In this study on innovative entrepreneurship and sustainable development, Professors Gireesh Shrimali, Charles Dhanaraj and Kirti Madhok Sud chronicle the evolution and growth of Husk Power Systems; the possible opportunities it could capitalise on and strategies to meet the various challenges in making the enterprising company operational.
Husk Power Systems (HPS) provided off-grid power to rural Indian villages of about 500 households each. HPS used proprietary technology to generate electricity from rice husk using 35 kilowatts (kW) “mini power plants.”
Gyanesh Pandey, CEO of HPS, and his top management team comprising co-founders, Ratnesh Yadav and Manoj Sinha, were completing a fund-raising exercise to finance HPS’ growth plans to provide power to 200 villages in rural India. The ability to create energy from waste material that was available in plenty was an exciting concept. But, making it operational as a business concern posed several challenges. The questions on their minds were: what incremental resources, both human and technological, would the company need to draw upon? How would they create a business model to manage this growth? And, should they continue to grow organically or move to a franchising model to realise the full potential of the business?
The Rural Energy Market
Expanding access to energy services was an enormous challenge for developing countries. In India, the problem was acute. The Indian government’s official notification identified 18,000 villages that ‘cannot be electrified’ and 125,000 villages that were called ‘un-electrified’, meaning that they did not get power supply for more than four hours a day. The Indian government was encouraging investment in renewable energy sources to meet these challenges.
Rice Husk as an Energy Source
Many scientists pointed to rice husk’s high average calorific value (3410 kcal/kg), indicating that it could be a good renewable energy source. India produced 132 million metric tonnes of rice in 2008. This provided roughly 14 million metric tonnes of rice husk, which would be sufficient to power 140,000 villages. HPS successfully developed a technology building on some of the practices that had been in use for over fifty years in India. HPS zeroed in on a 35 kW plant based on the generator set size available in the market. In hindsight it turned out to be a good decision because HPS supplied power to roughly three to four villages on an average from a single plant, which accounted for roughly 60 to 70 percent of capacity.
HPS Business Model
HPS deliberately developed a business model that went directly to the households rather than selling it to a grid. Going direct to customers meant that the load would not vary significantly, which increased the operational efficiency of the power plants.
A single plant could cost under US$32,000, employ 3-4 people and generate about 32-35 kW of electricity, which was enough to power about 500 households and shops, or about three villages. The waste product of the process was high in silica and could be sold to concrete manufacturers. HPS’ installation cost per kW was relatively lower than that of a coal plant which cost approximately US$1200 per kW, or a solar plant typically costing about US$4000 per kW.
HPS expected to achieve a steady stream of revenue from electricity sales of US$800-900 per plant per month. HPS plants were expected to break-even in three years. The Net Present Value (NPV) for a plant turned positive in 4 years based on electricity revenues alone and in 3 years if additional revenue streams were added.
The company was exploring various alternative revenue streams in addition to selling rice husk ash. HPS had concluded a strategic partnership with downstream electrical supplier Havells, a leading manufacturer supplying Compact Fluorescent Lamps (CFLs) to its power consumers. Havells recognised that HPS could sell roughly a thousand CFLs per new installation and the partnership enabled the consumers to get a better quality product at roughly 15 percent cheaper than the market price.
The most exciting source of revenue was to apply and trade carbon credits under the Clean Development Mechanism (CDM) under the United Nations Framework Convention on Climate Change (UNFCCC) Kyoto Protocol. Since HPS’ process was not only carbon neutral but also reduced fossil fuel (kerosene or diesel) consumption, it qualified for carbon credits.
Many scientists pointed to rice husk’s high average calorific value (3410 kcal/kg), indicating that it could be a good renewable energy source. India produced 132 million metric tonnes of rice in 2008. This provided roughly 14 million metric tonnes of rice husk, which would be sufficient to power 140,000 villages.
Decentralised Power Model
The villages (located in Bihar) serviced by HPS were small with around 100 to 200 households going up to 500 and they were off-grid. Power distribution happened overhead through wires hung on bamboo poles, enabling HPS to wire an entire village at around one third the cost of what it would take to dig and lay wires underground to supply power. HPS supplied power for roughly eight hours on an average from 5 PM until 1AM. While the initial target was all off-grid villages, HPS was supplying power in one area that was on the grid. This move was to test whether the company could effectively compete against both the government-supplied power and private diesel generator-set based power supply. The location was a small town called Majawalia where apart from government supply, six or seven generator set electricity providers were operating. HPS found that it was able to displace three or four of these suppliers. Small businesses like computer shops, photo shops, etc. began to purchase power from HPS for roughly twelve hours per day (in an area that was electrified) preferring HPS’ more reliable power supply source in the evenings.
