Dont Depend on What You Read

Think about starting a business; the very first step. Before you rent the office, buy inventory, put together your brochures, make a pitch to customers. The moment when you go from something else to an entrepreneur. This is the moment when you go from watching the cricket match or football game or Sunday afternoon movie to thinking about a product or service. You get an idea and you think, “I wonder if that would fly.” The next step is jump on the internet, do some research, come up with some assumptions on input costs, market price for the product, estimate the size of your market, and identify some of your early operational challenges. The internet is great, as are all those World Bank reports and research papers and NGO websites. But caution: don’t rely too much on what you read. Any bit of information that your business relies on must be double checked on the ground. Let me give you a few examples of what happens if you don't.

At the onset, MGP figured out that the lighting market was enormous. 400 million people in 80 million houses in India, another 200 million people in the rest of South Asia, nearly another 600 million in Sub Saharan Africa. Great stats from the web. Those don't really matter that much; we aren’t going to hit that many people for a while still. But we also read that the average off-grid household in India pays Rs. 150 per month for kerosene to produce 6 hours of lighting from a single kerosene lamp. I did some cross checking against kerosene imports and number of rural households minus urban household consumption minus cooking consumption and got just about the same answer – close enough that I didn't think twice. Not until we began installing our first facility.

We used this estimate to size our facility: 9 hours a night for Rs. 100 per month for two LED lights that are 10 times brighter than kerosene lamps. Cheaper, more hours of light a night, brighter, more light points. Beats kerosene across the board! We had a product nobody could say no to. At least nobody who fits that average profile we read so much about.

Kerosene consumption likely trends with income. So may electrification rates, but never mind that for the moment. A lot of solar lantern and solar home system companies are focused in South India, not too far from where micro finance institutions are focused. Rural houses who are great micro finance customers are also great lantern and solar home system customers. Their relatively higher income that allows them to pay back loans also makes them more able to buy solar products. And they probably buy a lot of kerosene in the absence of the grid because they can afford it.

I may be exaggerating the differences between the North and the South – I haven’t done much research on the South since MGP operates, and will operate, in the North where the electrification rates are lower and the number of people living off-grid is higher. We found out the hard way that in U.P. and Bihar, the average off-grid household is very different than the average off-grid household in South India. Our target customers use three liters of kerosene per month for lighting and only get 2 or 3 hours of light a night. Why only three liters? Because that is how much subsidized kerosene the government provides for houses below the poverty line. After that, customers have to pay market rate. Subsidized kerosene sells for Rs. 13 or 14 a liter while the unsubsidized price is around Rs. 30 a liter. As it turned out that our customers only pay Rs. 40 per month rather than Rs. 150. Our service no longer seemed like a no brainer in light of that new information.

So what happened when we came in with 9 hours of light (!) through two (!) bright (!) lights for Rs. 100 per month (L)? People wanted it initially because it was a great service, but after a few months they stopped paying. And when we went to uninstall it? They helped us! And they smiled and waved goodbye as we left! That’s what happens when you don't double check your data.

We had a few other assumptions that needed to be corrected, and we heard a lot of things that didn't turn out to be right. These include: a) rural people are horrible customers because they are backwards b) rural people are great customers because they are underserved c) rural people can’t pay for service regularly because they have irregular income d) rural people can easily pay Rs. 100 a month – that is so cheap! e) people travel 80 kilometers to charge their phone f) rural people are too poor to have mobile phones. The list goes on, and some of these are topics of future posts, but the point is we have learned our lessons. Now we double check everything in the field. There are a lot of exaggerated opinions and a lot of general facts, all of which are useful to a degree. But for a business with a target market, we needed informed opinions and specific facts. Those you won’t find on Google, those you can only get by putting your boots on the ground and asking a lot of questions.

