Business Operation Models for Solar Home Systems (SHS)

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Overview

There are different ways of operating a Solar Home Systems (SHS) business.

Although each SHS program has unique characteristics, there are two general approaches to bringing Photovoltaic (PV) to customers in the developing world:

Open market approach

In the most common approach, described by the World Bank as the open market approach, there is a roughly unrestricted market in which PV dealers and developers can conduct direct sales and — with government, donor, and nongovernmental organization involvement — establish PV microcredit, leasing, or direct sale programs.

Dispersed area concession approach

In the dispersed area concession approach, applied chiefly in Argentina and the Philippines and planned for northeast Brazil, a private electric utility, rural electric cooperative, or other institution is granted a concession for providing electricity services to unserved populations and does so in part through establishing a PV program.

Financial Sustainability

Few PV programs in developing countries, regardless of approach, have achieved independent financial sustainability. Although they are aiming eventually to become financially sustainable, most of these programs — while perhaps successful by other standards — have been unable to wean themselves from grant support.

The few success stories on record — that is, PV programs in developing countries that have managed to become financially sustainable without continuing to rely on subsidies — involve a comprehensive, phased approach toward stimulating the market for PV, creating a financing program, and providing servicing for the installed systems. In the Dominican Republic, for example, SOLUZ has established a 1,000 or more unit leasing program, which is now cash flow positive.

Why have so few PV programs in developing countries achieved financial sustainability? There are several reasons. The most common problem is extra costs arising from unanticipated maintenance, component replacement, outreach efforts, and training. In cases where extra funds are available to cover these activities, the “human software” to provide the maintenance or training often is not. In Kenya, a PV program did not address the middle -market consumers — i.e., consumers who cannot afford to pay the entire cost of a PV system up-front in cash but who are not so poor that they need the PV system price subsidized; the program in Kenya focused only on the cash market, thereby preventing the next level of penetration and precipitating a long-term decline in sales. In SriLanka, the lack of working capital and slim margins at the dealer level prevented the PV program from thriving, let alone expanding. A program in the Philippines suffered from, among other things, poor financial management and a lack of understanding of the terms and conditions of its own loan program on the part of key officers in the implementing institution.

In some countries, well-meaning government subsidies for PV have undercut the existing private PV industry, so that while an individual program may be successful, the sustainability of the overall PV market is damaged. This unintended outcome occurred, for example, with a United Nations-sponsored program in Zimbabwe. Subsidies, while certainly stimulating near-term PV sales, can work against financial sustainability in the long term. The Agricultural Development Bank of Nepal provided 50% subsidies of SHS hardware costs; and some donor programs continue to provide large subsidies for PV and other products in order to promote sales of domestically manufactured products.

Establishing a Photovoltaic (PV) Business in a Developing Country

Like many businesses, a PV business is tough to manage.

Many variables need close attention throughout each business stage:

• Research on markets (see also market analyis for Solar Home Systems (SHS) and PicoPV) and customer demographics
• Design of the system
• Who supplies the business with the system components? (Local manufacturers, import of components)
• Raising equity and managing working capital
• Training and oversight of both technical and sales staff, as well as End-user training
• Development of a microfinance approach that is appropriate for the customer base
• Management of the microfinance process (or strategic alliances with microfinance organizations)
• Installation
• Management of after-sales service
• Recycling of batteries
• Repossession of units from nonpaying customers
• Accounting and record-keeping

Questions to be considered by the programme / project implementation organisation:

How can expanding a business to rural areas be made attractive?

• Incentives to establish businesses in rural areas.
• inclusive strategies: examples of companies and programmes

The choice of a certain business structure / operation model also depends on the financing models offered to the costumers and grants and subsidies provided either to the costumers or the business itself.

In addition, there must be enough profit at each step of the value chain to provide incentives to PV entrepreneurs and to attract equity capital investment. If PV entrepreneurs go into business without the potential to achieve adequate profit margins, their companies will not be sustainable in the long run.

Access to working capital is key for PV firms. Even if technical assistance is available to research the markets, there will be a need for working capital to pay for advertising and cover early start-up costs, inventory, and accounts receivable. Growth businesses consume working capital as they grow to finance larger inventories and accounts receivable. A shortage of that working capital will choke a business.

Furthermore, PV businesses cannot rely on cash markets indefinitely. In time, any geographically efficient cash market will become saturated. At that point, PV businesses must finance middle-market consumers — i.e., consumers who cannot afford to pay the entire cost of a PV system up-front in cash but who are not so poor that they need the PV system price subsidized. But if the PV business becomes stalled in its middle -market financing stage before it achieves break even system installations (up to 1,000 units, depending on finance margins), it will collapse. Thus, customer financing instruments and service/collection infrastructures will be needed.

In sum, to operate an SHS assembly, distribution, or retail sales business in a profitable manner, an entrepreneur must have sufficient operating capital as equity; must be successful in making sales to customers in the cash market; and soon thereafter must be able to reach a break even point via sales to middle-market consumers who rely on customer financing instruments to make purchases.

