Arunabha Ghosh: Innovators, financiers learn your lessons

Hundreds of firms in India work to plug gaps in energy access through DRE solutions

Hundreds of firms in India work to plug gaps in energy access through decentralised renewable energy (DRE) solutions. They have a range of offerings: Selling or leasing solar home systems; microgrids; hybrid installations combining solar, wind, biomass or small hydro; productive energy services (irrigation, crop drying or storage, mechanical workshops); innovative financing for end-users; training workers in the DRE sector. As this column has argued earlier (Put off-grid on radar, August 16, 2016), the most innovative among these could complement the government’s ambitions for energy access. How could we encourage and scale innovation? Having served on several juries and committees to evaluate applicants seeking funding for their innovations, I have learnt some sobering lessons.

The biggest challenge to overcome is one of solutions looking for problems. Many firms make the mistake of offering technological solutions (say, a cookstove or a small wind turbine) without factoring in issues such as access to finance, consumer behaviour, or community support. We need integrated solutions — not a false choice between technologies and business models — trusted supply chains, distributors and after-sales servicing firms. 

Second, there is danger in blind replication. No doubt, scale in the DRE space does not imply that a single firm can become a giant conglomerate serving a countrywide market. Replication helps transplant successful models in other areas. That said, many firms fail to specify the problem or determine the scale at which their proposed solution is expected to yield returns. This makes it difficult for funders to evaluate metrics of progress. Is the offering a single product? Or is it a package, which includes multiple products (lights, cookstoves, appliances, smart meter), combined with financing and servicing? If the latter, are the right partners available?

Or is the firm focused on a particular geography? There is difference between a firm seeking funds for operations in a cluster of villages, a few districts, and a few states. Expanding scope means different funding needs: Grants, soft loans for demonstration, early-stage venture funding to establish a foothold in the market, or a revolving fund to scale operations. 

Third, the preferred investment and revenue models need to be tested in each area of operation to suit consumers and their willingness to pay. For instance, there is a surge in pay-for-service models. But the payback period for a home system would be significantly different from a solar irrigation system or a pico hydro-based microgrid. It is important to tweak the investment and revenue models accordingly.
 

Fourth, there is still very little innovation in productive DRE applications. Beyond applications for household electricity, there is vast untapped scope to increase productivity in rural economies. An IIT-Delhi study estimates that at least 50 per cent of energy in agriculture is derived through animal power, equivalent to diesel worth $3 billion annually. The Council on Energy, Environment and Water has launched a programme to encourage DRE for motive power in agricultural and non-agricultural enterprises.

Funders and impact investors need to heed lessons, too. Early-stage funding lasts a long time; there are no easy and quick exits. The investment philosophies of funds have to become more precise. The same fund is unlikely to be successful in supporting early stage R&D, incubating a promising innovation, and helping it break into new markets. The $7.9-million India-US PACEsetter Fund seeks to accelerate commercialisation of innovative DRE solutions by providing grant funding to develop and test solutions. Other funds are needed for flexible debt finance, to provide working capital, build capacity or procure assets. 

Moreover, funders must recognise that for DRE entrepreneurs, transaction costs of bringing together several co-financiers are very high. Yet, many funds insist on this as proof of viability and “buy-in” from other investors. The $20-million US-India Clean Energy Finance (USICEF) initiative, funded by US philanthropies and the Indian government, is intended for project preparation support for DRE activities seeking long-term financing. The expectation is to leverage up to $400 million of financing.

Another lesson for funders is that “prizes” help attract attention but not scale up businesses. Establishing prizes could trigger a lot of innovation but could also deflate confidence if follow up funding sources are not lined up. For scale or replication, additional funding is needed. Successful innovators/entrepreneurs are able to show a road map for commercialisation and scale. But, end-user financing for DRE systems remains a major bottleneck. Rural banks remain hesitant to lend without collateral and many borrowers have limited credit history. The cost of collecting bank interest from remote customers is another disincentive. A $40-million US-India Catalytic Solar Finance Program has been designed to give liquidity to smaller-scale DRE investments, hoping to mobilise up to $1 billion. 

Last, institutions and platforms are crucial to minimise policy risks and lower information barriers. The Clean Energy Access Network is a platform for DRE entrepreneurs in India. The International Solar Alliance could support innovators across member countries.

Innovations in DRE demonstrate that putting power in the hands of the poor could transform how energy access is understood and delivered. But entrepreneurs and financiers have to learn their respective lessons in order to find a broader common ground.
 

The writer is CEO, Council on Energy, Environment and Water, founding Board member of CLEAN, and Executive Committee member of the PACEsetter Fund @GhoshArunabha