This technical report reviews the business models used by pioneer firms in the solar home-based electricity services industry, specifically pico-solar lighting systems and solar home systems. Drawing on the grey and academic literature, the report provides a detailed industry overview, assesses key components of business models, and identifies remaining challenges and ways forward.
The solar home-based electricity services industry consists of pico-solar lighting systems (PLS) and solar home systems (SHS). PLS solutions have a generation capacity of between 0.1W to 10W and retail for US$6-100, with offerings spanning a continuum of electricity services, from providing lighting to mobile phone charging and powering small DC appliances. SHS solutions generate between 10W to 1000W and retail for US$75 – 1,000. SHS solutions offer broadly the same services as PLS solutions, with the option of limited motive and heat power and the ability to power AC electric appliances through an inverter.
The industry was worth an estimated US$550.5 million in 2014 and is expected to grow rapidly to US$2.4 billion by 2024. The backbone of the industry and its projected future growth is a group of pioneer firms. These pioneer firms, a mixture of small companies and social enterprises, have been operating in the industry for 5-10 years and are expected to achieve growth of between 40 and 400% per annum over the next decade. Industry trends suggest that the difficulty faced by early-entrant multi-national corporations (MNCs) in making inroads into off-grid rural areas may lead to the acquisition of existing pioneer firms and the transformation of the industry.
Business models consist of three interlinked components: a customer value proposition, key processes and a profit formula. The customer value proposition and profit formula define and create value. Key processes enable businesses to deliver value.
Customer value proposition
Access to electricity services is crucial to human welfare. At the most basic level, access to a reliable source of electricity is required to achieve basic needs: lighting, health, education and communication. Approximately 1.3 billion people are without access to electricity and its most basic services. Estimates suggest that in some scenarios the number of people without access to a grid connection could remain roughly unchanged through 2030. As a result, 25% of the unserved rural population are expected to be served through PLS and SHS solutions.
Pioneer firms have made significant progress in delivering on two key processes along the value chain: distribution to remote off-grid areas and providing finance to end-users. Distribution and end-user financing strategies vary among pioneer firms depending on existing strengths. Among distribution strategies, all strategies are characterised by pros and cons making it difficult to select a winning strategy. Instead, pioneer firms have played to their organisational strengths and have taken into consideration contextual circumstances in their targeted geographical areas. This contrasts with multinational corporation entrants who have to date struggled to make inroads in remote, off-grid areas. A review of traditional and innovative end-user financing strategies points towards pay-as-you-go (PAYG) as a way forward for the industry due to its ability to significant reduce transaction costs and its ability to match the willingness and ability to pay for the majority of end-users.
Pioneer firms currently achieve a gross product margin of between 1-5% due to the need to keep products affordable and competitive. Low marginal returns on each individual PLS or SHS unit mean that pioneer firms require scale to achieve sustained profitability.
Remaining challenges and key recommendations
A number of financial and technical challenges present themselves as barriers to further growth in the solar home-based electricity services industry. Financial challenges include insufficient working capital and associated supply-side bottlenecks, end-user financing of the poorest of the poor, and inefficient subsidies and punitive tariff regimes. Technical challenges include the prices of component parts, quality issues and end-user awareness, and maintenance and end of life use. Key challenges and recommendations to address them are as follows:
There is insufficient investment and working capital leading to supply-side bottlenecks.
- A common platform should be created to bring together socially oriented investors with investment opportunities in the solar home-based electricity services industry, provide information on the energy access industry to investors, and make available best practice examples to alleviate investor doubts about the social impact and financial sustainability of investments in the industry.
- Private sector investment should be incentivised through working with the public sector and international community to ‘de-risk’ regulatory and technology risk.
- Public funding should be leveraged to reduce the ‘hurdle rate’ of investment in the solar home-based electricity services industry.
- Context-appropriate due diligence protocols should be adopted in the financial sector to reduce the transaction costs associated with investing in the solar home-based electricity services industry.
Market mechanisms fail to provide end-user financing for the poorest of the poor.
- A pro-poor public-private-partnership (5Ps) model should be advanced. By allocating risk between the private and public sectors, this would allow pioneer firms to reach the poorest of the poor while earning a profit.
Subsidies for kerosene and punitive import tariff regimes create an unequal playing ground for pico-solar lighting systems and solar home systems in relation to incumbent technologies.
- Subsidies for kerosene among rural populations should be removed in a staged process with rural populations being nudged towards pico-solar lighting systems and solar home systems.
- Countries should recognise the public good characteristics of pico-solar lighting systems and solar home systems and reduce or eliminate import tariffs on key components.
Component prices account for up to 75% of pico-solar lighting systems and for up to 44% of solar home systems retail prices, respectively.
- A complementary research stream should be created that focuses on designing components for rural requirements and price-points. This research stream would complement blue skies research, which is required for disruptive breakthroughs.
- Quality issues and low end-user awareness concerning pico-solar lighting systems and solar home systems lead to market spoilage.
Quality standards initiatives, such as the Lighting Global Quality Standards from the World Bank Group, should continue to be supported and promoted.
- Multi-stakeholder education campaigns should be established to deliver accurate and appropriate messages to end-users.
Technical barriers hinder the uptake of pay-as-you-go (PAYG) end-user financing.
- There is a need for coordination between regulators, telecommunication firms and pioneer firms to address incongruences in operating procedures.
- International standards regarding the standardisation of user- and business interfaces, as well as end-user data privacy protocols should be adopted.
Maintenance and end of life solutions are required to improve the sustainability of the industry.
- Further emphasis should be placed on the use of ICT technologies to allow for real-time monitoring and just-in-time maintenance.
- Support for vocational training of rural-based technicians should be considered by government or donor bodies.
- Technologies amiable to recycling in rural hubs should be used in the design of PLS and SHS solutions.
- Formal recycling infrastructure (both hard and soft) must be created in rural areas.