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Mark Hankins

Building African Solar Markets Beyond Off-Grid and Energy Access

My recent article explored the development of the off-grid solar industry in Africa, highlighting how international finance is now driving the industry forward while raising questions about divisions between the PAYG sector and the so-called grey market. This piece takes the discussion a bit further and attempts to answer some of the questions raised at the end of the article. 

Formal assistance and government programs for the solar sector in Africa address three primary market segments.

  • Megawatt scale PV for PPA projects. Large scale solar is as important for African power sectors as it is elsewhere in the world. However, multi-MW projects have projects will have a minimal impact on local solar companies and job creation.
  • PAYG solar for base of the pyramid off-grid customers. As mentioned in the previous article, the sector has grown quickly and has attracted the attention of policy makers, donors and over a billion dollars of investment.
  • Off-Grid Solar for Public Services. Schools, clinics, streetlights and water supply in NGO and public sector projects represents a sizeable amount of trade with active players and significant long-term investment. 

Most of the organized planning and regulatory support for African solar sectors supports the above market segments. Though it is understandable that these are important focus areas for early stage development, state-of-the-art solar and storage technologies have much more to offer African economies badly in need of stable decentralized power. 

Unlike support programs in developed countries that incentivize solar among middle class and urban distributed customers, African programs have ignored this segment of the market.  An exclusive focus on the extreme ends of the market (megawatt projects, public sector institutions and Base of the Pyramid) restricts the organized growth of viable commercial segments and, importantly, the integration of the solar sector into urban and economic development. 

Moreover, the policy focus on off-grid energy access has confused African consumers about the long-term role of solar electricity. Many middle-class Africans whose experience with solar is limited to off-grid PAYG gadgets view solar technology as a second-class solution for poverty alleviation --- not as an increasingly cost-effective and technically mature solution for sustainable power supply. 

Learning from Commercial Over the Counter Solar Markets

Though donor and Government project focus on the relatively narrow segments, commercial solar markets driven by pure demand forces are addressing a much wider range of customers --- and growing. They are developing in the absence of supportive policy environments or grant funding. They need strategic support.

To call these developing sectors “grey market” or “informal” is inaccurate. This middle ground encompasses a wide range of actors that lie outside of the above groupings, who are uncounted and largely unsupported by structured finance or aid programs. Moreover, its role is unnoticed by energy sector planners who, on one hand, count designed MW farms that feed into grids or, on the other, count off-grid donor-assisted energy access markets.

 

Over the counter (OTC) trade is today the single most important segment of the solar sector in Africa. It employs the most people. Year on year, it delivers the most equipment. Because systems tend to be larger, the dollar-value of equipment supplied over the counter is higher than the PAYG sector. As well, the sector is innovative, it has wide geographic coverage and meets a wide range of consumer needs. 

This group of players ranges from professional established integrators, representatives of international groups and full-service companies to small professional service providers, family retailers, lone wolf engineer-entrepreneurs and rural-based technicians. Bitten by the “solar bug”, these players see a future for the technology, are locally-based and are responsive to customer demand and the developing needs of the market. 

They see the future impact of solar over the next ten years and want to lead an industry that meets commercial, high end residential as well as Commercial and Industrial needs. They understand that opportunities will flourish when the sector realizes regulatory support (i.e. net metering, tax incentives) and gets a buy-in from the financial sector. These companies don’t trade in PAYG --- they are interested in larger systems and see the future in on-grid power back-up approaches. 

In the absence of planned or organized support, commercial markets are moving forward.

  • In East Africa as much as 40MW of grid-connected embedded C&I solar has already been installed.
  • Solar PV and storage systems are commonly seen on buildings in urban areas, bought by consumers fed up with unreliable utilities. Such systems range in size from 200W to many kilowatts; they are isolated from the grid because there is not path to legally connect.
  • Solar pumping companies are suppling water supply systems for small scale and commercial farmers alike. This sector is thriving based on robust demand from the agriculture sector and a small amount of start-up investment (i.e. SunCulture, Futurepump).
  • Telecom companies are transitioning from generator powered based stations to solar systems with back up modern storage.
  • Off-grid tourism continues to innovate with projects that replace the need for diesel generators. 

Banks and projects are beginning to recognize the role of solar and distributed power, but the available support for distributed solar and larger off-grid solar projects is still only a small fraction of what is needed. The cost of conducting transactions is high and financial institutions remain skeptical, especially in the absence of formal policy direction or incentives. Because of high transaction costs, small players have trouble closing deals.

 

All of the above points to a need for a formal strategy to develop solar power sectors that reaches beyond BoP off-grid power. Based on the successful experiences of more than a billion dollars invested in off-grid markets[1], it is time to re-assess the next steps in the solar transformation in Africa. Climate change, grid-strengthening and consumer priorities demand that distributed solar be encouraged --- not stifled --- and that donors, policy makers, academics and consumer groups play a role in transformation. 

As mentioned above, a handful of support activities have assisted the build-out of the distributed solar sector across Africa. However, in the absence of key policy support environments (most crucially net metering or taxation incentives) such activities have a hard time making headway. Despite its potential, distributed power is more often seen as a threat by African power companies and Governments than a way to help build functionality of power sectors. 

If governments and donor partners can mainstream solar with strategic policy and financial in the way they did with off-grid solar (i.e. through Lighting Africa) they will be doing a major service to Africa.  They will help an existing dynamic sector to professionalize, expand and create high value jobs. This will make a huge contribution to the stabilizing grids, improving urban energy access and improving power supply for industry, commerce and, eventually, transport.

Building Market Oriented Support for Solar 

Other countries have planned for the integration of distributed and PPA solar power into the electricity sector with incentives, regulation and policy tools. California, German and British experiences all demonstrate that both MW-scale projects and smaller-scale distributed solar play important roles in the overall solar sector. In Africa, due to inadequate transmission and distribution capacity, small-scale distributed power will pay an even more important role in the coming decades. 

Some key support needs include the following: 

Sectoral Need

Description of Action Needed

Understand the entire solar market

Very few studies have looked at the entire solar market. Focus has tended to be on PAYG (GOGLA publications) and MW market (national data). Not enough studies are done of the “middle” and OTC markets and their contributions to the sector. “If we want to know where to head, we must know where we are starting.”

Expand awareness of solar’s role beyond Base of Pyramid and energy access markets. Build demand for solar products to the middle class and commercial markets

Change consumer, financier and policy maker perception of the role of solar energy. Stimulate consumer discussion with power companies about solar and grid connection and incentives.

Recognize the many markets where solar can meet economic needs today

Solar companies require finance and policy investments to move into viable segments (BoP markets are less financially viable). Urban markets, small town, productive use, C&I and middle class residential markets are key demand drivers .

Build policy to support distributed solar that meets crucial economic needs

Change the perception of policy makers with regard to distributed solar. Help to build the policy and regulatory environment so that grid proximate small solar systems are viable. Incentivize net metering, power back-ups, etc. Support critical niche markets.

Provide intelligent solar incentives

A variety of incentives can be used to support the next stage of solar developments, and they do not necessarily need to be cash intensive (net metering, tax breaks. For energy access projects, solar subsidies must correspond with the significant subsidies offered to grid based electrification efforts.

 


[1] Development of PAYG models, new equipment, business model innovations. Not necessarily the financial success of companies, because most have not generated returns.