For most parts of rural Africa, sunset is synonymous to darkness. This has been the trend for so long that it is seen as the norm rather than the exception. Data shows that 622.6 million of the 1.1 billion Africans have no access to electricity (WashingtonPost). The urban electrification rate stands at 60 percent, with rural going at 14 percent. The situation has borne the need for diversification and innovation, so in comes off-grid solar. It is a highly effective system that enables access to basic electricity services. The system powers households through a battery-connected rooftop panel.
The sector has experienced impressive growth in the past ten years. Globally, it has grown from nearly nothing ten years ago, to more than 100 companies now actively focusing on stand-alone solar lanterns and solar home system kits- specially targeted at those not covered by national grids. By mid-2015, these companies had made sales of more than 20 million branded pico-solar products (defined as having PV panel smaller than 10W).
Africa, Tanzania, Ethiopia, and Kenya lead the pack in adoption of off-grid solar systems; in fact, they account for 66 percent of all the units sold in the continent. As a result, the various systems are no longer a niche product in the aforementioned countries. In Kenya, more than 30 percent of people living off the grid have a solar product at home. This is according to data produced by World Bank and Bloomberg in the past year.
Pushing the upsurge are the ‘pay-as-you-go’ (PAYG) firms that sell kits against small installments instead of lump sum payments with technology that locks the functionality in the event of nonpayment by a customer. Compared to selling the products for cash, these PAYG companies have attracted four times as much investment in just half the time. There are about 20 such companies that provide consumer financing active today, serving almost half a million customers, mainly in Eastern Africa.
A typical off-grid solar business product offering varies a lot, for they experiment with different business models and deliver a wide range of energy service packages. The service packages can vary from simple solar lanterns to solar systems greater than 200 watts. Many businesses, however, have some common factors. They offer a solar product, which is typically a home system consisting of a PV panel, a battery and control unit, two or three lights, a phone charger, and sometimes other appliances.
The customer typically makes an initial payment of around $30 for the basic home system, followed by regular payments of about $0.30 -0.50 per day for access to the energy services from smaller wattage systems, and upwards of $2 per day for larger systems. This cost is usually calculated so that it is competitive with the daily expenditure on stopgap technologies, thus allowing customers to save from day one. However, this only applies to the most common models because pricing formats can differ substantially.
Payments are often made via mobile money, particularly M-pesa in Kenya and Tanzania. There are also alternative payment methods like scratch cards, direct cash payments, or mobile phone credit. The home system is usually enabled to operate by instructions received via built-in GSM chip or after the customer enters a code sent by SMS.
In addition, customers are typically charged per unit of time, not per kWh consumed. This means that if the sun is not shining or if consumption needs exceeding, then energy supply is transferred to the customer.
Depending on the business model, the customer either makes scheduled payments or can top-up their account at any time. When the account is empty or in arrears, the solar kit will stop functioning until a payment is made. The customer may either own the solar kit once a certain sum has been paid (rent-to-own model) or make continuous service payments.
It is suffice to say that off-grid solar systems have created new economic systems to exploit. The companies currently in the market occupy different parts of the value chain, which results in multiple growth strategies and, for investors, highly varied bets on where value is being created. Some companies occupy bits of the value chain, while others, such as Off-Grid Electric in Tanzania and Rwanda, are active across the full spectrum.
Here are some ways in which off-grid solar can be integrated into and transform the ways of doing business in Africa:
The first opportunity is for product developers. These include business-to-business PAYG integrators and manufacturers of off-grid solar products. Such companies develop activation technologies and integrate them with solar home systems; in addition, they usually offer a software back-end to manage customer accounts. The companies in this part of the business chain sell the product and license the software platform to their distributors against normal product payment terms. Many manufacturers of off-grid solar products are positioning themselves as PAYG manufacturers, bringing into force the relatively low barriers for entry. This action also produces the risk of tough competition, which is capable of eroding profit margins in this segment. Fortunately, manufacturers may be able to differentiate their products in the future by offering distributors high quality products. There is also a need for a more mature PAYG financing and distribution. The improvements in quality and value capture will most likely focus on making it harder for end-users to hack systems, as well as improving the software back-end to provide data that allows operators to cut service costs and default rates.
The second opportunity is for distributors. Distributors have to create value by building strong distribution networks and customer relationships, all while maintaining maximum flexibility with regards to the type of equipment they deploy. The focus here is investing in distribution networks and raising debt financing. The companies currently in this sector either have already established distribution businesses, or are aiming to build their own, which suggests that they could expand their offering beyond solar home systems at any given time. The opportunity does have its challenges though: the need to raise financing makes it hard for many of the specialized off-grid distributors to compete as PAYG distributors.
Service-platform developers have the third opportunity to position themselves as reliable middle-men by going one step farther than product manufacturers. The work here is to seek out partners who possess established, valuable customer relationships, and then leverage their infrastructure and data as much as possible. This can include using existing shops and staff for sales, as well as using data to screen customer applications. The platform developer provides the solar system, the operations platform, and a firmly integrated CRM system, which gives the distribution partner access to PAYG revenue with very limited capital expenditure. Due to leverage from existing distribution networks and brands, platform developers may see very rapid growth in terms of households served once the partnership is proven. Although, because much of the value is captured by the distribution partner, platform developers will most likely seek to scale rapidly across different markets with various partners in order to grow their business. Their focus is likely to be on mass sales of a small portfolio of products, centred on solar home systems. In addition, they may seek to upgrade existing customers to larger systems or appliances.
