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WRI’s new report, Power to the People, produced in collaboration with the Center for Development Finance-IFMR, looks at the market potential for clean and renewable energy in rural India. The following interview, with co-Author and NextBillion Staff Writer Saurabh Lall, explores the study’s main insights and conclusions.

This interview was first published on WRI’s website.

WRI: Why did you decide to research market opportunities for clean energy in rural India in your new report, Power to the People?

Saurabh Lall: There’s a serious need to look at how better energy solutions – energy that is clean, reliable, and affordable – could be provided to low-income populations in rural India. Because grid electricity isn’t consistently available in rural areas, people meet their basic energy needs with sources like kerosene, diesel generators, firewood, and dung. These fuel sources are cheap, but they’re also unreliable, highly flammable, and harmful to people’s health – the World Health Organization estimates that indoor air pollution from smoke causes 1.6 million deaths per year around the world. Cumulatively, these fuel sources are also very polluting and damaging to the environment.

At New Ventures, WRI’s center for environmental entrepreneurship, we provide business development services for many great environmentally-focused companies that are coming up with innovative solutions to this problem, with solar lanterns, energy efficient cookstoves, and other renewable energy technologies. We realized that if renewable energy is going to provide a clean and cost-effective solution for poor rural households, all of these companies that New Ventures and other organizations support are going to need to scale up.

One of the critical elements in any scale-up is investment. So we collaborated with CDF-IFMR to find out more about the market opportunity and investment potential of companies operating in this sector as well as the challenges they face reaching their potential. How well are these companies serving this market? How can investors help them?

The combined research and market expertise of New Ventures/WRI and CDF-IFMR allowed us to produce a report that will help investors understand the opportunities and challenges of the clean energy sector serving the rural poor in Indian.

WRI: Why can’t rural households simply depend on the electrical grid?

Saurabh Lall: Rural electrification has been growing in recent years, but it’s still pretty slow. From 2000 to 2005, the percentage of electrified rural households in India only increased from 48 to 55 percent. Even households that are connected to the grid often find that their electricity is poor quality. Cities are the priority when providing electricity, and so rural areas only get a few hours of electricity a day, and it’s a very low voltage. In some cases it’s barely enough for a light bulb.

If there are renewable products and services available, there is a market and people willing to pay for them, even in very poor communities.

WRI: In your report you find that despite low incomes, poor rural households are a significant consumer market for clean energy. Why is that?

Saurabh Lall: About 45% of the 150 million rural households in India do not have a reliable source of electricity. In this report, we focus on the very poorest sectors with monthly spending below $75 per month that represent the rural “base of the pyramid” (BoP) in India. This portion of the population amounts to 114 million households.

In our research we found that the rural BoP is willing to pay for energy services. They see the benefits and consider energy to be essential. Right now, the Indian BoP already spends $4.8 billion per year on energy usage, and that’s mainly for potentially harmful and inefficient fuels like firewood, kerosene, diesel generators, and biomass for cooking. The main takeaway from our report is that if there are renewable products and services available, there is a market and people willing to pay for them, even in very poor communities.

WRI: Which sectors did you study?

Saurabh Lall: We honed in on four specific sectors that offered the most potential for growth in the rural BoP market. At the individual household level, we studied solar lanterns and energy efficient cookstoves. And at the community level, we looked at small hydro and biomass gasification, which can supply energy to a local area without depending on the grid. The market for decentralized renewable energy generation has the largest potential because it mimics grid based electricity, which is what consumers want.

WRI: What are some of the benefits of meeting the energy demands of rural communities in India?

Saurabh Lall: Electricity acts as an economic multiplier. It has a huge impact on productivity and living standards. For smaller shops, dependable energy means they can keep their shops open longer, and they can use refrigeration to keep products fresher. In our research we came across a company that rents solar lanterns to street vendors. Vendors pay a few rupees to rent a lantern, and they can keep their stalls open later into the night, increasing trade.

With electricity, you also see people adding more value to what they sell-farmers can process their crops and sell the resulting products for more money. Electricity also improves education standards by providing students with better light for studying. This will have a long term impact on families’ economic status.

WRI: Why has it been difficult so far for renewable energy companies to grow in rural areas?

Saurabh Lall: The biggest challenge at the moment is distribution. Companies producing solar lanterns and energy efficient cookstoves are having trouble establishing rural retail networks that can effectively penetrate the rural BoP market. There’s also the challenge of maintaining and servicing products over such a far-flung customer base, which is essential to keep customer’s confidence in the technology. Some companies are solving this problem by partnering with NGOs and Market Development Organizations (MDOs) who already operate in rural markets. They have the retail distribution chains to promote socially and environmentally beneficial products, and they can also offer financing to consumers. For investors looking for new opportunities to invest in the clean energy market, while creating a positive environmental and social impact, we think this is a key success factor to look for in companies – strong partnerships with on-the-ground MDOs that can raise awareness and build the market.

In terms of policy, the Indian government provides a number of incentives such as capital subsidies, tax holidays and low-interest loans for renewable energy companies, which have really helped the sector grow in recent years. But there are still subsidies and government policies that contradict these incentives. The government heavily subsidizes kerosene, for example, which undermines the market for competing clean products like solar lanterns. It’s a challenge to sell a solar lantern for $10 when a family can get kerosene for much less than that, even if in the long term the solar lantern would be a better investment. Poor families have uncertain periods of income, so it’s hard for them to make a significant up-front investment in any energy solution.

WRI: What policy solutions do you recommend?

Saurabh Lall: Since so many people are dependent on the kerosene subsidy, the government can’t just cut it off. But we recommend that the government shift to an open-ended lighting based subsidy, to allow people to choose which technology they want to use, including solar lanterns and other clean lighting solutions. This would incentivize people to try new technologies that they might not be familiar with, and that actually work much better than kerosene or firewood.

The Indian government also has certain “priority lending sectors” that Indian banks are required to lend a certain amount of money to, like education, microfinance, and rural banking. It would be great if renewable energy was included in this group, especially since it’s one of those sectors that has a spill-over effect into the overall economy.

WRI: What is your advice to interested investors?

Saurabh Lall: At this stage, the sector needs patient capital and pragmatic expectations. Some companies also need short-term debt financing to free up cash flows so they can expand their businesses. The decentralized renewable energy (DRE) sector is the most mature, and appears ready to absorb mainstream capital.

While the demand for solar home systems, solar lanterns and energy efficient cookstoves is currently limited, it has the potential to grow significantly as upfront product prices are reduced through design and manufacturing advances, lower distribution and marketing costs through partnerships and the availability of consumer financing options.

Investors can assist market growth by providing capital as well as more strategic, nonfinancial resources such as business expertise and access to networks. If market challenges are overcome, the future rewards for investors and benefits to India’s rural consumers are likely to be significant.