Hey Discos! (that is, Electricity Distribution Companies)
If You Want to Make More Money, Consider Offering Your Customers More than Just Electricity
Power Africa, the U.S. government initiative led by the U.S. Agency for International Development to double access to electricity in sub-Saharan Africa, has been very successful in bringing people electricity in the off-grid space — solar lanterns, solar home systems, micro-grids, etc. But we also need to work together to get way more people connected to the grid in a commercial manner. I say “commercial manner” because it simply does not make sense to spend $1,200 connecting a person to the grid if all that person is going to use electricity for is to power a few light bulbs and charge a mobile phone. As the Economist recently reported, “[P]roducing more power does little if people are unwilling or unable to pay for it. . . . [Kenya Power] said that almost [one million] customers who are connected to the grid have bought no power at all.”
We’ve observed a few things about how the electricity market has been evolving in Africa. Namely: people want more than just an electrical connection, and even low income customers are willing to pay for power so long as it’s on their own terms.
The solar home system companies have figured this out, which is why they are growing rapidly, adding thousands of new customers each month. Mobile phone companies figured this out, which is why people often get mobile phones “for free” in exchange for long-term contracts. Banks figured this out decades ago, when they gave people free toasters just to open a bank account.
Most traditional electricity distribution companies (Discos) in sub-Saharan Africa, which connect people to the grid, continue to struggle financially. The first reason is that in many countries, governments, sometimes for political reasons and sometimes to make the cost of manufacturing lower, aren’t allowing the Discos to charge customers the actual cost of producing the power — a losing proposition for any business. Second, many customers refuse to pay or are not being charged enough for electricity because they do not have electric meters that tell them and the distribution companies exactly how much power they’re consuming. In some cases, “customers” create their own “connection” — essentially finding a live wire and “helping themselves” to electricity in a very dangerous way that results in many electrocutions each year.
Power Africa is working with Discos and governments to chip away at these issues and is making some progress. In one Disco in Nigeria, for example, we helped reduce losses from 54% to 40% in a few months, adding millions of dollars to the Disco’s coffers so that it could invest in maintenance and expansion.
But there’s another reason why Discos do not want to connect lower income customers: Many Discos currently view low income customers as financially unattractive. Household grid connections are very expensive, costing between $500 and $1200 in sub-Saharan Africa. Even if the Disco or the government pays for or subsidizes the connection, there’s a concern about whether the customer actually will use and pay for power. During a recent visit with a Disco in Uganda, the CEO reported that while his company had been connecting lower income communities free of charge, it seemed as if the people didn’t actually use the power made available.
It’s hard to imagine a for-profit Disco getting overly excited about connecting those customers whose needs may only include generating power for a few bulbs and a few cell phones. Discos get much more excited about selling power to a cement factory that will consume huge quantities of power or at least households with larger appliances like stoves, refrigerators, and air conditioning units that consume a lot of electricity. It’s a lot easier to collect revenue from and provide service to one customer who consumes as much power as 100,000 individual homes.
We can’t ignore those 100,000 customers, though, let alone the 600 million people without electricity in sub-Saharan Africa. Not only should they get access to electricity, most are willing and able to pay for it. For example, during trips to remote areas, I always note the number of satellite dishes on basic, rural homes — whether in the Peruvian Amazon or on an island on Lake Victoria in Uganda. Many low income people seem to find a way to pay for not only the power they need, but the power they want. If there’s a soccer or football game they want to watch, they will watch it.
People know what to do with the power — turn on the lights, charge a cell phone, run a television, charge an electric razor, heat a clothing iron, cook, refrigerate their food, run a water pump, etc. Power Africa partners like d.Light, Mobisol, M-Kopa, Lumos, Off-Grid Electric, BBOXX, and Fenix International are currently filling the gap to meet this demand. These solar home system companies are selling customers much more than just power. Rather, many of these companies are selling, leasing, or “renting to own” solar home systems that offer a full suite of appliances that make daily life easier. The “pay-as-you-go” model allows people to start off by spending the same amount of money that they would otherwise spend on kerosene on a small solar panel that can light some bulbs, charge phones, power a radio or television, etc. And then people quickly upgrade from a 15-inch television to a 32-inch television, to an electric razor, to a clothing iron, etc.
