2011 09 05_bridge to india_sustainability outlook_off grid solar pv_sustainability outlook

Green technology

PoweringIndia through

renewables

September, 2011

Gearing India towards Sustainability

The rural solar off-grid market in India is still mainly driven by government and NGO efforts. Nonetheless, there is an increasing interest from corporates and investors – both domestic and international – in exploring viable business opportunities to service India's vast rural, un-electrified population. Companies such as Selco Solar Light and Orb Energy are moving forward with commercial and scalable solutions. They are setting up structures that may allow them a profitable business in the future.

In India, close to 70-75 million households in rural areas (approximately 400m people or 80,000-90,000 villages) lack access to grid-connected electricity. Electrified households in the rural areas pay INR106 (€1.76) a month on an average for electricity. This is less than the INR150 (€2.50) which un-electrified households spend for light from a kerosene lantern. Assuming such households are able and willing to pay the same as electrified households, the market potential is in the range of INR90-95 billion (€1.50-1.58 billion) per year. Around 250,000 grid-connected villages with frequent power outages further increase this potential.

There are three key options for providing rural, off-grid, solar PV-based electricity solutions: small applications with integrated power generation capacity (e.g. solar lanterns and solar street lights), solar home systems (SHS) and mini-grids.

Costs of Off-grid PV Solutions

The MNRE estimates the benchmark costs for off-grid solar systems to be INR300 (€5) per W for p

systems with storage and INR210 (€3.5) per W p

without storage in the period of 2010-11. On-ground costs are usually higher - driven by high individual system design requirements and expensive transportation to and installation in remote areas. With low system prices, long lasting solar PV installations cannot be guaranteed.

The cost per unit from off-grid systems is INR13-14 (€0.21-0.23) per kWh. This is more than twice as much as the price for conventional grid power.

off-grid solar pv - a

potential Solution for rural

electrification in india

high

30 SUSTAINABILITY OUTLOOK 31SUSTAINABILITY OUTLOOK

slate for the projected power generation capacity can become a lot cleaner and greener by bringing down the demand on fossil fuels by another 15%. The road ahead is surely bumpy but can be maneuvered with a good thinking on strategy, policies and incentives, which the policy makers will be required to bring in. An overall reduction of 30% of the demand coupled with the innovation ahead can make the ride a lot smoother.

V.K.Kripanand is one of the founders of See

Beyond Technologies Pvt Ltd. and has over two

decades of experience in various aspects of the

IT industry related to software development,

software engineering and systems engineering.

His company is a product development outfit,

with a mission to build products and solutions

in the areas of Green IT, software estimation,

project management, and knowledge

management. In the recent 4 years, Kripanand

has been passionate about environment and

carbon footprint reduction and has

spearheaded many initiatives and product

innovations in areas of energy conservation.

By Mohit Anand,

Senior Consultant,

Bridge to India

Bureaucratic hurdles and issues of eligibility for the subsidy mean that a large share of allocated funds is not being drawn upon

Electricity from diesel generator-sets is available between INR10-15 (€0.16-0.25) per kWh which is still slightly less than the remotely installed solar power. The price for diesel power depends predominantly on the accessibility to the village and the diesel subsidy given by the government (and indirectly on the global oil price). There will likely be an upward pressure on diesel and kerosene prices as oil prices rise and the government contemplates reducing the diesel subsidy.

The high initial capital costs for solar systems create a strong liquidity barrier in rural markets, with household incomes of around INR1,500-5,000 (€25-83.33) per month or less (at the “bottom of the pyramid”) and often few savings. The liquidity barrier can be overcome with various instruments like capital subsidies and micro-loans. Since June 2010, the Government of India has been supporting different solar off-grid systems with a Refinance Scheme under the NSM, where

Benchmark costs for solar off-grid systems

` 300 (€ 5) per Wp(or more) with storage

` 210 (€ 3.5) per Wp(or more) without storage

` 4-5 (€ 0.06-0.08) per kWh for grid power

` 10-15 (€ 0.16-0.25) per kWh for diesel off-set

` 13-14 (€ 0.21-0.23) per kWh for solar off-grid

Electricity Costs

The adoption

of technology for

reduction in power

consumption and

clean development

mechanisms can

bring down the

demand for power

by approximately

15%

P E R S P E C T I V E

30% of the initial capital cost is borne by the government. In the financial year 2010-11, more than 40MW of projects have been sanctioned under this scheme, which includes off-grid power plants, solar home systems, solar lanterns, street lights and mini-grids. The subsidy schemes have limited success as projects are often not followed up by a sustainable implementation and monitoring process. Bureaucratic hurdles and issues of eligibility for the subsidy mean that a large share of allocated funds is not being drawn upon.

