Off-Grid Solar Market Trends Report 2022: Outlook Copyright © 2022 October | International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org The material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes if full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: +1-202-522-2625; e-mail: pubrights@worldbank.org. Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: Outlook, Washington, DC: World Bank. 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Production Credits Production Editor | GOGLA Designer | Future by Design (www.futurebydesign.studio); Data visualization: Future by Design Studio via Flourish Images | Cover: Baobab+ All images remain the sole property of their source and may not be used for any purpose without written permission from the source. This report is produced by Lighting Global/ESMAP, the International Finance Corporation, Efficiency for Access Coalition, GOGLA and Open Capital Advisors. Off-Grid Solar Market Trends Report 2022 Outlook 3 Acknowledgments The authors would like to thank those who generously contributed their time in the consultations that have informed this report. ESMAP/World Bank: Gabriela Elizondo Azuela, Sameer Shukla, Dana Rysankova, Johanna Galan, Maria Arango, Thomas Flochel, Bonsuk Koo, Lucie Blyth, Jennifer Lynch, Raihan Elahi International Finance Corporation: Bill Gallery, Subrata Barman Efficiency for Access Coalition: Makena Ireri, Leo Blyth, Jenny Corry, Elisa Lai GOGLA: Susie Wheeldon, Sjef Ketelaars, Drew Corbyn, Laura Fortes, Oliver Reynolds, Collin Gumbu, Patrick Tonui, Rebecca Rhodes, Timona Chore, Koen Peters, Aletta D’cruz, Eva Roig Open Capital Advisors: Andreas Zeller, Duda Slawek, Harry Masters, Tamara Kalunda, Travis Koteco, Hanna Dohrenbusch, Stephanie Onchwati, Millie Maina, Charlene Njau Other contributors: Ed Day (Greencroft Economics), Sanjoy Sanyal (Regain Paradise) Lighting Global is the World Bank Group’s initiative to rapidly increase access to off-grid solar energy for the 733 million people living without electricity world-wide. Managed by the Energy Sector Management Assistance Program (ESMAP), we work with governments, the private sector, development partners, and end-users, continually innovating to unlock key market barriers and enable access and affordability to those that would otherwise be left behind. Our support has expanded to technologies that go far beyond lighting, including systems to power the needs of households, businesses, schools, and health centers. We operate with funding gratefully acknowledged from ESMAP and their donors. For more information, please visit www.lightingglobal.org IFC—a member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work in more than 100 countries, using our capital, expertise, and influence to create markets and opportunities in developing countries. In fiscal year 2021, IFC committed a record $31.5 billion to private companies and financial institutions in developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity as economies grapple with the impacts of the COVID-19 pandemic. For more information, visit www.ifc.org Efficiency for Access is a global coalition promoting energy efficiency as a potent catalyst in clean energy access efforts. Since its founding in 2015, Efficiency for Access has grown from a year-long call to action and collaborative effort by Global LEAP and Sustainable Energy for All to a coalition of 20 donor organizations. Coalition programmes aim to scale up markets and reduce prices for super- efficient, off- and weak-grid appropriate products, support technological innovation, and improve sector coordination. Current Efficiency for Access Coalition members lead 12 programmes and initiatives spanning three continents, 62 countries, and 34 key technologies. For more information, please see www.efficiencyforaccess.org GOGLA is the global association for the off-grid solar energy industry. We are proud to champion one of the world’s most innovative and impactful sectors. Hundreds of millions of people already benefit from affordable, high-quality, clean off-grid solar products and services. With the right support, our pioneering industry will be able to scale up rapidly to improve the lives of 1 billion people by 2030. To help make this happen, we promote, safeguard, and convene the industry, advocating for enabling policies and increased investment as well as supporting our 200+ members with effective services. To find out more, visit www.gogla.org Open Capital Advisors is a management consulting and financial advisory firm that drives growth, enables investment, and builds markets across Africa. We help businesses, investors, development partners, and the public sector to identify opportunities and deliver unique, impactful solutions. Our mission is to advance African economies and build future generations of business leaders. Since 2010, we have completed over 1000 engagements across 25 countries in sub-Saharan Africa and raised over $1billion in capital for impactful businesses across the continent. Our locally based team of over 150 full-time staff brings experience from the world’s top consultancies, private equity firms, investment banks, and development organizations. For more information, please visit www.opencapital.com 4 Off-Grid Solar Market Trends Report 2022: Outlook Abbreviations ACE Africa Clean Energy MTR Market Trends Report AGG Africa Go Green Fund NDC Nationally Determined Contributions AI Artificial intelligence NEP National Electrification Plans B Billion OGS Off-grid solar BoP Bottom of the pyramid PAYGo Pay-as-you-go CaaS Cooling-as-a-Service PM-KUSUM Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan Scheme CO2e Carbon dioxide equivalent PUE Productive use of energy COGS Cost of goods sold REC Renewable Energy Certificates DFI Development finance institution RBF Results-based financing D-REC Distributed Renewable Energy Certificate R&D Research and development EforA The Efficiency for Access Coalition SaaS Software-as-a-Service ESMAP The Efficiency Sector Management Assistance Program SDG7 Sustainable Development Goal 7 EUS End-user subsidy SEA Southeast Asia FCV Fragility, conflict, and violence SEK Solar energy kit GDC The Global Distributors Collective SHS Solar home system GCF The Green Climate Fund SIDA The Swedish International Development Cooperation Agency GHG Greenhouse gas SPV Special purpose vehicle IoT Internet of things SSA Sub-Saharan Africa kWh Kilowatt-hour SWP Solar water pump LED Light-emitting diode $ United States Dollars LMD Last mile distributor T Trillion LPG Liquefied petroleum gas UNICEF The United Nations International Children's M Million Emergency Fund M&A Mergers and acquisitions VAT Value added tax MCA Micro carbon avoidance W Watt MEM Modern energy minimum Wp Watt-peak MTF Multi-Tier Framework 5 Context & Key Definitions For more than a decade, the biennial Off-Grid Solar (OGS) Market Trends Report (MTR) has been the anchor of the World Bank Group/GOGLA franchise of market data and trends reports, which are the go-to source of OGS sector information for investors, industry members, policymakers, and other stakeholders. The series includes semi-annual reports that track sales and impact results by country, region, and worldwide for VeraSol quality-verified products and other branded solar devices sold by GOGLA affiliates. The MTR is where we step back and dive deep into trends in the sector, alongside new research and data, to further understanding among market players and illuminate the pathway forward. Terms Definitions Off-grid solar products Off-grid solar products include both solar energy kits and off-grid solar appliances and this term is used in the report to describe the breadth of technologies that it covers. See definitions below. Solar energy kits (SEKs) These include solar lanterns, multi-light kits and solar home systems (SHS). • Solar lanterns are typically packaged as a simple, one-light lantern with an LED light, an embedded 0.5–3.0 Watt-peak (Wp) solar panel, and an internal rechargeable lithium-ion (Li- ion) battery. Some models include USB charging for mobile phones. • Multi-light systems include up to three or four LED lights with a standalone solar panel rated up to 10 Wp and a rechargeable Li-ion battery with most models including USB charging for mobile phones. • Solar home systems (SHS) have a solar panel rated from 11 Wp to usually up to 350 Wp and provide multiple electricity functions, such as lighting and powering a wide range of appliances such as TVs and fans. SHS are offered plug-and-play (PnP) or based on open- market components. In this report, SHS refers to both plug-and-play and component-based systems unless specified. Off-grid solar appliances These include solar-powered appliances which are energy-efficient and powered by direct current (DC), and include both household/small business appliances and productive use of energy (PUE) appliances. • Household and small business appliances are typically used within a home and include televisions, fans, refrigerators and radios. In some cases these products are used in small businesses, such as refrigerators in a shop. Note: a significant majority of solar-powered TVs and a proportion of fans are typically sold bundled with SHS especially in sub-Saharan Africa. • Productive use of energy (PUE) appliances are appliances that leverage solar energy to enable improved or new income generating activities, often in agriculture. These products include solar water pumps, refrigerators/cold rooms or agro-processing equipment. Access to electricity: The MTF, developed by ESMAP, represents an effort to build global, aggregable metrics and The Multi-Tier a database for evaluating electricity access in a non-binary fashion, measuring the quality Framework (MTF) of access rather than merely access to any source of electricity. Developed in the context of the Sustainable Energy for All (SEforALL) initiative, the MTF is being used as a more nuanced measure of progress towards Sustainable Development Goal 7 (SDG7), complementary to the binary methodology captured in the Tracking SDG7 report written by major development stakeholders. The MTF redefines electricity access to a multi-dimensional definition as ‘the ability to avail energy that is adequate, available when needed, reliable, of good quality, convenient, affordable, legal, healthy and safe for all required energy services.’ That is, having an electricity connection does not necessarily imply having access to electricity under the new definition, which considers additional aspects, such as reliability and affordability. Electricity access is measured on a tiered spectrum, from Tier 0 (no access) to Tier 5 (the highest level of access). Rural Encompasses all population, housing, and territory not included within an urban area. Urban Encompasses all population, housing, and territory included within an urban area. 6 Off-Grid Solar Market Trends Report 2022: Outlook Terms Definitions Unconnected Households that are not connected to national grids. households ‘Under the grid’ Households that are near to but not connected to national grids. Even where a grid connection households is nearby and a connection would be technically realistic, households may choose not to connect because of affordability constraints (either high connection costs to the grid or high tariffs to consume from the grid, or both) and poor reliability of service. Households with These households face frequent or lengthy outages of grid electricity or experience voltage unreliable/weak grid fluctuations that can damage electrical appliances. Households connected These households rarely or never face outages of grid electricity and do not experience voltage to reliable grid fluctuations that could damage electrical appliances. Potential market The overall market of people (households and microenterprises) that either lack access to an electricity connection (off-grid) or have a poor-quality electricity connection (unreliable-grid), forming the total potential customer base for OGS devices. This estimate includes customers that currently use OGS devices, as they represent a continued market for additional sales, replacements, and upgrades. Addressable market The share of the potential market that can be addressed by current OGS business models. This report analyzes the affordability of devices against the potential market to arrive at an estimate for the addressable market. Pay-as-you-go (PAYGo) PAYGo business models allow users to pay for their products via technology-enabled, embedded consumer financing. A PAYGo company will typically offer a solar product (typically solar home systems and multi-light kits) for which a customer makes a down payment, followed by regular payments for a term ranging from six months to eight years. Payments are usually made via mobile money, though alternative methods include scratch cards, mobile airtime, and cash. Quality-Verified ‘Quality-Verified’ products meet VeraSol (formerly Lighting Global) Quality Standards, which are minimum requirements for off-grid lighting product quality, durability, truth-in-advertising, warranty, and lumen maintenance.1 VeraSol provides Quality Standards for both solar lanterns and multi-light systems and SHS up to 350 W, and compliance is required to participate in VeraSol support programs. Quality Standards are one component of the VeraSol Quality Assurance Program. The International Electrotechnical Commission (IEC) has adopted the VeraSol testing methods as Technical Specification 62257-9-5. For more information, please visit VeraSol.org. Affiliate Affiliate companies are connected to any of the partner organizations involved in the semi- annual GOGLA sales data reporting process. This matrix of companies includes GOGLA members, companies selling products that meet VeraSol quality standards, and appliance companies that participated in the Global LEAP Awards or are engaging with the Low Energy Inclusive Appliances (LEIA) program. It is important to note that not all products produced by affiliate companies meet VeraSol quality standards, but stakeholders assume that all products affiliate companies produce are of reasonably decent quality. Non-affiliate Companies that are not within the matrix of affiliate companies are considered non-affiliate companies. Products distributed by non-affiliate companies are considered non-affiliate products. These companies do not report their sales to GOGLA, and much less is known about the quality and level of Tier access their products provide. Modern Energy Minimum Modern energy minimum is a benchmark that envisages annual per capita household energy (MEM) consumption of 1000kWh, inclusive of 300kWh household consumption and 700kWh for non- household consumption.2 1 Verasol (2022), Answering Your Frequently Asked Questions About VeraSol. Note: Verasol Quality Standards were previously referred to as Lighting Global Quality Assurance Standards. 2 Rockefeller (2021), The Modern Energy Minimum: The Case for a New Global Electricity Consumption Threshold. 7 Contents Acknowledgements.............................................................................. 4 Abbreviations....................................................................................... 5 Context & Key Definitions..................................................................... 6 Headline Trends................................................................................. 10 1 Introduction....................................................................................... 12 2 Reaching the Sector’s Potential: SDG7 and Beyond............................. 18 3 Measuring the Gap............................................................................. 30 4 Closing the Gap to Universal Access.................................................... 36 4.1 Finance and Funding Game Changers............................................................................................. 40 4.1.1 De-risking Mechanisms and Other Catalytic Finance............................................................. 40 4.1.2 Off-Balance-Sheet Financing................................................................................................... 41 4.1.3 Climate Funds and Carbon Credits......................................................................................... 42 4.1.4 Supply-Side Subsidies............................................................................................................. 43 4.1.5 End-user subsidies................................................................................................................... 44 4.2 Market Player Game Changers......................................................................................................... 45 4.2.1 PAYGo Availability.................................................................................................................... 45 4.2.2 Consolidation........................................................................................................................... 46 4.2.3 Specialization........................................................................................................................... 47 4.3 Technology Game Changers............................................................................................................. 47 4.3.1 Advanced Technology and Digitalization................................................................................ 47 4.3.2 Interoperability........................................................................................................................ 48 4.3.3 Modularity of Systems............................................................................................................. 49 4.4 Products and Consumer Game Changers........................................................................................ 51 4.4.1 Beyond-Energy Models............................................................................................................ 51 4.4.2 PUE Availability and Adoption................................................................................................. 51 4.5 Policy and Ecosystem Game Changers............................................................................................ 52 4.5.1 Cross-Sector Partnerships....................................................................................................... 52 4.5.2 Policies, Regulations, and OGS Integration in NEPs............................................................... 54 5 Conclusion......................................................................................... 56 6 Annexes.............................................................................................. 58 Annex 1 - Definitions of Key Household Product Segments and MTF level......................................... 59 Annex 2 - Definitions of Key Household and Productive Use Appliance Segments............................ 60 Annex 3 - Methodology........................................................................................................................... 