The Modi government has set itself the target to achieve electricity for all by 2019. While this is not the first time such a target has been set in India – in fact, similar targets have been set by previous governments for 2007 and 2012 – many observers think that if it can be achieved than by this government. However, it will not be easy. Let us look at what challenges needs to be solved.

• Cost of delivery of power to the hinterlands is highest and the ability of consumers in those areas to pay for power is the lowest
• There is a strong co-relation between states with the highest share of un-electrified population and poor financial health of a state’s utilities
• The government wants to involve the private sector with a focus on renewable micro-grids

The fundamental issue is that the cost of delivery of power to the hinterlands is highest and the ability of consumers in those areas to pay for power is perhaps the lowest. The challenge is the same for both grid extension and distributed generation. Depending on the option, the cost of delivery of power using a grid extension can be INR 6/kWh to INR 25/kWh, for a solar micro grid, it can be anywhere between INR 14/kWh to INR 18/kWh and for individual solar lighting kits and products, the cost of power is between INR 16/kWh to INR 40/kWh.

This economic perspective, however, is directly contradicted by the social one. It is unjust that affluent urban consumers pay significantly lower prices for electricity than their poorer rural counterparts. Therefore, any government scheme needs to have a social spending component to it. To avoid misuse of funds, all social spending needs to be administered and regulated. Due to this, the Indian bureaucracy often choose the option that is easiest to administer even if it is not the most effective and in some case it might even be right in doing so. There are several examples of this in the solar sector alone: i) the focus on utility scale projects that allows targets to be met with easy monitoring despite India’s leaky grid and the ability of solar to be produced in a distributed fashion; ii) writing off the generation based incentive (GBI) in favor of a capital subsidy scheme despite the fact that GBI would actually mean lower cost to the government in net-present value terms and it also being a performance linked incentive.

If we apply this principle to rural electrification using distributed renewables, micro-grids would be easiest to monitor and regulate. We already see that all the proposed changes in the Electricity Act 2003 point towards a micro-grids focused approach to rural electrification and in the past there have been talks about the central government working on a separate policy for the same. For any such policy, the central government alone can’t fund the entire effort and state governments and/or private sector will be required to provide a part of funds.

There is a strong co-relation between states with the highest share of un-electrified population and poor financial health of a state’s utilities. This co-relation forms a vicious circle that has stalled earlier electrification efforts. To break it, the government now wants to involve the private sector with a focus on renewable micro-grids. In the proposed amendments to the Electricity Act 2003, several changes have been made to cover aspects such as waiving the requirement for a power distribution license for rural solar micro-grids, a waiver of charges and clarity on what happens to these micro-grids when the conventional grid reaches in that area.

This is all good. However, there is still no proven business model that has evolved for micro-grids. Some private companies have tried different business models but none of them has proved to be scalable.

Coming back to the social spending aspects of micro-grids, an efficient incentive mechanism is required for a scalable business model to evolve. Until now, rural electrification has not even found a mention in the government’s ambitious 100 GW solar plan. Therefore, unless the government comes out with a robust policy for solar micro-grids with a substantial financial backing, the future for this option looks uncertain.

The end-customers are tired of waiting for the government and despite their financial constraints they have started to take things into their own hands. The market for solar products is evolving rapidly. Several companies have found scalable business models in this segment. By some estimates, this market has actually grown in volumes since the government’s subsidy scheme became dysfunctional. The government’s subsidy scheme was marred with lack of funds and late payments that ended up restricting the market more than promoting it. The most successful companies today (e.g. Greenlight Planet, D.light, etc.) are the ones that stayed out of the subsidy scheme even when it was operational.

Even though this non-incentivized market is expected to continue to grow at an impressive pace, it will not be able to reach the critical mass required to get electricity (or even lighting) for all by 2019.

If the government is serious about this target, it needs to up its game considerably and address the fundamental economics of rural electrification. People are demanding access to electricity now and the governments, especially at the state level, that are unable to deliver, may soon be out of power.

Jasmeet Khurana is Senior Manager Consulting at BRIDGE TO INDIA