top of page
  • Stephen Nash

Quality and cost reduction in the off-grid solar sector

Earlier in 2020, GOGLA published a new report titled “Pricing Quality: Cost Drivers and Value-Add in the Off-Grid Solar Sector”.  The objective of this report was to analyse the cost of off-grid solar products and to understand the drivers of cost premia for higher quality products (as defined by the industry). Analysis presented in the report suggests that the most important cost components where high quality products cost more are (a) the cost of quality batteries, (b) taxes and duties, and (c) marketing and after-sales costs. The graph below summarises the results of the analysis for a basic solar lantern.

Source: GOGLA, Hystra analysis – the published analysis presents a range; the graph above shows the midpoint

GOGLA’s report includes similar analysis for a basic 40-50 Wp Solar Home System (SHS). The absolute costs shown for the SHS seem high compared to other data points in the market, but the overall message is the same and the cost components that carry the greatest premia are consistent with the results shown for the basic lantern. The main difference is that the premium associated with sales, finance, and after-sales is greater, because the analysis assumes that the high-quality system is sold using a pay-as-you-go (PAYG) model.

It is worth trying to understand the key cost drivers – and in particular for the three cost components highlighted as being the major drivers of the cost premium – in more detail.

Batteries and other components. As noted above, the “material and components” cost is substantially higher for a quality product and the biggest driver of this cost difference is the battery costs. The GOGLA report notes that the biggest drivers of this cost difference are the use of different technologies (e.g. lead acid, vs. lithium ion for some quality products), and the use of reconditioned second-hand batteries in ‘non-quality’ products. GOGLA also notes that in separate analysis many ‘non-quality’ products failed tests; for example, for overcharge protection, or deep discharge protection. It is not clear that all of these observations impact quality as experienced by a consumer in Sub-Saharan Africa, so this analysis highlights several areas where manufacturers of ‘quality’ products might be able to reduce costs. For example, there are initiatives underway exploring the potential for using reconditioned batteries in the sector. It would be interesting to see research on the product life-cycle in Sub-Saharan African households for ‘quality’ vs. ‘non-quality’ products. Does the actual lifetime of the product justify the additional cost in a rural African context, or are there other factors that limit product life? Are the right attributes of ‘quality’ being focused on?

Taxes and duties. There has been considerable debate in recent years over the taxes that off-grid solar companies incur, in particular regarding import duties and VAT. Indeed, Kuungana performed analysis of the impact of reducing these taxes in Zambia two years ago. The topic has become topical again in recent months with Kenya removing the VAT exemption for solar products as part of a package of revenue-raising measures. Putting aside the issue of the exemptions themselves, the chart above highlights a difference in the taxes and/or the application of those taxes to different solar products. This points to a broader issue regarding the application of taxes. For a level playing field to exist, tariffs and taxes should be applied consistently where they are in place.

Marketing and after-sales. The graph shows that marketing and overheads are another significant driver of the cost difference between ‘quality’ and ‘non-quality’ products. The GOGLA report highlights a number of reasons for this, including higher product sales (for ‘non-quality’ products), developing a ‘last-mile’ distribution network, and legacy costs associated with Western HQs. This points towards opportunities for solar companies to reduce their costs and become more competitive. The observation of higher volumes of sales of ‘non-quality’ products again raises the question as to whether quality standards are appropriate to the context – maybe high sales volumes indicate that consumers are happy with some of these products?

However, there are some genuine costs to delivering energy services, especially to hard-to-reach communities. If these costs are as high as suggested by the GOGLA analysis, it might not make sense for multiple companies to develop this infrastructure – which would push up costs for end-consumers. In other utility sectors (including on-grid electricity) these issues are normally tackled through creating a monopoly for the distribution infrastructure and regulating the returns from that monopoly accordingly. The off-grid solar sector is obviously different in many ways from these heavily regulated sectors, but could some of these lessons be transferable?

The GOGLA report is a recommended read. Its main pitch is aimed at policy-makers, but the analysis presented raises some challenging questions for the industry itself, and points towards some of the structural challenges that may need to be tackled through regulation and/or market design for the industry to truly scale so that we can reach SDG 7.


bottom of page