How to Accelerate Energy Access through Off-Grid Innovation
A Q&A with Leslie Labruto, Associate Director and Head of Global Energy at Acumen
Since 2007, Acumen has invested $23.3 million in 23 companies in the lighting, power and cookstove sectors. Working across every rung of the energy ladder, these social enterprises have provided nearly 100 million people with access to energy. Many companies, from d.light to M-Kopa, have pioneered the off-grid sector and opened the doors for new energy companies to find faster, more efficient solutions to improve the lives of low-income people everywhere.
In 2017, Acumen launched its Pioneer Energy Investment Initiative (PEII), a $20 million initiative to expand its work in the energy sector. PEII funds invest early-stage, high-risk equity in off-grid energy access enterprises in East and West Africa and South Asia with the goal of impacting 60 million lives by 2026. We sat down with Leslie Labruto who leads Acumen’s Pioneer Investment Initiative to ask about the lessons Acumen has learned related to building successful business models that provide electricity to the poor.
Let’s start with the big picture. What challenges in the energy sector do you think need to be most urgently addressed right now?
In my opinion, there are two things that the energy sector needs to focus on, but doesn’t: alleviating poverty and first-time energy access.
There needs to be a poverty focus in energy access work. If energy is deployed properly — if you’re connected to a mini grid, if you have the right appliances — energy can help you generate income. At the core of Acumen’s energy strategy is poverty alleviation.
We also need to accelerate the rate at which people receive first-time access to energy. There’s still 950 million people without energy access. That’s about a seventh of the world’s population. First-time energy access is a pressing issue that needs to be addressed.
What opportunities for innovation do you see in the energy sector?
We need companies and startups to go to markets where there’s currently no energy access. Certainly, some of these markets are difficult to enter, but we need more companies focused on increasing energy access in countries where there isn’t an off-grid market yet.
We also need more companies improving productive use technology and thinking about how their business models can generate revenue for customers. At Acumen, we consider “productive use technology” to be products and services that create an opportunity for customers to generate income — for example solar irrigation pumps, sewing machines, welding tools, refrigerators, or hair clippers. At the same time, financing needs to be available to ensure these appliances are within reach for low-income customers.
There’s myriad of opportunities to develop more inclusive business models. For example, companies can provide longer term loans to low-income customers or ask for lower deposits from customers. These are changes that can make energy efficient appliances and productive use technologies within reach for the poor.
I think cooking is arguably the greatest challenge in energy access, though. Three billion people cook with dirty fuels. If we could help customers transition to electric or cleaner fuel sources, we can see substantial health gains.
What has prevented cookstove business models from gaining traction?
There are lots of reasons that cookstove business models have struggled to take off. One factor is that cooking is so steeped in behavior and habits. Introducing a new cooking technology with a new fuel source could change the way you cook and provide for your family. If the new stove isn’t sufficient to meet your old standard of taste, you end up stacking fuel sources when you cook (aka using your old cookstove in addition to an improved cookstove).
The technology for cookstoves is still emerging too, so even with the most advanced cookstove technology, customers are stacking fuels because their favorite foods don’t taste the same.
At large, clean cooking has turned into more of a ‘push’ product. Customers aren’t saying “I need this.” A lot of times, customers would just rather use the cooking technology they’re used to.
(As an entrepreneur), you have a better chance at success if you can demonstrate two things to customers: (1) that your product will save them money and (2) the quality of food cooked on a new stove will remain the same. But still, the cookstove sector is still widely misunderstood and poorly studied. The sector needs more capital and a bit more time to create a business model that’s really successful.
What advice do you have for entrepreneurs hoping to enter a new geography, potentially as a first-mover?
Acumen analyzes five different conditions that McKinsey identified to evaluate if markets are ready for energy access companies.
The first condition is off-grid regulations. What are the off-grid regulations? Do regulations exist? Ideally there are supportive regulations, but sometimes no regulations are better than bad regulations.
Second is the business environment. What is the business environment in the country like? How easy or challenging is it to set up an entity in the market? Are there opportunities to receive capital in market [from local investors, governments, or donors]?
