“We wanted to set this up as a business model,” said Abhishek Pratap, a Greenpeace campaigner overseeing the project. “Now we’re in course correction.”

It’s a scenario playing out at dozens of ventures across India’s hinterlands. Competition from state utilities, with their erratic yet unbeatably cheap subsidized power, is scuppering efforts to supply clean, modern energy in a country where more people die from inhaling soot produced by indoor fires than from smoking.

About as many people in India are without electricity as there are residents of the U.S., and the number is growing by a Mumbai every year. Prime Minister Narendra Modi wants to bring electricity to every home by 2019 by leapfrogging the nation’s ailing power-distribution infrastructure with solar-powered local networks — the same way mobile-phones have enabled people in poor, remote places to bypass landlines.

Political Minefield

“We are facing the searing impact of climate change and we spend more than 6 percent of our gross domestic product in adapting to its consequences,” Modi told Fiji’s parliament yesterday, saying technologies such as wind and solar mean “we don’t have to seek old pathways to prosperity.”

Modi’s vision is also championed by the World Bank, General Electric Co., and BlackRock Inc.-backed SunEdison Inc., which say switching from old-style centralized networks to microgrids is a cheaper, faster solution to bringing 1.3 billion people, mostly in India and Africa, out of the dark.

India’s state utilities risk crushing that model before it gets off the ground as they continue a policy of supplying farmers and the poor with cheap power.

While the utilities incur huge losses stemming from subsidies, changing the system is a political minefield. Bihar, for instance, has the second-largest number of people below the poverty line among India’s 29 states: almost 44 million living on 75 cents a day or less.

“The issue isn’t whether people can pay for power,” said Vivek Gupta, co-founder and director of Saran Renewable Energy Pvt., which suffered unannounced grid arrivals when building microgrids in Bihar. “They don’t want to pay because they know the government gives it for free if the grid comes.”

‘Huge Problems’

Bina Devi, 55, who squats on her heels in a dirty beige sari, says she’s grateful to Greenpeace for bringing the kind of modern energy needed to light schools, run health clinics and refrigerate food.

“It changed everything,” she said. Yet given the option for virtually free state power, she’s not inclined to pay for an alternative. “We hardly have enough money for food. It’s difficult to pay an electricity bill.”

Husk Power Systems Pvt., which has built microgrids to supply about 200,000 people with power from rice husks, has had “huge problems” with disconnections when the grid appears, said Chief Executive Officer Manoj Sinha. In Tanzania, by contrast, the state utility promised to stay away for a decade from the area where First Solar Inc.-backed Husk planned a microgrid.

“India is preventing innovation,” Sinha said.

Unelectrified Populace

The number of Indians without access to modern energy is increasing as population growth outpaces electrification — rising 13 million last year to 306 million, according to the International Energy Agency. That’s more than triple the next- biggest unelectrified populace: Nigeria with 85 million.

Delivering electricity the traditional way means building more transformers, substations and transmission lines, as well as more fossil-fuel plants. India can’t serve existing customers, with shortages of as much as 11 percent at peak hours, and its distributors are saddled with more than $32 billion in debt incurred from subsidies as well as losses from theft, a leaky network, and slack billing.

Efforts to expand the grid have fallen short since at least 2010, when the government set a goal to have every village electrified. As of September, 13 percent of villages were still pending, according to the government.

On the ground, many villages technically may be connected to the grid but get little or no power for years because of broken infrastructure. Others may have one government building tethered to a transformer and little else.

Ganges Island

The unreliability of grid power, which in some places only works when people are sleeping, makes alternatives attractive. Renewable-based options also offer clean, bright light in a nation where indoor air pollution is the second-biggest killer after high blood pressure, according to the Centre for Science and Environment.

Solar power can also work out cheaper in the countryside than using kerosene, diesel and candles — yet subsidies distort the market.

Mera Gao Power, which has built minigrids for 20,000 households in Uttar Pradesh state, is planning projects in Haiti and Nepal, where its model will compete against market-priced kerosene, unlike India, where the fuel is subsidized.

“In India, we can charge $2 a month, whereas we can charge $8 a month in Haiti,” says co-founder Nikhil Jaisinghani. “That’s very important to show to lenders and investors.”

Meanwhile, Saran Renewable is hedging its risks by putting one project as far from the state utilities’ reach as it can: on an island in the middle of the Ganges.

“It’s physically impossible to extend the grid there,” Gupta said.

Copyright 2014 Bloomberg

Lead image: Transmission lines via Shutterstock