61 8 Off-Grid Solar Market Trends Report 2022: Outlook List of Figures Figure 1: Estimated off-grid solar energy kit and appliance market turnover, annual (2021)................................................................p. 13 Figure 2: Level of service provided for different Tiers of electricity access..............................................................................................p. 15 Figure 3: Estimated composition of people that need to be reached with Tier 1 OGS systems to achieve SDG7.................................p. 20 Figure 4: Market classifications..................................................................................................................................................................p. 21 Figure 5 : New primary OGS users by market type under the universal access scenario........................................................................p. 21 Figure 6: Distance of new primary OGS users from the existing grid.......................................................................................................p. 22 Figure 7: Sales and connections needed to achieve SDG7.......................................................................................................................p. 23 Figure 8: Total annual unit sales required to achieve universal access 2021 - 2030 by market .............................................................p. 24 Figure 9: Total funding required to reach universal electricity access.....................................................................................................p. 25 Figure 10: Company financing requirement by market type....................................................................................................................p. 26 Figure 11: Comparison of funding flows to date, funding required to achieve SDG7, and funding required to achieve the MEM.......p. 27 Figure 12: Market potential for cold storage and SWPs in India and SSA by 2030...................................................................................p. 28 Figure 13: Projected shortfall from achieving SDG7.................................................................................................................................p. 32 Figure 14: Total company financing projections by scenario...................................................................................................................p. 33 Figure 15: Total company financing anticipated under the projected growth scenario.........................................................................p. 33 Figure 16: Comparison of SWP and cold storage unit sales in 2021 and market potential by 2030.......................................................p. 35 Figure 17: Recap of relative ranking of 2020 game changers for the OGS sector....................................................................................p. 37 Figure 18: How 2022 game changers for the OGS sector address key barriers to development............................................................p. 39 Figure 19: Example of an off-balance-sheet SPV structure.......................................................................................................................p. 41 Figure 20: End-user subsidy disbursement options.................................................................................................................................p. 44 Figure 21: Illustration of mesh-grids leveraging modular SHS in an off-grid community.......................................................................p. 49 List of Boxes Box 1: Case study on SokoFresh CaaS initiative in Kenya on off-grid solar refrigeration........................................................................p. 35 Box 2: A world with widespread adoption of interoperability and modularity.......................................................................................p. 50 9 Headline Trends 1.1 billion people need to be electrified by off-grid solar (OGS) systems to reach SDG7. This includes 493 million current OGS users who are expected to continue replacing and upgrading systems, 464 million new OGS customers who will use OGS products as their main energy source, and 186 million new OGS customers who will use their products 1.1B people need to be electrified to complement grid electricity. 416 million of the 464 million new OGS by OGS to reach SDG7 users will reside in nascent and emerging markets, primarily in sub- Saharan Africa. Given sector growth trends, 624 million people are projected to be connected to Tier 1 and above electricity access by 2030 via OGS solutions – this is 516 million fewer than the SDG7 scenario.3 Under 516M people will not be reached this projected scenario, the sector is expected to grow by 5% annually. under projected sector growth Depending on sector interventions, the sector could grow as fast as 7.2% annually or as slow as 2.8%. Based on historical sales and investment trends, the sector is projected to raise $7.8 billion between now and 2030 – this is $15.5 billion short of what is needed to reach SDG7. Significant capital is needed to seed companies, foster growth in new markets, and promote A projected $15.5B funding the transition to Tier 1 access for users currently below the minimum shortfall of what is needed to threshold of electrification. Crucially, this investment must be deployed reach SDG7 alongside game-changing sector interventions to achieve SDG7. $4.5 billion is needed just to close the affordability gap to be able to reach SDG7. Studies confirm that end-user subsidies can be successfully disbursed to improve affordability, but given the persistent affordability challenge of the large underserved populace, an increase in the scale of well- designed and funded end-user subsidy programs is needed, $4.5B will be needed to address particularly in underserved markets. Other non-customer revenue the affordability gap sources such as carbon credits could also help companies to bridge this affordability gap. Stakeholders must develop interventions that acknowledge both the development agenda of the sector and the commercial potential. An increase in supply-side subsidies and concessional finance is needed to support the OGS sector’s contribution to universal access by 2030. Despite an uptick in results-based financing disbursements, more More supply-side subsides are supply-side subsidies are needed alongside private investment so that needed for harder-to-reach companies can serve the hardest to reach while also operating viable markets businesses. 3 Note: The universal access shortfall includes: [1] 234 million people who will remain unelectrified by 2030 and, [2] 453 million people who will be using below Tier 1 SEKs to access electricity. 10 Off-Grid Solar Market Trends Report 2022: Outlook 11 © Pawame 01 Introduction © ZOLA Electric 12 Off-Grid Solar Market Trends Report 2022: Outlook Introduction The OGS market provides energy services to 493 market now has a $0.7 billion annual turnover.4 Given that million people. The market’s annual turnover is now the sector’s early business models developed just over a approximately $2.8 billion, covering a wide range of decade ago, these figures reflect a substantial and growing SEKs and off-grid appliances. The SEK market now has a market. $2.1 billion annual turnover, while the off-grid appliance Figure 1: Estimated off-grid solar energy kit and appliance market turnover, annual (2021)5 Estimated off-grid solar energy kit sales turnover $0.7- 0.8B Estimated off-grid appliance sales turnover $2.1– 2.2B Estimated off-grid solar kit sales turnover includes ~4% worth of TVs & fans sold bundled with solar home systems in sub-Saharan Africa. and turnover also decreased, with declines especially in cash sales of appliances.6 Since 2021, the sector has shown early signs of recovery. Solar energy kits recorded a 10% increase in sales from The OGS sector remains robust, with 493 2020 to 2021 and a 7% increase in market turnover, with a million people currently using off-grid correspondingly faster rebound in the sales of lower-cost solar technologies as their primary source single light with mobile phone charging and multi-light of electricity, for back-up connections, systems, compared to sales of higher-cost SHS. Cash sales for SHS products also remain depressed, negatively and for productive use. impacting the sector’s market turnover. Despite a slowdown of OGS sales, total financing Like other sectors, the OGS sector was impacted commitments for the sector since 2012—comprising debt, negatively by the COVID-19 pandemic, resulting in equity, and grants—surpassed $2 billion. From 2016 to decreased sales and market turnover. COVID-19 response 2020, yearly investment volumes plateaued between $300 measures limited company movements, pressured supply and $350 million, but investment reached $457 million in chains that resulted in price increases, and lowered 2021, driven mainly by debt financing for the industry’s income levels for consumers. As a result, unit sales of SEKs largest companies.7 Productive Use of Energy (PUE) declined 21% from 2019 to 2020, while market turnover companies, representing a relatively new market segment, decreased by 14%. Year-on-year, appliance sales volumes 4 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 5 Open Capital Advisors analysis based on data used in the 2022 OGS MTR ‘State of the Sector.’ 