5 pm,” says Aryamani Mishra, the branch manager. “Why pay for installation charges and engage in laborious paperwork?”

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Shortfall in electricity supply

Attrauli and Janigaon are not isolated examples. The 2011 Census showed 33 per cent of all Indian households – and 45 per cent of rural ones – do not have electricity. Over 22 per cent of the world’s population denied power lives in India, with 19,300 villages yet to be electrified. Even where grid power is available, supply is invariably irregular, especially in the rural areas of Bihar, Uttar Pradesh and states further east. A host of private companies have, thus, in recent years set up microgrids – solar, wind, biomass or diesel plants, or a combination of these – to meet the shortage. The most common are solar plants or solar biomass and solar diesel hybrids.

The business opportunity is huge. A report by the World Resources Institute and the Centre for Development Finance estimates it at $2.1 billion annually. “Even if off-grid systems have 20 per cent penetration, the installation base would be more than 7,000 MW,” says Anish De, Partner, Infrastructure and Government Services, KPMG in India. “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.”

NUMEROUS CHALLENGES

Thus, OMC Power, started in 2011, has set up 20 microgrids (each costing around Rs 60 lakh) in a couple of districts of UP, with capacities ranging from 36 to 50 kW. Mera Gao Power, begun in 2009, has a staggering 1,200 microgrids, in six clusters in UP’s Sitapur district, and supplies power to 16,000 households. Decentralised Energy Systems India, more commonly known as DESI Power, has six microgrids supplying power to 700 homes in five villages of Araria district in neighbouring Bihar. Naturetech Infrastructure has installed 27 tiny solar plants (each costing about Rs 8 lakh) across 20 villages in UP and Bihar, each producing 2 kW and servicing around 35 customers.

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Rich villagers use diesel generator sets, which come in all shapes and sizes, to cater to their domestic and farming needs, while the poorer ones have to make do with a mix of wood, diesel, kerosene and batteries, mainly to watch television.

These and other microgrid companies have made a significant difference to the quality of life of their rural customers, but the going has not been easy. To start with, the investment on such plants is considerable, around Rs 2 lakh per kW. “The cost is high because solar photovoltaic mini grids need battery backup, but power is lost when the battery is full,” says Shruti Mahajan Deorah, Co-author of Prospects for Electricity Access in Rural India using Solar Photo-Voltaic based Mini-Grid Systems. “They 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 is also essential.”

The government does provide a subsidy of 30 per cent, but many feel it is not enough. “Finance is a problem despite the subsidy,” says Shailendra Nath Sharan, Director, DESI Power. “Many companies cannot offer the guarantees and securities required to get loans. There is also acute shortage of grant funds for training and capacity building of villagers.” Even senior bureaucrats agree. “The government should facilitate soft loans at concessional rates,” says G. Prasad, Director in the Ministry of New and Renewable Energy. “The ideal mix would be 30 per cent subsidy, 50 per cent soft loan and only 20 per cent investment by the entrepreneur.” Another challenge is laying underground cables. “This requires permission from local authorities, which is difficult to obtain when the cable cuts across highways or through villages,” says Rohit Chandra, Co-founder and Chief Operating Officer, OMC Power.

At 20% penetration of off-grid systems, the installation base would be more than 7,000 MW, according to KPMG estimates.

Heavy investment in installation naturally pushes up the price of the power supplied. Can village residents, with their limited means, afford to pay to make such plants viable? “The biggest challenge in operating microgrids is the uncertainty around tariff payment and the absence of large commercial loads in villages,” says Arunabha Ghosh, CEO of the policy research institution, Council on Energy, Environment and Water. “There are, indeed, concerns around ensuring a steady revenue stream so as to recover capital and operational expenses, making it a risky proposition for entrepreneurs.” Prasad is even more explicit. “It has been observed that after a plant is set up, the villagers start defaulting on payments,” he says. “They know that once the apparatus has been set up, the money is blocked. Even if they do not pay, the plant will remain. Non payment by customers makes the project non-viable in the long run.”

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Rural communities are charged Rs 5 per day on a prepaid basis for OMC’s LED lantern and Rs 250 to Rs 350 per month for the bijli box, which helps provide multiple LED lights, charge a mobile and run a fan. The lantern/box is charged at the solar plant during the day.

Microgrid companies have coped with this problem in different ways. OMC Power, for instance, chooses its microgrid locations carefully. “We ensure that there are at least two telecom towers in the vicinity which will take power from us,” says Chandra. “This guarantees load off-take and enables us to supply power to the community at a reasonably low rate.” So far it has been supplying power to 32 towers belonging to Reliance, Bharti Infratel and Viom Networks as well as to villages. But while the towers and any business establishments in the locality are linked by cable and provided continuous power, the villagers get it only in 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 prior payment – Rs 5 per charge for the lantern and Rs 250 to Rs 300 per month for the bijli box which 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.”

