Barriers to Entry and Scale

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The previous sections of this feature have highlighted several important trends. First, with its growing population and standard of living, India will require considerably more energy in the near future if it hopes to continue to achieve high levels of economic growth. Second, although the government has focused heavily on grid expansion and has been somewhat successful, there are still huge segments of the population, particularly rural communities, that have limited or no access to modern power. Third, there have been many policies undertaken by the government to make it easier for other entities to enter the energy sector, especially for renewable energy providers, by providing tax exemptions and other incentives. Finally, rising fuel costs, decreasing resource availability, and increasing environmental concerns have made conventional fuels less and less favorable as a means of providing energy. All of these trends have produced a unique opportunity for distributed energy enterprises to enter the market in India. Not only can the enterprises meet the needs of isolated and disenfranchised rural populations, but they can do so in a financially and environmentally sustainable way. These types of enterprises, like the ones featured on The Energy Map, are a crucial component of any energy strategy in India and can help lift millions of people out of poverty. Despite the large number of distributed energy enterprises (DEEs) in India, very few of them have reached meaningful scale. Millions of Indians still suffer from the effects of energy poverty. There are three main areas of concern for DEEs: creating value, distributing products and services, and keeping costs low. DEEs need to be conscious of how the limitations of their technology as well as its ability to create value for customers. They also need to ensure that their business models fit the local context by paying attention to the realities of their target market and what ever regulatory restrictions exist. This section seeks to explain some of the barriers that exist that prevent small off-grid energy providers from entering the market or achieving meaningful scale.

Integration and Consistency of policies

The policy framework in India is extremely complex and at times even contradictory. At the ministerial level, the different ministries often have conflicting policies and jurisdictions. Because there is no single ministry responsible for creating and implementing energy policies, each ministry often pursues its own interests, rather than the interest of the country as a whole. Disputes over fuel prices, for instance, might pit the Ministry of Coal, seeking fuel subsidies, against the Ministry of New and Renewable Energy, seeking cancellation of such subsidies.The lack of coordination between the federal government and state level governments is a major issue for the implementation of policies. For example, some of the provisions of the 2003 Electricity Act federally mandated that energy companies have renewable energy obligations. Yet there were no provisions to allow the MNRE to enforce this policy at the state level. There are also major discrepancies between states that make their investment environments more or less competitive. This means that DEEs may find it too difficult to expand to another state based on the fact that the conditions there would require them to completely change their business plan.The inconsistency between state policies has resulted in a high concentration of DEEs in certain areas of the country like Karnataka, as discussed in the Energy Providers section. Furthermore, these differences have also resulted in varying levels of development of infrastructure and investments across states, creating a major imbalance in terms of economic prowess.India is in desperate need of a comprehensive, integrated, and consistent energy policy that addresses these imbalances and makes the investment environments in all states as equal as possible.  This reform must also shift the focus from the grid and large-scale operations and give more attention to smaller energy enterprises. It might include provisions to remove counterproductive trade barriers, subsidies, and other restrictions so that DEEs can effectively scale and move between states.

Geography

The main issue with geography is how it limits the viability of certain technologies. As discussed in the Energy Access section, solar technologies will be more effective in the south and west of the country than they will be in the northeast. Biomass power can only work in areas with enough available plant products, just as wind and hydro projects rely on the availability of their respective drivers. This can make it difficult for DEEs to expand without diversifying their product line.

