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Lighting Up Areas of Darkness: Power for Rural Livelihood Enterprises Programme

Ashok Khosla, March 1997

Can there be any resource management issue deserving higher priority among the nation’s policy makers than the need to accelerate delivery of energy and electrical power to the rural areas of our country? Without substantial increases in the availability of energy and power it is difficult to imagine how the growing numbers of rural poor will cope with the basic problems of survival and subsistence, let alone achieve the surplus and satisfaction that fifty years of nationhood should entitle them to.

We now need no-nonsense policies that allow a substantial increase by the poor in the use of energy for their daily needs, no less than for productive purposes. And such policies must be designed so as also to promote the goals of sustainability - both by shifting to the use of renewables and by reducing the longer term risks of climate change.

While attainment of sustainable development paths will unquestionably require fundamental changes in the consumption patterns of the rich, both in the North and the South, it will also need significant changes in the economies of our villages and small towns.

The 40 year old policy of creating expensive, centralised grid-based power systems combined with a rural electrification programme has not brought about the desired economic development of the rural areas and small towns. A viable alternative appears to lie in the concept of Independent Rural Power Producers (IRPP) which could effectively bring affordable power and energy services to these areas. Similar in many ways to the Independent Power Producers (IPPs) now being established in the centralised power and industrial sectors, commercial IRPPs, based on local sources of renewable energy, have become competitive with power supplied from conventional fossil fuel power plants at points of end-use.

The current situation of the power sector

Our power sector policy is predominantly based on the concept of centralised power stations using fossil fuels such as coal, oil or gas, and hydro-electric plants where appropriate water flows are available. Centralised stations include: mine-mouth or port-side stations, transmitting power over long distances by HV transmission lines; load centre power stations, which are located near industrial/urban consumption centres, with short HV transmission lines; large hydro-electric stations, which are generally located far away from load centres; and captive power stations built by the industry to meet its own load.

The inherent shortcomings of a centralised power sector in our country today make it unable to meet the demands placed on it which continuously outstrip its generation, transmission and distribution capacities.

There is, of course, also the rural electrification programme. Although reasonably successful in some states, it has yet to reach electricity into a very large number of homes or workplaces in rural India. In any case, it is primarily geared to supply irrigation water for agriculture. These loads, which are individually very small, add up to a substantial total which is largely seasonal and creates large peak loads during irrigation seasons. The capital intensive power lines in rural areas operate at very low and therefore highly uneconomic average load factors. Additionally, these systems are largely responsible for the very high transmission and distribution (T&D) losses of the power sector. Taken together, these factors make the rural electrification programmes inherently unviable in commercial terms.

Other factors which lead to the unsatisfactory performance of the state-run power sector are:

• Power tariff policies which do not permit differentiated rates for peak and off-peak consumption
• Very little demand side management (DSM)Leakages and theft of power, often on a large scale
• Over-staffing and other bloated overheads
• Political and bureaucratic interference in decision making and management.

As a result, most of the state electricity boards not only suffer from astronomical losses but they are also unable to meet their basic responsibilities, such as:

• Reliable supply of specified quality to the industrial and urban sectors
• Reliable, timely and adequate supplies to the agriculture sector
• Supplies to meet the "development needs" of the rural sector (affordable energy services for social needs such as drinking water, schools, hospitals, etc., and power for small, local enterprises)
• Minimum returns on investment (ROI)

Faced with such a situation, Central and State governments have started to tackle the problems of the power sector as a part of their broader economic restructuring programmes. Recent liberalisation of economic policies includes the opening up of the energy and power sectors to local and foreign private ownership. Very attractive financial incentives and risk guarantees are being offered to foreign investors and Independent Power Producers (IPPs) to build privately owned power stations and thereby add to the generating capacity of the centralised sector. An underlying expectation is that the IPPs will also lead to improvement in the overall performance of the power sector by subjecting the public sector utilities to market competition.

The activities of IPPs will be exclusively in the industrial and urban sectors since only these sectors can ensure the profitability risk minimization demanded by investors. IPPs are, therefore, unlikely to take an interest in the small loads and ratings of power systems needed for rural areas.

The role of IRPPs

Taking into account the situation as outlined above, it appears logical to look for new solutions which can satisfy the needs of development while taking into account the demands of the Climate Convention. To expedite the process, any new solution would do well to take advantage of the recent policies introduced to attract IPPs, and use the instruments and mechanisms which have been created for promoting them.

The IRPP proposed here is one such solution.

1. First, it works within the framework of the market, ensuring not only efficiency, but also an ability to expedite the acquisition of finances, managerial talent and innovative technology that were hitherto unavailable for rural electrification programmes.
2. Second, it can, at the same time, contribute to important objectives for equitable development. In comparison with conventional centralised systems, the IRPP’s services are inherently more accessible to those who need, but at present do not have electricity.
3. Third, by reducing use of fossil fuels and virtually eliminating carbon emissions it automatically meets important environmental goals.
4. Fourth, it can be innovatively structured to take advantage of new instruments created under the Climate Convention and other global treaties to promote sustainable development. For example, an IRPP would be a prime candidate to receive capital investment for any fund created through taxes on energy use or on CO2 emissions. It would certainly be eligible for its own revenues from the reduction of carbon emissions under the proposed Joint Implementation projects of the Climate Convention.

