The Prime Minister of India has been saying that electricity will be brought to all villages by 2018 with power available 24x7 to all households by 2019. The task, however, appears easier said than done as currently around 250 million people are without electricity access and probably an equal number do not have reliable supply. Some of the recent developments, such as notification of tariff policy, launch of UDAY (Ujjwal Discom Auurance Yojana), do, however, demonstrate that central and state governments are working collectively to ensure power for all.
One area worth discussing in this discourse is the government’s recognisation of mini-grids with recent developments on the policy front. The first was an explicit reference to mini-grids within the national tariff policy notified in January. This policy recognizes the importance of ensuring last mile connectivity by creating an enabling condition for investing in mini-grids. At the state level, Uttar Pradesh (UP), where electricity access, availability and reliability are major issues, took the lead and announced its mini-grid policy to provide a conducive investment climate to stimulate private participation. The state regulator followed it up and announced the draft regulations for operationalizing the policy. The last development was the constitution of a Committee by the Ministry of New and Renewable Energy for developing a mini-grid framework.
All the above are undoubtedly laudable moves. However, there are some grey areas that need to be addressed before we can derive full benefits of these policies and regulations.
The tariff policy mentions that investment involved in setting up mini-grids is substantial and one of the investment risks is the grid reaching the area before full investment is recovered. It further adds that to mitigate such risks and incentivize investment, an appropriate framework is required to ensure compulsory purchase of power into the grid from such mini-grids. While one waits for the regulations to be notified, it is important to take note that currently, there is no parity between mini-grid and grid-based tariff, which puts the mini-grid at an obvious disadvantageous position.
The UP policy is as an apt example. The policy allows projects to be established by private sector with 10 years of mandatory O&M, with government giving 30% subsidy. . However, monthly tariff is capped at INR 60 to INR 120, depending on load. Experience from existing private sector projects indicates that tariffs range between INR 100 and INR 200 for basic power supply. Discussion with developers indicates that any tariff below the existing price will make their operation unviable. Alternatively, the policy provides for installing mini-grids without subsidy. In such case, the developers are expected to identify projects and arrange for land. They will be allowed to charge tariff based on mutual consent with the consumers. However, the policy does not spell out the guaranteed return allowed on equity investment, similar to return on equity applicable when large power plants are set up.
To bring parity and at the same time ensure viability of mini-grids, the commission may think of creating universal service obligation fund through a suitable mechanism, such as using cross-subsidy or levying a cess on conventional electricity and/or deploying savings from reduction in kerosene subsidy. Using Aadhar, this amount can be used to provide direct subsidy to poor consumers, who can pay for the electricity from the micro-grids.
Second, the central and state policies indicate that mini-grids can start feeding power to the main grid when the grid reaches such villages. However, there are still some ambiguities related to their inter-connectedness and fate of the mini-grid infrastructure when the grid reaches such villages. The 2013 regulations of Central Electricity Authority on interconnections do not provide full clarity. The key regulatory issue is development of standards that will allow for a cost-effective interconnection solution without jeopardizing the safety and reliability of the power systems. The UP regulation is also unclear whether the developer can continue to serve locally, using distributed power and uptake electricity from the grid when it reaches there.
Third, the feed-in-tariff (FIT) for mini-grids should not be set similar to FIT for larger capacity grid-connected systems, which has the inherent advantage of ‘economies of scale’. However, large projects suffer from higher technical loss when the generated power is taken to remote villages. The FIT should ideally be set considering the realistic operation and maintenance cost of small systems.
Last but not the least is access to finance at the right terms and conditions which is critical for scaling-up micro-grids. While part-subsidy from government exists under some schemes, generation of the remaining capital at lower cost and/or without any collateral is difficult because of the high-perceived risks of investment in micro-grids. Hence, in the absence of a risk guarantee mechanisms, formal financial organisations will continue to be reluctant in lending. The problem gets compounded by the smaller capacity of these projects that makes it difficult for the developers to attract equity finance due to perceived challenges of scalability. Thus, unless Government includes this sector under priority sector infrastructure provisioning it would be extremely challenging to procure low cost and long term finance for micro-grids and could frustrate the very objective of ensuring last mile connectivity.
While the developments are positive, what is needed is to ensure that ambiguities are addressed through consultations with all stakeholders for ease of doing business for mini-grid developers, reliability of the mini-grids and affordable consumer tariffs.
(A shortened version of the article was published in the Indian daily, Hindustan Times, on April 26, 2015)