Business Models for Solar-Based Rural Electrification

Overview

The following article details the proceedings of the Micro Perspectives for Decentralized Energy Supply Conference - 2013

A Pricing Strategy for Micro Enterprises in Decentralized Electricity Generation Projects based on Renewable Energy

By K. Rahul Sharma - TERI India

Background

This paper analyses the economics of a Solar-PV based ‘Multi Utility Business Centre’ (MUBC) which provides electricity for productive applications. The project is carried out in India by TERI. It aims to provide decentralized power plant through solar energy and facilitates new business activities in three states in India. Electricity from a solar power plant facilitates a variety of business activities ranging from operating different appliances and machines such as fruit pulpers, water purifiers, grinders, driers, etc. Self Help Groups, Farmer’s Associations and Individuals from the surrounding villages access this SMU and utilize services for a fee.

Objective

To develop a model for how different business activities in a decentralized solar powered business unit can be priced, cross-subsidized and what affect the ratio of equity to grant has at various points in the system

Approach

One site among 7 such solar power Multi Utility Business Centers (MUBC) has been chosen for the study. The business unit charges a certain fee for each service provided. The unit itself is common property of the village, managed and owned by community members and not restricted to any one household. Surveys/FGIs/PRA techniques were utilized to estimate user demands, possible technical interventions for productive activities and ability to pay, among other factors, for the implementation of this MUBC.

Unit 1 – SPVPP

- Based on the Grant: Equity ratio, the Equity component has been used to calculate the LUCE (calculated considering outflows of annualised capital cost, operation and maintenance costs and battery replacement costs; and sale of electricity for cash inflows assuming an 8 kWp power plant operates for 350 days per year and produces 30 kWh per day). A sensitivity analysis was conducted for LUCE versus grant to equity ratio to determine the effects of the ratio on the LUCE and at what ratio the LUCE is equal to the current market price of grid electricity.

Unit 2 – MUBC

- The calculations lead us to the price per unit charged for each service provided. Annualized appliance capital cost, cost for units of electricity consumed for each service (on a per kilogram, hour or liter basis), appliance O&M including operator salary, logistics, inflation, taxes and profit margins. The percentage or money value of each of these components has been derived from the field survey conducted in 2012 in the same site and inputs from subject experts. This service charge is capped by an upper limit of the Ability To Pay (ATP) of customers, which depends either on prevailing market rates for the same service in nearby towns or on findings from the survey of potential customers.

Unit 3 – Customers/Users

The customers either directly use the service (TV-DVD, Water) or Take the final product to the market to sell at a sale price that includes raw material cost, service charge from the MUBC, logistics, inflation, taxes and profit margins as per the requirement of the business and activity. This is capped by the upper limit of prevailing market rates of such products. This sale price is directly affected by the service charge from the MUBC which is further affected by the LUCE from the SPVPP.

Results

Effect of grant and equity ratio on LUCE

In addition to the above, the effect of change in LUCE on the production cost of different services was determined as depicted for the manure mixer below:

LUCE (INR[USD]/kWh)	Buying cost of electricity. (INR[USD]/kg)	Total production cost (INR[USD]/kg)
7[0.127]	0.21[0.003]	4.04[0.07]
10[0.18]	0.3 [0.005]	4.19[0.07]
15[0.27]	0.45[0.008]	4.44[0.08]
20[0.36]	0.6[0.01]	4.68[0.08]

Discussion

The discussion revolved around the financing model of the project, the assessment of willingness to pay by the customers and the technical aspect of the project.

Q. 1. Participants were curious about the equity, debt and grant components of the project.

-Mr. Sharma stated that the project is largely financed through grant and that the equity component is below 3.4 % in all the cases. However he stated the important of increasing the equity component as societal awareness increases and that it will increases the accountability and ownership from the community managing the systems.

Q.2. What is the cost of management in the entire cost of the project?

- The cost of management ranges from 5-10% of the project cost. This is considered low as the system is managed by the community and NGOs.

Q. 3. How do you assess willingness to pay from the customers?

- Done through a survey with the customers. The service cost mostly depends either on prevailing market rates for the same service in nearby towns or on findings from the survey of potential customers.

Q. 4. What is the life span of the systems?

- Panel life is conservatively estimated at 15 years and battery life at 3 years.

