A No-Brainer for SMEs: How Solar Can Help Small Businesses Recover from COVID-19 – And Save Money in the Long Term
Editor’s note: This article is part of NextBillion’s series “Enterprise in the Time of Coronavirus,” which explores how the business and development sectors are responding to the pandemic. For news updates and analysis, virtual events, and links to useful resources related to the COVID-19 crisis, check out our coronavirus resource page.
As the planet emerges shakily from the dreamlike events of recent weeks, there’s no question that regardless of how long the coronavirus lockdown lasts, our global economy will be reeling for some time to come.
As businesses pick up the pieces and assess the damage, one thing is even clearer: Emerging economies that have less capacity for government largesse to fill the gap will face some of the hardest challenges. And small- and medium-sized enterprises (SMEs), one of the most fragile business groups in these countries, will be at the eye of the storm. Heavily reliant on the predictability of their cash cycle and notoriously challenged in their ability to access finance, a complete suspension of operations during lockdown will leave many on life support.
Despite their vulnerability, SMEs are absolutely critical to these economies, and without them a true recovery from this crisis will not come to pass. SMEs represent about 90% of all businesses in the world, account for two-thirds of the formal jobs in developing countries (importantly, 50% of new job creation in the private sector comes from businesses with 100 employees or less), and represent up to 40% of GDP in these countries. In short, while the sector is very fragmented, these are the entities that form the bedrock of local emerging economy ecosystems, and they remain critical to any recovery.
And as the dust settles and they struggle for air, these SMEs will be searching for any way they can to boost their cash position.
A Sunny Solution
Enter rooftop solar.
Solar is now the cheapest form of electricity for companies across the vast majority of Asia and Africa, regions simultaneously blessed with high sunshine and dogged by high power prices. Shifting to solar can literally save SMEs money from day one, boosting their cash reserves and facilitating immediate re-investment into their businesses. If SMEs could take advantage of the solar value proposition en masse, millions of dollars could be freed up to help fire the engine of economic growth in these emerging economies. Said another way, there is a pile of cash just waiting to be unlocked at the frontline of local industry, and solar is the key that can do it. It’s hard to find a more glaring opportunity for value creation in today’s world. And this does not even begin to take into account the significant environmental benefits that come as part of the deal.
The fact that this has not yet happened, however, points to some obvious hurdles.
The first and most important challenge is access to capital. Solar is cheap, but it’s hard to pay for all that “cheapness” at once. Solar modules on the roof can churn out electricity without any input (i.e. fuel) costs for up to 30 years. The catch: You need to install them first. While for many SMEs the value of solar is clear to see, with paybacks in as little as four years in places, they may not have the funds available – or more likely, the access to finance – to make an investment into something that is not their core business. This dynamic will only be exacerbated in a post-COVID-19 world.
The second important challenge relates to the complexity of the technology itself. Even if SMEs have the funds available to pay for solar upfront, they often do not understand the technology well enough, or have enough confidence in it (or in those who are selling it), to invest their hard-earned money in such a long-term asset. With even the heavy-hitters of the developed corporate world – see Wal-Mart vs. Tesla – having to deal with the fallout of fires from rooftop solar, who can blame them? In the world of solar for SMEs, it is not unusual to see oversized, badly designed systems employing sub-optimal hardware being marketed to these businesses. Navigating this is a minefield, not to mention a time commitment that SME owners and managers are reluctant to accept. Ultimately, confusion and underconfidence create inaction.
As a result of these factors, rooftop solar penetration amongst SMEs remains very limited across Africa and Asia. But you only need to glance out your plane window as you touch down, anywhere from Calcutta to Cape Town, to see the vast opportunity that remains untapped.
In order to solve this conundrum and unlock the solar revolution for SMEs, what is needed, first and foremost, are funders with the know-how, risk-appetite and operational ability to facilitate financing of rooftop solar for SMEs. This removes the upfront investment from the equation, and allows SMEs to begin saving money from the day the solar modules start generating electrons.
Next, SMEs need to gain confidence in the companies offering them these solutions. Buying solar is not like buying a car – each system must be tailored for the client’s unique site and demand profile, making the scope for mishaps (and mis-selling) much greater than when you’re buying something pre-packaged off a production line. In order to accelerate confidence in solar, it’s critical that solar developers, installers and independent power producers can demonstrate a clear alignment of interest with their customers (or “skin in the game”), by ensuring that customers pay according to what they consume. It’s very simple: If the system doesn’t do what its providers claim, the customer needs to pay less.
The Key to Success
These two goals are not without their challenges: Financing SMEs can be a difficult business in any context, and optimising solar performance and portfolio quality across hundreds of dispersed assets creates its own operational implications. But these problems are by no means unsolvable. And the opportunity that exists on the other side, for profit and planet, makes it an endeavour that is not just worthwhile, but critical. If the sector can address these obstacles effectively, solar will truly become a no-brainer for SMEs: They will not need to make an investment decision, they’ll only pay for what they get, and they will save money from day one. If businesses don’t embrace rooftop solar in this context, then they will be turning their back on the closest thing they will ever get to a free lunch.
This is the key that unlocks the door: Companies always want to save money. Solar can do that right here, right now. It’s just about structuring the equation so that those who are best positioned to take risk, take it. For the SME that transitions to solar, the world carries on: They do business, electrons flow somewhere above their heads, and their operating costs decrease as the sun rises and falls. Like most cases of true value creation, less really is more.
Photo courtesy of candi solar.