Lessons Learned from Over 60 Distributed Energy Enterprises : ‘Going Off Grid’ Series (pt 1)
Editor’s note: This is the first of a two-part post by the author as part of NextBillion’s ’Going Off Grid’ series. In part two, the author delves into the business models that are seeing the most traction in energy distribution for the base of the pyramid.
In today’s technology driven world, one in six people still live without access to clean, safe and reliable energy. That translates to approximately 1.3 billion people suffering from the effects of energy poverty. These people are underserved by traditional markets and government programs, and are in need of innovative solutions surrounding the provision of energy.
The Center for Science, Technology and Society at Santa Clara University has been working with social enterprises from around the world for over a decade, helping to incubate and accelerate innovative business models, many of which have become industry leaders. In 2009, the Center began to focus on clean energy more thoroughly, recognizing its centrality to social development. In 2011, we launched the Energy Map to share the findings that grew out of the work with over 60 distributed energy enterprises working across the world, including Africa, India, South East Asia and Latin America. The technologies being used include everything from solar home systems to gasifiers using animal or agricultural waste.
These enterprises are attempting to deliver innovative energy solutions to the 1.3 billion people suffering from energy poverty. While this sector is exciting and has the potential to radically improve the lives of those being served, research indicates that very few of these enterprises have achieved meaningful scale. In fact, many promising enterprises have folded as a result of the various barriers that exist for companies attempting to operate in the challenging markets of the developing world.
Since its inception, the Energy Map has focused on identifying the common barriers faced by distributed energy enterprises as well as the various strategies being employed to overcome them. Of all these issues, three business model challenges stand out: organization financing, product affordability and distribution.
Because profit margins are generally low and developing world markets are unstable, securing funding is essential for any distributed energy enterprise. Even though the beneficiaries are generally purchasing or renting the distributed energy products, the enterprises need additional capital to cover their startup costs, early growth and—in many cases—their ongoing operations. The major funding mechanisms identified on the Energy Map are grants/donations, debt/equity, self-funding and carbon credits. Most of the enterprises have multiple funding sources.
Of course, the source of funding depends largely on whether or not the enterprise is a for-profit or not-for-profit, but grants and donations play a large role across all types of enterprises. Of the 60 enterprises featured on the Energy Map, 27 identified as non-profits and 24 as for-profits, with the remaining nine being hybrid models. All the non-profits and hybrids rely on grants and donations for substantial portions of their ongoing funding. Further, six of the for-profit enterprises also rely heavily on grants and donations, generally with the goal of eventually becoming profitable without reliance on grants.
The majority of the for-profit enterprises rely on debt/equity to fund their business, although not all do. A small number of for-profits rely on self-funding and grant money. A total of 33 enterprises rely on loans and equity to acquire funds, meaning that several non-profits also turn to this model.
In terms of self-funding and carbon credits, only 21 enterprises rely on one or both of these sources. Self-funding is generally conducted only on small scales and depends largely on the affluence of the founder. Unfortunately, self-funding an enterprise is not a scalable option and therefore is limited. Carbon credits are essentially certificates that companies in more affluent nations purchase in exchange for the right to emit higher levels of CO2. These certificates are sold by enterprises that reduce global carbon emissions by distributing clean cookstoves and solar energy systems. This has created a market for carbon credits that helps to regulate worldwide emissions. Because of the required certification processes, however, it is not cost-effective for small enterprises to participate in this trade. Many of the more established distributed energy enterprises, such as Nishant Bioenergy, which produces biomass industrial cookstoves in India, have been certified and sell their carbon credits to other polluting companies. Unfortunately, the carbon credit system is subject to price fluctuations and simply cannot be relied on to provide all of the funding for an enterprise. At best, carbon credits and self-funding can be used to provide supplementary or bonus funding, but are ultimately unsustainable and unreliable financing strategies.