Q. 5. How are the peak load managed?

- The peak load is management is done through smart metering

Micro Financing Decentralized Solar Energy Systems in India: Problems in Up Scaling and Mainstreaming

Satish Pillarisetti, National Bank for Agriculture and Rural Development, India

Background

The project has been carried out by NABARD (National Bank for Agriculture and Rural Development) to promote decentralized solar energy systems in India. The project is undertaken to compliment the efforts by the Indian central government, under the Jawaharlal Nehru National Solar Mission, which aims to achieve 20 megawatts by 2022. The project is motivated by the rural banks-pioneers in financing solar home lighting units undertaken by Aryavart Gramin Bank in Utter Pradesh state in India.

Objective

Encourage replacement of non-renewable energy sources like fossil fuels, kerosene and diesel with solar PV and solar thermal off-grid applications of solar energy. The applications targeted are solar home lighting systems, thermal applications like water heaters, other power applications like irrigation pump sets and other electricity/power applications etc. The aim till 2013 is to produce 200 megawatts of off-grid solar power and further expand thereon.

Approach

The project offers financing schemes which complements the effort of the Indian Ministry of New and Renewable Energy. The funding of the scheme is given by Ministry of New and Renewable Energy (MNRE) of through Indian Renewable Energy Development Agency and administered by NABARD. NABARD provides 30% capital subsidy (through MNRE subsidy) along 50% as subsidized loan (5% interest per annum), the balance (20%) being the margin money. The loan is distributed through local commercial Banks and Rural Banks. This scheme makes it easier for customers to assess finance.

Some of the provisions under the schemes are:

Loan repayment period: Maximum of 5 years and Interest rate on NABARD refinance for Banks-2%.

NABARD refinances 100% of the loan with a repayment period of 5 years.

No collateral for loans up to INR 100,000 ($ 2,000).

Loan and subsidy amount together released to supplier by Bank on satisfactory installation.

Banks entered into an agreement with a local NGO and Extension Centre of Agricultural University (KVK) to popularize the scheme.

Benefits of solar energy, scheme details and finance facilities explained in detail through Audio-visuals and demonstration kits used.

Project Outcome

Progress of the scheme was dismal in general. In 2011-12 all banks together financed only 45,034 units. A ground level analysis was done to assess the poor performance. It was learned that the scheme design itself was faulty. The two components of capital subsidy and soft loan made it cumbersome and compulsory refinance from NABARD dissuaded some banks which had surplus funds. Moreover Cooperative banking system with a network of 120,000 outlets excluded from the scheme.

Base on these findings the scheme was modified in 2012-13 to overcome some of the drawbacks observed. Refinance and soft loan parts were done away with and Subsidy fixed at 40 % of the unit cost. Interest rate charged would be as per the base rate fixed by each bank and some part of the paperwork was simplified with an easy subsidy flow system.

The way forward for the project is include cooperative banking system into the scheme to capitalize on the vast network of 120,000 outlets and banking sector has to take more interest in this scheme and it has to be mainstreamed as a regular credit product of banks. Secondly public private partnership mode for motivating and sensitizing borrowers and a mechanism for servicing and maintenance should be in built into the scheme. And lastly a number of organizations like SELCO Foundation, TERI etc. are working to popularize the scheme to take it to a take-off stage. In many areas they are working along with NABARD in pursuit of this goal.

Discussion

The discussions were mainly focused on the rational of the modification of the scheme, the marketing and operation of the scheme and the way forward for such schemes.

Q. 1. Why was there a need for changing the scheme from capital subsidy from 30% to 40% and how does it affect the adoption by the public.

- Mr Satish asserts that as discussed during the presentation, the new scheme was introduced to make it simpler. However the outcome cannot be assessed as the scheme is newly implemented.

Q. 2. How was the scheme marketed and operationalized?

- The scheme is marketed in collaboration with local NGOs and learning institutes. Moreover in some cases the branch manager of the banks identifies and employs local youth to market the scheme to the public. The identified local youth are given training by solar company/dealer to maintain the system and also provided with a maintenance kit. The bank pays an honorarium per month and small fee is also charged to the borrower. NGO and KVK also roped in local grassroots organizations like Farmers Clubs and Self-Help Groups to popularize the scheme. Operational guidelines were also issued in May 2011

Q. 3. What is the challenges way forward?

- Mobilizing and building networks is still a challenge due to low social awareness about solar systems. Many other partners like cooperative banks, NGOs, farmers clubs etc. will need to be further explored. Along with it collaboration with other agencies both government and private will be explored.

