The Paradox of Rural Electrification

Renewable energy is increasingly being identified as suitable for distributed generation on a global scale. In India, this perspective was aided by increased focus on rural electrification by way of friendly provisions in the Indian Electricity Act 2003 and three important programs: the Rajeev Gandhi Grameen Vidyutikaran Yojana (RGGVY), Village Energy Security Programme (VESP), which has been discontinued since 2012, and Remote Village Electrification Programme (RVEP). Indeed, the landscape for distributed generation of renewable energy has changed vastly in the last two years. Easy availability of seed capital or donor grants encouraged young entrepreneurs in this space. Favorable policies and availability of capital subsidies further accelerated market entry. And yet, despite these measures, these players are having trouble expanding their scale of operations beyond a few initial pilots.

Broadly speaking, there are two kinds of firms in the mini-grid sector doing business in rural regions, the Renewable Energy Service Companies (RESCOs) and the Engineering, Procurement and Construction (EPC) contractors. In the RESCO model, the serviced households do not own the generation equipment, but pay a monthly user fee to the government agency that owns the equipment or to the RESCO itself. In the EPC model, the equipment is sold to the serviced community under joint ownership (with some after sales service support) or to a rural entrepreneur who then becomes responsible for collecting user fees from the households being served.

Viability of both the RESCO and the EPC model hinges on swiftly expanding the customer base in the initial years and efficiently organizing an on-time user fee collection process. These user fees, and the sales of generation equipment in case of EPCs, are the main source of funding the high working capital requirements of micro-grid firms which are often early startup companies. Because it is a nascent industry commercial debt is hard to come by. Furthermore, these early entrants do not have the cushion of being a sub-division of a larger enterprise capable of absorbing high capital requirements in the initial scaling up period. In the EPC model, since the upfront cost of such systems is steep, low maintenance and no fuel requirements make good economic sense only when lifecycle costs are factored in. Rural poor people tend to apply high discount rates in their purchase decisions and prefer continually high operating costs rather than a high initial cost.

On the other hand, in the RESCO model, the breakeven point is greater because small fee payments need to offset a relatively large system cost. The overhead cost of operating in remote rural locations is also high. To make matters worse, payments are not smooth and do not happen by themselves but require skilled human resources who are able to coax electricity dues out of serviced households. Collection is a tall order in a rural environment where villagers have been conditioned to expect electricity services to be subsidized. They are happy to deal with under supply from the central grid, or spend higher amounts on dirty alternatives like kerosene, or even to live in darkness than cough up large sums for a utility-imitating solution like a micro-grid. Even though consumers understand the benefits of electricity, the threat of electricity disconnection upon non-payment of charges often does not change consumer behavior.

A pricing solution to address the twin problems of high upfront cost affecting uptake rates and payment collections does exist: ‘pay-as-you-go’ pricing systems. One of the pioneers to offer such a payment solution is Simpa Networks. They have developed ‘progressive purchase’ meters that they mount on top of energy devices. Users pre-pay based on actual usage and each such payment contributes towards the total purchase price of the system. Pre-payment ensures that consumers are served while alleviating the risk of non-payment post consumption. However, the addition of such meters is an additional cost to an already expensive system.

In addition to pay-as-you-go systems, another solution that exists is the use of mobile money or money ‘topped’ up on mobile accounts that can be used as payments for energy services. A couple of mobile money platforms, although nascent, have made significant inroads in financing solar lighting products through mobile money. These include M-Peda in Kenya and Tanzania and M-KOPA in Kenya.

Many RESCOs employ locally sourced individuals for the purpose of payment collection. This reduces the cost of expensive pre-paid meters and/or expensive staff on the company’s payroll. Since a local recruit is likely to know consumer households on a personal level, it is easier for him/her to identify reasons for non-payment. Such reasons could vary between having access to alternative, cheaper means of lighting/energy needs, low levels of liquidity, by-passing the grid — electricity theft — in cases where the operator is not able to monitor household level consumption, among others. Other methods to improve payment rates could include more regular collections rather than monthly, say weekly or bi-weekly. This further break down in the total value of monthly bill amount makes it appear to be a smaller and affordable amount.

Modern off-grid clean energy solution providers are trying different methods of making their products more appealing by introducing innovative finance and pricing structures in a bid to secure a cleaner market share away from the near monopoly of kerosene based solutions. The fight will be tough as the steep upfront cost of clean solutions presents a major barrier to greater implementation. But, as awareness about the negative health and safety issues of solutions based on dirty fuels spreads, as the modern energy industry consolidates and as commercial debt starts to pour in accompanied by a slow exit (hopefully) of market distortionary subsidies, it will not be long before these solutions start selling like ‘hot cakes’ as indeed they should.

The views expressed here are solely those of the author and do not reflect or represent the opinions of any other agency or organization.

Image Credit: By RanjithSiji (Self) [GFDL ( undefined CC-BY-3.0 (], undefined


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