In some countries, system design and balance-of-system requirements have not been addressed — that is, PV systems have been sold in smaller sizes than what was really needed by customers, or the customers were left to buy the lighting or other components, do the rest of the wiring, etc. The result was that the whole system did not perform because some components were poorly integrated, incompatible with the rest of the systems, or had poor battery controls. The best approach to these risks is for a company to design a system that can withstand some abuse, and which is carefully tailored to what people want to use it for.

So far, successful SHS companies have tended to “own” their markets — that is, they are dominant in a region to a point where they have little meaningful competition. This dominance helps them protect margin and optimize SHS installation, servicing, and collections. A monopoly is not in the best interest of consumers or the marketplace in the long run, but market dominance appears to be extremely helpful in getting a PV business operation successfully off the ground in the short term until the market matures.

Human Capital Constraints on PV in Developing Countries

Two human capital constraints affect the penetration of solar PV in developing countries:

1. insufficient quantity and quality of PV industry entrepreneurs
2. stock of PV installers/maintenance technicians

PV Developers/Entrepreneurs

In most developing countries, despite an abundance of qualified entrepreneurs in traditional sectors, there are insufficient PV entrepreneurs. Why is this?

• First, there is a lack of general knowledge/awareness of the PV industry and its possibilities and profitability. There are few if any precedents or models of private sector entrepreneurs who have launched successful PV businesses and who are making money. It stands to reason that entrepreneurs would instead devote their limited investment capital to better known businesses.
• Second, the stock of entrepreneurs interested in SHS often involves individuals who do not have the track record, credibility, and capitalization that is generally sought by traditional sources of debt or equity financing.

The lack of outside capital support for solar PV entrepreneurs is due in part to the risks involved. These include both macroeconomic risks and microeconomic risks.

Even if an entrepreneur starting a solar PV business has done all the right homework (i.e., studied the demographics, mapped out a staged business plan, raised debt and equity financing, and started in the cash market business),he or she will still face major macrolevel risks, among them:

1. politically driven changes in fuel subsidies before an election
2. unanticipated extension of the grid (or just the promise thereof) into the operating territory of the company
3. imposition of additional trade barriers (for example, import duties) on imported components
4. deterioration of capital markets which impedes access to critically important growth capital to reach breakeven
5. loss of needed technical assistance because of some dispute between a host country and a donor country
6. launching of a subsidized solar PV program in the same market territory.

In addition, the entrepreneur will face the microeconomic business risks associated with any new business and new industry, namely:

1. improper system or balance-of-system design
2. poor cost accounting
3. failure to package the sale to include needed after-sales servicing
4. loss of technicians to competing industries after these technicians have already been trained

PV Installation and Maintenance Personnel

Apart from the shortage of entrepreneurs willing to enter the high-risk PV business, there is a shortage of trained technicians familiar with PV systems. The availability of trained PV installers and service technicians is essential to maintain continued operation of financed systems so that payments can be made. But people take time to be trained; then, even if they are successfully trained, they can get recruited away.

For these reasons, it is essential that training programs for PV installation and maintenance personnel be ongoing. A number of countries have established permanent training courses. In Tanzania, the Karadea Solar Training Facility, with a permanent staff of four, provides basic and advanced training for students from Tanzania, Uganda, Kenya, and Nigeria on how to install and maintain PV systems. It also provides guidance on PV projects for nongovernmental organizations, businesses and relief agencies.

Examples

Concepts Promoting Commercial Products

Different steps projects should pay attention to, are mentioned within these different concepts to introduce new commercial products to the market.

Mali

In Mali communal solar battery charging stations (SBCS) are operated by private service providers, who run them on a fee-for-service basis. The income generated from the SBCS is supposed to cover the maintenance and upgrade costs of the SBCS themselves and the PV systems generating power for key public buildings (schools, health centres, town halls).

The private operators have begun to install solar home systems, sell solar lanterns and provide after-sales services that go beyond the ELCOM (Électrification Communale) intervention.

Electrifying key public services with solar energy, and linking it with electricity provision for private use, will improve living conditions of the population, besides strengthening local government’s performance and legitimacy.

The intervention of Energising Development (EnDev) was the first attempt to bridge the local service delivery gap by allowing energy as “the missing link”, to cross-fertilize with private sector development and decentralisation dynamics. So far, the experiences are encouraging: schools offer evening classes, women benefit from light during birth.

► Mali Energy Situation

Further Information

• Inclusive Energy Distribution Strategies for Energy Access Programmes and Companies
• Innovative Business Models and Financing Mechanisms for PV Deployment in Emerging Regions
• Financing and Funding Portal on energypedia
• Selling Solar: Lessons From More than a Decade of IFC's Experiences by IFC, 2007
• Solar portal on energypedia
  
• Import of Energy Products