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Naturetech Infrastructure has developed an SMS-based prepaid meter. Customers can opt for a monthly recharge of Rs 100 to Rs 300. Smaller recharges of Rs 10 (one day), Rs 50 (seven days), and Rs 100 (15 days) are also available.

Naturetech, too, takes 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. “Customer pay an initial connection cost of Rs 500 to Rs 1,500 for the wiring, switchboard, etc,” says Shyam Patra, Founder and Director, Naturetech. “Thereafter, there is a monthly recharge of Rs 100 to Rs 300. We also have recharges of smaller amounts for shorter periods.” However, DESI Power bills micro enterprises at Rs 16 to Rs 18 per unit and households a flat Rs 120 per point per month, with Sharan maintaining that payments are not a problem. Mera Gao Power, which sets up a microgrid in $900 (about Rs 54,000), charges villagers a flat Rs 25 a week. “For us, revenue is proportional to the number of customers,” says Nikhil Jaisinghani, Co-founder. “We aim to reach 40,000 customer households by end-2015 and 100,000 the following year. We expect to start making profits at about 50,000 customers.”

Karnataka-based Simpa Networks has gone one step further by making the community the eventual owner of the solar microgrids it sets up. It began by supplying metering technology to microgrid companies, but now also provides power to rural customers, charging – apart from a small initial payment – Rs 25 a day for 28 months. Thereafter, customers become owners of the plant and do not pay anything at all, but manage its maintenance. This has the added benefit that no one tampers with the system since customers have a stake in keeping it running.

Naturetech recently set up a solar microgrid at Belkhor village in Amethi, UP, as part ACC Tikaria Cement Works’ CSR effort, supplying power to 30 households and fully funded by the company. More companies involving microgrid players in their CSR activities will surely help the latter find a firmer footing.

33% of all Indian households (about 80 million households, or over 300 million people) and 45 per cent of rural households do not have access to electricity

POLICY PANGS

There is one more pitfall microgrid players are well aware of but can do little about. What happens if, after a microgrid has been set up in a non-electrified area, a state-run company enters supplying highly subsidised grid power? Or if the currently erratic power supply in most rural areas dramatically improves? The microgrid company is bound to lose most customers. “There is constant talk from the government about regulating the sector. For political reasons, the government also talks a lot about grid expansion… The private sector is scared of the government’s actions and words,” says Jaisinghani. Sameer Nair, Co-founder of microgrid operator Gram Oorja Solutions, says it is a risk especially for solar microgrids, which take a relatively long time to break even. Author Deorah agrees. “There is currently no backup exit strategy,” she says. “That is another reason investors shy away.”

The solution obviously lies in the state and private companies working more closely together. Indeed, some experts feel the state alone should set up microgrids with the private sector playing only a supportive role. “We need high quality microgrids in rural India but perhaps these should be state funded,” says Anant Sudarshan, Senior Research Manager at the Abdul Latif Jamaal Poverty Action Lab (J-PAL), South Asia, an initiative of the Massachusetts Institute of Technology. “This would allow micro-scale decentralised generation without having to worry about building distribution infrastructure.”

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In Belkhore village, Amethi district, customers pay an initial connection cost of Rs 500 to Rs 1,500 to Naturetech for the wiring, switchboard, etc. Power is made available 24×7.

Some states like Chhattisgarh and West Bengal, and regions like Ladakh, have already moved in that direction. The Chhattisgarh State Renewable Energy Development Agency (CREDA), for instance, provides power from solar photo voltaic 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 Rs 300 and thereafter just five rupees 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.” Similar coordinated efforts by other states are also needed if Prime Minister Narendra Modi’s stated goal of electricity for every household by 2019 is to be realised.

However, despite the hurdles, some microgrid companies have attracted substantial funding. Among the investors in Simpa Networks, for instance, are the Asian Development Bank, USAID’s Development Innovation Ventures, International Finance Corporation and many more. It has so far raised $5.9 million in grants and equity and recently received even more. “We have just closed a new $7.2 million round of financing, comprising $4 million debt and $3.2 million in equity,” says Paul Needham, Co-founder and President. So too Mera Gao Power has raised grants and loans from the likes of USAID-DIV, Insitor Seed Fund, National Geographic and others. “Each company is responding to different opportunities,” says Jaisinghani. “To succeed, however, there will have to be consolidation. We hope that by 2018 there will be such consolidation and investors and lenders will understand how to evaluate companies in this space.”


Written by Sarika Malhotra for Business Today

Read original article: “Alternate current”

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