From pv magazine, November edition
The idea that Africa might leapfrog straight to cheap electricity by developing offgrid solar power is not new. And the idea has now spread to other parts of the developing world, where governments realize offgrid systems can replace costly plans for the expansion of the electricity wires in remote communities.
The Off-Grid Energy Access Forum, held last month in London, provided up-to-date information on the opportunities and challenges of offgrid development and why financing, business models and the quest for user data are the most critical issues.
The success of solar home systems (SHS) in many African countries is based on the pay-as-you-go (PAYG) business model and the use of mobile money. The high penetration of mobile networks across the African continent helped the emergence of PAYG solar systems to the extent that many stakeholders argue there is a virtual electricity network developing now in Africa too.
However, mobile money is not equally available in other parts of the developing world, so technology firms must find alternative solutions to collect payments. Juan José Estrada, CFO at Kingo Energy, a firm based in Guatemala, told pv magazine that his company uses local shops instead of mobile payments. Kingo Energy salesmen deliver the hardware directly to customers, who in turn pay in installments to selected local shops. Kingo Energy sends its staff to the local shops to collect payments each week.
Despite the lack of mobile payments in rural Latin America, Estrada believes PAYG business models will grow in the region. The company, which has attracted investment from Hollywood actor Leonardo DiCaprio – who also serves as an adviser to Kingo Energy – is now in talks with Colombia’s government to examine how they can best deploy their offgrid systems in rural communities. “The government examines whether a subsidy is required to help the purchase of these systems,” added Estrada. The idea is to provide offgrid subsidies and replace the need of a costly expansion of the electricity grid, but the government understands it might never pay the investment back. “Eventually,” Estrada said, “all companies want to rely on the market, not subsidies, but maybe subsidies are necessary to kickstart the market in some cases.”
Incumbents turn to offgrid
The event in London depicted the offgrid sector as mainly being populated by startups trying to penetrate underserved markets. Their products and services have also caught the attention of the incumbents, who see opportunities in new markets. The case of the EDF partnership with UK-headquartered Bboxx demonstrates how this can lead to win-win developments.
A year ago, French energy giant EDF acquired a 50% stake in Bboxx’s operation in Togo. EDF then said that this was “the first step in a broader partnership, with plans to expand the joint venture into other countries in Africa.”
Thomas Chevillotte, CFO at Bboxx, told the event that his firm focuses on Africa because mobile money has long been present on the continent. However, while it started as a technology company, it has since expanded to offer a wider range of services in various African markets, so it needs to raise equity to continue expanding. It was Bboxx’s choice to raise equity by establishing partnerships with key companies, added Chevillotte. In August, it also attracted a $50 million investment from Japanese industrial giant Mitsubishi.
Moreover, said Chevillotte, such key partnerships offer the startup credibility with governments, as well as with banks and other financial institutions (so that Bboxx can also raise debt later), and access to established processes (e.g. logistics or R&D). Valérie Levkov, EDF’s vice president for Africa, Middle East and Eastern Mediterranean, confirmed this win-win situation, adding that the move to the PAYG market continues along EDF’s investment in all other forms of electricity: large-scale, decentralized solutions and minigrids. With regards to Togo specifically, Levkov said the country was a good case because it has set up a functioning regulatory framework for offgrid investments. Togo’s president followed offgrid market developments very closely and has even interfered personally when things were not moving. This mindset is not present in all African countries, Levkov stated, and EDF uses its communication channels with government officials to showcase how offgrid technologies work in other countries, by offering real examples.
Regarding the use of EDF’s processes by Bboxx, Levkov explained that EDF’s labs can check and certify the Bboxx hardware to provide extra assurance to governments and thus facilitate entry into new markets.
Unit or corporate profitability?
The SHS sector is developing rapidly and sooner or later all SHS firms face the dilemma between scaling up and acquiring new customers or prioritizing deeper customer value. The insolvency of some high-profile companies (for example, Germany’s Mobisol – see pp. 20-23) has raised the question of how to remain profitable at the unit level and at the corporate level, too.
Mathilde Girard, investment executive at CDC Group, a development finance institution owned by the UK government, said that it was all about scaling up a few years ago, but today investors look at the profitability of the SHS firms with a renewed focus.
There are business-run costs that SHS firms need to be able to recover and this is complicated, as the SHS business model comprises many different activities, argued Girard. Therefore it is hard to define the unit economics. A critical task that needs to be addressed upfront, she said, is the allocation of risk, and addressing specifically who is taking those risks (the SHS firm, the investor, or the client). Eventually, any decision needs to be data-driven, concluded Girard.
