Why are SHS sales slowing?
The rise of the off-grid solar market in sub-Saharan Africa has been a success story for improving energy access in the region. But the latest sales data from GOGLA, the Global Off-Grid Lighting Association, shows the second semi-annual decline in global sales volumes. In sub-Saharan Africa there are, however, some encouraging signs. While sales volumes in East Africa have fallen, sales in other parts of the continent, which have thus far benefited less from off-grid solar products, are rising, albeit from a modest base.
Why are sales volumes falling? Has the market for Solar Home Systems (“SHS”) peaked? Have we been over-optimistic in the role that off-grid solar can play in increasing energy access?
To make a serious dent in energy access targets, a big scale-up in off-grid solar is required
Over 1bn people globally remain without access to electricity. If we assume that the average off-grid solar system has a lifetime of ~3 years (most systems sold provide Tier 0, or basic Tier 1 access) then many of the sales made today may well be replacing older units. In that case, with sales at their current level, off-grid solar would be reaching ~2.5m new households every year.
This is a great achievement, and would reach 30m new households, or as many as 150m people, by 2030.
But UN DESA (the UN Department of Economic and Social Affairs) expects the global population to increase from 7.3bn to 8.5bn by 2030. We would expect at least 180m of this population growth to be in areas with no access to electricity – demographics would suggest that, if anything, this is a very conservative estimate.
So today’s achievement does not even keep pace with population growth.
Financing is often cited as a major constraint for off-grid solar – is financing to blame for the slowdown?
The recent – excellent – “Energizing Finance” series of reports published by SE4All show that financing commitments made to improving energy access were $23.1bn in 2015. This is a huge headline number, but digging deeper in the same report suggests that only ~$200m of this amount was committed to decentralised solutions, and only ~$100m to stand-alone solar products. This is the amount of finance committed; the amount disbursed is much lower.
Using the GOGLA sales data again (which breaks down sales by system size), I’ve estimated the weighted average cost of a system to be ~$70. Using this number, we can estimate the working capital required per new household / customer. To estimate the cost of financing inventory needs we can assume that companies hold ~3 months of inventory. To estimate the cost of financing Accounts Receivable we assume that system lives are roughly double the period over which consumers pay for them.
Based on these assumptions, each new ‘connection’ will require ~$23 in working capital. The funding disbursed in 2015 would allow for ~2.5m new customers. That is exactly what we see in the sales data.
This suggests that financing absolutely is a binding constraint on the industry and may well account for the stagnation in sales. My analysis assumes that the financing being made available is revolving – which it isn’t – so the constraint is likely to be become an ever-increasing challenge if the sector is to grow. The financing need will also increase further as households want to move up the energy ladder, buying larger systems.
While the data demonstrates the impact of financing constraints on the sector, it also demonstrates that the sector is delivering great value: the consistency between the financing data and the sales data suggests that the financing that has been made available has been efficiently deployed to maximise the number of systems sold.
Recent deals – such as the $80m debt facility secured by M-KOPA and arranged by Stanbic Bank – show that innovative deals can be done. But these latest industry numbers show the urgency in scaling up such solutions.