6 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 7 Ibid. 13 attracted almost 10% of total investment volume in 2021 governments have incorporated OGS into their integrated ($44.9 million).8 2022 will likely be another record year in electrification plans, and many more have launched rural terms of investment volumes. electrification initiatives.11 In line with affordability levels of target customers, a single As a result, the OGS sector is poised to play a significant light with mobile phone charging as well as multi-light role in achieving the electricity access goals under systems still comprise the vast majority of sales in the Sustainable Development Goal 7 (SDG7). SDG7 aims to sector, though uptake of higher-capacity systems continues ensure ‘access to affordable, reliable, sustainable and to grow. The COVID-19 pandemic widened the affordability modern energy for all’, and includes five specific targets gap for many and has accelerated the trend whereby for 2030.12 Beyond these access goals, SDG7 also aims companies increase sales of higher-tier systems to ensure to increase the proportion of renewable energy in the the health of their loan portfolios and protect their bottom generation mix and improve energy efficiency, with lines. Sales of larger SEK systems (Tier 1 or higher) and indicators for funding flows, and the proportion sales to populations with weak grid connections highlight of renewable energy-based generation for developing the importance of the sector to support customers as their countries. energy needs increase over time, to enable productive uses Besides providing primary electricity access, the OGS of energy, and also to improve reliability of electricity access. sector also plays a significant role providing backup solutions to weak grid customers, supporting the reliability of access under SDG7.13 As of 2020, an estimated 775 million people globally are connected to grids that provide low levels of availability or reliability, causing hundreds of hours The OGS sector is a major contributor to of outages that impact daily lives and hinder economic SDG7, providing access to solutions that activity.14 OGS will continue to play an important role to provide a wide range of energy services. customers of these weak grid connections, customers that already comprise a significant share of OGS sales in some markets. OGS products remain a cost-effective solution to electrify The OGS sector can provide end users with a range of millions of off-grid homes and businesses. OGS has been systems that provide differing “Tiers” of electricity access. identified as the least-cost solution to electrify 464 million SDG7 considers Tier 1 electricity access as the minimum more people, including a portion of the 733 million people bar for electrification, which in practice equates to an SEK currently without access as of 2020, and accounting for product that is at least a 3 Watt-peak multi-light system.15 population growth between now and 2030.9 Tier 1 access, however, is just the first step in moving people The sector is increasingly recognized as vital to achieving onto the energy staircase. As electricity demand grows over global electrification goals. OGS products can be deployed time and people gain access to larger systems, they move faster than main grids and mini-grids, and can more cost- towards higher levels of services (see Figure 2). effectively service smaller loads. As a result, they are estimated to be the most cost-effective and feasible solution for 55% of new household electricity connections over the next five years (estimates from 2020 to 2025).10 This has become evident over the last 2 years, as at least 12 additional 8 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 9 Estimate based on analysis of the Global Electrification Platform, ‘Low Demand’ scenarios. 10 Ibid. 11 United Nations, United Nations Framework Convention on Climate Change Secretariat (n.d.) NDC Registry. Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. ESMAP (2022), Tracking SDG7: The Energy Progress Report: Access to Electricity. 12 United Nations, United Nations SDG Goals: SDG7 Ensure Access to Affordable, Reliable, Sustainable and Modern Energy for All. 13 Note: This report defines unreliable grid as frequent or lengthy outages of grid electricity or voltage fluctuations that can damage electrical appliances. 14 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. Note: This is an estimate of back-up OGS users and potential SEK customers. 15 IEA (2022), Tracking SDG7: The Energy Progress Report. 14 Off-Grid Solar Market Trends Report 2022: Outlook Figure 2: Level of service provided for different Tiers of electricity access16 Medium System Tiers peak capacity Availability (Hours) Products Day Night Partial Tier 1 Below 3W Tier 1 3W 4 2 Tier 2 50W 4 2 Tier 3 200W 8 3 or Tier 4 800W 16 4 Tier 5 2kW 23 4 Note: [1] The icons represent possible product options that could be powered in the different tiers of energy access depending on the usersʼ needs. For example, in Tier 3 a user could have a refrigerator or a solar water pump. [2] Tiers, as highlighted in the graphic, describes either the minimum peak capacity or the system availability. Larger-tier systems that enable the productive use of energy, particularly in agriculture, can unlock more economic activities. For example, solar water pumps reduce domestic labor, which can save time for the 14 The OGS sector is critical to support a million women in sub-Saharan Africa (SSA) who spend an clean and just energy transition, as well as average of 30 minutes a day fetching water, contributing to other sustainable development goals. SDG5 (gender equality) and SDG10 (reduced inequalities).19 They also increase productivity, with 96% of farmers reporting more productivity due to their SWP in a survey Beyond supporting SDG7, OGS can also support the across six countries, thus contributing to SDG2 (zero attainment of a host of other development goals hunger), SDG10 (reduced inequalities) and supporting including SDGs for health, hunger, climate action, increased incomes.20 Furthermore, solar cold chains could education and income.17 For example, many OGS systems save up to 14% of global food production supporting today are being used to generate income and increase food security for nearly 950 million people annually.21 food production (SDGs 1 and 2), and to date, the sector has By meeting the potential market for SWPs and cold contributed to avoiding 190 million metric tonnes of CO2e storage, the sector can enhance food security, create jobs, emissions (SDG13), and saved fuel costs of $26 billion by reduce fuel expenditure and avoid millions of tons of switching from dirty fuels to solar SEKs (SDG1).18 CO2 emissions as consumers replace non-solar powered appliances.22,23 16 World Bank Group, Global Energy Survey: Applying Multi-Tier Framework for Measuring Energy Access. 17 UN SDG Goals: SDG7 Ensure access to affordable, reliable, sustainable and modern energy for all. 18 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 19 UNICEF (2016), Collecting Water is often a Colossal Waste of Time for Women and Girls. 20 Efficiency for Access Coalition and 60 Decibels (2021), Uses and Impact of Solar Water Pumps; International Food Policy Research Institute (2019), Solar-powered Cold-storages and Sustainable Food System Transformation: Evidence from Horticulture Markets Interventions in Northeast Nigeria; GOGLA (2021), Powering Opportunity: Energising Work, Enterprise and Quality of Life with Off-Grid Solar. 21 Efficiency for Access, Creating a More Resilient Food System Through Sustainable Refrigeration. 22 Efficiency for Access (2022), Impact Assessment Framework V2. 23 Note: CO2e emissions avoided only consider SWP pumps directly replacing diesel pumps. 15 Another major benefit of higher-tier systems is providing Preparedness and Response (HEPR) trust fund to establish cost-effective electricity for education. Research shows a storage warehouse equipped with five solar direct drive that nearly 60% of children born today increase their refrigerators in Sao Tome and Principe, contributing to productivity by 50% with better access to quality education approximately 75% fuel and operations cost savings and healthcare.24 Children in SSA are therefore at a major compared to diesel generators.31 The project led to better disadvantage, as only 33% of primary schools in the region health outcomes for expectant women and children under have access to electricity, in some cases contributing to age 5 due to safer and more reliable vaccine storage, low-quality education.25 OGS could electrify these schools, and building on this success, the Sao Tome and Principe contributing to better learning outcomes by providing government is poised to receive additional funding from lighting, and powering better tools for teachers, such as ESMAP and Green Climate Fund to scale the project. laptops and the internet. The OGS sector also has major potential to support Healthcare facilities could also benefit from widespread climate mitigation and adaptation goals in emerging electrification using OGS. Only about 28% of health markets (SDG13). Between 2020 and 2022, at least eight centers have access to reliable electricity.26 OGS, especially countries seeking to meet and/or surpass their climate higher-capacity SHS, provides an effective alternative to change commitments either updated or revised their power these health centers and free up resources to focus nationally determined contributions (NDCs) to include on the quality of care; research shows that OGS costs increased access to off-grid energy solutions.32 By nearly five times less than operating a diesel generator.27 replacing kerosene and diesel, the sector has enhanced OGS-powered refrigeration of medical supplies, including climate mitigation and adaptation for climate-vulnerable vaccines, and powering of medical equipment can also populations, contributing to a just energy transition.33 improve outcomes. In India, nearly 20-25% of temperature- Despite progress in the sector, there is a substantial sensitive health products–including vaccines– are spoiled shortfall in achieving SDG7. In 2020, 733 million people due to insufficient cold storage.28 still lacked access to electricity.34 COVID-19 has made Funding for healthcare centers can help reduce wastage achieving SDG7 more challenging, causing job losses for of health supplies and improve healthcare outcomes. many and pushing 100 million people into extreme poverty The total addressable market for last-mile, off-grid solar in 2020 alone.35 The OGS sector has shown resilience in vaccine storage alone is estimated at $811 million; however the face of the global pandemic, but the electrification gap it is likely billions are needed for the whole sector.29 remains large. Some development partners are already funding projects This report aims to survey the outlook for the off-grid in this space. The World Bank alone has contributed solar market and interventions needed for the sector nearly $650 million across over 25 countries to support to achieve its full potential impact. Chapter 2 discusses electrification of public institutions using mini-grids and what it will take for the sector to achieve its primary OGS solutions.30 Development partners have also funded development goals, including both access to electricity cold storage; for example, the World Bank provided and a host of other development goals enabled by $80,000 through the World Bank’s Health Emergency electricity access. Chapter 3 assesses the gap between that 24 World Bank (2018), If Countries Act Now, Children Born Today Could Be Healthier, Wealthier, More Productive. 