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

My second event at the 2009 Net Impact Conference was a very well orchestrated case study analysis of a critical emerging market and base of the pyramid (BoP) issue – off grid solutions and energy consumption. Off grid solutions have been a point of exploration in recent years with initiatives such as the Solar Foundation work in Ethiopia and the reading lamp project in Africa and India.

Our presenter, Wolfgang Gregory, Chief Sustainability Officer for OSRAM Sylvania, a subsidiary of Siemens, painted a very lively picture of the origins of a project that has the potential to dramatically change the off grid sector. He set the context narrating a meeting in Germany where members from his team pondered on a potential opportunity.

OSRAM Sylvania is a leading provider of lighting solutions and through its Global Care program is committed to investing in sustainable programs in emerging markets. About 77 billion liters of kerosene is being used for lighting every year in different parts of the world accounting for a market of $55 billion USD with nearly 1.6 billion people having no access to electricity. This equated to an enormous market opportunity for OSRAM and also a potential to innovate within this sector.

Off grid opportunities

Lighting accounts for 19% of global electricity consumption resulting in emissions of approximately 190 Million tons of CO2 year. Besides being a very inefficient light source, kerosene is expensive, dangerous and poses a health hazard for its users. The sale of kerosene also poses other challenges in certain regions of the world such as Africa resulting in bootlegging, fraud and corruption.

But kerosene has an important attribute that makes it particularly appealing to communities with low and irregular incomes – it can be bought and sold in small quantities. On the other hand, while many clean off grid alternatives have emerged, they lack a maintenance aspect that severely reduces their utility over time and their acceptance by the local communities. According to Wolfgang, OSRAM’s solution was prioritized around being cost effective, resilient to usage in rural areas, and a built on a “sustainable model” that incorporated traditional habits of people (e.g. people in Africa were willing to walk up to two hours to buy things).

The pilot and other locations

Under OSRAM’s triple bottom line focus emerged a unique business model that was piloted in Mbita, Kenya in April 2008. This small town on the banks of Lake Victoria does not have a permanent power supply, but does have a thriving economy based on fishing. Around 175,000 fishermen use kerosene lamps every night to entice the fish.

Through a specially constructed photo voltaic power station (OSRAM Energy Hub, O-Hub) the local people were offered four different products:

• Battery boxes – rented on a daily basis and returned in exchange for a fully charged one;
• LED lanterns – designed in Germany using Sylvania technology;
• Mobile phones chargers – in partnership with Nokia; and
• Clean water – based on UV treatment (similar to the Water Health International model)

This renewable Energy hub is charged through solar panels that cover the roof and was built in three months employing 20-25 people from the local community with additional jobs created for operations and sales. Microfinance funding was also offered by partnering with a local organization to help pay for the initial deposit fee.

Outcomes

Following the Mbita project, OSRAM launched three other O Hubs with mixed results. The recharged battery rental service has taken off and has proved to be the most successful of the current offerings. The mobile charging units were also successful, which makes sense given the prevalence of mobile phone users in Africa. The purified water model failed due to their dependence on rain water. Finally, the LED lanterns had problems because they were designed for the German market and didn’t survive the local conditions.

In spite of these results, OSRAM claims that three of the hubs have been cash flow positive and they are very committed to moving this project ahead. If plans go ahead, we can expect to see up to ten such hubs in Africa over the next three years with an investment of $6M USD and partnerships with regional organizations such as utilities, NGOs and microfinance institutions.

Afterthought

The significance of designing renewable lighting for the BoP is multi-faceted. It has strong health implications particularly for women and children. Access to lighting also allows economic activity and education to continue at night when it otherwise might cease with the sunset. In the Mbita location, fisherman reported better sales since they can keep their stores open in the evening. The fact that energy hub is purely based on photovoltaic source is commendable.

On a macro level, it also represents three things. First, this is high profile effort by a large multinational to design specifically for the BoP recognizing a large market opportunity and indicating a commitment to continue to serve this market through its determination to launch additional hubs.

Second, I became aware of the competitive nature of this business model learning that Philips, a major competitor of Siemens has undertaken a similar project. OSRAM is also planning to expand its product mix by incorporating mobile phone accessories and other items. I am curious to see whether this competitive environment results in a proliferation of products purely based on economic drivers while missing the critical social issues of BoP communities.

Finally, the project had an interesting side effect. The local kerosene salesmen are renting batteries and LED lanterns and delivering them for a small fee to other locations. It will be interesting to see if this entrepreneurial delivery network will lead to some benefits for the ultra poor who are currently not able to access the energy hub due to location and price constraints.

So watch this space!