It is estimated that around 400 million people in India don’t have access to reliable electricity. That’s around one third of the country’s population. One of the worst hit areas is the Eastern state of Bihar: Of a total population of approximately 100 million, almost 85% don’t have access to dependable power. And within Bihar, the hardest-hit are the rural poor.

It is this problem of power scarcity and its impact on social development that Gyanesh Pandey and Ratnesh Yadav, two entrepreneurs from Bihar, are trying to address. Their company, Husk Power Systems (HPS), set up in 2008 in Patna, the state capital, generates electricity from rice husk, a waste product of rice milling. In the areas where HPS has put up its power plants, not only are the villagers assured of reliable electricity, they also pay less than what they were previously spending for light from kerosene lamps. There are side benefits too; electricity from HPS does not have the environmental and health hazards posed by kerosene.

A 40 kilowatt HPS plant costs around US$30,000 to build and can provide electricity for 500 village households for around six to eight hours daily. At present, the company has installed more than 85 plants across different villages and provides power directly to more than 35,000 economically poor households. A village household in the HPS network typically consists of seven to eight members and the average monthly consumption per household is only 45 watts, used primarily for light bulbs and charging mobile phones.

According to Pandey, at Rs. 2.20 per watt (4.4 U.S. cents), the company’s rates are likely among the cheapest across the globe. “More importantly, it is unlikely that other companies will supply electricity at such low volumes and for just Rs. 50 or Rs. 100 (US$1 or US$2) per household,” he notes. Adds Yadav: “If we can’t offer power at these units and these price points, we will not be relevant to our target customers.”

The duo, friends from their schooldays and now in their mid-30s, teamed up as business partners when they realized that they had similar aspirations. Pandey, an electrical engineer from the Institute of Technology at Banaras Hindu University in the neighboring state of Uttar Pradesh, was then in the U.S. He went there to study at Rensselaer Polytechnic Institute in New York and then worked in Los Angeles with International Rectifier, a semiconductor firm. Yadav, a graduate of the University of Delhi, stayed on in New Delhi after his studies and worked in his family’s transportation and liquor business. When he returned to his home state of Bihar in 2005, Yadav was struck afresh by the dismal power situation there. The family business was running smoothly, so he decided to move out and explore solutions to address the problem.

Despite the relative comforts of living in the U.S., the problems in his home state also remained a concern for Pandey. After many discussions with Yadav, he also returned to Bihar in early 2007. The two started exploring various options in the power sector, including solar, wind and bio-diesel, but found them unviable. “We knew that the high-tech and high-cost solutions would find no takers in our villages,” Pandey points out.

Zeroing in on Waste

The duo ultimately saw the most promise in rice husk, the outer kernel of rice. Unlike most other agricultural waste, the high content of silica in rice husk makes it unfit for use as animal fodder or household fuel and typically it is simply discarded. The duo heard that others had been trying to use rice husk to generate electricity, but had not met with success. After months of research and various iterations, they came up with a viable solution: They converted rice husk into combustible gas and then used this gas to produce electricity through a generator. “The technology itself is very old. What is unique is the way we have used the technology and designed the system,” says Yadav.

Charles Dhanaraj, an associate professor of management at the Kelley School of Business at Indiana University, and head and senior research fellow at the Center for Leadership, Innovation and Change at the Indian School of Business in Hyderabad, has studied the company closely. “I have seen husk powered stoves in the outskirts of Jamshedpur, not far from where I lived for five years. Methane gas got out during the burning of these stoves and the smoke was horrible on the eyes,” Dhanaraj notes. “What HPS has done is to turn the problem on its head and convert it to a solution.”

Rajan Kundra, deputy chief investment officer at Acumen Fund, a U.S.-based nonprofit social venture that has invested in Husk Power says his organization was impressed by the management team’s “ability to deploy systems and operationalize the power plants in a way that we had not seen [done] by others.”

To keep costs to a minimum, HPS has taken various measures. For instance, the system design itself requires the most basic of gasifiers and generators, thereby reducing manufacturing and maintenance costs. Instead of laying underground cables or using cement poles for supporting overhead distribution cables, HPS uses inexpensive bamboo poles. To avoid electricity theft, the firm has designed its own low-cost, pre-paid energy meters. Labor costs are kept low by employing locals from the villages. When HPS noticed that their customers were using poor-quality bulbs that led to loss of power, they partnered with a manufacturer of high quality bulbs and sourced the bulbs for their customers at discounted rates.

