Decisions, Decisions: How do enterprises choose their markets for clean energy products and services in India?
The off-grid electricity market in India is large, with more than 300 million people living without access to electricity. With such a large market, how do enterprises decide upon which small geographical area to focus? Is the market selection based on a robust methodology or more of a blindfolded dart game? Should companies focus on a small niche market or is there a need for diversification from day one of operations?
From our experience, a matrix of choices determines where enterprises choose to work. Some choose areas where they have strong family ties. Some are directed to areas designated as “un-electrified” villages. Some entrepreneurs focus on the poorest areas to create impact. We, on the other hand, advocate a strong analytical approach to choosing the geographical area of operation. Rural areas are remote and in need of electricity, but this need does not often translate to demand. 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 (administrative units within a state) 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 in darkness. The states of Uttar Pradesh, Bihar, Jharkhand, West Bengal, Orissa and Assam had rural un-electrification rates (un-electrified rural households/total rural households) between 50-90 percent in 2011. Un-electrification rates were as high as 90 percent in rural Bihar in 2011. But rural solar penetration in these states was less than 1 percent. The central India belt of Madhya Pradesh, Maharashtra, Chhattisgarh and the western state of Rajasthan was slightly better off. They had rural un-electrification rates between 25-50 percent with equally low solar penetration rates.
Since no one is queuing up to buy a solar home system, identify the early adopter micro-market
The early adopter market for DRE products will be 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 checked how asset ownership data for television and motorized vehicles has changed over 10 years, from 2001-2011). 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, as the reluctance to invest in DRE products is related to the risk associated with the redundancy of these products once the grid comes in.
There are 321 districts (with 67.6 million households across these 10 states where the rural un-electrification rate was more than 25 percent). But that is not the market. Applying the criteria that we have developed, the addressable market encompasses 80 districts with 15.9 million households, or 23 percent of the 67.6 million households. The battle for clean energy will be won or lost in these 80 districts.
Focus on the district/micro-market to achieve meaningful revenue
In our experience, enterprises that start looking at villages to begin operations spread too quickly to new geographies across multiple districts or even across states. As a result, they end up spreading their resources too thin.
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 percent in 2011, with 380,000 rural households living in the darkness without access to the grid and solar systems. Seventy-nine percent of the rural households in Gorakhpur had access to banking services and the district exhibited strong economic growth between 2001-2011 (by our parameters). Un-electrification fell by only 4.9 percent over this period, but the penetration of solar systems was less than 1 percent.
Ten percent of the un-electrified rural households translates into a market of ~ 38,000 solar systems in the Gorakhpur district alone. The size of a solar system will vary by household. At an average price of INR 10,000 for a 20-watt system with two LED bulbs and one mobile charger, the market size is equivalent to INR 38 crore, or U.S. $6.3 million. This is a conservative scenario where we have assumed that the penetration of solar products is limited to 10 percent. We have also discounted the fact that villagers may opt for the costlier, larger SHSs instead of smaller 20-watt systems. Even with these very conservative assumptions, an enterprise can generate INR 38 crore from one micro-market or one district.
In our experience, there is 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 the Sitapur district. This is a clear example of adoption of the micro-market strategy.
Partnerships can be developed in the micro-markets to reach scale
The district level micro-market approach allows companies to identify and foster key partnerships specifically with managers of lead PSU and Regional Rural Banks who are located at the district town level. It allows companies to develop partnerships with local administrative layers and with community organizations. The district town is the place to locate dealers and service centers. Finally (and perhaps most importantly) it allows these companies to sharply focus their tiny budgets on marketing. The products have to be sold, for which companies need to spend money on advertising in local cinemas, village markets, hoarding and cable television inserts.
Identify a micro-market within a cluster
In most of the states we analyzed, 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 11 districts, starting from Ratlam in the west and stretching to Jabalpur in the east, form another cluster. Clusters also exist across 10 districts in southern Maharashtra (stretching from Jalna to Kolhapur) and three districts in southern Chhattisgarh.
One giant cluster sprawls across the states of Uttar Pradesh and Bihar. Twenty-eight districts (starting from Faizabad) in eastern Uttar Pradesh and western Bihar (starting from Gopalganj in the north to Gaya in the south) form one giant cluster with 9.7 million rural un-electrified households. This cluster alone accounts for 61 percent of our target market.
While thinking of where to pick that “one” micro-market/district to bet their fortunes, clean energy enterprises should assess the access to banking institutions in these clusters and the political, economic, behavioral issues that impact the market.
This is perhaps the only way innovation works
Geoffrey Moore in his book, Crossing the Chasm, identified the need for early adopter markets. The challenge for clean energy enterprises is to find early adopter markets of aspiring households in what are very challenging areas. It is by no means an easy challenge, but the parameters that we propose could be among several to use. From a micro to a mainstream market, the only way is to navigate across a cluster.