Time for solar PV sector to find alternative ways to power remote communities
It was the golden child of the solar energy community, a business that raised millions of euros in investment without even appearing to try, had hip Berlin headquarters, slick branding, and boasted a global customer base that numbered 600,000.
But for Mobisol GmbH, the dream of supplying high-tech solar-powered kits to homes in isloated communities proved too much as the commercial reality of relying on wobbly microfinance and a cycle of debt investments brought the energy company close to collapse.
In April of this year, Mobisol filed for insolvency, a matter of months after two of its key personnel left to set up the solar non-profit Access to Energy Institute, raising eyebrows in a sector that was already starting to ask itself difficult questions about funding and sustainability.
In a statement announcing its self-administered insolvency — and its hopes for an optimistic future — Mobisol’s managing director Andrew Goodwin said: “We are convinced of Mobisol’s successful future. Mobisol´s unique business model with a mix of technology, financing and distribution of innovative solar systems holds immense potential and makes a real difference to the lives of people in regions with weak development in Africa and other parts of the world.”
Funded by excitement, and ability to raise millions of capital through sale of equity, debt loans and grants from big eco-system players, Mobisol smashed through the big numbers. But Mobisol’s “unique business model”, however, clearly had its flaws, particularly when it came to financing, both in the structuring of loans as well as its overseas operations. Repeated rounds of investment certainly helped drive Mobisol’s expansion and profile; and while its vision of providing lighting to households across Africa was beautiful, the reality of microfinancing from people on the poverty line proved too much.
In an interview with John Dizard in The Financial Times, Mobisol’s MD acknowledged concerns about the business’s long-term profitability. Mr Goodwin said: “The view was that we would be able to increase prices over time, which did not turn out to be the case. The second issue is that sales volumes have been affected by the pressure from new competitors.”
Putting aside questions about a strategy built upon raising prices in under-developed communities, ultimately Mobisol had built itself up using a system renowned for running at a loss. Moreover, its 10-year subscription micro-finance model was always going to struggle in sub-Saharan Africa, where incomes are so reliant on seasons, healthy crops and other factors far removed from local people’s controls.
Such models carry the risk that the micro-loans used to purchase the kits do not get paid off, and as a result the number of loan defaults increases in number. The similarity to the sub-prime scandal debacle that brought banks and economies to their knees is hard to ignore. For a sector that is buzzing with innovation and a desire for sustainability, this financial model is tired and outdated.
In Rwanda, one of Mobisol’s key markets and where Challenges operates an office out of Kigali, a good season makes for a strong harvest and easy repayments. But relying on the unpredictable weather as climate change increasingly impacts upon this region is no way to run a strong and sustainable business model. Next year, the crops might fail. And again the year after.
In contrast, Zambia has this year suffered a weak harvest, which is already impacting upon such businesses, while the cyclone that devastated Mozambique and parts of Malawi has left many farmers and their families simply struggling to survive. While solar companies can remotely turn off the kits in the event of a loan default, there’s no real way for them to reclaim the kit; another flaw in the subscription model system, in its current form at least.
Of course, solar minigrids and the microfinance model used to purchase them have had strong support as grant bodies, government, aid agencies and the supply-side ecosystem in general have jumped on the solar PV bandwagon in the way they did with eco-friendly cooking stoves a few years ago. In Rwanda this support, at least from official circles, is now starting to cool.
The Kigali government has a vision of country-wide electrification by 2025, with 60% of the country on the grid, and the remaining 40% powered through minigrids. But as Neil Walker, manager of Challenges Rwanda, says: “The gravy-train is over. The business model isn’t working.”
It was, he says, predictably inevitable. “Often, no due diligence was being done on these micro-loans, with not a huge amount of concern in the ability to pay back the debt. While the motivation was noble — the vision of giving people the gift of electric lighting –these long-term micro-loans were never going to be sustainable for people earning a dollar or two a day. And while the grant or investment model is one way to drive market expansion, that’s simply not a sustainable business model.”
There are, Neil adds, signs that the sector is going through a process of realignment. “What had been relatively easy [accessing sites, obtaining permits] is now proving more difficult, and I wouldn’t be surprised if this is being repeated across the sector.”
But the problem didn’t just lie with the financing; it also encouraged bizarre practices that demonstrated just how far removed the supply-side (the solar companies funded by, for example, grant bodies or aid agencies) was from the delivery agents and the recipients on the ground.
“I know of one company that was handing out popcorn makers so the users of solar home systems could be seen to be using up more of their electricity. Many of these homes were having a surplus of electricity so electrical appliances were being issued to use up the additional electricity generated so as to not appear wasteful,” explains Neil.
“It made it look like the need, and therefore the impact, was far greater than the actual reality. It helped to justify the intervention, of course, and helped to justify the investment being poured into the sector by grant bodies wanting to appear impactful.”