According to Pandey, HPS can cover the entire spectrum of installation, generation and distribution of electricity at half or even one-third of what it costs conventional thermal power plants or solar and wind plants. In an article in The New York Times, Ramapati Kumar, an advisor on climate and energy for Greenpeace India, said that HPS’ model could “go a long way in bringing light to 125,000 unelectrified villages in India,” while reducing “the country’s dependence on fossil fuels.”

But even at this low price point, one of the biggest challenges that the duo faced in the initial years was resistance from customers. It was a combination of mistrust and inertia towards change. “We had to go house to house to convince them,” recalls Yadav.

Partnering for Growth

Having crossed the first hurdle, the co-founders now want to expand fast. Their target is to put up around 2,000 plants by the year 2014. But this comes with its own challenges. While setting up the plants itself is not complex, managing them in remote locations using unskilled labor will not be easy. “The biggest challenge for Husk Power will be to develop a scalable approach that allows for efficient operations,” Kundra of Acumen notes. “They can’t run 1,000 plants in the same manner as they do 50 or 100.”

HPS is looking to address this issue through a partnership approach. It is examining two types of partnerships. In one, HPS will build, own and maintain the plants, but will hand over the distribution operations to local entrepreneurs against a fixed monthly charge. In the second model of partnership, HPS will only build and maintain the plants; the ownership and distribution operations will be left to the partner. “Our ability to partner will be key to our success,” Pandey says.

At present, two of the company’s 85 plants are being operated under the build and maintain model, and 30 are being operated under the build, own and maintain model. The rest are wholly run by the company. Moving forward, HPS would like to have around 50% to 60% of the plants under the build and maintain model and 10% under the build, own and maintain approach. “We want to collaborate with people who have local knowledge, access to the remote areas and can buy 50 to 100 plants from us,” Yadav notes.

The partnership approach has another advantage — building the ecosystem. Yadav and Pandey say that their model is not about just providing electricity, but about bringing change and social development, and empowering the rural poor. “Our big picture includes providing energy, training and employment, women’s empowerment and health care,” Pandey states. All of these are interlinked in our model.”

So how does the HPS model enable those additional impacts? Take employment creation for instance. Each plant typically requires around three to four people to manage it. The system has deliberately been designed so that unskilled laborers can operate it with minimum training. The training itself is provided by HPS. The company is now looking at setting up a centralized training institute, which will deliver training through video, online classes and in-person lecture demonstrations.

A waste product of the HPS power plant operations is rice husk char, which can be used to make incense sticks. Local village women are trained and employed for this purpose by a non-governmental organization (NGO) set up by HPS. HPS then sells the incense sticks to companies who add various fragrances and market the incense under their own brands.

Since the company sells power directly to its customers, it has access to a large customer base in the villages. This is very attractive for fast moving consumer goods companies. HPS aggregates the various product requirements of their customers and then buys the goods in bulk directly from the consumer products firms. HPS passes on part of the margin benefits to the villagers. Currently, sale of electricity is the prime revenue source for the company, but the cofounders predict that the incense stick business and product channeling will also become significant sources of income.

They are also looking at creating additional revenue streams. For instance, silica is another waste product of their operations that is being monetized. Also, since the HPS process is not only carbon neutral, but also reduces kerosene and diesel consumption, it is eligible for trading in carbon credits.

In its initial stages, HPS was funded by Yadav and Pandey and the first two plants belonged to an NGO set up by them. Once they had a proven concept, the co-founders were joined by another friend, Manoj Sinha, and his classmate at the University of Virginia’s Darden School of Business, Charles Ransler. Sinha and Ransler put together a business plan based on Yadav and Pandey’s model and won around $100,000 as prize money in various business plan competitions. Since then, HPS has received funding from the Shell Foundation, the Acumen Fund, the Indian government, the International Finance Corporation and others. According to Pandey, HPS has invested a total of around US$6million.

At the plant level, profitability is expected four to five years after installation. At the company level, HPS expects to become profitable once it installs around 100 to 120 plants, possibly by April 2012. Once that happens, the co-founders are looking to expand outside Bihar and, eventually, outside India. “We have built an ecosystem that takes waste from the community and uses it to give them back multiple benefits,” Yadav says. “There is no aspect that is harmful to anyone. This is what will make the model sustainable.”

Dhanaraj of IU and ISB agrees. “HPS has the formula to bring the problem, the stakeholders, the technology and the funders together…. It can be a major force for change, for urbanizing the rural areas in India and elsewhere.” In addition, Simon Desjardins, program manager at the Shell Foundation, notes that the challenges of doing business in Bihar force innovation, which is an advantage as the company tries to expand. “In many ways, Bihar is a proxy for the rest of India, excluding the urban growth centers, and a unique test bed for technology and service innovation that could be applied throughout the world.”