NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

When I hear there’s emerging solar energy-related news, my heart skips a beat. The sector offers so many highs and lows that I’m never sure what to expect. New developments may range from the growth of institutional investors’ support for photovoltaics (PV), to the boom-and-bust cycles of off-grid solar players. There’s never a dull moment in solar energy.

That unpredictability and ambiguity came to mind when I read candi solar CEO Philippe Flamand’s NextBillion article, published earlier this year, on why solar is a “no-brainer” for micro, small and medium enterprises (MSMEs) as they recover from COVID-19. The article left me with a question: If the prospect of PV is as undisputed as Flamand argued – a cost-efficient way for MSMEs to generate clean energy – what is standing in its way?

Lack of Capital isn’t Roof-top Solar’s Only Challenge

Flamand correctly zoomed in on the role MSMEs play globally, and the stress they are under during the COVID-19 pandemic and the subsequent economic fallout due to lock-down measures. It cannot be mentioned often enough how underfunded the MSME segment of the economy is across all markets, from north to south and east to west. The MSME finance gap in emerging markets already adds up to US $5 trillion. With many microfinance and non-banking financial institutions also in lock-down across the globe, this number can only go up, as the supply of credit further dries up for these businesses that are underserved by traditional banks.

In this climate, it’s natural to consider the potential for roof-top solar, where PV panels are installed on the roof or elsewhere on the premises of the end-user. But can this approach be a silver bullet for meeting MSMEs’ energy needs? It’s true that solar brings cost savings, and sometimes it even provides a more reliable energy supply than the utilities servicing some regions (thus reducing downtime for a company). So why does the sector have such an underwhelming showing when looking at the actual numbers in emerging markets?

Vietnam, for example, recently burst onto the solar stage, reaching 4.5 GW of total installed PV capacity within just three years after starting its renewable energy program. Yet the roof-top solar segment of the country’s total PV capacity contributed only 378 MW of that figure. If we break this roof-top segment further down to the MSME level, assuming that non-household PV users with under 100 kW of capacity consist mainly of individual MSME systems, the country’s MSMEs only had 44.84 MW of installed capacity at the end of 2019. So when we combine all of these <100 kW roof-top solar systems at Vietnamese MSMEs, they constitute a mere 1% of the total market.

This lack of progress can’t be explained just by pointing out the lack of capital or the complexity of the technology, as Flamand suggests. I argue that there is more at play here – and that the most important obstacle to the sector’s growth is the fact that regulation needs to come up to speed. For the purposes of this article, I will focus on grid-connected use of roof-top PV, as off-grid solar for MSMEs is a different beast with different challenges.

First, let’s look at the value proposition of roof-top solar PV: In any market, it is just one of many options for people to invest their money. That goes for residential users, but also for business owners. We all have to make investment decisions, and for business owners, this sometimes boils down to putting money into revenue-generating investments instead of cost- saving ones like roof-top solar PV.

Even when there is a support scheme in place, like government renewable energy programs, solar PV is apparently not appealing enough for most business owners to invest in it. Moreover, in countries like Vietnam, electricity prices are subsidized – sometimes even reducing prices below the actual costs of energy for specific market segments or customers, meaning that the utility is losing money on these subsidized energy customers. In these cases, electricity prices are kept low to offer financial support to certain segments of society – for example, as part of pro-poor programmes, or to support business activity. And these subsidies have also been a commonly used tool in times of elections, to woo voters in certain markets. It is hard to make solid investment proposals for solar PV in those situations, to both end clients and also to investors, because why would you opt for solar if the utility offers such low prices?

How Regulation is Holding the Sector Back

This brings us to the point of regulation. For any industry to thrive, you need steady and secure regulations in place. Based on my own experience in emerging economies, where I’ve provided business and project development support for PV companies seeking to enter these new markets, it was essential to bridge gaps between government, the private sector, the general public and financiers. In most markets, that meant PV regulation and policies were either in their infancy or still being worked out. It takes time to design a system that caters to all stakeholders’ desires, especially when they can be contradictory – for example, the need to decarbonize when you have a coal-based energy industry.

A completely new framework has to be set up to allow and license roof-top PV in a controlled and safe manner. When a lot of end-users put PV panels on their roofs, it affects the distribution system, technically – and it impacts the existing energy market, financially. In most markets this leads to a regulatory balancing act between green and affordable energy on one side, and state-owned utilities, distribution companies and energy generators on the other side. Sometimes these energy companies are even bundled into one state-owned organization. And this brings us to the crux of solar PV’s challenge: Regulation is patchy, not in place, not consistent or not adequate in a lot of places, in both emerging and developed markets.

