Solar home systems can help to bridge the electrification gap in developing countries—if certain conditions are met.
About a billion people have no access to electricity. While progress in lessening that figure has been steady, it is still likely to be at least 870 million in 2020.1Expanding the grid is part of the answer to the question of how to bring power to these people, but it is not the only one. Many countries in sub-Saharan Africa and South Asia,2which make up 90 percent of the world’s unelectrified population, are also exploring off-grid solutions, including solar home systems (SHSs). So are countries in the Caribbean and Southeast Asia, which account for most of the remaining unelectrified population. The global market for SHSs has grown 23 percent a year since 2012,3representing more than four million units installed.
Solar systems can serve homes that are too remote, that are too poor, or whose energy consumption is too low to make a grid connection economical (see sidebar “What a solar home system does”). They can also be useful for households connected to the grid whose power supply is still unreliable. Our assessment of the 39 countries that represent more than 90 percent of the unelectrified population found that, based on projected grid expansion, population growth, and consumers’ ability to pay, as many as 150 million households could benefit from SHSs by 2020 (Exhibit 1).
That number of households is the potential. For it to become reality—or perhaps even outperform projections—we have analyzed what countries are doing best when deploying SHSs and why they are succeeding. On that basis, we identified the key issues developing markets need to face if they want to encourage the formation of a healthy and sustainable SHS market. Our conclusion is a hopeful one: none of these problems is insoluble. In fact, there are good examples at work in each instance.
Conditions for success
The following five factors matter most in attracting investment to the sector:
- Off-grid regulations. A positive regulatory environment for SHSs includes recognizing them as a possible electrification solution; articulating how grid expansion will evolve; accepting global product standards; and imposing low or no import duties on solar products and accessories.
- Business environment. Solar companies need a stable environment in which to operate. This includes clear policies on licensing, employment practices, and repatriating profits. As SHS companies are usually financed in US dollars or euros but SHSs are paid for in local currencies, SHS companies value a stable local currency. Volatile exchange rates can wipe out their profits.
- Logistics and channels. Distributing SHSs in rural areas can be difficult. Therefore, good road networks and the ability to create broad networks of distribution partners, such as post offices, banking agents, microfinance institutions, and even gas stations, are critical to fostering large-scale deployment.
- Affordability and willingness to pay. There must be enough customers with sufficient cash flow either to purchase an SHS system outright or make a deposit and then follow up with regular payments (called “pay-as-you-go”). They must also be willing to pay based on trade-offs with their current energy spending and positive perceptions of solar products.
- Ease of payment. To keep the cost of collection low, when the pay-as-you-go model is used, an intermediary is required to facilitate payments. Access to these intermediaries, such as mobile money providers and microfinance institutions, is critical.
After evaluating these five factors, as well as other indicators, we evaluated countries according to their readiness for widespread SHS adoption (see sidebar “Understanding our analysis of SHS readiness”). This ranks the 39 countries that compose more than 90 percent of the global unelectrified population on how ready they are to increase SHS deployment (Exhibit 2).
In broad terms, countries fall into four levels of readiness (Exhibit 3). Top-level countries score well on all indicators, although all have room for improvement on at least one indicator. They appear primed for SHS growth.
Countries in the second level typically face logistics and distribution challenges but have most other elements, including off-grid regulations, affordability and willingness to pay, business environment, and ease of payment, in place. The implication is that their governments have done well to create the right regulatory structure but that longer-term investment initiatives are required to improve the logistics.
The third-level markets also have logistics and channel difficulties, and they struggle with other issues as well. Their governments will need to devise new policies and improve the regulatory environment to attract SHS investment.
Countries in the bottom level tend to be the poorest, so they also fall short on affordability and willingness to pay. Even if governments in these countries installed a first-class regulatory and business environment, there might not be enough consumer buying power, at least at first, to support wide-scale SHS investment.
Creating a positive environment for SHS investment
Our analysis of SHS readiness shows that different countries have different challenges in areas such as electrification strategy, consumer awareness, product quality, payment solutions, financing, and logistics. In this section, we outline these principles with specific case examples that can help countries improve their solar home system readiness.
Recognizing SHSs as a viable alternative to grid-based electrification means that countries can count SHS deployment toward overall electrification targets. Doing so creates certainty for private companies seeking to invest in the sector.
