Rural electrification rates in India lag behind government goals, in part due to the inability of distribution companies (discoms) to fund central grid expansion. In the absence of central grid electrification, generation systems that serve only a small number of customers offer an immediate pathway towards rural electrification, in particular mini-grids. Yet private investment in mini-grids in India has been virtually absent. Using a comprehensive life-cycle cost analysis, we find that mini-grids are more economical than incumbent energy services available to households without central grid connection. Through a qualitative analysis, we identify the threat of central grid extension as the gateway barrier preventing mini-grid development in India. The issues associated with the gateway barrier have common elements with the so-called holdup problem as identified in the economics of organizations. We suggest several modifications to a proposal by the Indian Forum of Regulators that would regulate the terms on which entrepreneurs could develop mini-grids and then receive contractual protections on these infrastructure investments.
In calculating the cost of mini-grid electrification, we present cost estimates for three technological assumptions, namely mini-grids with (1) diesel, (2) solar and battery, or (3) solar and diesel generation technologies. We assume that the minigrid meets the nine hours of load of the greatest cumulative magnitude, ... that each mini-grid is accompanied by a distribution network of 3 kilometers [and] the mini-grid provides electricity with 90% reliability.
Figure 2 summarizes our cost competitiveness assessment. The figure emphasizes two points. First, mini-grid solutions, across a range of technologies, are less costly than incumbent energy services that consumers who are not connected to the central grid are currently using. Second, all of the distributed (i.e., non-central grid) technologies greatly exceed an indicative retail rate offered by discoms, $0.062/kWh (INR 3.74/kWh at 1USD = 60INR). Thus, an extension of the central grid would imply substantial revenue risks to the mini-grid entrepreneur in the absence of adequate protections. Households could opt away from the mini-grid and purchase lower-priced electricity from the central grid.
We estimate that diesel-only, solar and battery-, and solar and diesel-based mini-grids cost $0.52/kWh, $0.36/kWh, and $0.30/kWh, respectively, while the pooled diesel solution costs $0.95/kWh. The cost of the kerosene solution and tariff from the central grid remain at $0.94/kWh and $0.06/kWh,respectively.
By Stephen D. Comello, Stefan J. Reichelstein, Anshuman Sahoo and Tobias S. SchmidtStanford University Graduate School of Business http://www.gsb.stanford.edu
Working Paper No. 3382; December 2015