(Solar) power to the people
John Lennon sang, in Power to the People, “A million workers working for nothing, you better give ‘em what they own”. And while he spoke of a very different kind of power, coincidentally enough it applies to solar micro-grids, where power is no longer provided by an unknown entity, but from within the community itself.
Unlike power from the grid, the community pays for part of this micro-grid to ensure it is well-operated. The relationship becomes one of ownership, pride and partnership. Lacking the expertise themselves, the community will need to rely on debt providers and other third parties that will include both technical service providers and local businesses. In our conclusion of this three-part series on the solar businesses in India, we take a detailed look at both the financing of these micro-grids and services needed to build and operate them.
As we discussed in the previous column, the drop in equipment costs and improvements in technology have made distributed solar micro-grids more economically viable. Such micro-grids can be built through community financing. What that means is with an investment per household of Rs12,000–15,000, supplemented by debt financing, a village of about 100 households can build a micro-grid that will work in tandem with the grid power to provide high-quality electricity around the clock.
However, for this model to succeed, we need two necessary ingredients—debt financing to cover most of the upfront costs, and a services company that will operate and maintain the said micro-grid.
First, let’s look at the factors that will enable financing of these micro-grids. Since most of the micro-grid setup costs will be paid for by debt, it’s essential that low-cost debt providers are able to sustainably lend to such projects. Low-cost debt providers need to minimize two major risks—underwriting and execution risks. In order to mitigate them, they tend to look for steady cash flows from the micro-grid consumers, and the ability of the sponsors to execute and operate projects.
The sponsors in this case of course are the residents of the community dependent on the micro-grid. It goes without saying they such residents usually have no experience in the operation and maintenance of this infrastructure. This creates the need for a good operations and maintenance (O&M) service provider, who maintains the quality and quantity of power output from the plant. This is a shift from the previous model of utility scale power plants, where the owner of the plant was also the operator—thus negating the need for a third-party operating service.
Before we talk about ensuring steady cash flows from micro-grids, we must address the issues that have historically plagued utility companies that provide power to these areas.
A combination of waivers from the government, wilful non-payment, and unchecked theft have meant that a significant portion of consumers don’t pay for the power they consume.
Altering the status quo will require multiple interventions. Switching from waivers to direct benefit transfers (like in the case of liquified petroleum gas) will go a long way in disincentivizing non-payments. And since these micro-grids are owned by the community itself—unlike conventional power that comes from a faceless entity—the sense of ownership and responsible usage will address issues of wilful non-payment and theft.
Additionally, bringing in a creditworthy commercial consumers like a local industry, mobile towers, or pan-India state entities like the Rural Electrification Corporation (REC) and Indian Railways, could help ensure steady demand and consequently cash flows.
Such steady demand for high quality power can be met by micro-grids only when operated by a competent O&M service provider whose responsibilities will include project management of the initial build-out of the micro-grid, guaranteeing stable production of power, grid balancing, and integrating multiple sites.
Project management services for utility scale projects are dominated by large engineering procurement and construction (EPC) players. However, in the case of micro-grids, the key may be to decouple the “C” (construction) from EPC.
Smaller scale O&M service providers can select the right site optimizing for sunlight, design the micro-grid, and procure the right material. They can then employ local technicians and entrepreneurs who will be able to build the micro-grids with supervision and technical support from the service provider.
Managing the ongoing operations of a distributed solar micro-grid will provide a unique growth opportunity for both local and centralized services. These services come in three tiers— trained and skilled manpower to handle routine maintenance of electrical systems, semi-skilled labour to act as the first line of response in case there is a significant reduction in power generation, and unskilled labour to clean the panels and ensure physical security of the micro-grid.
The O&M service provider would employ the first tier of skilled manpower, and will train local manpower to carry out the second and third tier services. This model would have the added benefit of creating sustainable employment for the community.
Technical services around grid integration and management will become critical with the increase in renewable energy flowing through the grid. This service is largely a technology based solution, which will require the on-boarding of several micro-grids and partnership arrangements with local distribution companies.
The successful combination of service providers and low-cost debt financing will set in motion a virtuous cycle, wherein financing will enable more micro-grids and proliferation of micro-grids will improve the quality of service providers and sponsors, which in turn will drive more financing.
This flywheel effect will go a long way in solving our power shortages. And if micro-grids in remote areas such as the one in Meerwada, Madhya Pradesh are any indication, they point to a future where a combination of community ownership, local business participation, and tech-enabled low-cost operations, enable true energy independence for India, in a truly Indian way.
Vaidhehi Ravindran and Vignesh Nandakumar are venture capital investors at Aspada Investment Advisors. The Bharat Rough Book is a weekly column on building businesses for the mass markets represented by the middle of India’s income pyramid.