By Sanjoy Sanyal and Pamli Deka
The potential market for off-grid electricity in India is large, with more than 300 million people living without access to electricity. With such an expansive market, how do enterprises decide where and how to focus? Is the market selection based on a robust methodology or something more akin to a blindfolded dart game? Should companies focus on a small niche market or is there a need for diversification from day one of operations?
From our experience, a variety of factors determine where enterprises choose to work, but not all of these are meaningful. Some entrepreneurs choose areas where they have strong family ties while others center on areas designated as “un-electrified” by the government, areas with little or no access to electricity. Some are motivated to serve the poorest areas in order to create impact. Still, even though rural areas are remote and in need of electricity, this need does not often translate to ability to pay for that electricity. As a result, the penetration of distributed renewable energy (DRE) products and services is limited.
We at New India Ventures advocate that entrepreneurs use a strong analytical approach to choosing the geographical area of operation. Enterprises should avoid spreading resources too thin across many regions, focusing on smaller areas at the district level (administrative units within a state) where there is clear demand and financial capacity to invest in off-grid electricity solutions.
To facilitate more analytical off-grid electricity market research, we conducted a Micro-Markets analysis to help target geographical markets. We’d like to share what we learned from this analysis with you.
Initially, the Micro-Markets analysis looks at states where the majority of the rural population live in darkness. The states of Uttar Pradesh, Bihar, Jharkhand, West Bengal, Orissa, and Assam had rural un-electrification rates (un-electrified rural households as a fraction of total rural households) between 50-90 percent in 2011. Un-electrification rates were as high as 90 percent in rural Bihar in 2011, but rural solar penetration in these states was less than one percent. The central India belt that includes Madhya Pradesh, Maharashtra, Chhattisgarh, and the western state of Rajasthan was slightly better off. The states there had rural un-electrification rates between 25-50 percent with equally low solar penetration rates.
These grim electrification statistics and low solar penetration rates contribute to our hypothesis that the early adopter market for DRE products will be un-electrified areas where access to finance already exists, where there is relative economic buoyancy, but where grid growth has been sluggish. We use this set of criteria to identify our target districts within each of the states mentioned above. Access to bank finance is critical as most solar home system (SHS) companies use bank loans to finance consumer purchases. The grid expansion rate is important, as the reluctance to invest in DRE products is related to the risk associated with the redundancy of these products once the grid comes in.
Of the 321 districts where the rural un-electrification rate is more than 25 percent, 80 districts could be addressable DRE markets according to our criteria. These districts include 15.9 million households or 23 percent of the 67.6 million households analyzed. The battle for clean, distributed energy will be won or lost in these 80 districts or micro-markets, with each presenting enough opportunities and challenges for a given enterprise.
Take (just arbitrarily) the district of Gorakhpur in eastern Uttar Pradesh, one of the districts we identified as an addressable micro-market. The rural un-electrification rate was as high as 68 percent in 2011, with 380,000 rural households living in the darkness without access to the grid and solar systems. However, 79 percent of the rural households in Gorakhpur had access to banking services and the district exhibited strong economic growth between 2001-2011.
To offer a conservative estimate, considering just 10 percent of the non-electrified rural households in Gorakhpur would translate into a market size of INR 38 crore or USD $6.3 million. This estimate uses an average price of INR 10,000 for a 20-watt system with two LED bulbs and one mobile charger. We have also discounted the fact that villagers may opt for the costlier, larger SHSs instead of smaller 20-watt systems. Even with these very conservative assumptions, an enterprise could generate substantial revenue from this single micro-market. Mera Gao Power, for example, has been working with this strategy to sharpen its focus on Sitapur district, where it has been scaling up microgrid development operations. This is a clear example of adoption of the micro-market strategy.
Another advantage of the micro-mrket approach is that working at the district level is small enough for companies to foster meaningful partnership, specifically with managers of lead Public Sector Undertakings and Regional Rural Banks, who are located at the district town level, as well as with local administrators and community organizations. The district town is the place to locate dealers and service centers. Finally (and perhaps most importantly), it allows upstart companies to more efficiently market their services in local cinemas, village markets, and cable television inserts, despite a tiny budget.
Finally, we noticed that in most of the states we analyzed the highly un-electrified districts were co-located in a cluster. For example, in Orissa, four districts form a cluster in the northern part of the state. The rural areas of southern Madhya Pradesh across eleven districts starting from Ratlam in the west and stretching to Jabalpur in the east form another cluster. One giant 28-district cluster sprawls across eastern Uttar Pradesh and western Bihar encompassing 9.7 million rural un-electrified households. This cluster alone accounts for 61 percent of our target market.
While deciding which micro-market/district clean energy enterprises should bet their fortunes on, they should assess the access to banking institutions in these clusters and the political, economic, and behavioral issues that impact the market.
Geoffrey Mooring in his book, Crossing the Chasm, identified the need for early adopter markets. The challenge for clean energy enterprises is to find a manageable subset of India’s potential early adopter markets. It is by no means an easy challenge, but the parameters that we propose could be an improvement over existing approaches. Counterintuitively, targeting micro-markets may be the best way for enterprises to serve such enormous unmet electricity demand.
Sanjoy Sanyal is the Director of New Ventures India. Under his leadership, New Ventures has developed a strong network of institutional investors and also been able to help early stage green entrepreneurs raise US $10 million in funding. He also provides mentoring to early stage entrepreneurs in as a Charter Member of TiE.
Pamli Deka is currently working on the Clean Energy Access work with New Ventures India, focusing largely on building partnerships for social enterprises with investors, banks and corporations. She is also involved in developing tools for helping address the challenges of end user finance and marketing and distribution.