simon rolland

PV off-grid in developing countries is more than poverty mitigation – it’s sound business sense

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One of biggest challenges of rural electrification through renewables is getting people to see the bigger picture: we’re not only helping African children who still do their homework by candlelight, there’s also a whole market out there yet to be fully tapped by the private sector. It’s the proverbial win-win situation.
PV off-grid in developing countries is more than poverty mitigation – it’s sound business sense

It is true that over the past 10 years, feed-in tariffs (FiT) have accustomed the PV industry to unnatural growth and large profit margins and that in comparison, the revenues that could be generated by investing in the off-grid market of developing nations aren’t as appealing.

However, recent developments in Europe are heralding a change in markets conditions which is shaking the status quo. Announcements of tariff cuts in France and Britain, following the dramatic slash in Spain and the prospect of a similar action in Germany, can pull the rug from underneath the industry forcing companies to face reality. It might also make them realise the potential of the developing world, the actual birth place of the PV adventure.

 Although the rapid sector growth in Europe has taken the industry’s attention away from the potential of other parts of the world, it has also helped overcome at least one bump on the road to a healthy renewable energy market in more challenging economies: scaled production and affordable technology. The huge production capacity of PV manufacturers today motivated by FiT markets has driven  prices to a point where they start becoming attractive to even the world’s poorest communities.

 A technology that people can actually afford is a perfect starting point for two great business opportunities for RES companies in general and the PV sector in particular: supply of electricity to the population still in the dark and the hybridisation of the diesel systems on which the developing world is currently so dependent on.

Although investments in both cases have already been proven profitable and sustainable (see case-study below), they still have common barriers. The investments necessary for creating and developing a new market are a barrier common to every industry, but other challenges are specific to renewable energies in the developing world. These include among others capacity building, confidence in consumers and their governments and specific energy credit schemes.

 Needed: entrepreneurs with vision

According to the International Energy Agency (IEA), 1.5 billion people worldwide don’t have access to electricity and a billion more have only an unreliable and intermittent supply. The traditional solution – connection to the grid – is often very costly and not feasible in isolated rural areas, which account for around 85% of that population. It is estimated that in the developed world and under normal terrain condition, grid extension costs $5.000 per kilometer, while that figure goes up to $15.960 in Senegal or $19.070 in Mali. The demand in rural areas is generally small so it doesn’t usually justify such an investment.

 In such isolated areas, off-grid renewable energy systems are often the best solution. Through mini-grids, they can provide centralised electricity generation at the local level using a village distribution network. Another option - stand-alone systems - can cover the needs of single households, public buildings or commercial needs.

 A simple ball-park calculation can give us a general idea of the potential size of this market: let’s assume, as GIZ has done, that the 1.5 billion people correspond to about 300 million households which are currently using traditional low performance energy sources and technology. Taking into account the generally accepted cost predictions, many of these would be able to afford the US$30 entry level products. Even if only half of them can afford it, that’s still a 4.5 billion dollar market.

 The IEA also confirms this potential and has recently published figures which should have inspired every business developer in the energy sector. According to them, to reach universal electricity access by 2030, 949TW will be needed in the developing and emerging markets. Of this, 35% (339TW) should be supplied through mini-grids and 18% (171TW) by isolated off-grids.

 This might not translate as a huge immediate profit for the off-grid renewable energy sector, but it is a strong nod from one of the most influential voices in energy issues in the world. A voice that in the past was not exactly known for its support of renewables.

 Re-inventing the wheel?

One of the other most powerful arguments supporting the upcoming natural expansion of off-grid renewable energy markets in developing countries is their current extensive use of diesel. Roberto Zagha, World Bank Country Director in India said that in that country alone, there is 20GW of diesel-installed capacity. Considering that in many cases renewable energy sources represent a cheaper option that diesel, this points to the possibilities of scaling up renewables in a big way.

 Other opportunities around the world range from the 4.9 MW diesel installed capacity of the Savai’i Island in Polynesian to the 200MW expected in the next 20 years in the Marsa Alam Tourist Development Area (Egypt) alone. Now consider the estimate for the remaining developing countries and emerging economies.