Alistair Gordon, CEO of Lumos, a Dutch SHS provider, agreed with Girard on the use of data, adding that Lumos selects its customers based on data, while sometimes the company might decide to leave some customers because the data shows that they won’t be able to pay back the investment. Therefore, running the business needs to be readjusted based on the data. Lumos, said Gordon, is currently “focusing on unit profitability and we believe that corporate profitability will follow.”
To unbundle or not to unbundle?
One solution to allocate the risks of running a SHS firm might be to unbundle it. In fact, Emma Hawkins, director of corporate finance at PEG Africa, a company that operates in several West African countries to provide financing to customers, said her company was unbundled from the beginning.
The SHS business is comprised of four main parts, said Hawkins: R&D, financing, distribution (the sellers) and rural logistics. So, you end up with a PAYG company and it is very hard to manage everything alone. On the contrary, if a firm focuses on what it knows best and explains this to investors, then investors will have a better understanding, so the company will be able to attract financing and grow. Unbundling today is also easier than it was five years ago, claimed Hawkins, because there are a lot of new companies now in the market that offer many services.
Quest for data
Bundled or unbundled, it is clear that SHS companies base their decisions on data. And they are not the only ones who need and use data. Governments, banks, insurers and retailers all need data access to make decisions on who they finance or insure, and where they sell their products. And the quest for data is one of the trickiest issues facing the SHS sector today. The lack of national regulatory frameworks for data protection allows various companies to exploit the end users that they aim to help.
The SHS will collect data based on the usage of their systems (when and how much electricity is used, payment details, etc). Often, SHS will turn to third parties to buy similar kinds of data before they decide to invest in a market or region. Mohsen Mohseninia, VP of European market development at Aeris, a company that builds on the Internet of Things to develop various solutions enabling access to data, told the conference that Aeris builds relationships with mobile telecommunication firms in various countries so it can collect data that it then sells to its clients.
Brianna Schuyler, data scientist for Fenix International, a U.S.-headquartered company that offers SHS solutions in Uganda and Zambia, told the event that Fenix can help other companies to sell their products to its customers. This is done based on data collected via solar home systems, explained Schuyler. Fenix, which was acquired by France’s Engie in 2017, knows which customers are reliable, and which batteries are not fully used, meaning there is an opportunity to sell more gadgets.
Christopher Baker-Brian, CTO at Bboxx, said that his company also uses its data to help governments or other companies to sell products and services. Reliable Bboxx customers will be offered TV sets, microloans, insurance products and other services provided by either Bboxx or its partners. Baker-Brian also suggested that data collected by SHS firms, banks and insurance companies should eventually be integrated. However, he noted that “data protection law is a hot topic” and “the sector needs to work on data protection in the following years.”
The conference offered a detailed discussion on microgrid developments, too. EDF’s Levkov told the event that EDF and Bboxx have developed a pilot minigrid in Togo, which is now operational. Yet, Levkov told pv magazine that the microgrid sector needs to answer many questions before it can take off at a large, commercial scale. Levkov is particularly keen to address certain safety issues (such as whether local operators follow safety procedures), as users often have no prior experience in electricity. Microgrid business models also need to be defined, although for the project in Togo, Levkov said this was easy, because a telecommunications tower located near the microgrid offered to buy a large part of the generated power on a long-term basis.
Having anchor customers has proven to be a vital element for the success of a microgrid development. Alakesh Chetia, CEO of Yoma Micro Power, a Myanmar-based company that specializes in the development of solar+storage microgrids, said that they mainly build their projects around the needs of telecoms customers, who serve as their anchor clients. Communities surrounding the telecommunication towers also benefit from energy provision – and he said that local households that connect to the microgrids first aim to install lamps, then a TV set, and thirdly an electric rice cooker.
In contrast to Yoma Micro Power, which is an energy firm providing only electricity, Benedikt Lenders, head of microgrids for Engie’s African unit, said that his company has built a microgrid business model that provides three things: electricity, services such as WiFi that are enabled by electricity, and also customer advisory services on how to use minigrids to boost economic activity. Yet Lenders added that developing a minigrid business model is tricky, because not all villages are similar and what is applicable in one area will not necessarily work in another. Therefore, the main challenge, according to Lenders, is to reach the level of scale where the business model becomes efficient.
Aaron Cheng, president of PowerGen Renewable Energy, which specializes in developing microgrids in Africa, said that subsidies, user tariffs and a developer’s return are the three angles that define the microgrid business. It might well be that the future of the microgrid business depends on the level of government support to its remote communities over the short term.