Most of the small, affordable solar home systems being used in sub-Saharan Africa still aren’t big enough to support basic cooking needs like boiling a pot of water. And there’s your edge, Discos. You can give people enough power to make a cup of tea, which millions of Africans do every day using biomass, wood, and charcoal. Grid power can satisfy all household electricity needs, plus larger commercial and industrial needs in a community. Discos, unfortunately, aren’t currently offering their customers the opportunity to lease or buy appliances over time, and most customers cannot afford to buy them outright.
That’s one opportunity that Discos should explore: pay-as-you-go service with appliance leasing or “rent-to-own.” When the U.S. electrified rural America in the 20th century, the U.S. partnered with companies like General Electric to provide newly electrified farmers with loans/discounts for appliances.
How might a Disco model its business in a way that can attract these paying customers? These same customers are paying solar home system companies for appliances, while still buying wood and charcoal for cooking. As customers make payments over months and years, they are demonstrating that they are stable customers whose incomes are slowly growing.
Or maybe go out on a limb and give away a free $10 electric tea kettle to new customers who agree to buy or lease other appliances, with the understanding that people will consume and pay for the electricity required to boil the pot of water?
For Discos to see better returns on their investments, they know that they need to be able to charge the actual cost of power. But also, they should see what they might learn about their potential customers from the solar home system companies. Fenix International, for example, based in Kampala, Uganda, has tens of thousands of paying customers who live in the most remote areas of Uganda. Fenix tracks its customers’ payment habits and is able to establish a credit rating for these rural customers, which in turn allows its customers to access student loans. That’s right, an electricity company is providing student loans to some of the most impoverished people in the world. The private sector is helping people emerge from poverty while still earning a profit.
Cross-subsidization or bundling services. Because solar home system companies are not offering people enough electricity to cook or boil water, they might consider offering bundled services to offer people gas or other modern means for cooking, or they will may not survive once the grid arrives. Perhaps the Discos (or solar home system companies) could partner with telecom and gas companies to offer people packages that could include pay-as-you-go for mobile phone service, electricity, and cooking gas. What often seems to be a losing proposition, though, is selling a rural customer nothing more than a tiny amount of electricity from the grid.
So, Power Africa partners — all 150 of you — let’s put our heads together and rethink the Disco business model. Might Discos offer the same services as the solar home system companies? Or, even better, perhaps Discos should partner with the solar home system companies to offer the services to their clients as an option other than the grid? Perhaps the Discos and solar home system companies can work together to develop micro-grids that take advantage of the pay-as-you-go model that solar home systems know so well, but that also provide enough power for cooking?
Importantly, we should focus less on how much power people use and more on how much productivity a household can get out of a fixed amount of power. Access to an unlimited supply of power at $.10 kWh is a good option only when the power can be used for something. Solar home system companies measure how many productive things a person can do with a fixed-sized solar panel as they become more and more efficient. See my recent blog titled, “Rethinking the Cost of Off-Grid Power: Let’s Do the Math.”
As the people in the most remote areas start getting access to electricity through solar home systems, increasing their income through the use of productive appliances, and building their credit by establishing a payment history, these previously overlooked customers will appear as attractive prospective customers to a Disco that decides to extend the grid to rural areas. If the Discos don’t act soon, newer and more efficient technologies and businesses could render Discos irrelevant. Power Africa will keep working with the Discos, solar home system companies, and micro-grid companies to make sure that an increasing number of people can have access to productive electricity. Regardless of whether the Discos and solar home system companies work together or compete with one another, the customer will benefit, and so will the smarter, most innovative companies.