Rural PV Applications

There are three main options for providing rural, off-grid, solar PV-based electricity solutions: small applications with integrated power generation capacity (e.g. solar lanterns and solar street lights), solar home systems (SHSs) and mini-grids. According to the MNRE, more than one million solar lanterns have been distributed in India. These systems consist of a small PV module, a battery and a light (LED or CFL). Some of the key companies in the field are Omega Electronics, Solarsis and Ritikaya Systems. In addition, 625,000 SHSs were installed by 2010, of which SELCO has set-up around 120,000 systems (one-fifth of the total installed). Other important companies in this field are Orb Energy, Omega Electronics and Orange Alternative.

Financing Rural PV Applications

For a typical SHS of 30Wp with storage, the total system cost is close to INR 9,000 (€150). Under the Refinance Scheme, the government pays INR 2,700 (€45) and INR 4,500 (€75) is covered by a low interest loan. The household has to pay the remaining INR 1,800 (€30). For this, different microfinance options are available. A frequently used financing scheme is the SHG Linkage Program with 20 million customers. In this program, poor people who live in rural areas without any access to modern financial services are clustered in self-help groups (SHG). These groups can open a savings account and get access to credit loans. The Reserve Bank of India (RBI) and the National Bank for Agriculture and Rural

Development (NABARD) are the major providers of the SHG Linkage Program.

Companies interested in selling solar home systems under a government support scheme first have to get a permit from the government in order to be eligible for the subsidy. Then they have to partner with a local non-governmental organization (NGO) or a microfinance institution (MFI). Usually, Village Electrification Committees are set up to involve the customers or beneficiaries in the projects. The local partner - NGO or MFI - has to get an approval from the district authorities for the execution of the project. The capital subsidy is released from IREDA to the primary lending institution like NABARD on receipt of the application. After the successful implementation of the solar system, the capital subsidy is passed on to the EPC company. The local partner has to ensure that the repayment and the interest are collected in the village.

Other than the lack of funds faced by potential electricity consumers, there are a number of other operational challenges to providing solar-based power solutions to off-grid consumers in India. For one, due to political dynamics and election promises, electricity is widely considered to be a free government service. This can reduce the willingness of consumers to pay for power or solar power systems. Another reason is that the end

consumers may not have many electrical appliances and hence may not consume much electricity. This is a chicken-and-egg problem that will likely solve itself over time. Such a situation makes it difficult to determine the right size of a system. Moreover, the electricity needs to be used in such a way that the consumer can apply it to a business model that allows him or her to pay for the electricity and perhaps

make a profit above that. Examples are electric water pumps that increase the yield of the fields or a village cinema that attracts paying viewers. A third challenge is the frequent theft or destruction of PV panels in remote areas. Lastly, many projects fail because they lack maintenance and monitoring structures to upkeep the systems throughout their lifetime. Presence of dust and low quality of the components add to a bad performance by the installed systems.


Business Models for PV-based Solar Home Systems (SHSs)

There are a number of companies in India that have started to successfully tackle the

challenges. Selco Solar Lights, for example, has

set up 25 energy service centers in

the states of Maharashtra and

Gujarat where they sell solar home systems and offer financing as well as maintenance services. Selco sells their systems through financing agreements with regional rural banks, MFIs and credit cooperatives. The loan covers 85% of the capital cost, repayable over five years at an interest rate of 12-17%.