Pricing
The company charged a household a minimum of US$1.8 a month and it got a guaranteed supply of power for eight hours a day, enough for two CFL lamps and unlimited phone charging. However, the ground reality was that there was no power supply most of the time and even when it was supplied, availability was from 1 AM to 6 AM in the morning when there was little use for it. HPS also recognised that rural consumers were reluctant to pay and, therefore, when it started operations it attempted to get payments upfront. The company targeted to collect upwards of 80 percent of the revenue expected in the first ten days of the month. Rural consumers saved 50 percent of what they were spending on kerosene and diesel and getting better services from HPS. Reliability of supply was the single most important factor that attracted customers. HPS had proved that rural communities were willing to pay for reliable electricity.
Entering a New Market and Generating Initial Sales
When HPS entered a new market, it tried to do an elaborate pre-selling. An installation team consisting of a technical person and a sales person was tasked with pre-selling roughly US$800-900 worth of power supply, with a minimum connection of US$1.8 per household. Consumers were simultaneously educated that for HPS to be sustainable, upfront payment was necessary. Although the initial response was positive, which seemed to indicate that people understood the value proposition, HPS felt that customers in rural Bihar generally over-promised and subsequently backed out. The trust factor was built up gradually as the villagers saw HPS starting its operations and continuing on. The HPS experience was that after about twelve months of operations, the business became demand-driven.
Supply Chain and Operations Management
A decentralised supply system for husk was critical for HPS because transportation costs beyond five or six kilometres were significantly high. The solution arrived at was to have a cluster of four or five power plants (serving fifteen to twenty villages), serviced by the four to eight rice mills operating in the vicinity.
HPS had also managed to de-skill operations to such an extent that it could recruit local people. The new hires were trained at HPS’ training facilities to enable them become operationally ready within six months.
Funding the Business
The prize money of US$95,000 from various Business Plan Competitions enabled the founders set up the first two plants. This was followed by a US$125,000 grant in late 2008, from The Shell Foundation, which focused on enterprise-based solutions to global poverty and environmental challenges. In May 2009 the Foundation provided a second grant of US$270,000 for scaling up operations. HPS was also able to gain the support of the Indian Government’s Ministry of New and Renewable Energy (MNRE) which provided subsidies, access to systems and support for training employees.
Growth Strategy
Shell Foundation’s initial support enabled HPS to provide electricity to about 15 villages. By April 2010, HPS had 30 power plants. HPS planned to increase its total installed capacity to run 50 power plants i.e. a capacity of 1.5MW by the end of the year and considering an aggressive expansion spree over the next five years with plans to build over 2,000 plants across multiple countries by 2014. HPS was considering plants in Uttar Pradesh, West Bengal and Orissa, areas which were both rice-rich and electricity-poor.
The company was also considering the franchise route along with organic growth, although specific plans were still under consideration. HPS was inclined not to run operations nor own any equipment at the franchisee units, but to retain 20% of electricity revenue plus revenue from carbon credits. One or two plants would be set up for each franchisee and initial training would be provided. Each franchisee would be required to build a minimum of 8-10 plants.
The Way Forward
HPS believed that its strength was in its innovative business model and processes it had developed over the years. HPS had the lowest installation costs for a power plant and was hoping to further cut installation costs by another 20 to 25 percent in the next one to two years. The Company kept abreast with technology developments in alternative sources such as solar and wind.
However, HPS saw the several challenges that could impact its growth plans. For one, their generator set supplier did not seem to share the growth vision of the company. Equally daunting was the recruitment and training challenge. However, the company had slowly but steadily built its credibility in the market place.
HPS recognised that its ability to meet its projected growth target for year-end 2010 was critical to raising the additional funds required for the ambitious scale up targets planned over the next few years. Equally important, going forward were tactical issues such as optimising operations, adequacy of human resources, improving revenues per plant, addressing supply side constraints and creating a different growth model to support the planned growth.
Vivek ND, Associate Editor, ISBInsight compiled this summary based on the original case written by Professor Gireesh Shrimali, Assistant Professor of Energy Economics and Business at the Monterey Institute of International Studie; Professor Charles Dhanaraj, Professor of Strategy and Global Leadership, IMD, Lausanne and Kirti Madhok Sud, independent researcher.