India's efforts to tackle energy poverty are having a big impact, but is it enough?

With an annual GDP growth rate of 5.8 percent over the past two decades, reaching 6.1 percent in 2011-12, India has become one of the world's fastest-growing economies. As its economy surges ahead, India is witnessing an unprecedented demand for energy and a growing deficit in power supply. Recognizing the economic, social and ecological threat posed by fossil fuel dependence, the Indian government has developed a wide swath of policies to increase the country's renewable energy generation. 

Among these, the Jawaharal Nehru National Solar Mission, launched in 2010, intends to improve energy access in India’s hinterland, which is harshly affected by the adversities of energy poverty.

It hopes to achieve 20 million square meters of installed solar water heaters and a power production of 2,000 MW through off-grid solar systems by 2022. To support the venture, the government introduced a capital cost subsidy of 30 percent and a five percent interest rate subsidy to financing respective loans. In early 2012, the interest rate was abolished and the capital cost subsidy raised to 40 percent.

Energy Poverty: An Issue of Vital Importance

The National Solar Mission rightly recognizes access to clean, affordable and reliable energy as a fundamental driver of economic growth, environmental sustainability, and social development. Just as workshops need energy to power their machines and service providers require light to power their operations, farmers need pumps to irrigate their fields.

In India, however, more than 400 million people do not have access to electricity. Energy is a luxury. The economic, environmental, and social costs of continued energy deprivation are too high. Something must be done.

Frequent energy cuts and high diesel costs do not only jeopardize the productivity and competitiveness of businesses. They also put a high economic strain on households, which often resolve to harmful indoor fires and unsustainable wood harvesting.

The ambition of the National Solar Mission to promote rural electrification does indeed tackle an important problem. But does it follow the right path?

The Potential of Clean Energy Technology

The focus on subsidizing decentralized access to renewable energy technologies is promising. Countries such as Bangladesh have achieved great success with similar programs, and enabled rural electrification for millions. Clean energy technologies also provide a simple and affordable alternative to costly and often inefficient expansion of the national electricity grid. 

Solar home systems, for instance, can be easily installed on rooftops of rural homes and provide electricity for home lighting, TVs, and refrigerators. Solar water heaters, on the contrary, may provide access to hot water for sanitation and hygiene.

And yet, the purchase of subsidized clean energy technologies by end-customers has been feeble.

Hesitation Among the Stakeholders

Potential customers have strong doubts on the performance of the technology. They do not trust that providers will install, service, and maintain the systems properly.

Secondly, local financial institutions are hesitant to offer credit for clean energy products to rural customers who cannot afford upfront costs. The government interest rate subsidy on loans has not been able to reverse this tendency. As a consequence, by the first quarter of 2012, banks had only financed around 40,000 to 50,000 solar home systems.

This is largely a consequence of:

1. A low awareness of business opportunities for clean energy lending 
2. Lack of knowledge of energy technologies
3. A high-risk perception concerning use and maintenance of the technology by borrowers

In addition, the small loan quantum raises doubts on their financial viability. Commercial banks, in particular, avoid these risks. While more than 40 rural banks had adopted finance schemes for solar energy, only half a dozen of commercial banks have done alike — and among these, only big banks with larger financial backing.

Undeniably, greater availability of credit energizes poor households, and small businesses have the potential to dramatically increase demand for clean energy products, thus realizing the goals of the National Solar Mission. For this, end-user financing is essential.

The failure to attract finance for clean energy technologies is a major weakness of the National Solar Mission. It is, hence, all the more important to address this barrier.

Getting Financial Institutions to Invest: The Path for Policies

Financial institutions largely underestimate the economic, technical and ecological potential for solar finance in India. Aryavart Gramin bank, which successfully financed 45,000 solar home systems, is leading the way. But for others to follow, support mechanisms need to be put in place.

Financial institutions need to understand the opportunities inherent in micro-energy finance. Indian policies should support related capacity-building measures. Respective workshops should raise the awareness of financial institutions for business opportunities in the clean energy market, highlight best practices, and create linkages between the demand (clean energy companies and customers) and supply (local financial institutions).

Training, on the other hand, should involve capacity-building by applying financial risk-return analysis to assess the economic viability of micro energy finance. Finally, organizations like the SELCO foundation and TERI can play an important role in popularizing the incentives for solar applications among local populations.

Improving Energy Access

Local financial institutions, such as regional rural banks, public sector banks and microfinance institutions already serve millions of households across India with financial services. By extending them to involve credits for clean energy technologies, they would improve energy access for millions across the globe.

The potential market for decentralized energy supply is vast, but it needs stimulation. Policy makers, therefore, must create conditions that will unleash market forces to communities at the base of the economic pyramid. Innovative approaches to build trust in end-users, ease business for suppliers, and raise awareness of local financial institutions are required. They are worth the effort, as they bear the potential to unleash market forces for decentralized energy supply, and thus contribute to overcoming energy poverty on a large scale.

The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.

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