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November 19, 2010

Sierra Club India Environment Post: 1.2 Billion Reasons to Pursue Micro-Energy for Rural Electrification, Part 2

In India 78 million rural households are reliant on kerosene. These households spend as much as one-third of their incomes on a fuel the government subsidizes to the tune of $2 billion annually roughly, 40 percent of which is diverted to the black market away from the intended beneficiaries. By converting this massive expenditure toward micro energy it's possible to mobilize at least the first 10 watts of energy access -- a measure which would replace the dangerous and heavily polluting fossil fuel that dominates rural areas of India and many other countries around the world.

The idea that this level of energy, or anything less, is minimal and should therefore be given freely has hampered efforts to build the micro energy market. The fact is that with enormous gains in efficiency from LED lighting, 10 watts of power goes much further today than it did even a few years ago. What's worse, it completely underestimates the ability of the poor to leverage even small amounts of power for transformative purposes. We need look no further than mobile phones to see what even a few watts of power can do in the hands of the poor.

This market is beginning to take shape with cash sales of LED lamps lighting the path, many financed by 6-12 month working capital loans. However, this is just the first step. What are really required are 1-3 year energy loans from the private sector. This can be stimulated by targeted grants that bear first loss risk guarantees to private investors to encourage them to charge ahead and invest. These loans are then able to mobilize 10-100 times the investment. Taking our previous assumptions of $10 billion in capital requirements to build out the industry, only $0.1-1 billion of grants would be required over 10 years, not the $36 billion the IEA estimates which will be spent on ineffective and inefficient grid extensions regardless.

These grants are already beginning to flow into this nascent sector. However, the next step is perhaps the most difficult. The private sector will simply not invest in longer term 5-10 year loans for village scale mini-grid power. Even microfinance field practitioners use relatively short finance windows of 1-2 years which are much too short to finance appropriate infrastructure. There is, therefore, a clear need for targeted and effective public policy that promotes an incremental approach which will build investor confidence, reduce risk premiums, and create the ability to secure longer term capital investment.

For example by leveraging the support of developmental institutions and the larger pools of capital that entrepreneurs now have access to, it is possible to finance the electrification of rural schools, cell phone towers, and other public infrastructure with renewable energy. In each case renting or selling rechargeable lanterns (for instance to school children) allows the population to match every day patterns of movement (going to school), energy consumption and cash flows. This leverages the power of a single investment to ensure energy access for surrounding communities. Variants of such a model have been proven successful by campaigns such as TERI's Lighting a Billion Lives. The Government of India is now trying the approach with rural cell phone towers, which will number 639,000 by 2012 and hold tremendous promise for renewable energy and community power.

More profound are the implications for societies around the world that choose to build local renewable energy economies. First and foremost such economies avoid the tragic legacy of displacement and disenfranchisement of centralized energy projects. More importantly, they will have a cascading development effect by improving productivity and income as well as health and educational outcomes. All of which will contribute to decreasing levels of rural-urban migration that are strangling the developing world's cities while leaving millions at the mercy of natural disasters and climate-change impacts in the most vulnerable areas in the world.

We now sit at a historical crossroads capable of transforming the lives of billions. Strategic investments in decentralized renewable energy through mini-grid infrastructure alongside micro-energy services are perhaps the only way energy will be effectively and equitably delivered to the billions who lack it. Indeed, it may represent not only a step towards reversing the failures of the past, but a means of powering humanity towards a better future. 

-- Justin Guay

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