Enabling Mini-Grid Development in Rural India

Abstract

Summary 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, mini-grids offer significant potential for an immediate pathway toward rural electrification and the attendant gains in economic growth and productivity. Yet private investment in mini-grids has been virtually absent in India. Using a comprehensive life-cycle cost analysis, we find that mini-grids based on solar PV power and storage are more economical than incumbent energy services available to households without central grid connection. Under current law, a prospective entrepreneur in India does not require a license or certification in order to build a mini-grid and subsequently provide electricity services in the area covered by said installation. Conversely, there is no legal or regulatory framework that specifies what is to happen if the central grid were to be extended to an area that is already covered by a mini-grid. We report detailed survey evidence from interviews with entrepreneurs, analysts and policymakers whose assessments converge on the same point: mini-grid investments would be jeopardized in the event of central grid extension, precisely because discoms would, by regulatory order, provide electricity services at highly subsidized rates, well below their full economic cost. Our fieldwork suggests that the threat of central grid extension is a 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. There have been two recent federal policy guidelines and one actual state-level policy addressing the regulatory status of mini-grids. We examine the effectiveness of these policies/proposals in terms of an entrepreneur’s willingness to develop mini-grids in the future.