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19.02.2019, Nikhil Jaisinghani

A Re-Analysis of Smart Power India’s Electrification Data

Smart Power India (SPI) recently released its newest report, “Rural Electrification in India: Customer Behaviour and Demand”. This is the product of a survey of 10,000 rural households and 2,000 rural enterprises across four states of India. The report is full of interesting data points, a virtue of most of their reports. However, the conclusions are somewhat preconceived and are worth rethinking. 

First, the report does a nice job of disaggregating survey results across a number of metrics. The authors show how electricity demand, connection rates, and quality of power vary across states for example. They also disaggregate the data by types of households and types of enterprises. Households are categorized as either “rural poor”, “rural lower”, “rural middle”, and “rural affluent”. Enterprises are categorized as “rural small”, “rural mid”, and “rural large”. Looking at the data by household income and enterprise size, we can better understand the nuances of electricity access, demand, and supply. 

A quick observation is that the rural households surveyed appear to be from larger communities. Villages (with around 1,000 households) are larger than hamlets *typically less than 200 households) but are outnumbered 3 to 1 in Uttar Pradesh, for example. The sample shows that the average community had over 900 households, well above the average rural community size in Uttar Pradesh. However, this makes sense as the study was funded by SPI which is a donor funded project which aims to provide supplemental power in villages of North India, all of which are larger and already electrified. It is simply worth noting that the large number of hamlets in India are not adequately represented in the data. Hamlets are more remote, and their households tend to be poorer, more reliant on agriculture, and less educated. Rural poor households and rural small enterprises are more common in hamlets. Thus, many of the impacts of poverty, education, and source of income are more acute in hamlets than in the typical community surveyed by SPI. In addition, and critical for those interested in providing energy access, many rural hamlets remain off-grid while all rural villages are now electrified. 

The survey found that the average household demand for electricity is 39.3 kilowatt-hours (kwh) per month while the average rural enterprise demand for electricity was 39.5 kwh per month. This may seem surprisingly similar, especially since many readers, not knowing the rural Indian context, would expect enterprises to be more power hungry. More on this point later. 

Household demand for electricity is fairly basic. At 39 kwh per month, households are primarily paying for lighting, phone charging, and air circulation, though air circulation (fans, air conditioners) are seasonal in North India and probably used only 5 to 7 months a year. Those households with higher demand have connected to the electricity grid already and consume, on average, 51 kwh per month, while those with lower demand for electricity tend to find alternative sources such as a solar home system, a solar lantern, or kerosene. The authors found three household factors to be drivers of power use: income, education, and salaried employment. The report also showed that these metrics are somewhat correlated with the rural poor and rural lower (lower income categories) households tend to have lower education rates and tend to be informal laborers or farmers. Unfortunately, these primary drivers of power consumption are quite static in the short to medium term as incomes and education rates rise and local economies are reshaped over longer periods of time. Thus, we can assume that rural demand may be quite sticky and encouraging greater demand for power may be an uphill battle. It is also worth noting that as hamlets have more rural poor and rural lower households than villages, the remaining off-grid communities would be expected to have much lower per household and per enterprise demand for electricity. 

One household activity which is clearly power intensive is irrigation. The report found that all irritation is done using some sort of electricity, though 75% of irrigation pumps are run by diesel generators rather than grid electricity. Given the grid access rates are higher than 25%, we know that many farmers choose to use diesel rather than grid electricity to run their pumps. One reason may be power dependability, but another reason, which gets at the economics of irrigation, is that farmers who already have diesel generators are disinclined to move to grid power as this would require purchasing a grid compatible motor despite them already having a perfectly good diesel run motor. This additional upfront cost is not justified by potential cost savings (if there are any; the report indicates that grid power may actually be more expensive than diesel). 

The data on rural enterprises is equally interesting. While the household access rate is 58% in Uttar Pradesh, the enterprise access rate is only 44%. The factors which drive enterprise power demand are scale of operation, nature of commercial activity, and education level of the owner (and reading the report, the nature of the activity seems to be the most important). Just as with households, these factors can be assumed to be static. Rural entrepreneurs rarely go back to school, the nature of the business is known, and scaling a rural enterprise is difficult because of competition, limited access to finance, and business linkage constraints (certainly, rural enterprises that do scale are the exception and do not do so rapidly). Thus, rural enterprise power demand may also be quite sticky, and encouraging greater consumption may be challenging. Once again, rural enterprises in hamlets are smaller (scale), run by local residents (who are less educated than village residents), and thus would be expected to have lower demand for power. 

As already noted, the average rural enterprise has the same electricity demand as the average rural household. If we disaggregate the enterprises by type, the report shows that that retail and service enterprises have much lower power demand. The average retail enterprise and service enterprise demands less than 1 kwh per day; of the 2,000 rural enterprises surveyed, 1,800 (or 90%) were retail or service enterprises. Clearly, rural enterprises are not power hungry. Further, the SPI report also shows that almost most types of enterprises could be run without electricity. Only flour mills, cyber-cafes, and photo studies require electricity to operate. We may speculate that electricity enhances the profitability of such businesses, but we should better understand how. 

For example, let us look at a typical service business – a tailoring shop. One may believe that a tailor shop with an electricity connection would use power to run its sewing machines; yet this is rarely the case. I have traveled through rural areas of Uttar Pradesh and seen grid connected tailoring shops, but I have never seen one with an electric sewing machine. The below images are indicative of a typical tailoring shop.