 Despite the fact that the economic situation of rural areas naturally pushes people towards technology choices made on a short-term least-cost basis, in the long-term they are rarely the best solution, especially in isolated communities where diesel is an expensive resource difficult to distribute.

A recent study financed by the USAID concluded that when compared to 100% diesel-based systems – currently the most used solution to supply mini-grids – a renewable/diesel hybrid mini-grid offers lower operating costs, making electricity production more affordable over the life time of the system. This is good news for these populations, but it also opens new market perspectives for the private sector.

 The (real) price of energy

For both the supply of electricity to populations currently living without it and the hybridisation of existing systems, the barriers to a healthy and fully-functioning market are rather similar. They range from unsubstantiated stereotypes to serious macro-economic challenges that require many influential heads to come together.

 One of the most popular clichés is the impossibility of a profitable market in developing countries. Surely the world’s poorest population cannot afford to invest in energy? The fact is: they already do. Someone is already paying (and dearly) for the diesel generators and their fuel, while 1.5 billion people are investing in candles and spending valuable time gathering wood - which they could be using is a better way - just to cover basic energy needs.

 Not to mention that the WHO believes that the burning of simple household biomass fuels – wood, crop residues, animal dung, shrubs and grasses – is responsible for some 1.4 million premature deaths annually in developing countries, mainly among women and young children.

 Financing is, as expected, still a complex problem to solve in this context. Along with technology and political will new models are needed to translate this reality on the ground.

 Several companies, many of them members of ARE, have developed technologies and business models that have proven profitable for all stakeholders involved, from the technology supplier, to the operators or the consumers. One such case is the project that the Rural Energy Foundation (REF) started in 2003. Their objective was to reduce the three main barriers to sustainable renewables market growth: lack of availability of technology, low benefits awareness and limited affordability by consumers.

 With initial financial support from governmental and private investors, REF coached, supported and financed local entrepreneurs, their technicians and salesmen, to create a sustainable supply-chain of Solar Home Systems in several African countries. They’ve also sponsored large-scale marketing campaigns and live demonstrations.

Finally, and to ensure return-on-investment, as soon as demand started to develop, REF implemented credit and carbon schemes, thus improving the affordability of their products. Now REF has some impressive numbers to show: facilitated access to electricity to almost 500.000 people at a cost of less than €4 per connection. 277 retailers established that sold 123.167 solar home systems.

 The project is going so well that REF has decided to transfers its operations to SolarNow, a social enterprise selling solar products with a hire purchase facility. They found that this way they could offer lower prices due to quantity discount, supply the huge demand for hire purchase and effectively ensure quality-control of materials and services.

 Follow the money

Although SolarNow managed to gather the necessary investment to kick-start the project and maintain the distribution systems needed to reach sufficient scale, these efforts might be too tiresome for most companies. At the moment, such schemes are mostly funded by social investors, foundations and visionary venture-capital funds but, once that initial bottle neck will be overcome, the sky’s the limit.

 For that to happen, experts believe that microfinance institutions will have a major role to play, but even then energy loans are not smooth sailing. In a household that buys a solar lamp to save money on kerosene or candles, the investment takes several months to pay off, and there is no actual income from the lamp. For bigger energy projects, such as a PV/hybrid mini-grid able to supply a village, the loan needed is much larger and projects require time and efforts at all stage of project development as well as along its lifetime.

 However, as it happened in many new markets, creativity can overcome all barriers. For example, social enterprise MicroEnergy Credits decided to aggregate carbon offsets. When micro-entrepreneurs in developing countries request a loan that might help off-set climate change, they have that extra push. Similarly, more and more cases of hybrid mini-grids managed by private profitable operators appear to be successful and sustainable.

Regulation and taxation

Grassroots moments and creativity might have come a long way, but certain bottlenecks can only be overcome with the right political will, and this is especially true for issues around regulation and taxation. Ethiopia, for example, imposes a 100% duty on imports of solar products while cases have been reported of solar PV systems being three times more expensive in Ghana than in Bangladesh, and small hydro being twice as expensive in African countries than in Sri Lanka because of import duties.

