Consumer protection code in the off-grid solar sector
The off-grid solar sector is growing quickly. This growth is mainly fueled by the rapid increase in investments in companies using the ‘pay as you go’ (PAYGO) business model, which attracted approximately 85% of all investments in the off-grid solar sector between 2012 and 2017. In this model, customers buy Solar Home Systems on credit. As this involves extending consumer finance to people with unstable and low incomes, it is important to pro-actively mitigate the risk of overselling.
FMO has therefore financed an initiative by the sector organisation GOGLA to develop and promote a consumer protection code that is intended to become the de facto sector standard. The Access to Energy Fund (AEF) has invested in several off-grid solar companies to which this code is relevant. In a recent investment, AEF supported d.light with USD 7 mln in equity alongside the Infrastructure Development Fund (IDF), which invested USD 3 mln, and Norfund, Swedfund and Inspired Evolution, which invested another USD 30 mln.
Potential impact of d.light
Country: Keyna, Uganda, Tanzania & Nigeria Investment: USD 7.5 million Purpose: Growth funding Contracted: December 2018
Off-grid solar companies can impact the lives of their customers and the environment in many ways. Among the outcomes cited most often are: 1) an increase in productive hours, used by children to study longer at night, for example; 2) saving money previously spent on lighting, which costs households in d.light’s markets between 7% and 10% of their annual income; 3) increasing physical health by reducing indoor air pollution, which is especially important in Nigeria where mortality due to indoor air pollution is significantly higher than the SSA average; and 4) a reduction in CO2 and soot emissions from kerosene lamps. Soot is the second-largest contributor to global climate change after CO2.
d.light targets families at the base of the pyramid (earning <USD 3,000 per year) without reliable power. Access to electricity is lowest in Tanzania and Uganda, with only approx. 18% of the population having access, and highest in Nigeria at approx. 53%. In rural areas, access is significantly lower, however, at 9% in rural Tanzania and Uganda and approx. 32% in rural Nigeria. d.light’s customers therefore range from underserved to extremely underserved.
To sketch a picture of the potential impact of d.light, we can draw on the growing body of research on the impact of off-grid Solar Home Systems. Studies of the impact on time spent studying mostly observe a modest increase in total study time (~ 0.5 to 1 hour per day). The impact on educational attainment remains unclear, however, ranging from zero to little impact. Based on data from Acumen, we expect the average d.light customer to spend USD 43 less per year on lighting compared to traditional sources, such as kerosene or candles, while reducing their GHG emissions by approx. 550 kg of CO2 equivalent per year. With regard to improving physical health, quantitative data on the exact health effects, e.g. in terms of mortality, is unavailable. However, a study by SolarAid observes that 63% of its clients in Kenya, Tanzania and Uganda feel healthier after switching to solar lighting.
AEF (alongside IDF) closes a critical funding gap for d.light because of the perceived high risk of the off-grid solar sector and the countries in which it operates.
The data used to estimate the potential impact of d.light paints a diverse picture. Therefore, it is essential to point out the risk that the impact does not materialise as expected. This risk is not negligible. Acumen’s data on lighting cost savings and GHG emission reduction, for example, is highly heterogenous, with some of Acumen’s off-grid portfolio companies even increasing their customer’s lighting cost, instead of decreasing them.