/ 20 November 2020

The solar energy market will grow if innovative business models are developed

Scatec Solar 2
Scatec Solar is Africa's biggest solar power producer

Southern Africa has the sun exposure, available land area and declining prices of components that mean the area is well positioned to sustainably address the region’s power challenges through solar. 

But despite this potential, the solar industry in the region remains largely untapped. This is especially true in the residential market, which is often overlooked based on the view that solar is too expensive, less attractive for consumers and delivers low returns. 

Innovative business models can address these challenges and accelerate adoption to grow the local solar industry.

There are 17.1-million households in South Africa and 84.7% of these receive their power supply from Eskom. In addition, 1.5-million households are not at all connected to the grid. For those that are connected to the grid, a sizeable number are considering investing in alternative energy supply to complement what Eskom offers, for instance during times of load shedding or load reduction. 

The ever-rising electricity tariffs — 100% since 2009 — have also created a segment of households that are seeking relief by going completely off-grid. 

An opportunity exists to serve the residential market, which can be further segmented into the urban off-grid, hybrid, and rural off-grid submarkets. Each of these submarkets has unique needs and sensitivities.

The urban off-grid submarket

Depending on the size of the house, this sub-market’s electricity is used to power appliances that include geysers, stoves, microwaves, air-conditioning systems, irons, entertainment systems and swimming pool heaters. For this submarket, the main drivers for considering a solar system installation are reducing or removing the monthly energy bill and ensuring control over supply at all times. With many people now working from home due to the Covid-19 lockdown and social distancing protocols, a break in power supply means limited productivity when laptops and internet connections go down.

A bundled approach can better serve this end-user market. 

First, suppliers should understand the high-energy-consuming appliances in the household. An integrated solution should be developed to target the reduction of grid energy for these appliances. Solar systems can be combined with complementary products, such as gas products, to provide an integrated end-to-end solution.

This bundling approach can greatly reduce the customers’ energy bill but comes with the setback of a high capital and switching cost. 

One way to overcome this challenge is through partnerships with financial service providers, which can provide financing that can be tied to a mortgage loan for the home where the system will be installed. Upfront costs can be optimised and more affordable monthly instalments spread over a longer term.

The urban hybrid submarket

This submarket is made up of small houses, townhouses and/or apartments that have fewer appliances than the urban off-grid category. These customers are looking to reduce their utility-based electricity spend and ensure energy supply continuity during load shedding. They are not prepared to make the full investment required to go off-grid and want to use solar energy as a back-up energy source.

Serving this market requires a targeted approach that focuses on essential appliances that need to continue running during periods of grid-supply disruption. These appliances include lights, televisions, satellite dish receivers, internet routers and security systems. The ideal solution should include panels, an inverter, and batteries. The solar panels generate energy during the day, which is used for part of the load during the day. Batteries are charged to store excess energy that can be used to carry selected appliances in the event of grid-supply outage at night.

This submarket typically has multiple drains on their wallets, including school fees and vehicle loan repayments. It is critical that financing strategies address these realities. Suppliers should consider deploying a hire-purchase approach, similar to the automotive industry. Customers could pay a deposit for the installation of the solution and make monthly payments over a stipulated period. Payments are split over an affordable (for the customer) yet viable (for the supplier) payback period to the mutual benefit of both stakeholders. This will enable more buy-in as most customers simply cannot afford to make an upfront cash payment for the system.

The rural off-grid submarket

Rural off-grid users typically stay in remote areas with no access to electricity due to transmission and distribution constraints. For this submarket, energy is for lighting, powering entertainment appliances such as televisions and radios, as well as charging mobile phones.

This segment is best served through a prepayment model. In this approach, an energy service provider either sells or leases modular solar photovoltaic systems in exchange for regular payments based on usage. 

When purchased units run out, the system automatically disconnects the electricity supply from the solar system until more units are bought. 

Flexible payment solutions are critical for adoption and success here. For example, payment should be possible via USSD or smartphone apps. According to the International Renewable Energy Agency (IRENA), 730 000 units of such a prepayment model were sold in East Africa in 2016 and 8-million people thus gained access to electricity between 2015 and 2020.

South Africa can customise similar innovative models and accelerate the democratisation of electricity access.

The South African solar market offers significant opportunity for industry participants. In the residential segment, suppliers should consider entering into partnerships with financiers and leverage these relationships to offer off-grid, hybrid and prepaid solutions that can increase energy access for the country and the rest of the Southern African region. Business model innovation will play a critical role in addressing the needs of each of these submarkets.