Can Blockchain help reduce Energy Poverty in Rural India? (1/3)
#1 Problem Definition
This is the first article in a series of three, being: #1 Problem Definition, #2 What is Blockchain, #3 Blockchain as a solution for the energy industry. Anyone interested in the combination of rural electrification with Blockchain technology I invite to get in contact with me through yvo@energybazaar.org.
The energy sector in India is at a crucial turning point in time. No less then 240 million people that are yet deprived of access to energy, but are on the verge of being electrified because of dropping prices in solar energy generation, storage and infrastructure innovation. In this small series of articles, I will explore a small set of problems that are apparent in the sector and will hold this to the light of Blockchain technology, that is becoming more and more seen as a resourceful solution for use in the energy world. This first article will sketch the problem definition from an Indian perspective. The second article will pose as a general introduction to Blockchain technology and the third article tries to connect the dots where problem and solution could meet.
So let’s sketch the problem, where it must be disclaimed that this is but a fraction of the issues faced in the rural energy technology sector today. The objective of rural electrification is pursued by many different organisations, in the industrial, governmental, academic and public spheres. Both bottom-up as top-down approaches are being tried, on which perspective Rob de Jeu has written an interesting piece. A coherent cooperation between parties, however, seems almost absent. While latest policies in, for example, Bihar, have tried to close the gap between microgrid operators and distribution companies (DISCOMs/utilities), there is still little willingness between the parties to work together on a large-scale level.
Microgrid operators are largely private entities, facilitating energy services in villages and remote areas that are often not reached by the central grid. DISCOMs are the operators of that central grid and are still profoundly loss-making public organisations, even though that is not required. Microgrid operators and DISCOMs need to start collaborating, there were the central grid gets extended to areas where microgrids are already installed.
The Government of India has reformed the energy sector immensely in the past decades, because the model was unsustainable and loss making. However, attempts to attract more private companies in the distribution sector in order to restore its performance has not been as effective as anticipated. A study by Kessides sheds a light on the possible reasons for this. According to Kessides, there is a certain order of reforms that has to be followed. First raise prices to cost-covering levels, second create regulatory institutions, third restructure the sector and only then privatise. It is costly to maintain a different order and this is exactly what India has done. The highly subsidised DISCOMS were, at the time of privatisation, still offering electricity at prices below the cost of producing it, coming from the time where the Government wanted to speed up electrification by making it possible through low prices for rural customers. Before prices were raised to cover the costs of electricity, privatisation was already introduced, making it very hard to persuade customers from loss making public DISCOMS to go to private DISCOM parties.
The biggest barrier was not a lack of cost competitiveness, as one would expect, but a competition between the DISCOM and the microgrid operator.
Attracting private investment for microgrids also not had the expected impact. A working paper by a PhD student from Stanford tried to find the ‘gateway’ barrier to microgrid implementation. The biggest barrier was not a lack of cost competitiveness, as one would expect, but a competition between the DISCOM and the microgrid operator. When the central grid of the DISCOM gets expanded to the rural area, it gives the villagers a cheaper form of energy access, with which the microgrid cannot compete, because the DISCOM is so heavily subsidised.
This barrier has been acknowledged by the governmental entities. Bihar, one of the States most deprived of energy access is creating a lot of policy on the matter. In the latest draft policy on microgrids it has been tried to resolve the ‘gateway barrier’. At the moment that the central grid is extended to the area, the DISCOM has to take over the assets of microgrid operator (the network) according to the current booking value. Furthermore, the microgrid operator can choose from several options, among which the option to enter into a Purchase Power Agreement (PPA) with the DISCOM. This is where energy can be exchanged according to a pre-set pricing mechanism.
This option is a huge step in ensuring the security of investment for microgrid operators. However, it is not very attractive for the DISCOM. It now has to deal with a large number of different microgrid operators, when they are expanding their operations (which are unsustainable to begin with). Part of the problem is that the PPA, as proposed, is a very static agreement, in a system that is in constant flux and change. Every time the system changes, because more solar panels are installed, the agreement must be changed and renegotiated. An undoable job for the DISCOM that is already flooded with ineffective operational processes. Apart from that, the DISCOMs are reluctant to connect their already fragile systems to the alien systems of microgrid operators, making grid balancing another issue that they need to be worried about. All together, it seems understandable that DISCOMs don’t show a lot of willingness to work with microgrid operators. This poses as a real barrier to further integration of the electricity system.
Blockchain is to Bitcoin what the Internet is to Facebook. Blockchain is the decentralised platform behind Bitcoin that allows for easy, transparent, trustable and secure transactions.
A technology called Blockchain, that became known to the larger crowd with the launch of Bitcoin in 2008, promises to revolutionise the way the world works. Blockchain is to Bitcoin what the Internet is to Facebook. It is the decentralised platform behind Bitcoin that allows for easy, transparent, trustable and secure transactions. Easier transactions, that theoretically would also apply to sharing of energy. Would a technology like that prove the solution to resolving the reluctance of DISCOMs and microgrid operators to work together and therefore speeding of the development of energy access to rural areas?
Next article will see to a further explanation to the Blockchain technology, after which in the third article I will go deeper into the impacts for the energy industry, specifically in the rural parts of India. Stay tuned.
I want to thank my editors Rob de Jeu, Vincent Hunink, Camille Hunink, Marina Graciolli de Paiva, David de Vries and Bart Keulen for their contribution in making this a more readable piece of text and understandable for a larger public.
I also want to thank the TU Delft Global Initiative and Rural Spark for making the visit to India happen. Check out their channels for more projects on development connected to Delft University of Technology.
