Design Business Model

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Introduction

Business models for off-grid access to renewable energy in Nigeria are rapidly emerging to reach new markets, implement technologies, and respond to policy requirements. This section will provide an overview of the range of different business models for off-grid solutions (mini grid and standalone solar (SAS)) and key approaches to design such models. Particular emphasis is put on the contexts of energy-poverty and the options to increase the ability to pay of customers. After defining business models in general, a classification of the various off-grid energy access business models is provided. This is followed by guiding principles that shall help to approach the process of deciding on and developing a business model. Lastly, a list of helpful tools and resources in this context is given.

Definitions

A business model describes how a business creates value and how it interacts with actors like customers, suppliers or investors. SAS and mini grid developers have different approaches to delivery energy and thus their business models are different. This section aims to give an overview of the different business model opportunities for both SAS and mini grid.

Standalone solar

Table 1 displays the common SAS business models in the Nigerian off-grid energy market and different payment options. Beyond these SAS business models, there is a range of potential distributor partnerships for SAS equipment or aftermarket services. Companies that are not operating in the SAS area but have access to rural markets may be able to distribute solar equipment in parallel to their existing supply chains in the future.

Table 1: Overview of SAS business models and payment options (own compilation based on USAID, 2019)

SAS business models	Description
Direct sales / purchase	A company completes the sale of a SHS in one transaction. No financing is required to facilitate the transaction.
Credit sales	Customers purchase a system on credit predicated on an agreement to repay over a set period. Includes both lease-to-own and end user credit transactions. For end-user credit, a third party to the developer provides credit necessary to fund the purchase price.
Power as service	The SHS system is not sold to the end users by the SHS company, instead, the company uses the system to generate power provided to the end user. The company is also in charge of operations and maintenance expenses.
SAS payment option	Description
Mobile money	Payment services made from or via a mobile phone from an account linked to a mobile phone number.
Mobile apps or online web portal	Online payment via an app or payment gateway.
Cash collections through stationary or door-to-door agents	Manual collections through agents that collect cash at stationary kiosks or go door-to-door.
Unstructured Supplementary Service Data (USSD) Codes	Use of mobile phones to communicate with the network operator’s computer to process energy payments when the user dials specific codes.

Mini Grids

In the mini grid space, business models vary by ownership/operatorship, size and customer. There is no single proven business model for mini grids. However, different strategies are used to make a business model successful. Table 2 shows the characteristics of business models and briefly describes the existing strategies to make them viable. Module 5 of the AFDB mini-grid training further explains these aspects (refer to list of tools).

Table 2: Overview of mini grid characteristics and strategies to develop them (own compilation based on AFDB, 2020)

Characteristics of mini grid business models
Ownership/operatorship	This can be done by public, private, or community entities or public private partnerships or other hybrid models
Size	Mini grids vary from a few kilowatts to up to 10 megawatts
Customers	Households, small businesses, large anchor clients or a mixture of all three
Strategies to develop viable mini grids
Demand management	Demand-side management is the process of actively influencing electricity demand on mini grids so it matches electricity generation. Generally, it is cheaper to adjust demand than supply.
Promoting Income-Generating End Uses	Productive, agricultural or commercial loads often are needed to reach the critical mass of sales needed to cover the fixed costs of mini grids (reference to PUE section).
Quality of electricity service	Quality of electricity service may be defined in terms of ability to serve different types of user, availability (hours per day), and continuity (no blackouts). Developers must decide early what tier of electricity service they offer for different customer types and measure their willingness and ability to pay for such service cost
Tariff design	Tariffs for privately-owned mini grids must cover all the costs of the mini grid (fixed and variable costs) plus a margin. Tariffs may include a fixed charge or capacity fee (which is independent of consumption) and an energy price (which is consumption-based) or just an energy price. The level of tariff is set based on projected demand.
Revenue collection	One challenge is to find the right balance between commercial viability and the ability and willingness of end users to pay. The success in collecting revenues from end users depends on: Affordability of tariffs Willingness of users to pay Metering technology Anti-theft measure Staff responsible for the collection Type of tariff which can be adapted to local constraints
End user finance	Demand for electricity can be stimulated by providing financial support to end users of the mini grid. Users may require finance to cover the up-front costs of connections, indoor electric installations and purchases of electrical equipment. This support may be provided directly by the developer or through third party financing institutions. It may also be subsidised through output-based aid, which links the payment of public funds to the delivery of connections. Demand side subsidies (DSS) is increasingly being considered as a form of energy subsidy for poor electricity users. Although DSS is still in its early stages of adoption across sub-Saharan Africa, a few countries such as Togo and Rwanda have implemented DSS programmes for the off grid solar sector, providing Nigeria a good basis to build on. REAN suggests three DSS instruments suitable for Nigeria: cash transfers, end-user product price subsidy, and freely distributed products. The successful implementation requires a structure that is targeted, practical, and transparent.

