3 Keys to Achieving Scale in the Off-Grid Sector
by Sarah Bieber, Director, Scaling Off-Grid Energy
Grand Challenge for Development
The off-grid energy market is on the brink of achieving real scale. In an effort to understand what is holding it back in some markets and propelling it forward in others, the Scaling Off-Grid Energy Grand Challenge for Development partnership, along with other donors and investment firms commissioned Hystra for a groundbreaking market analysis report, “Reaching Scale in Access to Energy: Lessons From Practitioners”.
There are important takeaways for clean energy entrepreneurs, investors and others interested in growing the renewable energy market. The report relies on insights and best practices from 26 pioneers who are working to further off-grid energy solutions, specifically solar home systems (SHS), solar lanterns, clean cookstoves, and “pay-as-you-go” (PAYG) models for solar home systems. With approximately 1 million cumulative units sold to date, PAYG systems account for only 10–15 percent of SHS sold globally, but constitute most of the recent growth and innovation in the sector. The report reveals three key ways that companies are innovating to penetrate markets in a real way:
1. New Financing Partnerships Can Help Grow a Customer Base
PAYG customer service models increase access to energy for low-income households living in remote locations, and help previously unbanked customers build their credit. To reach these customers in this capital-intensive sector, companies are overcoming significant financing constraints by sourcing international and local-currency debt from third party financiers, partnering with microfinance institutions, and crowdfunding platforms. These new financial instruments, in lieu of local commercial lending options, are helping increase financial inclusion for many low-income customers.
2. Product Diversification is Key
Companies have been increasingly diversifying product and service offerings, and system appliance upgrade opportunities are allowing customers to expand quality of life and income generation opportunities. Although upgrades currently account for a mere 2–3 percent of total sales, it is clear there is an untapped market emerging. Companies are also looking ahead with grid integration solutions that build long-term value into solar home system and micro-grid business models as national electricity grids evolve alongside the sector.
3. Data Drives Best Practices
Progress is also being made by investors, donors, and industry leaders to establish industry-wide metrics to promote best practices, such as the World Bank’s Key Performance Indicator Framework. Standardized baseline data provide companies and investors with critical information, as they do their due diligence before entering a market.
Despite these recent advancements, business models serving off-grid regions continue to face a barrage of market hurdles that Power Africa is helping to overcome in the attempt to serve a diverse client base and provide “last-mile” distribution to rural customers. These hurdles include:
1. Barriers to Access for Low-Income Customers
While PAYG models are bridging some access gaps for low-income customers, challenges remain. Limited financing options in local currency, restrictive telecom and banking regulations that squash user-friendly mobile money apps, and the default risk of end-user financing haven’t gone away as the sector matures.
2. Risky Pricing Strategy
Ambitious growth targets can be the result of donors or other funders setting unrealistic goals for companies, creating a race to acquire more customers and boost connections by artificially driving costs down in order to access lower-income users. To do this, companies are reducing the initial deposit which is a high-risk pricing strategy — customers without prior credit history are left with a new system and often unaffordable debt.
SOGE aims to remove these pressures by using milestone-based awards with realistic targets developed in collaboration with companies, mitigating this risky approach. Sustainable customer acquisition will be critical in upcoming years to ensure stable company growth and prevent customer default rates from skyrocketing. Some companies such as PEG Ghana, a SOGE grantee, are taking steps to improve customer payment rates. In Ghana, where mobile money is a new technology, PEG is testing three mobile money tools simultaneously to see how repayment rates vary, and will ultimately select the best method based on results from the experiment.
3. Need for Local Capital
Unlocking local capital remains a key barrier, with companies struggling to source affordable local debt financing in the midst of currency fluctuations, hyperinflation, and ongoing economic recessions.
These are not insurmountable challenges. As the Scaling Off-Grid Energy Grand Challenge for Development aims to reach 20 million connections is sub-Saharan Africa, the partnership will continue to support companies through direct grants and strategic market interventions to improve country conditions and reduce specific market challenges called out in this report. Together with other donors and private capital partners focused on a few key areas, we can unlock the potential of off-grid energy.
Special thank you to the Asian Development Bank, the Inclusive Business Action Network, responsAbility Investments AG, Schneider Electric, the Swiss Agency for Development and Cooperation, and TOTAL for partnering with SOGE to commission these insights, and to Hystra for sharing their analysis of the interviews. We hope others working in the off-grid market will find the lessons learned in this report as a valuable roadmap to help focus efforts, and propel off-grid energy into the future.
The Scaling Off-Grid Energy Grand Challenge for Development (SOGE) is a partnership between USAID, Power Africa, the Shell Foundation, DFID, and the African Development Bank that aims to scale the off-grid solar market to provide 20 million new household and small business electricity connections across sub-Saharan Africa.