25 Power Africa (2020), Power for All Factsheet: Decentralized Renewables: Improving Children’s Welfare. 26 World Bank and WHO (2022), Electrifying Health Centers Report (unpublished). 27 Lumos (2020), How Solar is Supporting Education in Africa. 28 Intellecap (2021), Off-Grid Solar Refrigeration: Cure to the Growing Vaccine Wastage Crisis. 29 Ibid. 30 Open Capital Advisors consultation with the World Bank. 31 Ibid. 32 United Nations, United Nations Framework Convention on Climate Change Secretariat (n.d.) NDC Registry. 33 GOGLA (2022), How to Make Climate Finance a Game-Changer for the Off-Grid Solar Industry. 34 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. Note: This report reflects similar electricity access figures as those reported in the SDG7 tracking reports. The SDG7 tracking reports apply the following methodology; [1] Access to electricity service from Tier 1 to Tier 5 is considered in instances where surveys based on the Multi-Tier Framework have been conducted, [2] In instances where surveys have not been conducted, electricity access is calculated by a binary measure of “connected population” or “unconnected population” derived from existing household surveys, such as the DHS and LSMS. 35 World Bank Group (2020), Poverty and Shared Prosperity 2020: Reversals of Fortune. 16 Off-Grid Solar Market Trends Report 2022: Outlook benchmark and the sector’s current trajectory. Chapter 4 will Finally, Chapter 5 will summarize the roles of key sector discuss the game changers that are needed to propel the stakeholders in actualizing those game changers to achieve sector to ultimately reach its development potential. universal access. © Baobab+ 17 02 Reaching the Sector’s Potential: SDG7 and Beyond © d.light 18 Off-Grid Solar Market Trends Report 2022: Outlook This chapter focuses primarily on how the sector can The sector is expected to continue serving urban and easy- improve access to reliable, modern energy services and to-reach customers that have unreliable grid connections, how much funding is required. While focusing specifically and the estimate assumes that the proportion of OGS on access to Tier 1 electrification, the chapter also users employing OGS products as a back-up power source discusses the additional impact and investment required will remain constant until 2030.39 if the sector were to provide higher levels of electricity access, for example those envisioned under the Modern Energy Minimum (MEM) benchmark for OGS users, which aims for a per household annual consumption of 300kWh. This chapter details the required connections per market type, the sales required to achieve those connections, and the funding required. 1.1 billion people need to get access to reliable, modern, and affordable energy by 2030 under the SDG7 scenario: 89% of the 464 million to-be newly connected OGS users live in nascent and emerging markets. This report considers both current and new OGS users to estimate the sector’s needed contribution towards SDG7. The Global Electrification Platform (GEP), under the ‘Low Demand’ scenario, considers 464 million people to be best electrified using OGS technologies between now and 2030. The report then assumes that OGS will continue to be utilized by the 493 million current users over the next 8 years, with those currently using below Tier 1 SEKs expected to upgrade to a Tier 1 or above system by 2030.36 Apart from primary OGS connections, this report also assumes that 186 million new weak grid customers will use OGS as a complement to a weak grid. The global weak grid population is today estimated at nearly 775 million projected to grow to just under 1 billion people by 2030 as a result of population growth and grid expansion.37 To © Sun King date, a proportion of sales has been to these weak grid customers, who experience frequent or lengthy outages of grid electricity or voltage fluctuations that can damage electrical appliances.38 OGS companies have served these customers, improving the reliability of their energy connections, a key aspect of the access goals under SDG7. 36 Note: This assumption is made on the basis that while grid and mini-grid development might be planned to connect some of the current users, grid and mini-grid rollout has historically remained slow and power provision issues have persisted. 37 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 38 Note: Due to data limitations, this report evaluated data on the proportion of SEK users who are currently using SEKs to complement weak grid connections and is assumed this to remain constant from now to 2030. 39 Note: This report considers the proportion of weak grid consumers using SEKs as a back-up highlighted in the 2022 OGS MTR ‘State of the Sector.’ There is currently limited data for this exercise, and more data could be helpful in informing stakeholders about the weak grid market. 19 Figure 3: Estimated composition of people that need to be reached with Tier 1 OGS systems to achieve SDG740 1200 186 1000 OGS users (in millions) 800 464 600 1,143 400 336 200 157 0 Current users New primary New weak grid Total users connections connections Below Tier 1 Tier 1 and above Ultimately, the sector will need to reach 1.1 billion people with Tier 1 and above OGS products by 2030 to reach SDG7, assuming grid and mini-grid also achieve their potential for electrification.41 Among them, 650 million people could be first-time OGS users, including the 464 million people who will use OGS as a primary electricity solution, and the 186 million people who will use it to complement a weak grid, as noted above. Though it is assumed that the current 493 million users will continue to use OGS solutions with all customers upgraded to at least Tier 1, in practice some may stop using OGS if other connections, for example grid or mini-grid, are available, reliable, and cost-effective.42 This report estimates the total number of new connections as well as sales required by type of market. © Power Africa Market classifications include peaked, mature, emerging, and nascent, according to the classification in the 2022 OGS MTR ‘State of the Sector’.43 The market classifications are based on the electricity access gap in each country, OGS product penetration, and OGS sales growth rates. 40 Open Capital Advisors analysis based on data used in the 2022 OGS MTR ‘State of the Sector,’ GOGLA data and GEP data. Note: [1] The 493 current SEK users are assumed to continue to use an SEK through to 2030, with users currently using below Tier 1 systems expected to update to a Tier 1 or above system, though it is possible that some of these people may also get new grid or mini-grid connections in which case they may still use an SEK as a back-up, [2] The 464 million additional people using SEK as their primary source of electricity access is based on the GEP ‘Low Demand’ scenario, [3] The 186 million additional people using SEK alongside a grid or mini-grid connection is based on the current proportion of SEK sales which are deployed as backup systems. This number could be significantly larger given the scale of the potential market identified in the 2022 OGS MTR ‘State of the Sector.’ [4] The current users include both below Tier 1 and Tier 1+ users. 41 Open Capital Advisors analysis based on data used in the 2022 OGS MTR ‘State of the Sector,’ GOGLA data and GEP data. 42 Ibid. 43 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 20 Off-Grid Solar Market Trends Report 2022: Outlook Figure 4: Market classifications44 Nascent Emerging Mature Peaked N/A Under this universal access scenario, 416 million of off-grid solution providers from operating there without the 464 million people needing Tier 1 access as a first- incentives, which has limited sales to date. While a number time primary connection (89%) reside in nascent and of these markets have substantial electricity access needs, emerging markets, primarily in SSA.45 These markets have they also consist of low-income target populations which the least-developed OGS sectors. Some are characterized presents a less attractive commercial potential for OGS by a degree of fragility, conflict, and violence that hinders companies. Figure 5: New primary OGS users by market type under the universal access scenario46 500 4 39 400 New primary OGS users by market type (in millions) 300 233 464 200 100 183 0 Nascent Emerging Mature Peaked Total The Democratic Republic of Congo (DRC) and Nigeria unelectrified population. Nigeria also has major issues will make up the largest share of the 464 million new with grid reliability, creating demand for SEK products as primary OGS users in nascent and emerging markets. a secondary source. The DRC is a key nascent market for The largest proportion of new connections in emerging currently unconnected primary OGS users and will make markets (30%) will be in Nigeria, driven by Nigeria’s large up 26% of new connections in this market type. 44 Note: [1] Market classification is based on a combination of cumulative sales penetration and recent sales growth rates as outlined in Chapter 5.1 of the 2022 OGS MTR ‘State of the Sector.’ [2] The energy access gap in countries for which GOGLA members do not report sales data accounts for less than 1% of the remaining energy access gap to achieve SDG7. 45 Note: This classification excludes ~2% of total reported sales to GOGLA from countries that are not within the regions considered in this report, such as in Europe. 46 Note: Market classification is based on a combination of cumulative sales penetration and recent sales growth rates as outlined in Chapter 5.1 of the 2022 OGS MTR ‘State of the Sector.’ 21 Only 43 million (9%) out of the 464 million new primary remaining new connections to achieve universal electricity OGS users live in mature and peaked markets.47 access, mostly in relatively hard-to-reach areas. Beyond These countries are located primarily in South Asia, these new connections, the OGS peaked and mature Southeast Asia, and East Africa, and have relatively markets will continue serving current OGS users. favorable economic conditions and conducive enabling Most of the 464 million new primary OGS users will environments compared to nascent and emerging markets. be located far from medium voltage (MV) grid lines. As a result, 64% of total sales since 2016 have been in these Particularly in nascent markets, 73% of new SEK users markets.48 Governments in mature and peaked markets utilizing OGS as a primary source of electricity access have not only made great strides to increase electrification will be located farther than 5 km from the MV grid lines.49 through OGS, but have also increased grid connections However, given how remote some of these currently through grid expansion and densification, though many unconnected communities are, reaching them with SEK grid customers experience frequent outages; OGS as a distribution networks could be very costly. back-up energy service can help improve these reliability issues. As a result of this progress, there are only a few Figure 6: Distance of new primary OGS users from the existing grid50 Distance from the grid (% of new primary OGS users) Peaked 85% 15% Mature 67% 22% 5% 6% Emerging 41% 49% 5% 5% Nascent 27% 30% 11% 32% 0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Share <5km Share <25km Share <50km Further than 50km For the weak grid portion of the market, rapid and migrating to urban areas in search of employment urbanization is anticipated to continue as one of the opportunities. With their large populations and unreliable, key drivers for back-up sales due to increased grid expensive grid connections, Nigeria, the DRC, and connectivity. Over the last 10 years, rapid urbanization Bangladesh are assumed to account for the largest share of has created a need to improve grid connections. The people accessing OGS as a backup between now and 2030, urbanization rate in SSA has grown steadily to reach 44% in at 23%, 14%, and 11%, respectively, of the total population 2021.51 Rapid urbanization is assumed to continue over the that uses OGS solutions for back-up.52 next 8 years due to high population growth and the large number of young people reaching working age each year, 47 Note: This classification excludes ~2% of total reported sales to GOGLA from countries that are not within the regions considered in the scope of this report, such as Europe. 48 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 49 Note: This is based on GEP analysis on how far from the grid new people live to gain access to OGS from 2022 to 2030. 50 Ibid. 51 Statista (2022), Urbanization Rate in Africa from 2000 to 2025. 52 Open Capital Advisors analysis of sales required to achieve universal access to electricity by 2030. 22 Off-Grid Solar Market Trends Report 2022: Outlook To achieve the goal of 100% access to affordable, reliable, and modern energy, total annual unit sales need to grow To reach the goals of universal and from 32 million in 2021 to 56 million in 2030, assuming reliable access to electricity under SDG7, that grids and mini-grids also achieve their potential. This estimate includes sales to new consumers who annual unit sales need to grow from 32 use OGS as their primary source of electricity, sales to million units in 2021 to 56 million units in customers who use SEK products as a backup to weak- 2030. grid connections, and replacement and upgrade sales to existing consumers.53 Figure 7: Sales and connections needed to achieve SDG754 Achieving SDG7 464M ...people that were previously unconnected would gain access 186M 32M 56M 1.1B ...people with weak grid connections Growth in annual unit The total unit sales will benefit ~ 1.1 are estimated to use OGS as back-up sales from 2021 to billion people as one system can be solution 2030 that will be used by multiple people in one needed to achieve the household. Specifically... sectorʼs goal of 493M universal and reliable ...people currently using OGS access by 2030 system, are assumed to continuing to use OGS by replacing and upgrading their SEKs with Tier 1 and above Tier 1 systems at the end of their useful life Sales in nascent and emerging markets would need to grow more rapidly in earlier years to close the electricity access gap by 2030. 58% would be needed in nascent and emerging markets driven primarily by sales to currently unconnected populations while the 42% in mature and peaked markets would be driven primarily by replacement sales to current users–including those who will upgrade © Efficiency for Access from below Tier 1 to Tier 1 and above SEKs–and sales to weak grid users. While sales are anticipated to remain relatively stable in mature and peaked markets, sales in nascent and emerging markets will have to dramatically increase between 2022 and 2027, before stabilizing as it approaches the SDG7 target, to avoid a cliff-edge as soon as SDG7 is achieved. 53 Ibid. 54 Open Capital Advisors analysis based on data used in the 2022 OGS MTR ‘State of the Sector,’ GOGLA data and GEP data. 23 Figure 8: Total annual unit sales required to achieve universal access 2021 - 2030 by market55 60 50 Total annual unit sales (in millions) 40 30 20 Nascent Emerging 10 Mature Peaked 0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Beyond the 56 million annual sales needed for household This report also estimates the investment required to electrification to achieve SDG7, significantly more sales reach 1.1 billion people with Tier 1 and above SEKs. First, are likely required to meet the needs of PUE and public it assumes the total sales needed in each market (as in the institutions.56 The above estimates exclude sales of PUE previous section), and the composition of companies to appliances –such as those in agriculture– and sales of OGS meet those sales. It then estimates the cost of goods sold solutions to public institutions including schools or health (COGS), and operating costs for those companies in each institutions. Overall sales in the sector could therefore be market. This gives a total estimated figure for the funding significantly higher. Healthcare institutions, for example, needed to achieve SDG7 goals. Differences exist across could significantly benefit from OGS, since nearly 1 billion markets, which is reflected in the analysis. For example, people worldwide are served by health centers without serving customers through smaller distributors typically access to electricity.57 Cumulative sales may be even larger present in more nascent or FCV countries, would require if the roll-out of planned grid and mini-grid connections higher investments due to higher COGS and operating takes longer than anticipated under GEP projections, expenses driven by lower economies of scale, tougher which could make OGS an attractive interim solution. operating environments, and lower levels of digitalization. The OGS sector requires $18.8 billion in investment to fund company operations and $4.5 billion in additional funding to address the affordability gap between now and 2030.58 These estimates assume universal access to Realizing the sales required to achieve Tier 1 and above SEK systems, comprising at a minimum SDG7 goals will require $18.8 billion of multi-light systems and entry-level solar home systems with an average cost of $100 per system.59 The sector will external investment plus $4.5 billion require a mix of debt, equity, and grants, as outlined below, in additional funding to address the as well as subsidies and other non-customer revenues. affordability gap. Companies’ financing requirements will differ ultimately by market and level of maturity. For example, companies in nascent and emerging markets require more start-up or market-entry grant capital compared to large companies serving mature markets. 55 Open Capital Advisors analysis based on data used in the 2022 OGS MTR ‘State of the Sector,’ GOGLA data and GEP data. 56 Powering Healthcare Initiative | About us. 57 World Health Organization (2022), Accelerating Access to Electricity in Health Care Facilities. 58 See Annex 3 - The methodology for estimating the investment needed to achieve SDG7 and projected investment. 