To achieve its renewable energy targets, the Bangladesh government prioritized off-grid technologies to bring electricity to rural populations.4Not only does the government-run IDCOL explicitly support rural SHSs, but so do regulatory agencies. Bangladesh’s Renewable Energy Policy of 2008 provided a framework that has enabled SHSs to scale up quickly; by the end of 2014, more than 3 million SHS kits had been distributed. Similarly, in the Philippines, government agencies articulated and then acted on policy and budget proposals to support electrical cooperatives in providing SHSs to rural households.5
It is important to keep in mind that customers who have a grid connection might still be in the market for an SHS as either a backup or a lower-cost alternative. Therefore, while an electrification strategy may focus SHS on low-income consumers or rural areas, it should not restrict the SHSs to them.
Successful consumer-education campaigns inform people about the costs and benefits of SHSs. In Kenya, for example, Lighting Africa sponsored road shows, media campaigns, and product-discussion forums to inform people about how home-based solar works.6It even managed a product placement in one of the country’s most popular television shows. The campaign, which ran from 2009 to 2013, reached millions of Kenyans, and the uptake of solar lighting rose sharply. Coordinating campaigns with system providers will ensure that solar products are available as demand builds.
Bad products can slow consumer acceptance and give SHSs a poor reputation. Therefore, countries should consider adopting the internationally accepted Lighting Global product standards, building awareness of the problems associated with poor-quality products, and monitoring the sales of substandard products. A Bangladesh government program made its financial support to SHS developers conditional on acceptance of these standards. The developers had to purchase their kits from approved suppliers as well as submit to technical audits of installation and maintenance.
In the areas of the world most in need of electricity, many households are short of cash; they might be able, however, to pay back the capital investment over time on a pay-as-you-go basis—think of it as a mortgage for solar power. The customer pays a deposit ($15 to $35), then covers the balance in regular payments over nine to 36 months. Payment time frames depend on the provider, the size of the system, the amount of the deposit, the payment amounts, and what accessories are included. This approach makes SHSs affordable to households that cannot buy an entire system outright, which can cost $150 to $300.7
In Kenya, we looked at how much unelectrified households spend on kerosene, batteries, and mobile-telephone charging; the latter is often done on a pay-per-charge basis at small shops using car batteries.8We found that 70 percent of those assessed spend between 780 and 2,250 Kenyan shillings ($8 and $23) per month on these items. On that basis, they could afford a Tier 1 SHS (the most basic level according to the World Bank’s standards). Consumers can use Kenya’s M-Pesa mobile-money platform to finance their solar purchases, sometimes paying a little every day, other times by the month. Companies in Kenya will often set their repayment levels at the point at which the cost of the M-Pesa transaction is low—even at zero.
For solar financing for customers to work for both sides, transaction costs must be low. Countries can help mobile-money use gain momentum by building awareness and easing regulation, for instance, by granting licenses to nonbanking entities. Governments can also work with microfinance institutions (MFIs) to support solar-specific credit lines. This was the case in Bangladesh, where MFIs collaborated with local SHS partners to cover as much as 80 percent of the price through microloans. Governments need to avoid concessions or subsidies that could distort the market and harm successful private-sector business models (see sidebar “Is there a role for subsidies?”).
Financing for SHS companies
Countries are experimenting with expanding access to SHS by providing credit facilities through local banks or other debt providers and by guaranteeing loans to SHS companies. Multiple countries are testing results-based financing—payments to SHS companies to incentivize sales. For example, Tanzania is piloting results-based financing to encourage sales to an underserved region in the Lake Zone. This program also provides professional management support from TIB Development Bank. Within the first year, more than 10,000 households benefitted from the pilot. Another example of this principle is the India Ministry of New and Renewable Energy program that reduces the cost of borrowing from local banks for solar providers, thus enabling greater access to financing.
Logistics and channels
The costs of distribution and customer acquisition can be particularly high in remote, poor, and lightly populated areas—the very places that could benefit most from the technology. Distribution partnerships can help to overcome these challenges. For example, companies in Cameroon and Kenya have collaborated with fuel providers possessing a broad network of gas stations. In another case, a solar distributor in Kenya worked with the local government to store SHSs in neighborhood police stations. That reduced the need for companies to find and pay for storage in remote areas, which can be costly. To acquire new customers, one Nigerian company is marketing its solar products through telecommunications kiosks.
Solar home systems have proved their value by bringing light and power to the homes of tens of millions of people. But sunny optimism is not a business model. Like any other product or technology, the economics and practicalities must work. Spreading solar power further and faster to those who need it might not be easy, but it is certainly possible—as countries around the world are demonstrating.
Original Article is taken from Mckinsey&Compnay/by Adam Kendall and Gillian Pais, June 2018)