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BW Businessworld

End Of The Line

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We did not have electricity in our village until this plant came up,”says Ramashish Ram, a member of the panchayat in Tamkuha village in Bihar’s West Champaran district. He is referring to the Husk Power Systems (HPS) plant that supplies electricity to the village using rice husk as feed. Husk Power, which started out in 2007, today has 24 projects across the state providing uninterrupted power to 80 villages.

Up north in Uttarakhand, Avani Bio Energy taps the abundantly available pine needles to produce power. Avani uses the gasification technology developed by its founder Rajnish Jain. It began with a 9 kw project in the state in 2011, and has plans to set up 20 projects of 120 kw each by 2016. The first such project is just weeks away from going on stream.

Welcome to the world of  ‘distributed generation’ (DG), or of small and independent projects ranging from less than a kilowatt to a few megawatts, which produce and distribute power away from the government grid. “DG uses locally available fuel to produce power and distributes it locally,” explains Parimita Mohanty, head of the Centre for Distributed Generation at Teri (The Energy and Resources Institute).

With its mantra of ‘think local, act local’, distributed generation is just what the doctor ordered for India’s power-starved and unlit villages where some 40 crore people — one-third of the country’s population — still do not get sufficient commercial energy, either due to a lack of grid connectivity or insufficient supply. The good thing about DG is that it can also be fed by renewable and non-renewable energy sources. “Since it might take some time before the grid reaches all the villages, distributed generation through renewable energy sources in a village or a group of villages presents an important method of supplying energy to the population,” says Alok Srivastava, joint secretary in the Ministry of New and Renewable Energy.

Leading To Light 
A handful of DG players has made an impressive start. Take, for instance, Desi Power (Decentralised Energy Systems India Power), which started with a 50 kw, agri-waste-fired project at Baharbari in Bihar’s Araria district in 2001. Today, it generates 163 kw from four projects. “We not only brought electricity to this village but also helped its villagers in getting irrigation water and starting several micro-enterprises,” says Shailendra Nath Sharan, a director at Desi Power.

Most companies in the DG space rope in specialists to set up their grids. However, Desi Power prefers to set up its own as a way to keep costs down. “We paid Rs 8 lakh to build the grid for our first project. But ever since, we have started doing it ourselves, and our cost has dropped by 50 per cent,” says Sharan.

MPPL Renewable Energy, an engineering, procurement and construction company (EPC) that operates a biomass-based 4.5 mw unit at Malavalli in Mandya district of Karnataka, has plans to install projects of 20 mw each in Punjab and Tamil Nadu. In Punjab, it will set up a 12 mw project based on combustion technology and another one for 8 mw using biogas. In Tamil Nadu, it will set up seven projects, all based on biogas technology. However, instead of producing power, MPPL will use these plants for upgrading biogas for distribution as a natural gas equivalent.

“We decided to change the model from electricity generation to selling gas in Tamil Nadu, since selling gas is more viable than running a power plant,” says P. Sekhar, a director at MPPL. The company is working on a bio-gasification technology with EnviTec Biogas, a company listed on the Frankfurt stock exchange.

MPPL hopes to get the clearances for these nine projects over the next 9-12 months and complete them in 15-18 months after it has the final clearances.

The company says that an investment of close to Rs 7 crore is required for creating a capacity of 1 mw based on combustion technology. This includes the cost of setting up a mini-grid as well.

Costs, Market & Funding
But how do you cover the costs that come from operating in a rural environment and also the low economies of scale? “The financial success of these projects is linked to the growth of that community and that is a tricky issue. Many of these startups are looking at ways to reduce their transaction costs. They need to work at both ends of the market — bringing down their transaction costs and creating more demand,” says Rangan Banerjee, professor at IIT Bombay. Banerjee, who has studied various aspects of distributed generation in India, says that merely lighting a bulb in a village will not light up a DG promoter’s kitchen fire.

Lack of demand or failure to create enough of it is one of the reasons why Desi Power has scaled down its plans for Bihar — from 100 to 20 plants, with an average capacity of 50 kw each by the end of 2014. According to an impact assessment report by IDFC, Desi Power’s growth has been impacted by the limited development of micro-enterprises in the catchment area as well as the failure of the projected demand to materialise.

Desi Power’s business model is based on creating additional demand for its projects by helping develop micro-enterprises which, in turn, create demand as well as a certain load for its projects. The company currently provides electricity to rice mills, dairy units, irrigation facilities, home and market lighting, cold storage, battery charging outlets, small agro processing units, ice factories, workshops, cinema halls and telecom towers.

In fact, telecom towers are the new favourites of DG organisations as they provide the much-needed demand for power. Desi Power is renegotiating its power purchase agreement (PPA) with its dozen-odd telecom tower clients. “Many DG organisations are providing power to telecom towers as they give them their sought-after base load,” says Banerjee.

