Lanterns – PAYG – Micro-Grid: what’s next? Profitability!

Decentralized energy technology in Africa and Asia has undoubtedly seen an immense boom in the past 15 years. Each growth push was initiated by a new technical solution:

  • The development of small solar lanterns led to the first mass production in the sector and the entry of larger investors. Replacing kerosene lamps with solar lanterns became a hype and seemed to be a quick and simple solution for energy access. However, off-grid customers ultimately wanted more than lanterns and demanded larger Solar Home Systems (SHS), including TVs.
  • The mass distribution of SHS was made possible by a special financing concept: Pay-as-you-go (PAYG). For a long time, it seemed to be the unique solution for making a clean energy solution affordable for off-grid households. In fact, PAYG is an effective tool but it also involves significant infrastructure and financing costs. The PAYG hype has now cooled down a little, intensified by the economic difficulties of some PAYG companies.
  • Recently, microgrids have again become popular as a technical solution. They have the advantage for manufacturers and developers from industrialised countries that they can build on the grid-connected solar technology they are familiar with. In fact, microgrids offer some advantages – but also disadvantages: they are particularly suitable for a few larger users, but they have significant weaknesses due to their reduced flexibility in supplying numerous households with low consumption.

All three approaches are important as part of an overall concept for decentralised energy supply. No approach alone can offer THE solution for a decentralised energy supply. Only a good mix is able to offer an alternative to outdated central grid technology.

What’s next? Profitability!

Solar lamps, SHS with PAYG and Micro-Grids have made energy access possible for numerous people worldwide; the social impact is undoubtedly high. But so far, no company in the industry has managed to achieve stable profitability. It is unlikely that this will be possible at all with the current approaches:

  • Margins for price-sensitive solar lanterns are so low – also due to the strong price war within the industry – that, even with such high mass production, it is hardly possible to achieve stable economic profits.
  • In the PAYG sector, the high cost of collecting instalments is one of the factors that causes more costs than is often assumed. In addition, there are rising capital costs and a not inconsiderable currency and default risk. Investors are therefore becoming increasingly aware that it is difficult for a company focused exclusively on the sale of SHS via PAYG to achieve stable profits.
  • The profitability of Micro-Grids is also still a long way off. In addition to the financial risks, there are also the high management costs (technical, socio-cultural, organisational). Without subsidies, a microgrid cannot be operated in developing countries – but the same applies to the conventional power grid.

One thing is clear: It is not possible to supply the most remote areas and households that belong to the “poorest of the poor” in an economically profitable way without subsidies – neither through decentralised solutions nor through a centrally supplied power grid.

Profitability through new customer segments

Profitability can only be achieved if the better earning customers in Urban and Peri-Urban regions are included in the customer portfolio. They often use diesel generators, either because they are not connected to the grid or because the power supply from the grid is unreliable. Even these customers with more purchasing power are therefore waiting for a sustainable energy supply! Replacing a diesel generator with a solar system is just as reasonable as replacing a kerosene lamp with a solar lantern or an SHS.

And this customer segment is even far larger than the traditional off-grid market. This is the finding of a new IFC study: “About 1.5 billion people around the world live day-to-day with “broken” electricity grids and experience blackouts for hundreds and sometimes thousands of hours a year. For this population, reliance on distributed diesel and gasoline backup generators, or BUGS, is a common stopgap measure. These generators are deployed across the globe on a large scale both on- and off-grid, at homes, businesses, and industrial sites. They support access to energy but come with significant costs.”

In order to give this customer segment access to a reliable, affordable and clean power supply in the sense of SDG7, the traditional off-grid sector will have to open up: today, it is no longer just a matter of “basic energy access” for off-grid households, but of “sustainable energy supply”, i.e. ensuring a stable energy supply through decentralised solar technology.

For companies in today’s off-grid sector, this means the challenge of including modular AC systems in their portfolio in addition to the traditional SHS – either for full power supply or as backup solution. In addition, financing services must be developed for the wealthier customers. The maintenance and service infrastructure built up in the traditional off-grid customer segment can help win the trust of new customers. Local presence and service orientation are also important here. But thanks to higher margins, the new customer segment also offers companies in the industry, that have been chronically in deficit, the opportunity to achieve stable profitability for the first time.

Harald Schützeichel