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The Scalability of Off-Grid Renewable Energy Firms

The market is presently very favourable for DRE (Decentralized Renewable Energy) products to electrify rural India. The market is now approaching a point where the cost of fossil fuels being used to power homes is on par (or already exceed) equivalent renewable energy products. Further, the market is shifting from a product-centric to a service-centric approach to providing decentralised renewable energy. 
It is estimated that roughly 55% of rural Indian households do not have access to electricity without a foreseeable electrically connected future. This segment annually spends over $60 billion on energy due to inefficient and antiquated sources like kerosene. (1)  According to the Off-Grid Business Indicator report released by the Solar Energy Foundation, India ranks highest in the top five off-grid markets in the world with an estimated market share of $27.4 million a year. (2) 
The increasing cost of energy for diesel, kerosene and coal is helping stimulate DRE demand. The energy cost will increase for diesel as the new government reaffirmed a commitment to keep increasing tariffs for diesel each month. E-Hands Energy, a provider of solar/turbine off-grid products and solutions, states that the cost of running a diesel generator for 6 hours per day  would be about 10,000 INR a year including the fuel and the cost of DG set, amortized over 3 years. Their Namma Urja solar home system would cost less than INR 9000 with a rate of investment of less than 1 year. Meanwhile, an increase in the cess for coal was also announced last month, and a component of this cost may be passed onto consumers. 

Lessons learned from past 
Indeed, in the last 4 years, a large number of renewable energy companies have entered the Indian DRE and have experimented significantly with products and business models. There is a plethora of renewable energy products entering the market (solar, bio-energy, wind) – with mixed degrees of uptake. As part of this learning period, manufacturers, customers and system aggregators have learned tremendously about the different solar markets in India. In particular:

  • The familiarity of the customer base to the concept of solar and renewable energy products has increased. Here, the humble ‘solar lantern’ is often the low risk, low cost market entry product. For example, E-Hands sells a range of goods from solar lamps (INR 2,000) to larger systems (INR 40,000) in 27 different villages. However, their largest share of revenue comes from personal solar lamps. The uptake of solar lamps helps to shape/educate a customer base and enables them to consider more sophisticated RE solutions later on.

  • The competitive pressure on renewable energy product manufacturers to respond to quality concerns has increased. A few underperforming DRE products have led to cynicism in some market segments. Manufacturers are working hard to re-engage with higher quality products. Entrepreneurs are still mapping local, specific customer needs and the operational demands on their product, in order to iterate on solutions which remain resilient during deployment.

  • The concept of brand is becoming important – with the absence of a dominant ‘DRE product brand’ particularly in rural markets, there is a scramble to set up distribution, customer service and retail points that generate brand recognition – not for just one product, but a basket of DRE goods & services. This is particularly true for solar-powered DRE products. 

The key: Quality and service
Overall, the approach shifted from treating solar/DRE products as off-the-shelf FMCG-type goods to a “service subscription” model. In a subscription model, companies are supporting the DRE product with on-going customer service. This is critical in ensuring customer retention and loyalty, as well as, converting cross/up-sell opportunities.  
As CEO of E-Hands, Raghuraman C. clarifies, “The key [to growth] is providing a high quality product and high quality service in the village… Right now, we are understanding the local village and we have pin-pointed our top customers such as road side restaurants, weavers, poultry and flowers/vegetable sellers. These are the places that work beyond 5 pm and they are the ones who need access to energy. Hence, the incentive for village shops to invest in solar is there.” 
According to E-Hands, the financial case backs up the business logic: “For every one hour extended a shop earns INR 200, so they can afford to pay INR 100 a week for a system that can give them that kind of lighting,” says Raghuraman C.

Innovation sample: Solar powered food cart 
Another innovation off-grid solar provider is RayForce Greentech. RayForce developed a solar powered food cart to help road-side resellers to refrigerate their produce. This enables a dramatic reduction in food waste while enabling road-side fruit and vegetable sellers to still offer fresh produce to the doorstep of households in urban centers. At present, 100 solarised carts are being sold to different states including Gujarat, Rajasthan, Madhya Pradesh, Punjab, Haryana, UP, Orissa, Bihar, West Bengal, Tamil Naidu, Karnataka, Kerala and Andaman.
For the road-side seller, RayForce Greentech carts enable more revenue generation than non-refrigerated equivalent carts. 
This innovation has widespread implications on cold-storage in India. “We are also expanding to complete solar hybrid power systems for warehousing, refrigerated vans, local store houses, and retail shop/carts”, says Deepak Solanki. In this manner, one can see how solarised cold storage services could help bolster supply chains between store-houses, mandis, shops, and last-mile retailers.

Challenge: Customer relationship
The largest challenge for this “second generation” of DRE firms is to build a positive and constructive relationship with 3rd party ‘co-partners’ to ensure:

  • On-going maintenance of their systems

  • Enable revenue collection models 

  • Enable customer service

These functions are often too expensive for any one firm to do on their own. ‘Co- partners’ can take the form of mainstream retail store owners, NGOs, banks, microfinance institutions and others.
As E- Hands Energy states “If you don’t give your development partners work, it becomes really difficult to retain them. However, we have yet to reach the stage where we can give them enough renewable energy work.” 
For example, when working with road-side resellers or villagers, there is no one experienced enough in selling and maintaining renewable energy systems while they are being used by the customer. For E-Hands, one way to overcome this is to convince electrical shops near villages to become the dealers and sub-dealers. This can be a difficult task when the demand/awareness of off-grid DRE products is still low and development partners feel no incentive.  

Finance deficit still existing
After so much experimentation with product and business models, one may ask if the finance/investment deficit still exists.  At present no company has shifted to a completely sustainable revenue model – but many are trying to achieve the scale, distribution & collections infrastructure and brand recognition to achieve this. 
Solar firms are finding it difficult to find the right financing for projects. For example, E-Hands Energy used a variety of methods from crowd funding platforms to NGOS to micro-financers in order to implement their products/solutions. “After a while, it becomes difficult to collect money and I hope investors will take more risks”, Raghuraman C. 
For RayForce Greentech, cart-owners typically need product finance with instalment payments, and may further avail a mix of subsidies facilitated through banks. Some of their beneficiaries can avail subsidies via the National Horticulture Mission, RKVY and State Governments. 

Policy creates uncertainty 
In terms of other government policies, import duties continue to create uncertainty for DRE products. This is not only increases overall prices of DRE products. In addition, the relative size of import duties in different industries influences the choice of DRE technology. For example, in wind segment, the best technology for micro-grid turbine power is currently sourced from Europe. According to E-Hands, due to import tariffs on small duty wind turbines of 26%, the cost of small-grid turbine energy is 20% more than solar for equivalent generating capacities.
The DRE product markets have gained significant product and customer experience over the last 4 years. Finance and policy challenges have not been ameliorated.  One hopes the recent Budget announcements and policy vision outlined by the Modi government may provide comfort to businesses and investors as they work to scale-up DRE uptake in a challenging market. 

(1) www.worldenergyoutlook.org/media/weo2010.pdf
(2) http://www.sun-connect-news.org/fileadmin/DATEIEN/OBIN_Asia_2014_FINAL.pdf

Sustainability Outlook is a market access, insight and collaboration platform tracking actions related towards sustainability in the Indian economy.

Source: http://www.sustainabilityoutlook.in/content/scalability-grid-renewable-energy-firms

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