Indian Business Model Makes Green Energy Affordable

By David South, Development Challenges, South-South Solutions

New UNOSSC banner Dev Cha 2013

SOUTH-SOUTH CASE STUDY

The technology already exists to provide renewable energy and electricity to all the world’s poor. The trick is finding a way to pay for it and to make it sustainable. Many innovators are experimenting with business models to reach the so-called Bottom of the Pyramid (BOP) cohort, and the 1.2 billion poorest people in the world who do not have access to electricity (World Bank) (http://tinyurl.com/n9p3f5x). A further 2.8 billion have to rely on wood or other biomass materials to cook and heat their homes.

The International Energy Agency (iea.org) believes US $48 trillion of investment will be needed between now and 2035 to make sure energy capacity matches rapid population growth.

In the influential book The Fortune at the Bottom of the Pyramid (http://www.amazon.co.uk/Fortune-Bottom-Pyramid-Eradicating-Poverty/dp/8177587765), the late professor C.K. Prahalad (http://en.wikipedia.org/wiki/C._K._Prahalad) advocated seeing the poor as people with needs and assets: consumers who just need the right goods and services designed for them. It was a change from thinking only of the world’s wealthier populations as consumers, and revealed a market worth billions waiting to be tapped.

Energy is key to development and improvements to living standards. Yet energy poverty plagues much of the global South, especially in Africa and particularly in rural areas.

The World Bank has identified 20 countries in developing Asia and sub-Saharan Africa which will require a massive effort to expand access to electricity and safe cooking methods for poor households.

Around 80 per cent of the people without modern energy live in rural areas. While progress has been made since 1990 in expanding access to energy, it has failed to keep pace with population growth. According to the World Bank, the pace of expansion will have to double to meet the 100 percent access target set for 2030.

To avoid increasing global carbon emissions while achieving this goal, many are looking to renewable energy sources and technologies to reach these last groups of people.

As pointed out by the Institute of Development Studies (http://www.ids.ac.uk/news/can-renewable-electricity-reduce-poverty), “The global threat posed by climate change means that we also face the pressing need to use less carbon in existing energy systems. Making progress on both energy poverty and decarbonization requires a sharp increase in renewable electricity production, both on and off-grid.”

The institute identified four necessary factors for access to renewable energy to benefit poor people.

1.         Once electricity is generated, it needs to be reliably fed into the system.
2.         This additional supply must be made accessible, and affordable, for poor people.
3.         Increased electricity consumption then needs to translate into poverty reduction.
4.         Increased electricity supply can indirectly reduce poverty by boosting economic growth.

India’s Simpa Networks (simpanetworks.com), started in 2011, has a business model it believes will do the trick. Simpa has developed a clever way to increase access to home solar power systems for the poor, by allowing customers to purchase the system in gradual “rental” payments over time. The customers eventually come to own the power system outright, and from then on to generate electricity for free. Since the payments are small and incremental, it suddenly becomes within the realm of poor households to afford modern solar energy systems.

This is called the “Progressive Purchase Pricing Model” – similar to “prepaid”, “pay as you go” and “installment plan” models. Under this model, customers make a 10 percent down payment and receive the home solar system. The customer then buys a time-specific amount of energy for between US $1 and US $10 with their mobile phone. The orange lock box on the power system has a keypad on the front. When a code is punched in, it releases electricity (http://simpanetworks.com/our-solution/).

In increments, while the customer purchases energy for home use they also eat away at the cost of the system, until eventually it is paid off, usually at a total of US $300. Systems have an expected life span of 10 years.

With few cash resources, poor households usually are not capable of saving enough cash to purchase a full energy system for their home. Instead, they rely on buying kerosene for lamps or using battery-powered torches and lamps when they can afford it.

In 2012, Simpa teamed up with SELCO India (http://www.selco-india.com/) – a social enterprise providing sustainable energy solutions and services to households – to sell 1,000 home solar power systems, expanding to 5,000 systems in 2013, according to a case study from not-for-profit Synergie pour l’Echange et la Valorisation des Entrepreneurs d’Avenir (SEVEA) (sevea-asso.org). The goal is to reach 25,000 units sold by the end of 2014, proving this business model can scale. Ultimately, Simpa wishes to mega-scale its approach and reach 1 million households over the next five years.

Simpa believes take-up will be quick because this model reduces risk, both for the seller and for the bank that may loan the cash for the 10 per cent down payment. Simpa acts as a go-between for the system sellers such as SELCO and the banks. Simpa believe this business model reduces the risk of non-payment or loan default and has the right incentives in place to encourage the customer to hang in and keep making payments until they own the system outright. Customers enjoy the benefits of clean energy 24/7 from day one and can see clearly the connection between the energy they receive and the small payments they make. For those who default from paying, the system is taken from their home.

When the system was piloted in Karnataka, India, all loans were successfully repaid.

Simpa Networks is a venture capital-backed technology company. It hopes its approach will attract investors, particularly social investors, seeking a low-risk investment in helping expand energy access.

Resources

1) Social innovation: Creating products for those at the bottom of the pyramid from INSEAD Business School. Website: http://knowledge.insead.edu/csr/social-entrepreneurship/creating-products-for-those-at-the-bottom-of-the-pyramid-1957

2) Reality Check at the Bottom of the Pyramid from Harvard Business Review. Website: http://hbr.org/2012/06/reality-check-at-the-bottom-of-the-pyramid/ar/1

3) Getting BoP Products in Consumers’ Hands – MFIs and Micro-dealers Can Help from Next Billion. Website: http://www.nextbillion.net/blogpost.aspx?blogid=1796

4) Next Billion: Development through enterprise: NextBillion.net is a website and blog bringing together the community of business leaders, social entrepreneurs, NGOs, policy makers and academics who want to explore the connection between development and enterprise. Website: nextbillion.net

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