Decentralising energy access through mini-grids

As recently stressed by the Union minister for new and renewable energy RK Singh, the most cost effective and workable solution for this challenge will be a decentralised and locally managed ecosystem of generation, supply, billing and collection. Mini-grids are ideally suited to fill the void. In the past five years, even without receiving any subsidy, community solar mini-grids have emerged across Uttar Pradesh, Bihar and Jharkhand as a viable and low carbon alternative to both diesel generation and the main grid. Hundreds of mini-grids are operating profitably in the three states, and in the process saving tens of thousands of rural businesses through viable monthly energy bills and contributing to local economic growth.

Yet so far, DISCOMs have resisted partnering with private mini-grid developers in a meaningful way, despite the opportunity to create a decarbonised, integrated energy system that significantly reduces transmission and operational losses, while also improving and expanding last-mile customer service. The lack of integration means that both public and private capital is being deployed to build duplicative energy infrastructure. Worse, it stifles the full potential of India’s rural economy, where half of the country’s micro-, small- and medium-sized enterprises (MSMEs) are located, supporting 50 million workers. Ideally, the GoI should have left the work of last-mile connectivity to private minigrids operators, at least in specified areas in each district, in small business towns and in remote localities, thereby saving a huge chunk of taxpayer money--total DISCOM losses in FY22 were ₹28,700 crore INR--to be used for other priorities.

With electricity demand set to nearly triple in India by 2030, and rising temperatures adding to heat stress on the grid, there is an urgent need to seek new approaches for providing rural energy services that also support the GoI’s ambitious energy transition plan. This is especially true because agriculture-dependent communities, such as those in rural India, are the most vulnerable to climate shocks.

State-run grids and private mini-grids are a natural match. DISCOMs, which have been bailed out multiple times by the Centre, are competent at serving urban customers, but often struggle in rural areas. Mini-grid developers, meanwhile, excel at reliability and quality and also provide value-added services to rural customers, including appliance sales and finance, e-mobility, agro-processing hubs and clean drinking water.

Currently, mini-grid developers in the northeast states are free to operate alongside the grid as long as their generation capacity is under 500kW. And because the mini-grids do not “feed in” to the grid, they can also charge cost-reflective tariffs, which they do to compensate for not receiving any subsidy. So, while mini-grid tariffs are much less expensive than diesel, they are higher than subsidised DISCOM tariffs.

A major barrier to integrating minigrids into the main grid is agreeing on an appropriate feed-in tariff. In 2016, Uttar Pradesh made a provision for a feed-in tariff in its regulations, so the opportunity for overcoming this barrier exists. But this would either require a subsidy to be provided to mini-grid operators, or for DISCOMs to absorb the difference while determining their annual retail tariff.

A second barrier is that since unsubsidised mini-grid power is more costly, DISCOMs may not priortise it as a source for supply. But as the GoI has stipulated that all renewable sources are in the “must run” category for supply, it should be mandatory for the DISCOMs to take power from mini-grid operators.

Last, and most important, is the psychological barrier of the DISCOMs on working with the private sector. Even though community solar mini-grids have become mainstream in more mature energy markets like the United States, legacy mindsets persist about the role of the public sector and the opportunities for decentralisation. Until that changes, India’s distribution network will likely continue to be sub-optimal in terms of integration and use of capital.

Independent researchers have looked at various integrated models for rural India and concluded that, with the appropriate feed-in tariff policy, distribution franchising by private mini-grid developers is the best solution. In this franchise model, mini-grids would interconnect their solar power stations to the grid’s rural transmission and distribution network, and manage distribution, customer engagement and revenue collection in rural communities.

Rural franchising is not new. Such a model was introduced in 2005 in the domain of revenue collection and was operational in more than a dozen states, producing a range of positive results in tens of thousands of villages. However, the scheme was made optional in 2012–13 (in part because of opposition from DISCOMs wary that it was a first step toward privatisation). Franchising by private companies has also been successfully implemented in urban centres in India.

There are several reasons for reintroducing the rural franchise model:

· distribution franchising would reduce high transmission and distribution losses, which can be as high as 30%. DISCOMs can reduce losses by supplementing the main grid with local minigrids that are more efficient and reliable

· the GoI has set ambitious targets for increasing the share of renewable energy in the country's electricity mix and accelerating the country’s energy transition and mini-grids would contribute significantly to that goal

· mini-grid operators bring their own funding, reducing the burden on government to invest in new infrastructure, and

· perhaps most importantly, rural customers will be better served, especially MSMEs, thus increasing the opportunity for greater economic growth and improved livelihoods

This article is authored by Manoj Sinha, CEO and co-founder, Husk Power Systems and Desh Deep Verma, former secretary, Government of India.