Despite the teething problems, there is still remarkable potential for solar in Africa — some 100 million people lack access to electricity across the continent — and the results to date have been spectacular. Africa has more solar-powered homes than any other continent, and it has in general skipped the use of fossil fuel that is blighting other regions.
“Solar-powered lighting is a wonderful thing,” says Neil. “It’s a fantastic development, and means paraffin generators are used less. And, yes, people also have phones, and these are charged too, but to an investor any unused electricity looks like waste, which means that they’re not getting value, which is why pop-corn makers were being given to households that didn’t even have electricity a few months before!”
As well as the issue of repaying the micro-loans, the issue of maintenance and long-term application has also reared its head. Repairs require a dedicated network of agents — often the same employees charged with selling and installing the kits, and subsequently trying to chase down repayments. But many of these agents sell on commission, and may not always follow the recommended due diligence.
On top of the financial model and issues about surplus power, there is also a question of how many of these solar kits will still be being used in a year or three. “The technology has skipped ahead of the social and cultural capacity,” adds Neil. “A few years ago it was stoves, now it’s solar. It’s a trend, a bandwagon, and it’s adoption isn’t being applied holistically.”
While Rwanda’s bumper season means that households are able to honour repayments, in Zambia a poor harvest has had a detrimental impact on agribusiness that is having a significant knock-on effect.
“There’s been a rise in loan defaults, certainly, as people prioritise their spending,” says Gwen Parry, manager of Challenges Zambia. She adds: “Across the border in Malawi and Mozambique, where farms have been completely wiped out, well, I don’t think those people will be caring about their solar kits repayments when they’ve no food and nowhere to live.”
While the state-owned solar company is insulated by its preferential positioning for a raft of government tenders, other firms are more cautious in a sector that was brimming with optimism a few years ago.
One business that caters to Lusaka’s growing middle and upper classes says it is less open to risk from microfinance defaults, but acknowledged this seasons’ poor crops will in turn affect some of its own clients and is now concerned that an economic downturn could affect its customer base.
Another company focused on selling solar home kits, as well as eco-friendly cooking stoves, to the rural poor has said it is already experienced problems getting payments back on the “pay slow” method. While the business’s model of using agents in rural areas has allowed them to sell to a wide and large customer base, it has meant the agents are always pushing to sell to less reliable customers in order to increase their commission. Ultimately, it’s the company that loses out if the customers don’t pay up.
Gwen adds: “The provision to switch off the solar if payments aren’t made on time is a big motivator to ensure repayments, but it is difficult — almost impossible — to reclaim the systems if the person never pays. I think some of these smaller solar firms are realising that better training would help rectify this problem, including their ability to assess a client’s capability to repay the micro-loan.
“The impact of the recent Scaling Solar programme, a World Bank initiative to attract private financing into the sector in Zambia, has still to be seen. But we’ll be watching carefully and continuing to engage and work with key players.”
One solution to this problem that Challenges has been exploring is the minigrid anchor, whereby a large business acts as a hub and installs a larger mini-grid that can recoup some of that investment by supplying low-cost surplus energy to homes nearby.
“It’s more sustainable, less likely to default and less subject to the vagaries of the climate,” says Gwen. “And of course it matches the Challenges philosophy. By supporting a business to become investment ready and win that investment it can grow, support the local community, in turn contributing to the growth of that community and hopefully spawning new businesses.”
While the fall-out from Mobisol’s insolvency continues to ripple out and impact investors look for the next big thing, Challenges will continue to monitor its application in Rwanda where the model has been used as part of a wider project to support eight coffee-farming co-ops.
“It’s a brilliant solution for the coffee co-ops we’re working with,” explains Neil. “Several washing stations have now been equipped with these solar anchors, and supply to local homes, helping cement the business within the wider community. And they’re relatively easy to roll out after the initial installation. It’s early days, but the outlook for solar anchors is very promising.”
It’s a solution that will be of interest to many of the solar businesses represented by the Ugandan Solar Energy Association (USEA), which has just undergone a massive survey of the sector in partnership with Challenges Uganda. Like many of his peers, Peter Ojangole at SoloGrid also sees a shift in the wider investment landscape, especially as “Mobisol had a good number of popular energy sector investors, so we are bound to see a change in investor appetite”. He warned: “It’s a trend that’ll sweep the market if precautionary measures aren’t taken since many companies that are heavily financed tend to ignore market signals. Information gathering and opening up channels for business to see the gaps will be critical, something that USEA is taking the initiative on.”
For Allan Okello at Village Power Uganda, Mobisol offers a lesson for the whole sector: “The industry stakeholders right now can’t do much other than ensure their businesses are running sustainably. Company needs assessments can perhaps be conducted to identify business model gaps and risks, and risk management procedures can be put in place.”
But he was more robust in his view of the investment landscape: “Uganda continues to attract a majority of the solar investment that is coming into East Africa, so I think the industry needs to become more investment ready.
“Business is survival of the fittest; more adaptive business models and companies will run the industry. This is normal for competitive and fast-growing industries.”