By Sunil Wadhwa, Founder CEO, Multiple Orbits Consulting; Member, Global Expert Advisory Group, International Solar Alliance;
Ex-Managing Director, GE (T&D) India Limited; Ex-Managing Director, Tata Power Delhi Distribution Limited
It is a well-known fact that despite all the advancements, a large percentage of the population of the world is still unserved when it comes to power supply. According to data published by the World Bank, 1.3 billion people around the world lack access to power. More than 600 million of them are in sub-Saharan Africa and more than 300 million are in India alone. One out of every five people around the world without adequate access to power lives in India.
The reasons for this glaring data may vary by region, such as the location and distance of the population/human habitation from the grid. In certain cases, grid extension, being expensive, may be unviable when compared to the revenue it would generate from the marginalised communities. This economics, in turn, increases the burden on other consumers, which dissuades the setting up of power plants for those who are unserved, leading to the cycle of inadequate power supply not breaking.
Having said that, the good news is that renewable energy costs have been falling drastically over the past five years. While thermal power can reach consumers only through transmission lines, renewable power has no such limitation. Decentralised off-grid renewable generation and distribution (DGD) presents a solution to serve the large hitherto unserved population in the shortest possible time frame through what is often termed as microgrids.
The business case for DGD appears to be extremely strong and a win-win proposition for all stakeholders, considering the following factors:
- It is a known fact that microgrids present the fastest way to supply power to unserved consumers in most regions across the world, as the time-consuming effort of laying expensive transmission lines is dispensed with, at least in the initial phase.
- The positive socio-economic impacts that arise from the availability of electricity to such areas are substantial, being from almost a level of zero base, and these get accelerated due to the short lead time for implementing microgrids.
- With no requirement for long distance transmission lines, the overall system transmission losses of the utility get reduced.
- The carbon footprint reduction is huge and occurs through many direct or indirect effects of adopting microgrids, such as discontinuance of wood/charcoal burning for cooking, heating and lighting; dispensing with steel, copper, aluminium and rubber usage needed for transmission lines; and use of solar versus thermal power. This contributes towards a sustainable and healthy environment.
- Microgrids have a much lower system set-up cost than grid extension options in remote areas to serve the marginalised communities.
Despite all the merits of DGD, microgrid economics have a certain set of challenges, which are critical to keep in mind in order to make informed decisions.
If the state utility was to extend its grid all the way to the unserved areas, the incremental costs would be much higher than the cost of servicing those areas through a DGD microgrid. While that is a fact, the dichotomy is that the cost of serving unserved consumers through DGD using microgrids normally works out to be much higher than the average costs and the average retail domestic tariffs in the areas served by state utilities through conventional grids. This is because the cost of the incremental transmission grid and the loss per kWh served are much higher due to low demand in such unserved areas. Further, in most countries with such unserved populations, the regulatory commissions adopt a social tariff structure, setting lower-than-average cost-based tariffs for low-end consumers. A state grid-connected consumer pays such regulated tariffs. A fully cost-reflective DGD tariff, if charged directly and dedicatedly to the served consumers, becomes unaffordable for the poor consumers in such unserved areas and would also be much higher than the regulated tariff of utilities if the state grid served them.
So, if private players were to set up DGD microgrid projects charging full cost-based tariffs, there would be a major risk of the projects getting stranded as soon as the state utilities decide on full-fledged grid extensions in the future. There is clearly a need to evolve a de-risked business model to make such DGD microgrids both viable for investors as well as palatable to consumers. In the process, this can save utilities from incurring huge capex on extending lines to remote areas with low demand. A tripartite model, somewhat on the following lines, would work well with some tweaks, depending on local considerations.
Microgrids present the fastest way to supply power to unserved consumers as the time-consuming effort of laying expensive transmission lines is dispensed with.
A tripartite DGD model
- State utilities can follow a competitive bidding or pre-fixed feed-in tariff route.
- The scope of DGD will be all-inclusive, encompassing generation of power, setting up and maintenance of distribution networks, billing, collection and customer service (commercial and supply issues). Operations are to comply with safety and service level standards.
- The DGD operator has to assume the universal supply obligation in the area of its franchisee.
- A state utility will select the specific areas to be served by private sector DGD franchisees/concessions.
- Each area will have its own specific cost to serve depending on solar radiation, population extent and density, area to be served, growth potential, level of affluence, and any specific tender conditions for a minimum number of hours of supply and, therefore, need for storage, etc.
- The state utility/regulator will specify a maximum rate of consumer tariff to be charged by the DGD operator directly from its consumers for each of the years during the licence period (say, 3-4 cents with x per cent increase per annum), and this should ideally be the same rate that consumers are charged by the utility itself.
- Bidders will quote the balance tariff per kWh to be paid by the state or state utility to the DGD project company. This balance tariff could be payable on a monthly basis, or a part of it could be allowed by the state to be bid out as an upfront lump sum or an adjustable advance with a cap. Bid evaluation criteria could be the net present value of the lump sum and the per unit balance tariff for a given trajectory of demand for the licence period.
- Carbon credits or any renewable energy credits, as applicable, will belong to the state utilities or to the DGD project owners to make the price offer more attractive for consumers. The state will provide a sovereign guarantee or revolving letter of credit for the balance tariff portion.
- If during the concession/licence period the state utility grid gets extended and connected to the DGD area of supply, the contract of the franchisee will still continue and all units produced by the DGD will be injected into the state grid and be paid for by the state at the full rate (balance tariff plus consumer tariff). This will mitigate the risk of DGD microgrids getting stranded. All future capex on network strengthening will be charged to the state utility’s account. The DGD operator will continue to perform its commercial and operational responsibilities of billing and collection of all units consumed by customers. It will pass on the amounts (consumer tariff portion) thus collected to the utilities.
How does the tripartite DGD model become highly bankable
- The state specifying a palatable consumer tariff will make collections easier for DGD and ensure that consumers have low incentive to default.
- The community should be emotionally compelled to work towards the success of this low-cost DGD model, given the socio-economic value addition.
- A major part of the DGD revenue (balance tariff) should come from the state/utility with payment securities.
- There should be no risk of assets getting stranded when the state grid extends to the DGD franchise area.
What is the DGD business case for the state governments?
- Improved quality of life for the community – a compelling case for the political system.
- Increase in the state GDP.
- Saving on front grid extension costs for the state.
- Quick access to power for the unserved population at no upfront cost to the state/utility, as the cost will be spread over a licensed period by way of balance tariff to the DGD.
An alternative model would be to split the DGD into two parts:
- A 25-year PPA for generation and supply of power to the unserved area,
- A distribution franchise for at least 10-15 years.
The 25-year PPA between the independent power producer and the state utility will continue despite the grid extension. The distribution franchisee will set up and operate the distribution network and perform the commercial functions of billing, collection, network maintenance, and so on.
In a nutshell, renewable microgrids present a quick solution to serve the large proportion of unserved consumers, provided that microgrid investors are de-risked against the stranding of a project on future grid extension. Equally important would be to ensure that the tariff charged to end-consumers in such areas is no more than what their fellow citizens living in currently served areas pay.
If I were a state-level decision-maker, I would jump at this and win the next few elections! Such is the political case as well. And also win some sustainable environment-related awards!