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Reaching universal access to electricity - with off-grid solutions

Reaching universal access to electricity is an important objective, and there are several scenarios for how to achieve that. The International Energy Agency and UNF Energy Access Practitioner Network estimate that about $700 billion will need to be invested to ensure universal electricity access by the year 2030. Universal electricity access by 2030 also means around 950 terawatt hours of electricity need to be generated per year. The cost per new household connection amounts to $2,800 (see figure at the left). 

The electrification of households through solar solutions would require a fraction of the grid investment costs. While households connected to the grid have unlimited access to electricity, off -grid energy becomes a viable alternative when the grid is not available or too costly. For $10, solar lanterns provide basic energy services while large SHS provide sufficient energy to power refrigerators. A system to light an off -grid household and power small devices can cost $120 with an expected useful life of up to 10 years. Moreover, on the basis of past trends, this cost disparity is likely to increase.

Over the past decade, clean energy technologies have become cheaper. Unit manufacturing costs have come down worldwide as clean energy policies and emerging markets bolster demand. Grid extensions remain costly and demonstrate declining returns on investment when expanded from heavily populated urban areas (where connections are dense) to rural areas (where villages can be miles from one another).

Where the grid extensions are currently under way, investments per household are so high that most households have to contribute by paying high connection charges for grid electricity. For example, in Kenya the highest grid connection charges are around $400. For the same amount, small TVs. Accordingly, when the grid becomes available in rural areas it is common to see adoption rates as low as 10 percent of households. With a more affordable, fast, and reliable solution available, many customers opt for solar-powered energy.

 

Solar off -grid lighting is a multibillion dollar opportunity

Today, the world’s 250 million off -grid households consume around 25 billion liters of kerosene per year and spend more than $30 billion on fuel-based lighting such as kerosene and candles, excluding expenditures on batteries and diesel generators. 

This $30 billion expenditure on fuel can be used as a proxy to gauge the market for innovative alternatives. With the provision of SOGLPs, energy consumption at the BOP decreases and cash flow into off -grid lighting solutions increases. SOGLP companies interviewed as part of this study noted that a few customers return within months of their initial purchase, looking for bigger solar lighting products. Vendors also noted that the current market is most interested in small solar home systems in the $60 to $100 range. However, in countries such as Kenya, Ethopia, and the Phillipines there is a clear trend toward SHS over $100.

Should current trends continue, sub-Saharan Africa will eventually overtake Asia as the biggest off -grid market in terms of people and households as a result of population growth exceeding current capacity to extend the grid.

Globally, we estimate an annual market of up to $2.7 billion. As a result, $27.3 billion can be freed up as additional purchasing power for education, health, and further solar products and accessories such as solar lanterns, bigger home systems, TVs, radios, fans, and refrigerators. 

Market forces will redirect the freed-up $27.3 billion toward more economically productive uses, which are likely to include significant investment in access to off -grid energy. Thus, we see solar lighting as an enabler for the solar energy access market as a whole—the industry will feed off its own success. 

 

Market potential

In conclusion, we see the following market potentials based upon A.T. Kearney estimates, interviews, and market data. The market for SPLs today is estimated at $200 million globally, yet if every off -grid household used SPLs instead of kerosene-fuelled lamps the market would be $2.7 billion at current prices. 

For SHS we estimate a market potential of $6 billion, which will appreciate as the market evolves. Additionally, we consider the ability of large SHS to power electrical accessories such as TVs, fans, and radios a multiplier and believe this market could total $50 billion. Naturally, it takes time to evolve from the $200 million market today to $50 billion in the future. Nevertheless, with appropriate expertise and capital investment this market can grow exponentially. It is noteworthy that these market estimations do not include the additional 1 billion people worldwide who are connected to unstable grids and experience regular power outages. Solar solutions can of course be a fallback solution for when the electricity is off, offering a further upside to the market sizing estimates. It is clear that the market is currently underserved. Household penetration rates are estimated at 3 percent for SPLs in sub-Saharan Africa and the combination of SPLs and small solar home systems in Asia. However, some critics doubt the affordability of solar off -grid products and argue that the market is in fact much smaller.

At first glance, the affordability question is real: If households with a limited income must continue to purchase expensive fuel, they may not be able to save the cash to buy more economic solar lighting. However, affordability is not black and white. If devices are financed, then cash savings could go toward paying them off. Yet firms currently in the market lack the necessary capital or business models necessary to make such changes, providing a clear opportunity for innovative financing solutions and improved business models.

The mobile phone industry off ers a good example of the success businesses can have if they apply the right models in sub-Saharan Africa. 

Even in the countries with the lowest electrification rates, at least 70 percent of the population owns a mobile phone. If mobile phones and their communication charges are affordable, then so are basic solar lanterns or higher-level products with regular installments. Besides, as previously mentioned, a high mobile phone penetration implies the need for a means of electrification to charge the devices.

Evidence suggests that the market is currently limited by the supply side, not the demand side—an assertion confirmed by interview respondents, who also stated that where there is demand a means of supply can be found.

 

  • “The demand is huge! People want to live like us, with 10 lamps, outside and inside the house and for their stores.”
  • “Where there is demand, people find a way to get what they want.”The


BOP market is growing fast, and its aggregated purchasing power suggests significant opportunities for market-based approaches. By establishing trust in technology and freeing up household income for further investment, can pave the way for even faster growth at higher price points. 

Our interview respondents strongly believe that consumer finance is an important enabler and could be the way to multiply industry revenues. If industry can identify the right end-user financing mechanisms, then the market should be able to grow to its full potential. This includes existing solutions such as pay-as-you-go systems, mobile payments, and modularized systems that can be extended.

Our interviews and surveys suggest that about 50 percent of customers could afford average-priced SOGLPs without any commercial end-user financing. Affordability is increased to 60 percent if 30 percent of the price is financed through commercial end-user financing, and 80 percent if 70 percent were financed. The industry consensus is that by introducing models that enable customers to pay the full price in installments, it will be possible to realize the full market potential.


Source: "Investment and Finance Study for Off-Grid Lighting. An A.T. Kearney report in collaboration with GOGLA" (2014).


Download the full study here.

 

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