Solar Lanterns Transformations Life in Rural Tanzania

Andrew Mnzava, Entrepreneur

Background

Tanzania has amongst the lowest electrification rate in Africa. The project tries to introduce decentralized source of lighting through solar energy in rural areas. As the cost of such systems requires high initial down payment the project introduces revolving loan funds to finance rural lighting systems in southern highlands of Tanzania.

Objective

Identify and utilize existing SACCO's network in rural areas and for financing, management and distribution of rural lighting systems.

Approach

Identify and review existing network of SACCOS in rural areas for their willingness to participate in the project. Once the SACCOS are identified then selected managers are trained in bookkeeping and overall project management. Rural home lighting systems are then procured from manufacturers/suppliers and supplied and managed through the SACCOS.

Project output

40 SACCOS have been identified and successfully operational.

The types of solar lanterns supplied to the SACCOS from July-Nov. 2011 are given

Discussion

The discussions were mainly focused on the selection of SACCOS, operation of individual SACCOS, business expansion, financing and quality of the product.

Q.1. How is the SACCOS selected and how long does it take to select a SACCOS and start operation?

- Selection of SACCOS is done mainly through initial screening process and discussion to assess willingness to participate. Once the SACCOS are selected the management informs regional corporate offices for new orders. The transfer of new orders takes 2 -3 months to reach the customers depending the distance of the SACCOS to the supplier. Cost of transportation is minimized by collaborating with other transport agencies.

Q.2. How does the business expand?

- Mainly through word of mouth amongst the SACCOS members.

Q. 3. How are the products financed?

- The product is financed through community revolving loan funds. In most cases customers make up to 60 % upfront cash payment.

Q. 4. How the product quality is marketed and how are complaints for defective products managed?

- The quality of the product is marketed during the training of SACCO's member. Guarantee labels in the products are illustrated and defective products are analyzed and repaired and if possible replaced.

Business Models for Solar-based Rural Electrification

No Universal Model – One Global Approach

Hugo Niccolaï, Design engineer for stand-alone RE systems, EnR'Sud (France)

Background

The research has been carried out in 18 months across South America, Africa and Asia. The study is conducted to evaluate business models for decentralized Solar-Based rural electrification.

Objective

Design business models for solar-based rural electrification.

Approach

Decentralized business models for rural electrification in South America, Africa and Asia are evaluated to assess the best practices and design business models.

Project Output

Key learning:

All technologies are no longer an issue;

No universal systems;

No universal models;

“One shot” projects not sustainable alone;

Complementary strategies needed;

For regular sales: reducing upfront costs and getting regular payment.

Microcredit challenges

Microcredit not well developed everywhere;

In general, difficult to associate with DRE - not directly creating income;

Action limited on existing microcredit areas;

MFI are intermediaries: need of local companies, local solar experts communicating directly with the end users;

Materials replacement and technicians visits usually not covered by microcredit.

Model adapted to existing infrastructures, services and technologies already in the country

Success factors

Global approach of the country: existing technologies, infrastructures, local authorities;

Skilled and reliable field teams;

Ensuring customers satisfaction:

• Warranty
• After sales services
• Technicians support
• Optimizing operation & Logistic:
• Local transportation well known
• Located areas to minimize costs
• Interactive database to follow customers and new beneficiaries

Discussion

The discussions were mainly focused on the nature of financing across the globe, role of international agencies for successful rural electrification programs and overall trend observed from successful case study.

Q. 1. What nature of financing model have you observed in the case studies?

- Finance is initially donor driven but sustained growth is mainly driven through community self financed and management. Prime example is successful operation of Gramin Shakti in Bangladesh.

Q.2. What is the role of international agencies for successful implementation of decentralized rural electrification projects?

- Though initial funding is required, long-term success and sustainability of any project will depend on the capacity building at the local level. Often for a small project with limited funding, traveling expenses by foreign experts to project site dries up considerable amounts of project funds. To avoid such cases local capacity building has to be prioritize in project planning.

Q.3. What kind of success trend do you see across all case studies?

-There is no universal model. Cases differ as per the local social and economic conditions. However in most case ensuring customer satisfaction, community participation, and ooptimizing operation and logistic of the project emerge as a major them for success.