Another example is Orb Energy that has close to 90 branches in

four South Indian states which sell off-grid systems and offer services. With an investment from the Acumen Fund, they intend to double this number in the next two years by increasing their manufacturing capacity and the number of branches. A key learning for them has been that products for rural electrification have to be taken to the customer as low-income villagers rarely travel. In addition, local entrepreneurs are required as sales partners as they have a better understanding of the local energy needs. A widespread distribution network is crucial in order to reach out to customers and guarantee maintenance.

Indian companies involved in the rural electrification market expect orders to double in the next three years. As more solar systems will be installed, system design will improve, banks will become more confident with lending money for solar power projects and government policies may become more targeted and effective. At the same time, falling costs for PV modules and systems and rising costs of kerosene and diesel will make the solar market more competitive.

References:

1. World Resource Institute, Centre of Development

Finance, New Ventures; Power to the People - Report;

2010, p. 25



2010, p. 20

3. Ministry Guidelines by MNRE, June 2010,

http://www.mnre.gov.in

4. Industry interviews, BRIDGE TO INDIA analysis

5. BRIDGE TO INDIA analysis

6. For this reason, many villages prefer to wait for grid

connection, even if there is little hope for reliable grid

power in the near term. This also raises the question of

what will happen to more expensive solar power, if the

village becomes grid connected.

7. MNRE, http://www.mnre.gov.in/, June 2011

8. Dr. A. Raza (MNRE), Off-grid Lighting in India,

Presentation at DIREC 2010

9. The Hindu Business Line, “Selco Solar Light plans to

illuminate 2 lakh homes”, 21-03-2011, URL:

http://www.selco-

india.com/pdfs/sowra_jyothi_business_line.pdf



2010, p. 36

11. Acumen Fund, URL:

http://www.acumenfund.org/investment/orb-

energy.html, June 2011


13. Industry interviews

Self Financing

20%

Loan at 5% p.a.

50%Subsidy by the Central

Government

30%

Financing of a typical 30 W SHS including battery storage

Mohit Anand works as a Senior Consultant with

BRIDGE TO INDIA, a consulting company with an

entrepreneurial approach based in New Delhi.

Founded in 2008, the company provides market

analysis and market entry advisory to

international solar companies looking to enter

the Indian market. www.bridgetoindia.com

The key is to partner with experienced global companies with high-performance solutions and innovation teams that keep up with this rapidly advancing field

Living Off Grid's Flickr Photostream

30% of the initial capital cost is borne by the government. In the financial year 2010-11, more than 40MW of projects have been sanctioned under this scheme, which includes off-grid power plants, solar home systems, solar lanterns, street lights and mini-grids. The subsidy schemes have limited success as projects are often not followed up by a sustainable implementation and monitoring process. Bureaucratic hurdles and issues of eligibility for the subsidy mean that a large share of allocated funds is not being drawn upon.

Rural PV Applications

There are three main options for providing rural, off-grid, solar PV-based electricity solutions: small applications with integrated power generation capacity (e.g. solar lanterns and solar street lights), solar home systems (SHSs) and mini-grids. According to the MNRE, more than one million solar lanterns have been distributed in India. These systems consist of a small PV module, a battery and a light (LED or CFL). Some of the key companies in the field are Omega Electronics, Solarsis and Ritikaya Systems. In addition, 625,000 SHSs were installed by 2010, of which SELCO has set-up around 120,000 systems (one-fifth of the total installed). Other important companies in this field are Orb Energy, Omega Electronics and Orange Alternative.

Financing Rural PV Applications

For a typical SHS of 30Wp with storage, the total system cost is close to INR 9,000 (€150). Under the Refinance Scheme, the government pays INR 2,700 (€45) and INR 4,500 (€75) is covered by a low interest loan. The household has to pay the remaining INR 1,800 (€30). For this, different microfinance options are available. A frequently used financing scheme is the SHG Linkage Program with 20 million customers. In this program, poor people who live in rural areas without any access to modern financial services are clustered in self-help groups (SHG). These groups can open a savings account and get access to credit loans. The Reserve Bank of India (RBI) and the National Bank for Agriculture and Rural

Development (NABARD) are the major providers of the SHG Linkage Program.

