With more than 300 million people living without access to electricity, India’s off-grid electricity market is large and widespread. So how do enterprises decide upon the area to focus? Is the market selection based on a robust methodology or is it more of a blindfolded dart game? Should companies focus on a small niche market or is there a need for diversification from day one?
Solar water-heating mirror installed in a village in Maharashtra. (Image by World Resources Institute)
When it comes to providing electricity in off-grid markets in India – usually through renewable sources – some entrepreneurs choose areas where they have strong family ties. Some go to villages designated as “un-electrified”. Some focus on the poorest areas of the country.
None of these is an objective criterion. What is needed is a strong analytical approach to choose the geographical area of operation. Indian villages need electricity, but this need not mean there is a demand for electricity.
As a result, the penetration of Distributed Renewable Energy (DRE) products and services is limited.
We believe enterprises should focus on relatively small areas at the district level where there is a clear demand and capacity to invest in these solutions. In our micro-markets analysis, we have identified these target geographical markets and districts.
Our initial focus is on states where the majority of rural population lives without electricity. Uttar Pradesh, Bihar, Jharkhand, West Bengal, Orissa and Assam had rural un-electrification rates (un-electrified rural households as a percentage of total rural households) between 50 and90% in 2011. Un-electrification rates were as high as 90% in rural Bihar in 2011. But rural solar penetration in these states was less than 1%.
The central India belt of Madhya Pradesh, Maharashtra, Chhattisgarh and the western state of Rajasthan were slightly better off. They had rural un-electrification rates between 25 and 50%, but with equally low solar penetration rates.
This means no one is queueing up to buy a solar home system in these villages.
So what should an entrepreneur do? Identify the early adopter micro-markets. These are un-electrified areas where access to finance already exists, where there is relative economic buoyancy but where the grid growth has been sluggish.
We use this set of criteria to identify our target districts within each state. For economic buoyancy, we check how asset ownership data for television and motorized vehicles has changed over 10 yearsfrom 2001 to 2011. 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 – if people feel the grid will reach the village soon, they will be reluctant to invest in DRE products that may become redundant.
In the ten states mentioned above, there were 321 districts with 67.6 million households where the rural un-electrification rate was above 25% in 2011. But that is not the market.
Applying the objective criteria, the addressable market is 80 districts with 15.9 million households. That is 23%of the 67.6 million households.
The battle for clean energy will be won or lost in these 80 districts of India.
Once entrepreneurs have zeroed in one of the districts in this market, they need to focus on it and earn meaningful revenue instead of spreading too quickly to other districts, leave alone other states.
We strongly advocate that companies should focus on one district at a time, which we refer to as the “micro-market”. There are enough opportunities and challenges in any one district.
Take – just arbitrarily – the district of Gorakhpur in Eastern Uttar Pradesh. The rural un-electrification rate was as high as 68%in 2011, with 380,000 households without access to the grid or solar systems. But 79%of the rural households in Gorakhpur had access to banking services and the district exhibited strong economic growth between 2001 and2011 by our parameters. The un-electrification rate fell by only 4.9%over this period, but the penetration of solar systems was even worse, less than 1%.
If an entrepreneur could sell to just 10% of the un-electrified rural households in Gorakhpur, that would mean a sale of around 38,000 solar systems in that district alone. The size of a solar system will vary by household. At an average price of Rs 10,000 for a 20-watt system with two LED bulbs and one mobile charger, the market size is equivalent to Rs 38 crore ($6.3 million). This is a conservative scenario.
We know of one enterprise that has been working with this strategy to develop a sharp focus on one district. Mera Gao Power has been developing its micro grid market and scaling up operations within two blocks of Sitapur district in Bihar.
Expanding through partnerships
The district level micro-market approach allows companies to identify and foster key partnerships specifically with managers of lead PSU, regional rural banks, local administration and community organizations. The district town is the place to locate dealers and service centres. Perhaps most important, it allows the company to focus its usually-tiny marketing budget – in local cinema halls, village markets, hoardings and cable television inserts.
In most of the states we analysed, the highly un-electrified districts are concentrated in a region, forming a cluster. 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. Clusters also exist across ten districts in southern Maharashtra, stretching from Jalna to Kolhapur, and three districts in southern Chhattisgarh.
One giant cluster sprawls across Uttar Pradesh and Bihar, with 28 districts from Faizabad in eastern Uttar Pradesh and to western Bihar; contiguous to this is one cluster from Gopalganj in northern Bihar to Gaya in the south. This giant cluster has 9.7 million rural un-electrified households, and accounts for 61% of the target market.
The challenge for clean energy enterprises is to find early adopter markets of aspiring households in very difficult areas. It is by no means easy, but the parameters that we propose can be among several to use. From a micro to a mainstream market, the only way is to navigate across a cluster.
Sanjoy Sanyal and Pamli Deka work for New Ventures India