 Changing import tariffs on PV-related technology is a step easily implemented by national governments to reduce the cost of PV systems. It can, however, be a difficult step for governments that rely heavily on import tariffs for government revenues.

 Governments should also do everything in their power to support the development of a domestic solar industry, an absolutely essential step in creating a sturdy supply chain. Measures could include R&D support, education and favouring joint-ventures with northern companies to ensure technology transfer. 

 This of course is only one of the many issues that should be  address to sustainable open these markets and to make them truly self sustainable but even the step of the leap of faith has passed and one ambitious entrepreneur can really see attractive light in the end of the tunnel of energy poverty. This challenge, ARE has been created to face it.

 Let there be light

In the developing world, like everywhere else, there is not one-size-fits-all energy solution. But if private companies are willing to take a chance and invest on the extraordinary potential of these countries, there is no telling the proportions that the market might take. ARE and its members believe there are major opportunities for accelerating the implementation of PV there.

 If past experiences involving solar projects are applied to new ones by PV dealers and project developers, multilateral and bilateral agencies and host governments, then the future of PV (and the general off grid market) will be bright. In the next few years, renewable energy can become both a formidable boost to Africa’s economic development and the answer to the problem of energy access.

 About Simon Rolland and the Alliance for Rural Electrification

 The Alliance for Rural Electrification (ARE) is the only international business association in the world focusing on the promotion and the development of small scale renewable energy solutions for rural electrification in developing countries. ARE serves as an international platform for sharing the knowledge and experience of the private sector interested in operating in developing countries.

 Based on their experience, it develops technological, political and financial recommendations, which are made available for policy makers and other actors in the field of rural electrification. We are comprised of over 50 members from every sector involved in the renewable energy markets of developing countries. Our objective is not only to bring to the business community the knowledge of these business opportunities, but also to carry loud and clear the voice of this sector in these new markets.

 Simon Rolland is the Secretary General of ARE after being its policy manager for 4 years. He is responsible for the policy sector and outreach of ARE.

 With a background in political sciences, a specialisation in European Issues and work experience in NGOs and in the European Parliament, he works closely with ARE partners and international organisations in many advocacy and policy actions. Simon is an expert in policy support, institutional framework and financing schemes for rural electrification and ARE has become a pioneering organisation in the field of sustainable development, supporting and bringing together renewable energy companies active in the emerging off-grid markets for rural electrification in developing countries.

For additional information:

Alliance for Rural Electrification

Add a comment
Cindy

Thank you, Simon, for this insightful article. We at SunFunder couldn't agree more on the points you've made. Through our work, we find that many solar companies in developing countries are left in a limbo when it comes to financing: they surpass the criteria for loans from a microfinance institution like you said, but don't quite meet them for venture capital. So SunFunder offers a financing solution for these "missing middle" solar businesses by turning to individual investors who crowdfund solar companies working in off-grid markets. This way investments don't have to be made in one large, risky sum for solar businesses in developing countries to scale, and more people who are still living without access to electricity can benefit from solar -- the end goal that drives us forward. But it's clear that we're just one piece of the energy solution puzzle, and we're glad to be part of a larger movement of people from all sectors who are all working toward universal access to sustainable energy. We're always inspired by what others are doing, so thanks for sharing your knowledge!

Cindy
Thank you, Simon, for this insightful article. We at SunFunder couldn't agree more on the points you've made. Through our work, we find that many solar companies in developing countries are left in a limbo when it comes to financing: they surpass the criteria for loans from a microfinance institution like you said, but don't quite meet them for venture capital. So SunFunder offers a financing solution for these "missing middle" solar businesses by turning to individual investors who crowdfund solar companies working in off-grid markets. This way investments don't have to be made in one large, risky sum for solar businesses in developing countries to scale, and more people who are still living without access to electricity can benefit from solar -- the end goal that drives us forward. But it's clear that we're just one piece of the energy solution puzzle, and we're glad to be part of a larger movement of people from all sectors who are all working toward universal access to sustainable energy. We're always inspired by what others are doing, so thanks for sharing your knowledge!
antonio
Massive investment to get more 3% of a free (sun) resource as deadly damaged the Pv . All mistakes have a heavy price.
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