There are several mature and reliable technologies available for IRPPs. These include:

• Biomass-based systems, including gasifiers, combustion, etc.
• Biogas systems
• Mini-hydro
• Wind generators and pumps
• Solar PV
• Solar thermal

Advantages of IRPPs

Their competitiveness increases with the unreliability of power supply from the grid which can be expected to grow for some time to come, especially as the powercuts in smaller towns and villages become more frequent, longer lasting, and less predictable. The substitute and emergency power supplies are expensive, inefficient, highly polluting and full of complications. They will accelerate rural development sustainably by creating markets for local resources, catalysing the creation of new jobs, social services and the empowerment of the poor and women, and establishment of conditions essential for orderly social change. Being inherently profitable, they will spearhead the growth of renewable energy technologies and their large scale production, leading to the transfer of technology to other sectors on a South - South and even South - North basis. They can facilitate the introduction of a transitional energy policy during the next few decades which will promote an increasing share of clean power systems in the national energy mix and reduce the growth rate of CO2 emissions. They will thus partly compensate for the growth of CO2-intensity in the industrial and urban sectors, and will help reduce the risks of climate change even as the development process gets accelerated and energy consumption increases in India and other developing countries.

Currently, IPPs are being approved by government with rates of Rs. 2.00 to Rs. 2.50 per kWh at the point of generation. To this must be added the costs associated with T&D (investment plus losses) to determine the commercial price of power at the point of use, bringing the price of power to the consumer to nearer Rs. 3. In contrast, an IRPP based on biomass gasifier with duel fuel engine can deliver power to village users at a cost of Rs. 1.95 per kWh or less, even with no credit for utilization of waste heat. The assumptions and cost calculations are shown in the accompanying table.

Types of IRPPs

To start with two distinct types of IRPPs will have to be designed:

Commercial IRPPs

These would be appropriate for operation in small towns and larger villages which are already connected to the grid. In such communities, power connections to workshops, small-scale industries, shopkeepers, traders and households already exist, but there is no reliable or regular supply of power. Market research has shown that a considerable amount of power can be sold to these groups of consumers. Once local investors find that a reliable source of power exists, new micro-enterprises (e.g., agro-based processes, workshops and small factories) will be started, creating additional demand. New markets for small-scale irrigation, drinking water supply, schools, hospitals and other social services tend also to quickly come into being. A typical project profile for the commercial type of IRPP shows that such a unit can provide affordable electricity, yet be quite profitable.

Typical investors in commercial IRPPs are likely to be local, national or foreign:

• Power/energy utilities
• Industries (big or small)
• Development and private banks
• Pension funds, investment financiers
• Ethical investors
• Private capital

Semi-commercial IRPPs

A second type of IRPPs will require special structuring for villages which have neither a substantial existing load nor a large potential based on current earnings of the local population. Whatever small load that exists in such villages is predominantly for irrigation. A market for power has therefore to be created by working with other agencies to promote a number of integrated activities such as:

• Creating new jobs through the power plant (supplying fuel, plant management and O&M)
• Providing reliable and timely water supply services to increase the income from agriculture
• Networking with local investors, government and financial institutions, and NGOs to catalyse the establishment of micro-enterprises such as agro-based industries, small factories and workshops, and creating new jobs.

In such cases, where energy has to be used as the initial instrument to promote job creation and social development, the IRPPs will have to structure their financing to permit them to sell power at a price below the commercial prices for an identified section of the population for the first few years. As the paying capacity of this group of clients increases, the sales price can be regularly increased until the commercial level is reached. The financial packaging can quite easily be designed to meet these losses of the first few years. Several bankable project profiles are now available.

Typical investors in semi-commercial IRPPs would, in addition to those listed for commercial IRPPs include:

• NGO-funds (e.g. FREND)
• People in the towns and villages where the IRPPs are located
• Local small industries
• International funding mechanisms such as GEF
• Funds created from CO2 or energy taxes
• Joint Implementation under the Climate Change Convention etc.

Prerequisites for establishing IRPPs

To establish IRPPs on a large scale, the dual objectives of sustainable development and commercial viability will both have to be satisfied. While this appears to be eminently possible in principle, satisfaction of both objectives will have to be demonstrated in practice, on the ground. The social and ecological goals of IRPPs will have to be achieved in a manner which is acceptable to promoters of sustainable development. And their technical, commercial and operational viability will have to be demonstrated in commercially successful projects.

Decision making, managerial and financial structures will have to be engineered to safeguard the interests of all the parties concerned: the community, the financiers and the operational staff. This will involve innovative approaches for integrating technical, social, financial and ecological aspects; IRPP packages have ultimately to be attractive to prospective investors of diverse types without losing sight of the interests of local consumers.

The IRPPs, viable commercially, will also save the centralised power sector substantial amounts of money through reduced transmission and distribution losses and peak-load sharing and will play a complementary role in the national energy-mix. Given only a facilitating policy and financing framework from governments, investment funds, banks and the industry, the World Bank and IFC, and ethical funds, IRPPs are ready to make a break-through in the market place.

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