In almost every market, PV systems need a license before getting connected to the grid. From a grid operator and the distribution company’s perspective this makes technical sense, since each installed roof-top system changes the electrical load and demand of their network, and also changes the energy demand profile of the customer. So whenever a user goes solar, the utility will miss out on revenue. This challenge is especially acute in emerging markets, where you see the larger companies and/or multinationals opting for roof-top solar first. That’s often because these organizations either have corporate goals (like pledges to shift to renewable energy, e.g.: RE100), or their external stakeholders are demanding climate-friendly practices. When bigger energy users start generating their own solar energy from their roof-top systems, that decreases their demand for energy from the utility – and thus the utility loses their prime customers. If your largest, most credit-worthy customers leave, your model comes under stress – particularly for utilities and distribution companies, which tend to be anything but nimble or innovative in these changing times, after decades of operating with an untouchable monopoly.

For another example of the challenges of regulating energy utilities during the transition to renewables, let’s take a look at the road taken by Argentina. Its law on distributed power generation was passed in December 2017, after being in the making for some time. The law states that electricity distributors are not allowed to add any additional fees for network access, maintenance or electrical backups – or any other type of fee associated with the installation of distributed generation systems, which basically means roof-top PV. (This is quite a strong measure that forbids distributors from obstructing roof-top PV by levying extra charges, for example.) The different regulatory options they could choose from for supporting distributed power generation via PV came down to:

• Feed-in-tariffs, in which every kWh supplied into the network is reimbursed at a fixed price by the distribution company;
• Net-metering, in which every kWh supplied into the network by the customer is subtracted from their energy consumption – i.e.: they balance each other;
• Net-billing, in which every kWh supplied into the network is remunerated by lowering the electricity price the customer pays in their utility bill.

Eventually, the framework that the Argentinian government implemented was net-billing – a choice that is quite future-proof, as it allows for an eventual shift to “time-of-use” billing. In the not-so-distant future, when intermittent renewable energy sources comprise the bulk of energy generation, the price of electricity will fluctuate more over the course of a day. For example, when the sun is high in the middle of the day, PV systems will be generating much more electricity, and the price will go down as supply outstrips demand. In such a setting it makes sense to make customers’ energy bills reflect these fluctuations, an option that will be possible under time-of-use billing.

Once the law was accepted and the regulation in place, it was the Argentinian provinces’ turn to implement the framework, with their local regulators and distributors. Yet even now, three years after the law was passed, not all of the provincial regulators and distributors are up to speed, with only 10 out of 24 having implemented regulation for distributed power generation. So decisions made at a national level take time to work out into local and actual implementation.

This illustrates how regulators and policymakers are the biggest hurdle to the solar PV sector’s growth. These roadblocks are something that international finance or new business models will never be able to overcome on their own. Instead, the broader industry will need to build up its lobbying power and develop a more unified voice. Local PV associations will need to provide advocacy and convene private sector players, as will international initiatives like AFIDA, an Africa-focused project developers association. Furthermore, multilateral organizations and development agencies will need to support governments in crafting regulation that works, as is happening in GET FiT’s work in African markets and the Inter-American Development Bank’s work with the Bahaman government.

The Need for Local Financing and Domestic Growth

But unfortunately, even if the regulatory challenge is addressed, the sector will still face financial hurdles. Even if a solar PV provider has a great roof-top project with a credit-worthy client – i.e.: a project that financiers would deem “bankable” – and solid regulations in place, will it unlock international impact capital? Probably not, since the ticket size of the investment would be deemed too small for international investors, and the project would represent significant currency risk for these investors. When local MSMEs earn their revenue in local currency, pay their electricity bills in local currency, and likely pay for their PV systems in local currency, even a great project can be struck down by currency risk. And even smart solutions for reducing currency risk, like what’s offered by TCX, cannot take away all the risks on an individual project basis.

That’s why, when regulation is in place and roof-top PV projects are in need of capital, I strongly urge them to look for local financiers. There is support for local banks and financial institutions to develop their green financing products – and deals to capitalize green finance products by local financiers in a country are a better fit for international investors than one-off projects. For example, look at the green bond issued by Pan Asia Bank in Sri Lanka earlier this year: It was well-received by international financiers that would be less likely to finance a single solar roof-top project in Sri Lanka.

Pointing to a lack of capital as the sole reason for underwhelming growth of roof-top PV in emerging markets ignores the real challenges the sector is facing. Capital on its own will not enable the energy transition we need towards a just, reliable and sustainable energy system. We need a stable local setting that allows for PV to grow, with regulations, financing and business propositions that meet the local needs. If this support can be established, we’ll see another major upside of this local market development: It will provide fertile ground for a domestically grown PV industry.

Rik Teeuwen is Co-Founder of Footlight International.

Photo courtesy of World Bank Photo Collection.