Localized generation and distribution of power can help increase electricity supply in rural areas, says new World Bank report

February 15, 2011

Studies from rural Maharashtra show such a model can provide substantial economic gains to rural consumers

Mumbai, February 15, 2011 : A new World Bank Report says decentralizing power generation and distribution to the local level through the distribution grid of the state utility by using renewable energy sources will help reduce prolonged outages and increase electricity supply in rural areas.

If such sources replace kerosene and diesel for localized generation and supply, economic gains can be substantial, the Report Empowering Rural India: Expanding Electricity Access by Mobilizing Local Resources suggests.

Studies done in Radhanagiri subdivision in Kolhapur district of Maharashtra show that on an average a consumer gets only about 8-10 hours of electricity in a day. For domestic consumers, this amounts to a coping cost of Rs 11 per unit to meet just its lighting needs.

According to the report if this decentralized model is tried in Radhanagari subdivision of Maharashtra, it is expected that the area will not only receive 24 hours of supply, but the coping cost will go down to Rs 6 per unit. The utility’s system efficiency will also improve as the transmission and distribution losses will be brought down to 15 percent from current level of 36.81 percent.

Moreover, Maharashtra has 9400 MU of unexploited potential in Wind and Biomass. By following this model, rural consumers in Maharashtra, can make economic gains to the tune of Rs 4700 crores.

Distributed Generation and Supply of Renewable Energy also known as the DG&S model combines both generation and distribution. The rural franchisee in addition to distributing power and collecting revenues also generates power locally and supplies to the franchised area. The local community benefits because certain minimum percentage of the generated power goes to the designated area and the balance is fed into the grid. The franchisee will also be able to draw from the grid in case required. Such a model will augment generation using local renewable resources and supply power to areas that otherwise may remain power-starved despite having access to the grid, the Report says.

However, the existing policy allows such local generation and supply only in very remote rural areas that are still not connected to the grid. The Report recommends extending the DG&S model to even those rural areas that are connected to the grid and are not so remote. Presently, the focus is on either enhancing centralized generation or in improving the efficiency in the distribution business, the Report says

"Despite over a century of investment in electric power systems, there are roughly 1.6 billion people across the globe that lack access to electricity, mainly in rural areas. There are as many people in South Asia without access to electricity as in Sub-Saharan Africa, most of them in India," said Inger Andersen, Vice-President, Sustainable Development Network, World Bank. "Experience in countries like China and Philippines show that distributed generation projects that also combine supply and are grid connected has been successful. The involvement of local community leads to socio-economic development in the area, thereby promoting inclusive growth," she added.

Economic viability of DG&S

Highlighting its economic viability, the Report says where grid supply is poor and dependence is high on diesel and kerosene for lighting and other commercial activities, DG&S is economically and financially competitive.

The coping cost of electricity consumption in households that use kerosene for lighting is Rs 11/kWh, far higher than renewable energy sources (Rs 4.6/kWh for small hydro, Rs 5.7/kWh for biomass, and Rs 6.1/kWh for wind).

Given this analysis, the DG&S model could provide a fillip to the Government of India’s (GOI) initiatives in extending adequate electricity to rural consumers. Today, 56 percent of rural households still do not have access to electricity. With the demand for power outstripping its availability – with peak shortages of 13.3 percent and energy shortages of 10.1 percent in 2009-10 – rural areas face major challenges of very low per capita consumption and inadequate power supply (most rural areas receive only a few hours of supply per day) made worse by poor quality of service.

When faced with such shortages, the option for the distribution utility is often to supply additional power through short-term power purchases from the market. This is very expensive (Rs 6-10/kWh) and difficult to procure, given the country’s severe shortages. At an average retail tariff of Rs 3-4/kWh for domestic consumers, the utility loses Rs 6-9/kWh if it uses short-term power to increase the supply to rural areas. But if it appoints a DG&S operator, the gap is likely to be Rs 4/kWh, says the Report.

"It is thus clear that wider use of distributed electrification in a manner that meets local needs requires a new vision, one that moves beyond its focus on basic household electrification. It should be based on the diversity of local needs and decision-making processes, including the need for electricity to improve productive activities," said Hubert Nove-Josserand, World Bank’s Operations Adviser in India.

Looking forward

Extending capital subsidies available under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) to strengthen the distributions system and the Decentralised Distributed Generation (DDG) scheme for supporting generation projects to the DG&S model, even if partially, will jump-start the program and help establish investor confidence and interest in taking on the complex business of combined distribution and generation, the Report suggests.

Amongst the specific actions that the Report has suggested for Maharashtra are selecting the DG&S operator through a competitive framework, monitoring the operator to ensure regulatory compliance, and creating a Viability Gap fund to provide operating subsidies for bridging gap between cost of supply and tariffs, if any.

"India has, no doubt, undertaken several policy initiatives to enhance access and extending its national grid, but much still awaits to be achieved. The World Bank is looking forward to partner the Government to achieve its target of sustainable 100 percent electricity access," said John Henry Stein, Sector Director, Sustainable Development Network.

Win-win for all

For the Customers

  • Increase in reliability and service levels
  • Increase in electricity availability (as local generation is captive, the rural areas are guaranteed supply)
  • Community development (Long-term, reliable electricity from a local source can spur economic growth through energy intensive value-added service industries)
  • Savings in huge expenditure currently incurred in coping mechanisms like use of kerosene and diesel

For the Utility

  • Contribute to the RPO (Renewable Portfolio Obligation) of the utility if the local plant uses a renewable energy resource
  • Avoid transmission charges and losses associated with centralized power sources by using local generation utilities
  • Meet its service obligations
  • Reduction in market losses

For the Regulators

  • Meet the goals of improving availability, reliability, and quality to rural areas
  • Increase generation capacity by encouraging private distribution franchises to invest in distributed generation

1Radhanagiri subdivision comprises a cluster of villages. It has about 28,000 domestic consumers, 1200 commercial and 450 industrial consumers.


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