The fourth business opportunity goes to integrated service providers. This group is the closest to the traditional utility-business model in the off-grid market. They work along the entire value chain to ensure that they can capture value at each node, and to also ensure that all pieces work together smoothly. Integrated service providers tend to oversee product development. They invest heavily in a local presence to guarantee distribution, servicing, and maintenance as well. Often times, this calls for heavy investment in local shops and distribution centres, and training of local staff. The aim is to build lasting customer relationships and serve as a full energy-service provider. Eventually, most companies following this strategy will offer their customers a full set of appliances that can lift them up the energy ladder- from simple lighting to more advanced services such as TVs and refrigeration, and possibly even productive uses for small businesses or workshops. Because they invest heavily in local presence, these companies usually require a high density of customers. As a result, many of these companies usually focus on specific regions and grow by extracting extra value from their customer base rather than rushing for geographic expansion.
Nevertheless, these opportunities don’t come without major challenges. One persistent thorn in the flesh is distribution. With increased competition and cheap generics entering the markets left, right, and center, last mile distribution is becoming more important as a value driver. This is even more the case for the emerging PAYG segment, which relies on an ongoing customer relationship. The distribution can create more value from this relationship too.
The current distribution models adopted by companies in the field are diverse, especially for cash sales. Some operate their own stores and train their own sales agents, but also leverage existing retail networks, savings, credit cooperatives (SACCOs), and partnerships with NGOs and companies. Other companies may focus on particular niches including: corporate employee offers with a particular industry, bulk sales to governments or humanitarian organizations, or choosing a specific franchisee for a new market.
The most successful models for distributing branded products have largely incubated the market that exists today. A great example is SunnyMoney’s school-based programme in Tanzania, Kenya, and other countries. It is largely responsible for sales of more than 1.7 million quality verified products and distribution through Total’s network of gas stations. A key target of many of the early adopters is to reach the rural poor who may not be well served by existing retail channels; hence they set up shops in smaller towns and send sales agents into schools and villages. This has also been vital for building customer awareness about solar as a category.
Experts predict that the manufacturing sector will probably become crowded soon, which will erode profit margins and shift value capture downstream. These are the same dynamics as in the cash-sale market. Meanwhile, integrated service providers are most likely to propel a smaller number of customers up the energy ladder in markets with a friendly business environment. Because cost reductions for portable lanterns will remain most popular in that segment, most PAYG solar kits are likely to remain solar home systems. Some lanterns are likely to be sold under PAYG as well, namely, to consumers not familiar with pico-solar. With these, consumer financing can build trust in the technology.
There are several firms offering off-grid solar services based in several countries. One of the most notable ones is M-KOPA, which is available in Kenya, Tanzania, and Uganda. Their method works by having a customer collect the system in an M-KOPA service centre, or an affiliated M-KOPA dealer, and make payments via M-PESA. Off-Grid electric is the other notable firm, and it plies its services in Tanzania and Rwanda. Mobisol is yet another firm and although it is based in Berlin, it services households in Tanzania. The last firm that offers off-grid services is Nova Lumos, which partners with MTN to distribute 80W Lumos Solar Power Station in Nigeria.
In conclusion, off-grid solar is likely to attract new entrepreneurs and investments in the coming years due to the following reasons: First, customers will become more familiar with the business model, thus reducing the cost of customer acquisition. Second, the government of countries without existing offerings may see success elsewhere and try to attract off-grid solar companies.
Off-grid solar, PAYG in particular, has the potential to be relevant to established corporates in variety of industries, which means some of them may fund or buy PAYG startups. Some firms have already attracted funds from different industries such as equipment manufacturers (Schneider Electric), utilities (EDF), mobile operators (Orange, Safaricom), and solar distributors that were previously focused on the grid-connected market (SolarCity). This overlaps with money transfer as well. Banking and financing business could also spark interest among financial intermediaries at some point, while beverage and pharmaceutical companies may be interested in off-grid solar solutions that can offer solar-powered refrigeration. A good example is Coca Cola, which already has a partnership with SolarKiosk.
Even without partnerships with such established players, it is possible that investors and entrepreneurs will push ahead and create these services from scratch, using off-grid solar as a door opener.
Entering the PAYG business is becoming more accessible to companies as solar kits and back-end software that enable PAYG become available off the shelf.
Apart from providing people with a cheaper and cleaner alternative to the traditional services that are currently relied on, the off-grid solar industry has had several domino effect consequences. Gaining access to clean and affordable energy saves consumers money, reduces exposure to toxic materials released when burning kerosene, and cuts greenhouse gas emissions. In addition, money and time that is freed up can be redirected towards doing more work or getting more education. Additionally, replacing kerosene reduces fire risks and may even improve the comfort of families and entire communities. These indirect benefits tend to be harder to quantify, but it is generally agreed that they are very likely to occur. This is sure to be an industry of the future, and African entrepreneurs should continue exploiting it.