Decentralised renewables: the key to the G20 goal of universal access to clean energy

One of the successes of India’s presidency to the G20 has been putting the need for ‘universal access to clean energy’ on the agenda of the G20. Decentralised renewable energy (DRE) systems – which generate, store, and distribute power locally – offer a crucial way of achieving the objective of universal access and the G20 provides a platform to discuss ways to scale up this technology. India’s own story of developing markets for DRE offers important lessons and challenges for other countries.

India’s fossil fuel–dominant economy is gradually being replaced by renewable energy sources. Currently, 130 GW of renewable energy capacity has been installed in the country, the vast majority of which comes from utility-scale plants. By 2030, the nation expects to meet 50% of its electricity requirements from renewable sources, increasing capacity to 500 GW of non-fossil energy. In the past years, there has been increasing attention from the Government of India on the potential of DRE to deliver the additional renewable energy required to meet the targets.

DRE offers various benefits compared to utility-scale renewables. DRE systems power livelihoods, are less expensive than traditional power generation methods, boosting demand for clean energy and market expansion, for example, women operating textile centres in Lucknow, run on OMC Power’s solar mini-grid power.

However, DRE has experienced relatively sluggish growth in India. The 2022 target for 40GW of Rooftop Solar (RTS) capacity was missed by a significant margin. One of the most significant challenges is the financing gap for DRE in India and other low-, low-middle, and middle-income countries. DRE is hindered by small, fragmented markets and limited private commercial capital interest. The high upfront costs have typically put off residential consumers and small businesses from investing in RTS despite the payback period being just 4-5 years.

Importance of business models in DRE ecosystem

DRE systems in low-and middle-income countries require innovative business models, tailored financing, and a well-designed incentive framework. Recently we evaluated an energy financing initiative in India that demonstrates the potential of various rooftop solar models.

New business models are emerging targeting residential customers and small businesses as consumer demand increases. For example, community solar allows consumers with multiple rooftops and service connections to maximize solar energy utilization. Roof rent-based solar involves developers investing and leasing rooftops to owners, who receive predetermined rental payments based on solar production or space.

OPEX Model (RESCO model)

OPEX model allows customers to purchase solar energy output from their roof-mounted system without purchasing the system itself. They sign a Power Purchase Agreement (PPA) to purchase power at a predetermined rate for a specified period, with the solar installer owning the plant. PPA contracts typically last 15-25 years, with asset risks and plant operation and maintenance under the developer's purview. No upfront investments are required.

The fact that the risks are assumed by the project developer and the roof-top owner is not required to make an initial investment in the installed system is one of the model's main benefits. The developer also takes care of the Operations and Maintenance of the system. The consumer pays for the electricity consumption from the system based on the PPA agreement. OPEX models have been successful in for several Commercial and Industrial segments (C&I) and residential customers who do not wish to invest in non-core operations. It is preferred by them since these assets are handled through a third-party player.

For example, the Hyderabad 585 kW solar plant at SPAR Hypermarket, developed by Fourth Partner Energy Limited, uses the RESCO model under PPA agreement. The building consumes over 2 million units annually. The plant provides 40-45% of the daily energy demand for SPAR Hypermarket, saving on utilities without upfront investment.

Consumers with a low-risk desire and with capital restraints can think through the OPEX model. However, the difficulties frequently pertain to the PPAs' payment-related issues and mobilizing low-cost capital for meeting the requirements of system deployment.

CAPEX Model

One of the most employed models in India for RTS deployment, in the CAPEX model, consumers own the system, fund it, and consume the energy generated. The risks, upkeep and the operation connected to the system’s management are the responsibility of the consumer. Consumers using the CAPEX model are eligible to apply for any state subsidies applicable to deployment of renewable energy source. Advantages of this simple and straightforward business model includes a short payback period, access to tax benefits, government subsidies, rebates and exclusive ownership.

For example, Nagdev Industry in Bhiwadi, Rajasthan, used CAPEX model. They accessed a Rs 20 million RTS loan from Electronica Finance Limited to install a 430kW RTS plant. Nagdev industry benefits from reliable operations, tax savings through accelerated depreciation on solar power plants, ensuring faster return on investment.

Anyone who is willing to invest in a solar power plant up front can choose a CAPEX model. CAPEX investment has additional potential of protection against rising electricity tariffs, thus makes it a profitable investment. A consumer with green ambitions should certainly consider CAPEX, an exclusively owned solar plant is a notable commitment to sustainability.

The consumers might face challenges, including significant technical, financial and regulatory risks, such as installation and interconnection risks, investor risks, delays in subsidy payments, arrangements and dangers associated with exporting extra energy to the utility. Only a few banks and financial institutions offer funding, with some charging higher interest rates due to increased risk and project size.

Mini-grid models

Mini-grid ownership varies depending on the project, with governments, private companies, and local communities being the primary actors who can own, install, operate, maintain mini-grid systems. Popular models include community-based, private-sector, utility-based, and hybrid ownership.

Mini-grids play a crucial role in accomplishing the renewable energy goal especially in the rural areas, where the cost of grid extension is high compared to the low demand. Unlike a solar home system, mini-grids can provide enough power for productive uses. Installing mini-grids in most parts of developing world is technically feasible. A model operated by OMC Power in Uttar Pradesh and Bihar, for example, illustrates the case of providing reliable and clean power to micro enterprises in rural regions through their solar powered mini-grids.

In the commercially operated mini-grids, the private companies need to recover operating costs and the investments through revenue collection. Payment default rates and high demand projections were observed as challenges in such mini-grid models. Business models based on efficiently scrutinised demand forecasts can increase the commercial viability of mini-grids.

Moving forward 

India’s experience with DRE shows that the technology offers an opportunity not only to meet climate and energy access targets but also provides attractive returns to financial investors. For larger commercial and industrial (C&I) actors who have access to upfront capital or can get commercial financing, various DRE models are suitable. However, due to a shortage of funding, high risks rooftop solar continues to be limited among smaller C&I players, MSMEs, and residential customers. The G20 offers an excellent forum for discussion of the skills and potential solutions needed by financial institutions to assess solar project business models, particularly from a long-term risk perspective.

Saumya Vaish is a Consultant in Energy, Resources and Growth at our India office.