Companies interested in selling solar home systems under a government support scheme first have to get a permit from the government in order to be eligible for the subsidy. Then they have to partner with a local non-governmental organization (NGO) or a microfinance institution (MFI). Usually, Village Electrification Committees are set up to involve the customers or beneficiaries in the projects. The local partner - NGO or MFI - has to get an approval from the district authorities for the execution of the project. The capital subsidy is released from IREDA to the primary lending institution like NABARD on receipt of the application. After the successful implementation of the solar system, the capital subsidy is passed on to the EPC company. The local partner has to ensure that the repayment and the interest are collected in the village.

Other than the lack of funds faced by potential electricity consumers, there are a number of other operational challenges to providing solar-based power solutions to off-grid consumers in India. For one, due to political dynamics and election promises, electricity is widely considered to be a free government service. This can reduce the willingness of consumers to pay for power or solar power systems. Another reason is that the end

consumers may not have many electrical appliances and hence may not consume much electricity. This is a chicken-and-egg problem that will likely solve itself over time. Such a situation makes it difficult to determine the right size of a system. Moreover, the electricity needs to be used in such a way that the consumer can apply it to a business model that allows him or her to pay for the electricity and perhaps

make a profit above that. Examples are electric water pumps that increase the yield of the fields or a village cinema that attracts paying viewers. A third challenge is the frequent theft or destruction of PV panels in remote areas. Lastly, many projects fail because they lack maintenance and monitoring structures to upkeep the systems throughout their lifetime. Presence of dust and low quality of the components add to a bad performance by the installed systems.


Business Models for PV-based Solar Home Systems (SHSs)

There are a number of companies in India that have started to successfully tackle the

challenges. Selco Solar Lights, for example, has

set up 25 energy service centers in

the states of Maharashtra and

Gujarat where they sell solar home systems and offer financing as well as maintenance services. Selco sells their systems through financing agreements with regional rural banks, MFIs and credit cooperatives. The loan covers 85% of the capital cost, repayable over five years at an interest rate of 12-17%.

Another example is Orb Energy that has close to 90 branches in

four South Indian states which sell off-grid systems and offer services. With an investment from the Acumen Fund, they intend to double this number in the next two years by increasing their manufacturing capacity and the number of branches. A key learning for them has been that products for rural electrification have to be taken to the customer as low-income villagers rarely travel. In addition, local entrepreneurs are required as sales partners as they have a better understanding of the local energy needs. A widespread distribution network is crucial in order to reach out to customers and guarantee maintenance.

Indian companies involved in the rural electrification market expect orders to double in the next three years. As more solar systems will be installed, system design will improve, banks will become more confident with lending money for solar power projects and government policies may become more targeted and effective. At the same time, falling costs for PV modules and systems and rising costs of kerosene and diesel will make the solar market more competitive.

References:



2010, p. 25



2010, p. 20

3. Ministry Guidelines by MNRE, June 2010,

http://www.mnre.gov.in


5. BRIDGE TO INDIA analysis

6. For this reason, many villages prefer to wait for grid

connection, even if there is little hope for reliable grid

power in the near term. This also raises the question of

what will happen to more expensive solar power, if the

village becomes grid connected.

7. MNRE, http://www.mnre.gov.in/, June 2011

8. Dr. A. Raza (MNRE), Off-grid Lighting in India,

Presentation at DIREC 2010

9. The Hindu Business Line, “Selco Solar Light plans to

illuminate 2 lakh homes”, 21-03-2011, URL:

http://www.selco-

india.com/pdfs/sowra_jyothi_business_line.pdf



2010, p. 36

11. Acumen Fund, URL:

http://www.acumenfund.org/investment/orb-

energy.html, June 2011


13. Industry interviews

Self Financing

20%

Loan at 5% p.a.

50%Subsidy by the Central

Government

30%

Financing of a typical 30 W SHS including battery storage

Mohit Anand works as a Senior Consultant with

BRIDGE TO INDIA, a consulting company with an

entrepreneurial approach based in New Delhi.

Founded in 2008, the company provides market

analysis and market entry advisory to

international solar companies looking to enter

the Indian market. www.bridgetoindia.com

The key is to partner with experienced global companies with high-performance solutions and innovation teams that keep up with this rapidly advancing field

Living Off Grid's Flickr Photostream