The Battle Ready To Be Won

In India, the limited generation, transmission, and distribution infrastructure has left 400 million people across hundreds of thousands of villages without electric power. These people are left with no other option than to use kerosene lamps to produce minimal amount of light at night. Kerosene wick lamps generate between 1 and 6 lumens; I don’t myself know what a lumen is nor do I know of those who could spot one, but the point is these lights are dim. I’ve lived without power and been forced to try to do things with kerosene lamps at night. I just got used to going to bed early.

As seen from the photos above, kerosene doesn't compete with much. It only wins out when its competing with nothing. Rural lighting is yet an uncompetitive market. If you can come with anything, it will be better than kerosene. The challenge has not been the products though – do a quick google search and see how many solar lantern and solar home system companies you find. Yet they have had poor penetration in India. The challenge isn’t coming up with a better product, its coming up with a better product at an affordable price.

It has been argued that solar lanterns and solar home systems pay for themselves in less than a year. Possibly true, though my experience tells me that this is not universally true across unelectrified villages in India. But poor households don't often have a year’s worth of energy expenditures on hand. The obvious solution for these solar lantern companies has been to work with microfinance organizations. That works well where robust microfinance services are available, but many of the states where electrification rates are very low (see map below) are unofficially considered “no go” states for microfinance. Alternately, lantern leasing models could be developed. In this case, lanterns are recharged during the day at a central spot and customers collect their lantern before sundown. This is a model that The Energy and Resources Institute (TERI) has been promoting. The model is having a degree of success but has not yet proven itself commercially viable. Following the same lines, however, is the micro grid concept. Generate power centrally, distribute it to households, and produce light after the sun goes down. Many micro grid companies provide power for much more than light, but lighting is a priority need and many customers only purchase enough power for light.

In a recent report[1], the World Resources Institute estimated that off-grid distributed energy (OGDE) in India is a $2 billion a year untapped market. Data varies by source, but the trends are consistent. As of 2010, it is estimate that 48% of rural households are unelectrified nationally; Bihar, Jharkand, and Orissa have electrified fewer than 35% of rural households[2]. Ministry of Power data put the percentage of villages in Uttar Pradesh with electricity at less than 42% in 2006 (and therefore household electrification likely even lower).

Though the market potential is enormous, most companies active in off-grid energy distribution are not able to access sufficient capital to expand[3]. The reasons for limited investment in the sector include:

1.    the lack of a standard micro grid model that is profitable enough to offer attractive returns to investors while simple enough to minimize operational requirements allowing companies to focus on scaling up;

2.    unmeasured social benefits of micro grid operations on the lives of customers, evidence of which is necessary to attract funding from socially conscious investors; and

3.    non-uniform processes (such as tariff collection, minimizing power theft, and response to system abuse) and lack of standard metrics which make commercial analysis complicated for potential investors.

These challenges mirror those of the microfinance sector ten years ago when it was transitioning from non-profit to for-profit, when microfinance institutions (MFIs) were less focused on rapid expansion, and when the investment community did not believe the sector offered lucrative investment opportunities. The scale and explosion of MFI’s was in part enabled by developing a standard business model and best-practices for operations. This input of information enabled more capital flow and operational support resulting in a maturation for the sector. Once the microfinance sector was standardized and operational models consolidated, micro-financial services were scaled up at a rapid rate and are now provided to 26 million borrowers in India alone and nearly 100 million globally[4].

The micro grid sector is the next microfinance industry in India and is on the verge of a similar growth. In ten years, a micro grid company will be announcing that their IPO brought in tens of millions of dollars in investment. The sector will be bringing in $100 million in revenues from an assortment of companies. The models, both technical and non-technical, will be consolidated.  Tens of millions of people will have access to improved light. And those that invested early in the sector will have reaped great rewards for their vision.

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[1] “Power to the People: Investing in Clean Energy for the Base of the Pyramid in India”, World Resources Institute, Center for Development Finance. http://pdf.wri.org/power_to_the_people_front.pdf

[2]   “Rural electricity to speed up inclusion”, Econonic Times, May 27, 2010.

[3] The exception is Husk Power Systems which has a rapid investment repayment period due primarily to government subsidies.

[4] Figures from MixMarket.org as of 2009.