Rethinking rural electrification

Rural electrification in India has suffered not from a lack of effort, but for want of well-planned efforts in the right direction. No wonder a basic service like access to electricity has remained a favourite poll promise of every major political party for decades. This time, the government is focusing on two major sectors—grid expansion and renewable energy. 

Successive governments have proposed using renewable energy to bridge the rural electrification gap since the 1980s. Renewable energy was also seen as a way of creating local employment and boosting the local economy. Most of all, it had the potential to ensure that electricity supply in villages is independent of, or at least less dependent on, large electrical grids. 

However, the jurisdiction of the Union Ministry of New and Renewable Energy (MNRE) has been limited to only those villages the grid will never reach. After Census 2001, MNRE launched a scheme called Remote Village Electrification Programme (RVEP) to cover 18,000 villages. Its aim was to provide basic lighting services in these villages using off-grid renewable technology by 2012. But the UPA government saw that the home lighting concept was limited in scope and provided only temporary relief. The scheme was discontinued in the 12th Five Year Plan when the Modi government came to power. 

The Union Ministry of Power introduced a scheme called Decentralised Distributed Generation (DDG) under RGGVY in 2009 with the aim of providing one unit of power to every household in villages where grid expansion was not feasible. But with new ambitions and sanctioned projects of the Ministry, DDG was relegated to the bottom of the pile. In seven years, the scheme has commissioned only 12 per cent of projects sanctioned by the Ministry. 

The Jawaharlal Nehru National Solar Mission (JNNSM), launched in 2010, also promoted off-grid solar-based decentralised distribution systems. The scheme offered a capital subsidy of 30 percent and an interest subsidy of 50 percent on the project cost. On the face of it, the scheme exceeded its target of 200 MW by achieving 252 MW by the end of 2013. But a closer look reveals that only 27.5 percent of the target was allocated to the rural population. More than 40 percent of the projects were directed at institutions and the remaining was allocated to projects located in urban and semi-urban areas.

All these schemes had some major drawbacks: they could provide only lighting services or only a few hours of electricity or were designed only for institutional set-ups. They were flawed in their conceptualisation or implementation. More importantly, even when all these schemes were put together, they were insufficient to provide electricity to more than 200 million Indians. 

Finally, in June 2016, MNRE introduced a new draft policy called “National Policy for Renewable Energy-based Micro and Mini-Grids”, marking the first step in the transformation of energy access and supply. It targets setting up of at least 10,000 projects with a minimum capacity of 500 MW by 2021. It lays out all the options available to developers and the support the Centre can provide to develop this sector. It contains a set of guidelines that states can use to draft their own policies depending on their regional and local circumstances. Unlike existing mini-grids in India, which provide a few hours of electricity at high costs to people who don’t have any option, the draft policy proposes to extend energy services beyond lighting. By introducing the concept of mini-grids for productive and commercial purposes, the policy emphasises the importance of a diversified customer base for the developer and differentiated tariffs for different kind of loads. 

Despite these positive features, many obstacles remain in the growth of mini-grids, of which finance is the main concern. The capital subsidy regime, in which MNRE offers up to 30 percent and MOP offers up to 90 percent subsidy, has failed to enable access to electricity. This is because the government wants to give subsidy in a staggered manner based on project development and performance while mini-grid developers want the entire subsidy upfront to avoid bureaucratic delays. But giving into the developers’ demand may not be feasible as it was observed that after receiving the entire subsidy, some developers either abandoned their work or were found wanting in the maintenance of mini-grids. 

Lending by banks to mini-grid developers is also virtually non-existent. The reluctance of bankers stems from a poor recovery of loans from developers. The developers, in turn, are unable to recover dues from rural customers who often fail to pay on time due to irregular incomes and the high cost of electricity supplied by mini-grids. 

To address such challenges and facilitate the implementation of the national mini-grid policy, Delhi-based non-profit Centre for Science and Environment (CSE) has developed a business model which recommends finding alternate ways to finance mini-grids. CSE proposes bringing mini-grids under regulation and support projects through feed-in tariff (FiT) or generation-based incentive (GBI). In FiT, power distribution companies pay developers a higher rate for every unit of electricity supplied to a grid. In cases where a mini-grid developer provides electricity directly to customers, CSE suggests that the developer should be paid for all of the electricity generated from renewable energy as GBI instead of passing the cost on to the customers. Better recovery of dues would make these projects attractive to lenders.

The environment advocacy group also says that mini-grids must be included in the Reserve Bank of India’s (RBI) priority-sector lending list. Currently, the RBI supports off-grid solar home lighting systems for individual households. Mini-grids can qualify for long-term finance at subsidised rates of three to four percent as they are rural infrastructure development projects with long gestation periods. With the expansion of mini-grids, the cost of renewable energy is expected to decline, along with a rise in the purchasing power of consumers. The future of power is modern, distributed, people-centred and decentralised renewable energy secured from a large range of sources. Such a model is more likely to result in successful rural electrification.