Guiding Principles

This section describes first steps that can be taken to identify and design a suitable business model. Besides, it emphasises certain considerations that are especially relevant in entering low income markets.

Specify/visualise/Break down your idea

To find a suitable business model for your electrification intervention, it is of great help to break down the idea in the various parts and activities that are relevant for a successful business. The Business Model Canvas is a useful tool that can support this process. It is a framework to guide decision making by analysing the delivery model’s value added; the types of relationships it creates with partners and end users; and the resources and activities required to implement it. This model was adjusted by

to assist the design of business models particularly in contexts of energy poverty. They developed the Energy Delivery Model Toolkit to help practitioners create pro-poor energy services that are financially, socially and environmentally sustainable. (Refer to tools)

Combine for-profit and pro-poor

A for-profit business model for rural electrification needs to embrace complexity and trade offs, because it deals with low income customers. It is crucial to consider the broader context in which the energy service will operate, to ensure that it will meet the priority development needs identified by the community and that it will be financially, socially and environmentally sustainable. ##add some additional points

Be context specific and integrate community needs

For a business to be potentially viable in the long term, it is essential to adjust the business model to the specific context to meet the actual consumer needs. Integrating community needs in the design of the electricity intervention is an integral part of this. To capture socio-cultural needs beyond energy access, community groups that understand their needs have to be connected to energy companies that implement solutions. Business models that are co-created with the users may enhance competitive advantage while integrating the voice of the community. However, while the available knowledge on private sector engagement in rural electrification is growing, knowledge of particular and contextualised business processes, i.e. firms’ ‘ways of doing business’ in a particular community, is limited.

Existing Tools

• Energy Delivery Model Toolkit

This toolkit helps to understand the enabling factors and barriers to deliver energy services for poor groups by learning from practitioner experience and research. The toolkit illustrates the six-step EDM design process and the two innovative tools that support the design process for inclusive energy services planning, the Delivery Model Map and Delivery Model Canvas.  The two tools integrate a pro-poor focus by considering long term development impacts and environmental sustainability of the model. Based on Osterwalder’s Business Model Canvas, which is a purely business-focused tool, it was adapted by energy access practitioners in order to assist the design of business models in contexts of energy poverty.

• Energy Business Model Generator for Low-Income Markets “Energize the BoP!”

The practitioners guide aims to support entrepreneurs in taking the right steps towards creating a sustainable business in the BoP’s (Base of the Pyramid) energy market. While explaining the various challenges in the areas business case, customer interface, development process and support directory, the guide also describes solutions how to possibly overcome them.  The theoretical content is complemented by various case studies which demonstrate good practices. Concerning the main users of the WP5 toolbox, the development process section is the most relevant one. It covers information on the resources that are required to develop a business, providing information on the process, product, market insight, human resources as well as finance.

• PAYGo Performance, Reporting, and Measurement (PERFORM) Data Collection Tool

This tool is an open source tool that provides the solar industry a standardised and transparent set of key performance indicators (KPIs). It supports users in collecting data and conducting quantitative analyses of PAYGo firm performance and enables them to calculate the PAYGo KPIs from building block indicators.

• CORE (Cornerstone for Rural Electrification)

CORE is an international initiative that offers technical assistance in the area of decentralised rural electrification (DRE)  to practitioners, communities and governments. CORE developed a resource library with a collection of DRE training materials and guidelines, focusing on mini grid development.

Bibliography