59 Open Capital Advisors analysis of product prices based on a review of Mangoo marketplace, company websites, consultations with off-grid companies and chinese manufacturers, and industry reports such as the Ipsos market studies in Kenya, Ethiopia, and Tanzania. 24 Off-Grid Solar Market Trends Report 2022: Outlook Figure 9: Total funding required to reach universal electricity access60 25 Total funding required (in billions, USD) $4.5 20 $5.3 15 $23.3 10 $6.3 5 $7.2 0 Debt Equity Grant Affordability Total funding gap need Debt comprises nearly 38% of the total external address the affordability gap, and can be addressed with investment required by the sector. Companies in the demand-side subsidies as well as other non-customer sector have large working capital requirements for both revenue such as carbon credits. The affordability gap inventory and receivables, with the latter a particularly represents the difference between the commercial price acute need for PAYGo companies. Small, last-mile of a Tier 1 SEK and the ability to pay for the 464 million distributors will require term loans or revolving working people who would need access to an SEK as their primary capital facilities, while larger companies will look for larger- form of electricty access by 2030. This affordability ticket debt, both on- and off-balance sheet. estimate assumes PAYGo accounts for 30% of the unit sales reaching otherwise unconnected households and Equity comprises 34% of the external investment that unconnected households are concentrated among required. Equity investments fund core operations and the lowest income strata in each country.62 This estimate position a business for growth. Growing businesses also does not include the current affordability gap for the 157 require equity to shore up their balance sheets before million people that have below Tier 1 access with OGS taking on more debt financing. Eventually, businesses may products. The affordability gap therefore is likely larger grow to the point that they can shift their more mature than presented. lines of business off their balance sheets (see section 4.1.2). Accelerating availability of the PAYGo business model A substantial amount of grant funding, at levels much could significantly reduce the magnitude of the higher than historic levels, will be required to support affordability gap. Without end user finance – that is, if all market entry in nascent and emerging markets where SEKs were sold cash over the counter – the affordability many of the harder to reach customers live.61 This gap would rise to $5.9 billion. If PAYGo were deployed for estimate, 28% of the external investment needed, is much all sales, the affordability gap would fall to $1.3 billion. larger than the proportion raised in the past. Catalytic However, there may be important market segments supply-side grant capital would be allocated to companies where deployment of PAYGo business models at scale of all sizes expanding into nascent and emerging markets may be challenging, such as those in fragile and conflict- to connect first-time users or to support PUE. Such affected settings. These markets may have infrastructure financing might include market-entry grants, RBFs, and gaps or logistical or security challenges that hinder cash innovation competitions, whether based on milestones or repayment collections from what are likely to be relatively otherwise. low-income, vulnerable households. Where feasible, Beyond the investment required by the sector, an programs that support the expansion of PAYGo would help additional $4.5 billion in funding will be required to further reduce the affordability gap, though such programs 60 Open Capital Advisors analysis on total funding needed to reach universal access split across debt, equity and grant. 61 Note: Non-dilutive funding refers to any capital that a business receives that does not require them to give up ownership or equity. Saratoga Investment Corp (2022), Non-Dilutive Funding 101 & Why You Should Consider It. 62 Note: PAYGo accounted for around 8% of unit sales and 34% of the value of sales in 2021, as PAYGo is typically used for larger SEKs. 25 should take care to promote good PAYGo portfolio quality necessitating more grant funding. Emerging and nascent and ensure consumer protections. markets are also anticipated to have a large share of small and mid-sized companies in the sector, which have Demand-side subsidies and climate funding could higher COGS and lower operating margins compared to also play a major role in bridging the affordability gap. established companies, and which have attracted limited Demand-side subsidies specifically reduce the cost of investment in the past. Unable to generate sufficient systems below commercial rates, whether using ‘pro-poor’- revenue to finance their operations, these companies style RBF, conditional cash transfers, or other mechanisms. need to raise money from external sources to finance their Certain forms of climate funding could also help bridge operations and growth. the affordability gap. Carbon credits, for example, could provide an additional form of subsidy to companies on a $1.9 billion and $4.9 billion of the anticipated $23.3 per-unit basis, which can improve company margins but billion would flow to peaked and mature markets, can also reduce the affordability gap if prices are reduced respectively.65 These markets have a lower electricity by the amount of the carbon credit.63 access gap, making up approximately 9% of the to-be newly connected OGS users by 2030. The investment Of the total $23.3 billion in funding required by the needed in these markets is therefore primarily needed to sector, up to $16.5 billion will be required just in nascent replace existing Tier 1 systems, upgrade systems that are and emerging markets.64 The electricity access gap is not Tier 1, and serve back-up users, though some funding much greater in these markets compared to mature and will be needed to connect the currently unelectrified peaked markets, with 89% of new primary connections population. The affordability gap is much lower in these occurring here, especially in large markets like Nigeria and markets: $0.5 billion of the total $4.5 billion affordability the Democratic Republic of Congo. A significant amount of gap (11%). In peaked and mature markets, established funding here will therefore go towards reaching currently companies are anticipated to have a larger market share, unconnected populations with primary OGS connections. given their existing presence and customer base. In many of these markets, the cost of serving customers will be higher than in mature and peaked markets, Figure 10: Company financing requirement by market type66 12 Company financing requirement 10 (in billions, USD) 8 6 4 2 0 Nascent Emerging Mature Peaked Debt Equity Grant Affordability gap The total investment figure of $18.8 billion is likely a households with higher energy needs, and to support conservative estimate for the sector. This total investment business activities and the energy demand of public need assumes universal access only to Tier 1 products. institutions, including schools and health centers. However, in reality, companies will continue to offer a Furthermore, in practice a part of the investment will flow diversified portfolio of products providing different Tiers towards non-energy products that will not contribute of electricity access. This is especially important for directly to achieving SDG7. 63 D-REC Initiative (2020), Creating a New Global Mechanism for the Certification of Distributed Renewable Energy. 64 See Annex 3 - The methodology for estimating the investment need to achieve SDG7 and projected investment. 65 Open Capital Advisors analysis of investment required to achieve universal access. 66 Open Capital Advisors analysis of total financing requirement for the OGS sector split across debt, equity and grant across the different market categories. 26 Off-Grid Solar Market Trends Report 2022: Outlook energy service too, which would increase funding needs: $48.8 billion would be required to help enable higher levels of service like the MEM benchmark for OGS users, which aims for per-household annual consumption of 300kWh, Providing access to higher-tier systems equivalent to Tier 2 access at a minimum.67 Given that that enable more productive uses of there already exists a large affordability gap to ensure energy could increase the funding universal access to Tier 1 electrification, and that Tier 2 requirements to a minimum of $48.8 systems would supply more electricity than is currently billion. demanded by the majority of low-income and unelectrified users, the affordability gap to reach Tier 2 access for all would be substantial, and is not included in the $48.8 If the sector aims to achieve beyond Tier 1 electrification billion funding need.68 Consumer financing will address for households, the funding need will be much larger. affordability challenges, but even with consumer financing, Tier 1 is the minimum level of electrification needed to a large majority will still not be able to afford the products, achieve SDG7, and it is often just the first step on the requiring much higher subsidies in turn. energy staircase. OGS products can support higher tiers of Figure 11: Comparison of funding flows to date, funding required to achieve SDG7, and funding required to achieve the MEM69 The $48.8 billion does Investment required to achieve MEM $ 48.8B not include the substantial amount of funding required to address the affordabili- ty gap. Investment required to achieve SDG7 $ 23.3B Past funding flows $ 2.3B Beyond electrifying households, OGS can also play a solar water pumps (SWPs), respectively, in India and critical role in providing electricity to power productive SSA combined between now and 2030.70 The two most uses of energy, particularly in agriculture, and also in developed PUE use cases, from a technical and business providing electricity for public institutions in healthcare model standpoint, are SWPs for irrigation, and cold storage and education. Nearly 569 and 192 million smallholder facilities for agricultural produce. Other use cases for farmers (SHF) could benefit from cold storage and agriculture are less developed, so this report estimates 67 Rockefeller (2021), The Modern Energy Minimum: The Case for a New Global Electricity Consumption Threshold.; Note: The average selling price assumed for these systems is $250 per unit. 68 See Annex 3 - The methodology for estimating the investment need to achieve SDG7 and projected investment. 