Incentives for Distributed Energy Resources in Rural India

We aim to examine a policy initiative that could enable entrepreneurial activity and flows of private capital to distributed energy resources (DER) within the Indian electricity sector. The proposed work will build on our ongoing research (supported by SEED), from which we concluded thus far that a key barrier to DER (e.g., solar mini-grid) investments is the uncertainty surrounding the revenue streams that the investor would receive if the mini-grid were forced to compete within the central electricity network (i.e., grid). This scenario would occur if the mini-grid were to be interconnected with the central grid. Indian regulators have attempted to address this obstacle by proposing that the entrepreneur would become a franchisee of the local distribution company (i.e., retailer) in the event of interconnection. However, this proposal has not been implemented. This is partly because the entrepreneur could rationally expect to receive, under the franchising model, unit revenues no greater than prevailing residential or agricultural tariffs. These rates are generally low in India because residential and agricultural ratepayers are cross-subsidized by commercial and industrial customers. Given this, we envision a new thread of research to explore pricing schemes that would more fairly compensate the DER entrepreneur. In the research described by this proposal, we would quantify the extent to which an agreement in which the entrepreneur receives unit revenues based on a dynamic pricing profile would enhance the viability of a DER facility, relative to one that offered a static price. We expect that these results will not only advance the development of the franchisee model in India but also offer an approach for electricity pricing and DER entrepreneurship policy in other developing economies.