How to Light Africa Within a Decade

15 january 2013

Today, when the sun goes down in Africa, over 150 million homes will not turn on the lights. The reason is simple: they don’t have electricity. Instead, they will extend their day by the dim light of kerosene lamps. Families will huddle around these lamps, inhaling the lung-burning equivalent of two packs of cigarettes each from kerosene fumes. If they’re unlucky, their children will knock over the lamps and burn themselves, drink the kerosene and end up in the hospital, or knock over the lamps and burn down their houses. Meanwhile, these lamps combined will equal to carbon emissions of all the motor vehicles in the UK. This can be a bit depressing, but there is some good news. Today’s breathtaking advances in batteries, solar panels, and LEDs have eliminated all economic and technological reasons why every house that wants modern lighting cannot have it. With the right policies and cooperation from the public and private sector, we can make modern energy universal within a decade.

Over 150 years ago, when Edison turned on his first lightbulb, he had to compete against the burning of oil for light. Today’s solar entrepreneurs have the same competition, and amazingly there are more people “off the grid” today than in Edison’s time. Like Edison in New York City, solar must deliver a better service for a cheaper price if it wishes to displace the burning of oil for light. Despite its incredible potential, many solar offerings today don’t achieve this. They are either too underpowered to be aspirational (more like flashlights than home electricity), or too expensive to be widely adopted (especially given the risk of failure & lack of service infrastructure). In theory, solar promises decades of “free” power after a high initial cost, but off-grid solar systems are complex electrical systems and many rely on low quality batteries or lights that can fail in a short time.

Yet a new generation of enterprises are overcoming these barriers by taking inspiration from the mobile telephone industry’s dramatic rise in Africa. Using pre-payment and mobile money (e.g. M-PESA in Kenya), they are making high quality solar systems accessible and affordable to the mass market. Pre-payment allows customers with variable and unpredictable incomes to pay what they can, when they can, for an essential service. It can also remove risk from the customer: if the system stops working, and nobody fixes it, they don’t have to keep paying. Mobile money removes much of the friction from small, numerous transactions that would have traditionally made these services unfeasible. The result for African households is simple: much better light, often mobile phone charging and even radio & TV, often for less money than they were already spending on substitutes for electricity (such as kerosene and mobile phone charging).

These innovators are already seeing rapid adoption in the market, but they share a barrier to widespread scale: access to finance. Because they finance the upfront cost of the solar system, they have an constant need for capital to reach scale. This is not a problem in itself; their customers are able to pay more than enough to service market-rate loans. But because the industry is so new, and because many of the innovators are small companies, they are unlikely to find finance available from traditional sources such as banks. They need help at the early stages from subsidized sources of finance that care about the developmental and environmental benefits of their work.

Donors and development institutions have long seen the clear benefits of modern energy in the developing world, and have invested in considerable funds and manpower into it. But these investments have failed to spur the same kind of transformation that the mobile phone industry did. Many were simply too early, investing in early solar systems that were expensive, unreliable, and sold without finance or pre-payment. Others invested in programs like solar technician training. These programs are admirable, but completely unhelpful to today’s most advanced companies, which are building integrated systems that rarely need service and can be easily installed by the user or a non-technical installer. Finally, some invested in grid expansion, which is incredibly expensive and only benefits the wealthiest 10-20% of people in the extension areas. Even many houses right underneath the grid cannot afford connection fees, a meter, and household wiring expenses.

There is a better way for donors and development institutions to light the world, and it is also an innovation in its own right: results-based finance. The idea of results-based finance is simple: instead of financing programs aimed at achieving your goal (whether lighting homes or immunizing children), pay a financial reward for the achievement of the goal and let the market find the best way to achieve it. When designed well, a results-based finance program does not try to pick winners, does not distort markets, and achieves a very high social return per dollar invested. It also accelerates a nascent market, allowing the best companies to achieve scale and innovate further to deliver better service at lower cost. It should always be designed as a bridge to scale, not a permanent subsidy.

Luckily, there is already a successful template for how to stimulate mass-market solar adoption. In the year 2000, Germany adopted a “feed-in tariff” program to stimulate its domestic solar market. These carefully designed subsidies, initially quite generous, have been reduced over time as the industry gained scale and costs were reduced. At the time of initiation, household solar was an expensive novelty limited to a few early adopters. Twelve years on, the program was so successful that Germany stimulated not only their domestic solar market but the whole world’s, driving a 80% reduction in the cost of solar modules and countless innovations in the delivery and finance of household solar systems. Today, this cloudy nation leads the world in household solar installations per capita and boasts a mature solar industry. This same approach can be applied to results-based finance for the off-grid market.

