How investors can ride the off-grid wave
Off-grid energy technologies are now worth $700 million a year, according to a new Bloomberg New Energy Finance report — and sales should rocket to $3.1 billion by 2020, by which time almost 100 million households worldwide will be powered exclusively by local solar energy. With at least 100 companies now active in the off-grid energy sector, and sales of “pico-solar” items such as solar lanterns already in the tens of millions, there are big opportunities ahead both for companies and investors.
The biggest growth is happening in Africa, and to a lesser extent in Asia — both regions where huge numbers of people lack access to conventional, grid-based electricity. Latin America is another potential growth market: across the region, about one in five people who live outside major cities are without access to electricity. Globally, about 1.2 billion people remain beyond the reach of electrical grids — and annually, those people spend about $27 billion on lighting, gadget-charging, and other energy needs, suggesting that there’s a big potential market for renewable off-grid technologies.
Tapping into that opportunity can require some creative business models: the world’s off-grid population is vast but poor, and lacks the resources to pay up-front for solar panels and other renewable tech. That’s leading companies such as Kenya’s M-Kopa to sell their solar gadgets through microfinancing deals, with customers paying a few dollars up front and then a few cents a day until they’ve paid off the cost of their devices. “If you boil it down, what we are is a finance company,” says Nick Hughes, M-Kopa’s strategy director. “What we’ve done is to give the customers some collateral and a line of credit.”
It’s a strategy that’s working well: by extending almost $100,000 in loans a day, essentially to anyone with a phone number, M-Kopa racked up $30 million in sales of its combined solar lighting system, radio, and charging stations in 2015. That figure should double this year — and with the company now planning to expand into neighboring countries, M-Kopa’s founders say they’re convinced they’re building a billion-dollar business.
They might be right, says Nairobi investment analyst Aly-Khan Satchu, who says M-Kopa is the first company to show that Silicon Valley-style startup strategies can be applied effectively to the energy challenges and long-tail opportunities of East Africa. “It has shown that you can take nickels and dimes from the bottom of the pyramid and build a substantial business,” he says.
The success of early-mover companies such as M-Kopa has drawn plenty of interest: at least 20 companies now offer simiilar pay-as-you-go financing systems for energy products targeting emerging markets. That’s good news for customers, who are projected to save around $200 a year on fuel, phone-charging and battery expenses once they switch to solar.
It’s also good news for the environment: the kerosene and candles burned by off-grid households is responsible for a colossal amount of carbon emissions. It’s been estimated that transitioning the 500 million or so South Asians now living without electricity to solar-based lighting systems could reduce the region’s carbon output by 23.3 million tons a year.
The key now, industry-watchers say, is to draw enough capital to the off-grid sector to help successful startups to scale up and seize the opportunities that lie ahead. Though the sector has long been held back by limited financing opportunities, things could be changing: the sector has drawn more than half a billion dollars in direct investment to date, of which $276 million was invested last year, a fifteen-fold increase over investment levels in 2012.
The U.S. government is now trying to spur further investment and lending, most notably through a USAID loan-guarantee service that will underwrite 50 percent of loans made to companies focusing on “beyond the grid” energy services. Such efforts “could be the catalytic agents the private sector needs in order to allow beyond-the-grid companies to scale their business models,” writes GTM’s Daniel Tomlinson.
Companies to watch
* Micro-solar leasing platform Off-Grid Electric raised $45 million late last year from investors including the Packard Foundation and the Calvert Foundation. Its devices will power 1 million Tanzanian homes by next year, and it is preparing to launch in Rwanda.
* German solar company Mobisol is rolling out off-grid services across eastern Africa using a rent-to-own business model, providing solar systems equipped with TVs, stoves, and even hair-dryers. “We want to bring the ‘modern lifestyle’ to rural areas,” explains Klaus Maier, who is overseeing the company’s expansion.
* Crowd-funded San Francisco solar-finance startup SunFunder has helped wean 368,000 people off fossil fuels by issuing project-based loans to solar companies in Africa and elsewhere. It aims to facilitate $1 billion in financing for emerging-market solar projects by 2020.
Ben Whitford is the US correspondent for The Ecologist. He has written for the Guardian, Newsweek, Mother Jones, Slate, and many other publications.