Note, there is evidence of power in each picture, with meters or fans visible in each image. Yet all of the sewing machines are pedal powered. Why? Electric sewing machines are more expensive. They are harder to repair. And the rural poor tend to choose lower cost in exchange for more effort if it helps them keep more revenue for themselves. Still, electricity certainly helps. The lighting these tailors use helps them work at night when they otherwise could not, increasing their productivity and thus their incomes. Small scale tailors, barbers, and carpenters can all operate more cost effectively using manual tools but are more productive with electric lighting. This basic use of electricity does not require grid electricity

Agricultural processing is certainly more productive when mechanized. Yet, this is another example where rural India has found another solution that is better than grid power.

Once a household has invested in a tractor, it is far cheaper to purchase a processing attachment that is powered by the tractor’s motor (such as those shown in the images above) than it is to purchase an AC powered machine. The motor is a significant portion of a mini mill’s upfront cost so if farmers already have motors they can use, they can save themselves a lot of money. Even better, a tractor attachment is mobile, allowing farmers to take their processing equipment to the customers. While large scale processing from large rural enterprises may make sense to be grid electrified, rural small enterprises are more viable with grid alternatives. Based on my experience, mid-size processing facilities do not take advantage of electricity when it is available. Like irrigation pumps, once an enterprise has purchased a diesel generator, it is cheaper to run that generator than it is to retrofit the installation for grid power. 

To quote the report, "enterprises using non-grid sources, with the exception of private diesel generators, incur smaller electricity expenses than those using grid-electricity. Even though grid-users also have higher electricity consumption, these numbers indicate that many rural enterprises have chosen to reduce their electricity costs by adopting alternative solutions to suit their electricity needs." It is odd that the report makes an exception for diesel generators as table 4.1 of the report seems to indicate diesel power is cheaper than grid power. Further, the report does not take into account the cost of replacing existing diesel generators with AC motors. The point here is that the low demand for grid electricity in rural India is authentic and is a function of the customers, not the grid. Certain uses of grid power are clearly useful, but tailored energy solutions have already been found which are simply better than grid power. The business case for more electricity simply seems to be absent for many rural enterprises and the demand for power is driven by largely static metrics. This is not a point we should resist but instead embrace. 

This brings us to the conclusions which, as mentioned earlier, appear to be preconceived. The report is written with the intention of determining how to increase power consumption at the household and enterprise level, despite the fact that the report also shows that demand is low for reasons that will not change in the short or medium term. The first of the report’s suggestions is to lower tariffs in Uttar Pradesh by installing meters, thereby charging household less – and generating less revenue for the distribution companies. This is quite easy for a project with the backing of a rich donor to say – “increase subsidies”. But India is poor on a per-capita basis and further subsidizing power for hundreds of millions of people would require the country to divert funds from other priorities such as education and health care. The distribution companies, which already operate at a loss and are less able to provide quality service to customers, have been fighting for years to increase tariffs to help them one day become break even (all of the infrastructure costs would still be publicly-funded but subsidies would not then be required to cover operating costs). Most development institutions agree that power should be cost recovering in order to be sustainable. This suggestion is unpalatable. 

A second suggestion is to increase quality of supply. This of course goes hand in hand with revenue. Without greater revenue per customer, improved service is very challenging to tackle. Coupling the dual demands of higher quality and lower cost electricity service cannot be met with the national grid. And given demand is low, if consumption remains low, a national grid is not the appropriate mechanism for delivering power. 

This brings us to what the conclusion should be from the data. The report shows that distributed generation through solar mini grids and diesel gen sets is both lower cost (and at that without subsidies!) and higher quality. Further, and this is important, decentralized generation can be sized to community demand which is, as we have already established, largely driven by static factors. Thus, for rural hamlets with very low power demand, small solar grids which satisfy the lighting and phone charging services demanded year-round by both households and enterprises can provide high quality, low cost electricity for a significantly lower public investment than the national grid. In villages, larger diesel and solar powered systems can meet the greater demand and still come in at a lower cost than the national grid. By deploying appropriate and tailored technologies to meet the demands of rural communities, instead of a single solution to serve everyone, quality of service can be improved, cost to customer can be lowered, and financial obligations from the national government which has a multitude of urgent priorities can be reduced. Yet, the authors continue to pound away on the same drum that’s been beat for over half a century. 

The rural electrification space needs visionaries. Data is a tool only as useful as those who wield it. My mother worked at IBM in the 1980s when her boss told her that computers would never be used by anyone other than housewives to store their recipes. AT&T stood pat 20 years ago declaring that the mobile phone would never be widely adopted and couldn’t challenge landlines. Close mindedness costs us time and opportunity. The time is ripe for a new wave of thinkers to displace Smart Power India, advocating for customized, tailored approaches to the rural areas which meet their electricity demand while charging affordable prices. We can only hope that policy makers, donors, and financiers can see through the flashy images of fancy donor funded reports to see the real opportunity to meet India’s objectives.

 

Nikhil Jaisinghani is an experienced entrepreneur having co-founded Value Development Initiatives, a Nigeria-focused energy infrastructure company, and Mera Gao Power. Experience in both companies has led Nikhil to the driving principle that service businesses rather than product businesses have the greatest potential of reaching the world’s poor. Nikhil is responsible for raising investment at Mera Gao Power.