Dear Critics: Here’s Why the Off-grid Energy Industry Needs Impact Investment
Editors’ note: This post was written in response to a post by the impact investing firm Ceniarth, explaining why they’re reducing their exposure to the venture-backed, solar home system segment of the market. You can read an additional response post, from the impact investing firm Persistent Energy Capital, here.
We read with interest Ceniarth’s reasoning for reducing their exposure to the venture-backed solar home system market. While they are of course welcome to change their investment thesis, their article potentially discourages others from taking time to understand the industry. This, in turn, does a disservice to the many companies that are approaching the sector responsibly and building sustainable business models and, most importantly, to the households that continue to live with unreliable, dangerous, inadequate and ultimately extremely expensive means of lighting and basic energy. As representatives of the Global Off-Grid Lighting Association (GOGLA), established to represent the off-grid industry and help it grow sustainably, we would like to respond to Ceniarth and shed light on what the industry is doing to address the challenges.
To give some context to those readers of NextBillion who come from outside of the energy access sector: More than 1.1 billion people still live without access to electricity. Without access to modern energy sources, households spend an estimated US $27 billion every year on lighting and mobile phone charging with kerosene, candles, battery torches or other fossil fuel-powered stopgap technologies. Thankfully, there is a fast-growing energy access sector which is tackling this issue head on, offering people access to solar products and systems which can transform lives overnight, improving living conditions, health, education, creating jobs, income opportunities and helping consumers save money. Access to electricity can be provided in different ways: by extending the grid, by building mini- and microgrids to connect communities, and through stand-alone solar home systems and solar lanterns which can be purchased, leased or rented by individuals or households. There is a need for each of these solutions; the advantage of stand-alone products is that they can often be deployed much faster than grid extension or microgrids, providing crucial development impacts sooner rather than later. Since 2010, more than 23 million such stand-alone solar products have been sold across the globe, with about 8 million products sold in 2016 alone. These products are currently bringing improved energy access to over 85.5 million people, saving an estimated US $4.9 billion for these households (in aggregate), and offsetting an estimated 26.9 million tons of greenhouse gas emissions in CO2 equivalent. (Note: GOGLA publishes a semi-annual report, “Global Off-Grid Solar Market Report Semi-Annual Sales and Impact Data”; preceding data is taken from the forthcoming July-December 2016 report.)
While impressive, these figures are still a drop in the ocean and there remains a huge opportunity to create universal energy access. This is why, contrary to Ceniarth’s view, we do not see the $200 million invested into off-grid solar last year as a problem. Access to distributed clean energy has been historically underfunded by public finance institutions (see Sierra Club’s analysis on this topic) and, as Ceniarth notes, private investment has been scarce until very recently. Now, it is estimated that $49.4 billion of investment on energy access alone is needed annually to reach Sustainable Development Goal 7 on access to clean, modern energy. While $200 million in 2016 is a good start, a lot more will be needed to help existing companies reach scale and to foster the hundreds of new enterprises that are needed in this sector. We do agree, however, that irresponsible or misguided investments are potentially dangerous to the sector. We therefore encourage investors to make informed decisions, take the time to understand the markets they are engaging with and support the industry as it addresses its challenges.
Ceniarth’s second concern is that customers may be negatively impacted by the growth of investment in the sector, particularly within the vertically integrated solar home system market, where products are made more affordable by offering flexible payment plans rather than requiring full payment upfront. However, unlike free giveaway programs, commercial approaches to rural electrification depend on customer satisfaction and long-term customer relationships for their very existence. This means that it is in the companies’ interest to meet the customers’ needs both in terms of products being offered, as well as in terms of after-sales service and customer care. This is why we see that a commercial, demand-driven approach is, in many cases, likely to deliver more beneficial impacts than free giveaways or other supply-driven approaches.
As an industry, we work continuously through our Sustainability, Impact, and Business Development working groups to ensure that we are taking the necessary steps to ensure strong customer protection throughout the lifetime of a product, and at the end of a product’s life. We are also studying closely the lessons learned from the microfinance industry, while recognizing key differences between the two sectors.
Ceniarth expresses displeasure on two fronts: that companies are selling products that go beyond a small solar home system, and that they are not serving the most rural and remote communities. On the first issue, we see it as a positive development that customers are able to purchase different kinds of goods and services, if they so choose. This has been enabled, in part, by gains made in energy efficiency, which makes it possible to power many more different appliances with a solar home system. A few years ago, an 8-watt television would have been unimaginable, and now it is commonplace. The simultaneous fall in price of solar PV panels has created a wealth of opportunity that did not exist previously. In our view, expansion in terms of goods and services is a growth opportunity, not something to be dismayed about.
On the second issue, last-mile communities are, by their very nature, hard and expensive to reach and to serve. It should be noted that this is not a challenge that is unique to energy; the last mile is challenging for every sector, including microfinance. In Ceniarth’s view, PAYGO solar companies are not serving the most remote, isolated communities and are therefore not delivering on the “original promise” of the sector. However, the diversity of needs and characteristics of populations without access to modern, clean and affordable electricity is such that a diversity of business models and approaches is also needed. Ceniarth is welcome to focus on extremely rural and remote communities if it sees that as most aligned with its vision. However, that should not diminish the value of efforts to bring access to modern electricity to areas that are less remote but still not adequately served by the grid, or even to offer more choice and security to on-grid customers. The fact that some companies have chosen to serve markets in peri-urban and densely populated areas simply shows that there is a clear need for clean energy access solutions in these areas and that companies are moving to service this demand, providing customers with clean alternatives to diesel gen-sets and other polluting, expensive and antiquated solutions. This does not mean that there is not still a need or opportunity to service rural areas, nor does it mean that other companies are not focusing their efforts on rural populations. Some companies will be better suited, equipped or driven to reach the last mile than others and we agree with Ceniarth that this is a particular market segment where there is scope for more innovation and creativity.
Finally, Ceniarth addresses the topic of income generation, and the use of solar products for increasing value across the agricultural supply chain. We fully agree that it is important to consider the off-grid energy market within the context of the wider world and economy around it. Markets do not operate in a vacuum and initiatives which tackle wide-ranging poverty and income-generation issues across these markets should be embraced. However, again, the need for solar products for productive use exists alongside the need for clean energy within households for lighting, mobile charging, entertainment and cooling; the two are not mutually exclusive. Some companies will choose to focus on both, others on one or the other. Similarly, some consumers will require solar irrigation pumps or other larger equipment and be in a position to buy or lease such products, while others improve their daily lives with a rented solar lantern. Both customers have valid needs and desires, and we need to work collectively – as investors, entrepreneurs, governments, donors and others – to meet those needs in a way that is sustainable on all fronts. At the same time, a single company cannot be saddled with the burden of having to provide for every need, across every market segment.
At GOGLA, we work closely with our industry and associate members to innovate, to foresee and address problems and challenges, and to build a sector that responds to the needs of customers across the globe. It is a constant learning process, and we welcome hard questions and tough love from investors. At the same time, we see that there is so much more growth potential in this market, and we hope that investors reading this will be encouraged by the opportunity this market presents. This way, the entrepreneurs who are out there in challenging markets, getting their hands dirty and changing lives with every new customer they reach, can continue to grow in breadth and depth.