The third condition is logistics and channels. If you’re trying to get products to low income customers, how will you physically get products to them if they’re located in disparate, low-volume communities? If customers are in a remote part of a country, what infrastructure exists to reach them?
The fourth condition is willingness and affordability. Do customers actually have the money to pay? If the population lives on less than $1 a day, and your most affordable solar system is meant for customers living on $3.10 a day, there’s just simply not the cash flow available for your business to succeed.
The final condition is ease of payment. Mobile money has been hugely instrumental in enabling energy access. Mini-grid customers pay with mobile money. Solar home system customers pay deposits and make loan payments with mobile money. If there’s no mobile money penetration, it’s really tough for companies to recoup their costs to really track cash payments. So, what technology exists to make payment really easy?
How are social enterprises uniquely suited to play a role in addressing challenges or pioneering innovations in the energy sector?
Of the 800 million people that have gained energy access in the past decade, 45% have been from path-breaking startups.
We’re seeing that, increasingly, social enterprises can get to customers at a lower cost than the competition. Extending the grid can cost up to $2,000 per connection, compared to a solar home system, which can cost $200 or even cheaper. There’s a role for home system companies and solar distribution companies to serve customers in a cheaper, more efficient way than some grid solutions. And again, we need social enterprises to explore new, untapped markets.
Acumen has been investing in the energy sector for over a decade. What do you look for when you evaluate investments?
There’s five factors we look at when we’re evaluating investment potential.
First is the product or service. What is the product, service, or technology a company is offering? Have customers shown they want what is being offered? What are the margins for the product or service?
Second is the market size. How big is the company hoping get? Is that hope realistic? How well do you know your market? How well do you know your customer?
Third factor is the team. Probably the most important is who you are as a team. Are your entrepreneurial and have you done this before? Are you a good leader? What is the intention you hold? Are you willing to really commit to solving this problem by being in the market for long time?
The fourth factor is the deal. Obviously, every time an investor looks at a deal they are evaluating the historical and project financials, evidence of revenue generation, and the valuation and terms associated with the transaction. .
Lastly — probably as important as the team — is the customers. Who are your customers? We reach out to customers in our due diligence to ask: “How did this product change your life?” We want to understand what meaningful change customers saw: quality of life improvements, longer hours of study time, etc. For Acumen, poverty focus is critical.
What are the biggest pitfalls or mistakes you’ve seen social entrepreneurs in this sector encounter?
Oftentimes, we see valuations that are too high. It’s just a bad sign in terms of humility and expectation setting.
We’ve also seen entrepreneurs underestimate the cost of distribution. It’s much more difficult to sell a product or service when it’s in a rural region. You may spend half a day getting to a customer, and then that customer might not want what you’re selling. There are a lot of costs that go into distribution and it can be quite discouraging.
Finally, you always need more money than you think you’re going to need. Prepare for the fact that energy access business models are capital intensive and line up early investors who can support your vision over a long time. Tap into all types of capital available in your market, not just public grant capital, but also debt, equity, and grants. Different types of capital can enable different activities. Be responsible and thoughtful about how you take on capital and how you plan to repay loans.
If you were talking to a group of students looking to create an enterprise in this field, what advice would you have for them?
The first piece of advice I have is that you need to be in the market you want to serve. If you’re not in the market you want to serve while you’re in school, ideally you can relocate there after school. You can’t develop a solution when you’re not talking to the customers who are ultimately going to be using your product or service.
The second piece of advice is to talk to your customers all the time. See what their feedback is, understand what’s working for them and what’s not. Customer feedback is going to be a critical driver of early success.
Third, look for partners. There’s so many people out there eager to support you: NGOs, for-profit companies, investors, networks of peers, research partners. The list is endless. The key is to make sure you’re committed to partnering with people who have been pioneering this work and reinventing the wheel so that you can work together to develop a solution. That’s how can you stand on the shoulders of giants.
The last bit of advice is to be realistic. Nothing is worse than a company saying the addressable market is all unelectrified people. Be humble in recognizing that this is a really challenging task.
Want more energy insights from Acumen? Check out our Energy Impact Series, a collection of new research on the social impact of off-grid solar energy access.