distribution

Geography can also limit the enterprise’s ability to reach its customer base. This is an issue in terms of finding new customers, being able to deliver products, and the ability to provide services and maintenance. Simply because DEEs are more likely to reach isolated communities than the grid, it is not easy for them by any means, especially when considering their budgets and personnel limitations.Distribution is a key concept highlighted in the energy map, and finding innovative ways to get products to isolated customers is crucial. One possible solution is to make use of existing distribution channels. For example, d.light partners with organizations like NGOs, microfinance organizations, and rural LPG distributers to help reach new customers. For more information on innovative strategies for overcoming distribution challenges, click here.  grameen_shakti

financial viability of enterpise

Starting any business often requires a significant amount of capital to cover the basic costs of managing a business. Add to that the relatively high cost of energy technologies and it becomes clear that DEEs face significant financial barriers. Without outside funding, it is nearly impossible for these enterprises to become a reality. Understanding the various financing methods available to a DEE is important. Often, businesses rely on a mix of loans/equity, self-funding, and grants to get off the ground.Even if an enterprise successfully covers the costs of starting a business, there are still many barriers surrounding O&M costs, which are often relatively high for any energy business.  DEEs must also compete with government instituted fuel subsidies, which make their products comparatively expensive. Even renewable energy subsidies can create problems for DEEs. For instance, the Jawaharlal Nehru National Solar Mission, intended to protect the Indian solar industry, can prevent DEEs from entering the market based on the fact that they cannot use cheaper Chinese products, or if they do, they have to pay a landing charge to import them.Any DEE entering the energy sector is taking on a significant amount of risk. Trying to manage a complex supply chain, especially one that may cross state lines and end in remote rural areas is risky. Furthermore, it is difficult for these enterprises to ensure that their customers will be able to pay for their energy. Theft of these products is also a major issue. Using smart meters, like those produced by Lumeter Networks, is one way to control for these issues. For more information on the various financing methods being used by DEEs around the world, click here.

operational capacity

From the enterprises’ perspective, reaching out to geographically isolated populations who are likely uneducated is a major challenge in that it requires more work. The enterprise must identify potential customers, sell the product, educate or train the customer, and then be able to provide service and maintenance. As mentioned before, many of these enterprises do not have the capacity to do this. Many enterprises focus on installing products but fail to adequately address O&M needs that may arise down the road.

Customer willingness to pay

Another major issue faced by DEEs is to achieve widespread willingness to pay by their customer base. Part of this issue is getting villagers to understand the value of having clean energy. It has been shown that villages that have some form of electrification are more willing to pay for energy projects, even among poorer families. Because so many energy projects have failed or broken down in the past, many rural communities are skeptical of new energy technologies. Furthermore, some of the benefits, such as education and health, are less tangible and take longer to manifest than something like financial security. Therefore, people may not comprehend the full value of energy products, especially considering their high upfront cost.Even if an enterprise is able to articulate the linkage between energy, income generation, education, and health, many poor families simply cannot access enough credit to afford the services.  Formal banking institutions are highly reluctant to offer loans to poor families and the idea of saving money is often lost on many people. Therefore, it is crucial that innovative payment mechanisms, such as the PAYG model used by enterprises like SELCO, and/or microloan institutions are incorporated into business models.  topimg_18874_harish_600x400
Even if an enterprise is able to articulate the linkage between energy, income generation, education, and health, many poor families simply cannot access enough credit to afford the services.  Formal banking institutions are highly reluctant to offer loans to poor families and the idea of saving money is often lost on many people. Therefore, it is crucial that innovative payment mechanisms, such as the PAYG model used by enterprises like SELCO, and/or microloan institutions are incorporated into business models.Affordability is perhaps the most important factor to consider for DEEs. Providing energy products to poor communities means that these products must at least be on par with or cheaper than conventional energy sources. Creating low cost products like the cook stoves produced by Prakti Design is the most obvious method, but other companies like ONergy, make use of microfinance institutions and other partnered financing mechanisms. To learn about other strategies used to make products affordable for poor customers, click here.

knowledge and expertise

Most of these enterprises are small and they simply do not have the capacity to obtain the type of knowledge, expertise, market analyses, or technologies that they would require to scale. Although there are a variety of barriers faced by DEEs in India, the high number of enterprises means that there exists tremendous opportunity to build a network amongst businesses to highlight common issues and share useful models for dealing with them.

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