These findings reflect the nature of the distributed energy market in several ways. First, high startup costs often require businesses to access large amounts of capital right from the start. This is the reason why so many enterprises, even those intending to eventually turn a profit, rely on grants and donations. Second, as mentioned before, small profit margins lead many organizations to enter the market as non-profits, which account for nearly half of all of the enterprises featured on the Energy Map. And while non-profits have strong local impact, only in exceptional cases (like Bangladesh’s Grameen Shakti, which has sold over a million solar home systems) are non-profits able to scale. Of course, the Energy Map is only representative of a small sample of enterprises using particular funding strategies, meaning that there could be others out there that we simply have not discovered. Nevertheless, the geographical and technological diversity of these enterprises is a good indicator that these strategies are representative of the larger distributed energy sector.
Another major challenge faced by distributed energy enterprises is the affordability of their products. Poor customers are unable to pay high upfront costs and do not have the credit to take out large loans that are often associated with many of the technologies sold by distributed energy enterprises. From among the enterprises on the Energy Map, five affordability models have been identified, although many enterprises make use of two or more of these.
The first involves low-cost products that are purchased upfront. Twelve of the enterprises featured on the Energy Map use this affordability model. For example, THRIVE, based in Hyderabad, manufactures low-cost solar LED lighting systems that cost between $2 and $5 USD. This is the simplest model, in that it does not require the enterprise to develop any financing services and the customer is responsible for paying the full cost. This works best for enterprises offering small products that do not require extended servicing or maintenance.
The second model, in-house financing, involves the enterprise covering the upfront cost of the product. Customers then pay back the enterprise in small payments, or buy purchasing credits. Fourteen of the enterprises featured on the Energy Map use this method to make their products affordable. One example of an enterprise using this model is South Africa-based Alternative Energy Development Corporation, which sells 12V zinc fuel cells at far below the market value. Customers sign a two-year contract whereby they make small payments each time they have their fuel cells recharged. This method works well when the enterprise is capable of leveraging the customer’s willingness to pay. For example, some companies have the ability to cut power for non-paying customers.
The third affordability model takes advantage of partner financing through banks or microfinance institutions. Another 18 of the enterprises on the Energy Map make use of this affordability scheme. This works best with enterprises that are supplying larger, more expensive products in that it makes the product affordable, thus enabling the company to focus on distribution rather than financing. For instance, SELCO India sells solar home systems that are initially priced at $150. By partnering with banks, SELCO enables its customers to receive reasonable loans in order to buy these systems.
A fourth affordability scheme makes use of business-to-business or institutional sales. In this case, enterprises sell their products to other organizations or companies that work directly with the poor. Twelve of the enterprises on the Energy Map use this model in one form or another. This model takes advantage of NGOs and other organizations that have more money than poor customers, thus allowing them to sell in larger volumes and at a higher price. For example, WE CARE Solar sells solar powered “suitcases” equipped with medical equipment for pregnancies and birthing operations to medical institutions already working in the developing world.
The final model is subsidization, whereby the enterprise absorbs a portion of the total cost of the product to make it affordable to customers. In many cases, subsidies are used to cover the costs outside of, but attached to, the product, such as maintenance and/or training. Subsidization is used by about 19 of the enterprises on the Energy Map to make up for the extra costs of different products. This is a useful way to drive down customer costs, but is ultimately unsustainable for the enterprise and can distort markets. For instance, Light Up The World relies on donor subsidies to cover the costs of their LED village lighting systems. Customers simply pay a small price to cover the costs of maintenance. Unfortunately, relying on subsidies is both unstable and unsustainable. Enterprises can only rely on subsidization up to a certain point.
Ultimately, the affordability scheme is dependent on the technology being used by the enterprise, with smaller products generally being able to fit into the simple low-cost product category, and larger ones needing more complex strategies. Furthermore, it is likely that several schemes are used simultaneously.
Jack Bird is a recent graduate of Santa Clara University, currently living in the Bay Area and working as a research assistant for the Center for Science, Technology and Society’s energy sector.