How might a well designed results-based finance program for lighting Africa look? It ought to have five main principles:

• Fund Services, Not Watts – Efficiency is the name of the game when you are off the grid. An inefficient 50 watt system and an efficient 15 watt system can deliver exactly the same service level. Fund outcomes that can be objectively measured: lumens of light, hours of radio, number of phones charged, etc.
• Fund Durability – It is easy to deliver a high level of service the first time a cheap or poorly designed solar system is used. It is much harder and more expensive to provide a system that delivers at a high level for years, with service included. A strong technical analysis can identify high quality systems and reward the investment in quality. Some funding should be reserved and only dispersed after systems are demonstrated to be functioning highly after 1-3 years.
• Only Fund on Audit-able Data – Any organization seeking funding should provide exact data, in spreadsheet format, including GPS coordinates of customers and detailed system specifications, so that a random audit can be conducted.
• Release Funding Quickly and Transparently – A well-designed program cannot subject entrepreneurs to a yearlong opaque process and grueling reporting requirements. It must have a transparent funding protocol with rapid turnaround and personalized service.
• Build a broad market – No more than 20% of the fund should go to a single company, country or organization, and funds should be distributed pro rata if there is more interest than funds available. This prevents one large & well-funded company from swooping in and claiming a lion’s share. Special effort should be made to fund local small solar dealers as well as ambitious high-growth startups.

Supposing a program was designed like this, what effect would it have? Talking hypothetically, let’s assume an average of $50 per household results-based subsidy upfront and an average of $17/year subsidy for the first three completed years per African home with a modern solar system installed. That is a total of $100 per household.  Let’s assume a $50 Million results-based fund is committed by donors. The results of this relatively small amount of donor funding could be staggering: modern light for 2.5 million people (500,000 households), private investment of $100 Million into Africa, and a jumpstart to an industry that would serve many millions more.

This level of subsidy assumes a roughly $300 per household total cost for a company (or coalition) to source, market, distribute, install and service a high quality, durable solar home system. Such a system would have multiple bright lights, a mobile phone charger, and a way to power a radio. This basic level of service is far better than more off-grid homes have today and requires no technical advances or cost reductions. Smaller systems could be subsidized proportionally and still provide more light than kerosene lamps at a lower cost. Costs will vary between organizations, but a well-designed program will reward those that deliver more services with more financial efficiency. By buying down the company’s total cost by 33%, the results-based finance can let the company charge 33% lower prices, a $50 lower down payment or upfront price (and lower ongoing fees), or simply install 50% more systems on the same funding base. This has the net effect of stimulating both market adoption and company growth, which further drive costs down for customers with volume and competition.

Could such a volume of funds be dispersed in a short time period? Absolutely. The management, technical and distribution capacity exists in the market today. Is the market ready? Absolutely. African households crave modern energy. High costs, distribution, and market barriers have kept them from adopting modern energy, but these are already being overcome through companies with better business models, better technology and lower solar/LED/battery costs. Finally, can such a fund be administered efficiently? Absolutely. Many existing networks of technical and market expertise exist and can aid. Organizations like the Canopus Foundation, GVEP and GSMA Development Fund’s Community Power are a few of many examples. Considerable technical expertise is also present in national development organizations such as Germany’s GIZ.

A final important question must be considered by policymakers: should a results-based program focus only on solar? Arguments can be made on both sides, but one thing has been empirically proven: solar is the only energy technology (renewable or otherwise) that can generate an exactly sized and reliable amount of electricity at nearly any off-grid home without ongoing fuel & maintenance costs. This allows it to truly reach down to the bottom of the pyramid, who often live in very widely dispersed communities. Wind & hydropower are great, but are extremely location-specific and require resource studies before installation. They also cannot easily be “scaled down” to household level. Biomass and biogas are great as well, but require both an ongoing fuel stream all year and a modified diesel generator to generate power, raising costs and maintenance substantially. Mini-grids show great potential to power dense off-grid communities (especially places like Bangladesh & India), but are unfeasible for more widely dispersed homes.

A focus solely on off-grid household solar can leverage existing proven technologies and accelerate existing businesses. It can also help fund administrators dive deeper, rather than wider, understanding the exact differences between high & low quality solar systems and understanding different models for distribution and finance. Finally, household solar can deliver service at a price point that is accessible to many off-grid households without any further technical advances or market price reductions. Numerous studies have shown that the “mass market” price for energy in Africa is $4-15 per month (whether financed or sold as a service), which can be achieved today with solar.

If public-private partnership can achieve mass market affordability of solar coupled with a high level of durability and service, we will see a solar revolution in Africa to rival the mobile phone revolution, and we’ll see it within a decade.