Funding remains a thorny issue. “It (the rural population) is a very difficult segment to break into and funding institutions are not even coming in,” says Sekhar. “We need funds for not just setting up plants but for demand creation as well. The process is excruciatingly slow because we have to arrange for funds at both ends. This is a very challenging task,” seconds Sharan.

Often, DG organisations have to source funds from multiple sources, apart from dipping into their own pockets. Promoters of Desi Power, for instance, pooled their money to fire their project in Orchha in Madhya Pradesh and got further help from a Dutch government programme under the UN Framework Convention on Climate Change, which was looking to earn carbon credits by participating in renewable projects. Desi Power is looking at private investors under the JV route.

Similarly, MPPL Renewable Energy had to self-fund its Karnataka project; it will fund its future projects the same way. Being an EPC company, it hopes to find developers who can take over the project after its sustainability has been proved.

Some DG players such as HPS and Avani Bio Energy manage to get funding from organisations such as Shell Foundation and Acumen Fund that take an active interest in rural projects. “There are just a few organisations and fewer technologies that have worked in this space. These projects have been able to deliver reliable service. Plus, the demand in the market for reliable electricity from a consumer using a candle or kerosene lamp for lighting is very high,” says Anuradha Bhavnani, programme director, India, at Shell Foundation, which provides initial risk capital to projects like HPS. The foundation has invested $2.35 million in HPS. However, Bhavnani insists that funding is only a part of the commitment that the foundation brings to the table. “We take up only one or two projects as our objective is to create pioneers in the field. Our ground funding is based on the organisations achieving certain milestones and we help at all the stages in working towards these milestones,” she says.

Still, lack of financing options remains a major concern for DG promoters. Many of them might succeed in putting up their first projects but the journey thereon becomes tough. For most DG organisations, the gap between their first and second projects is very wide. For instance, MPPL Renewable Energy, which put up its first project in 2001, is yet to finalise plans for its next project.

Business With Potential
Promoters, however, are not deterred. They still see distributed generation as a business with huge potential and one worth persisting with, getting the basics right before going for expansion. A good example of this is Punjab Biomass Power, promoted by Bermaco Energy and Infrastructure Leasing & Financial Services. Four years ago, it commissioned a 12 mw plant fuelled exclusively by rice straw at Ghanaur village in Punjab’s Patiala district. Its management initially concentrated entirely on ensuring that the plant performed without glitches.

After a consistent performance over the past two years, Punjab Biomass Power is now working on plans to set up nine projects (in Punjab and Bihar) in the next five years. “We faced many problems in setting up our first plant. But we have learned from the experience and will be setting up the next projects in 18 months each,” says Murad Ali Baig, director at Punjab Biomass Power.

“The business, theoretically, is a very profitable one, given that the cost of producing power is 30 per cent lower when compared to a conventional energy-based project and the tariffs are higher,” adds Baig. The government, too, believes that distributed generation is an environment-friendly and a quicker way to make power available to remote villages through mini-grids. But it is also aware that an ecosystem needs to be created so that distributed generation projects can be easily replicated in newer areas and can be self-sustaining as well.

“Home lighting may not be able to generate enough revenue from beneficiaries. So if we combine distributed generation with livelihood and productive activities, it is possible that the beneficiaries will be able to earn enough and pay their electricity bills. We are working on some interesting financing models and also policy changes required to ensure that such distributed generation projects become viable,” says Srivastava.

Currently, distributed generation gets support from government schemes such as Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) under the Ministry of Power, and the Remote Village Electrification Programme (Ministry of New and Renewable Energy). RGGVY provides 90 per cent subsidy on the capital cost of a project. A recent report extolling the RGGVY scheme said it had exceeded its target of 1 lakh villages and 1.75 crore below poverty line (BPL) households by providing electricity to 1.04 lakh villages and free connections to 1.95 crore BPL households. But such statistics can be misleading. A village is deemed electrified if the basic distribution infrastructure is made available, if public places like schools, health centres or panchayat offices get electricity along with 10 per cent of the total households. The earlier definition was worse: a village was deemed electrified if any electricity was used in the area for any purpose.

Experts agree that RGGVY is not a complete solution to the electricity needs of villages. “Achieving targets does not mean that the energy is generated. What the government needs to do is constant monitoring and a performance assessment of these schemes,” says Banerjee.

Entrepreneurs, too, are not unduly worried about gird-connected power to villages under RGGVY. “The supply is mostly irregular and short. Then, these are mostly single phase lines put up by the state government which will be good only for the lighting needs of households and smaller motors. With this power, running micro-enterprises and energy services, which have to be the backbone of development in these villages, will be a little tough,” says Sharan.

Grid power is often associated with shortages, irregularity and inefficiency. In such a scenario, distributed generation projects hold out hope for far-flung villages of the country. 


(This story was published in BW | Businessworld Issue Dated 20-05-2013)