69 Open Capital Advisors analysis of past funding flows from the GOGLA Investment Database, investment required to achieve SDG7 and higher levels of service like the MEM. Note: [1] The amount described in this report to achieve higher levels of service like the MEM does not account for the funding required to address the affordability gap, which is expected to be substantial based on the high cost of Tier 2 systems relative to income levels for populations in these markets, [2] 300kWh has been equated to a minimum of Tier 2 system capacity and the investment need only considers the users to be connected under the SDG7 scenario. 70 Note: The 569 and 192 million smallholder farmers relates to individual farmers and not smallholder farmer families. 27 only the potential for solar water pumps and cold storage. The large potential market consists of smallholder farmers in value chains with the greatest potential for cold storage and irrigation including horticulture and dairy (see methodology section in Annex 3). While strides have been made to increase electrification levels and its reliability in these regions, there is still a huge potential to increase electrification of the agriculture sector. Figure 12: Market potential for cold storage and SWPs in India and SSA by 203071 600 Smallholder farmers (SHF) (in millions) 77 500 400 300 492 © Efficiency for Access 200 48 100 143 0 Cold Storage SWP India SSA 71 Open Capital Advisors analysis of market potential of PUE split across cold storage and SWPs in India and SSA. 28 Off-Grid Solar Market Trends Report 2022: Outlook 29 © Power Africa 03 Measuring the Gap © SolarWorks! 30 Off-Grid Solar Market Trends Report 2022: Outlook Over the past decade, the OGS sector has experienced would also avoid 412 million MT of CO2e emissions and fluctuating growth, with periods of growth between enable $108 billion in cumulative savings. This scenario 2015-2019, a decline in 2020 due to COVID-19, and a assumes a steady economic recovery from COVID-19, with recent uptick in sales as the sector recovers. As the sector a corresponding increase in consumer incomes, continued, continues to rebound from COVID-19, it is important to and only minimal impact on pricing. consider how the sector might grow by 2030 and what is In the optimistic growth scenario, the sector will grow needed to close the remaining gap to universal access. 7.2% year-on-year until 2030, reaching 928 million people cumulatively with Tier 1 solutions by 2030. This growth, while unlikely, matches trends observed between 2015 and 2019. This period experienced steady macro- Despite sector-wide efforts, up to 606 economic growth and coincided with the rapid uptake of PAYGo and major financial investments in the sector. The million people may remain without Tier 1 optimistic scenario assumes that supply chain challenges electricity access in 2030.72 are resolved; real consumer incomes return quickly to pre-pandemic levels and then continue to grow; the effects Beyond describing the sector’s contribution to of negative shocks on key markets are limited; and sector sustainable development goals, this report also projects support programs are rolled out effectively, playing a potential growth pathways for SEKs. Based on analysis major role particularly in nascent and emerging markets.76 of historical sector growth, this report estimates sector With a 7.2% annual growth rate, the sector could connect growth of 5% year-on-year while also presenting scenarios approximately 928 million people with Tier 1 and above with more conservative growth of 2.8% and accelerated Tier 1 SEKs between now and 2030. However, the universal growth of 7.2%. These figures are based on analysis of access goal would still be missed by 232 million people historical trends for below Tier 1, Tier 1, and above Tier 1 who would be using below Tier 1 SEKs by 2030. The SEK sales (see the methodology section in Annex 3). This sector would also achieve 433 million MT CO2e emissions report assumes that the sector will continue to serve both avoided and $134 billion cumulative savings. Tier 1 users, and those above and below Tier 1, as it has If interventions are not well funded and implemented, done in the past, with more sales of Tier 1 expected by the sector would grow at a much more modest 2.8% 2030 in an optimistic scenario of 7.2% growth compared to annually, in line with the conservative scenario, reaching a 2.8% conservative growth.73 534 million people cumulatively with Tier 1 and above Under the projected growth scenario, the sector could solutions by 2030. This growth rate is based on trends reach 624 million OGS users cumulatively with Tier observed between 2016 and 2021, when already high 1 and above electricity access by 2030, 516 million inflation and food prices impacted end consumer incomes, people fewer than what is needed to achieve universal then further exacerbated by COVID-19. This conservative access.74 This growth is based on historic trends observed growth scenario could happen if consumers’ ability to pay between 2015 and 2021, and represents the midpoint of stagnates and faces a slow recovery to pre-COVID-19 levels the conservative and optimistic scenarios. Assuming 5% in major OGS markets, or if supply chain shocks continue annual growth in sales, the sector will connect 624 million to put upward pressure on prices. At this growth rate, people with Tier 1 and above systems, but leaving 516 the sector is assumed to only connect 534 million people million people with below Tier 1 or no access.75 A majority cumulatively with Tier 1 and above Tier 1 SEKs. Under the of those that will remain unserved in this scenario are conservative scenario the SDG7 targets would be missed located in nascent and emerging markets. The sector by 606 million people, including 251 million people with 72 Open Capital Advisors analysis based on data used in the 2022 OGS MTR ‘State of the Sector,’ GOGLA data and GEP data. Note: This shortfall represents both new primary users, back-up users and includes people currently using below Tier 1 SEKs as these do not constitute universal access. 73 See Annex 3 - The methodology for estimating projected global off-grid solar sales. 74 Open Capital Advisors analysis of sales required to achieve SDG7. Note: The shortfall includes, [1] Population that will remain without access to electricity by 2030 and, [2] People who will be using below Tier 1 SEKs to access electricity by 2030. See Annex 3 for more details on the methodology. 75 Note: This shortfall represents both new primary users, back-up users and includes people currently using below Tier 1 SEKs as these do not constitute universal access. 76 See Annex 3 - The methodology for estimating projected global off-grid solar sales. 31 insufficient, below Tier 1 SEKs.77 The sector would achieve external shocks, such as a resurgence of COVID-19 and 390 million MT CO2e emissions avoided and $88 billion increasing global food prices; or extreme weather events cumulative savings. might negatively impact the sector’s development. Such external factors could lower disposable incomes of target A range of major risk factors could trigger slower customers and/or obstruct company operations. These growth rates, including a global recession, high levels risks are also likely to most affect already fragile and of inflation, and conflict. While this report assumes that conflict-affected states, which account for the majority of the sector will continue to recover from COVID-19, other the potential SEK users in nascent and emerging markets. external macroeconomic factors, such as high inflation; Figure 13: Projected shortfall from achieving SDG778 Electricity access Electricity access Electricity access 1200 shortfall, 606M shortfall, 516M shortfall, 232M 194 232 1000 electricity access (in millions) 355 Total OGS users with 800 322 251 600 1,140 928 400 157 534 624 200 336 0 Current Conservative Projected Optimistic SDG7 Tier 1 and above users Below Tier 1 users Unconnected population systems. Also, the unserved population is anticipated to reside mainly in nascent and emerging markets, which are characterized by high poverty levels, and in some cases, fragility and conflict. This increases the funding To connect the 624 million users under the required to reach consumers compared to those in mature projected scenario, the sector is projected and peaked markets. Finally, the projected S-curve of the SDG7 scenario necessitates a faster ramp-up in sales to raise ~$7.8 billion between now and in the shorter term - so as to avoid a cliff-edge in sales in 2030, a funding shortfall of $15.5 billion. 230 - which also requires more financing for replacement systems before 2030. Under the current financing trajectory, the sector In this scenario, large companies are expected to raise would raise $7.8 billion in investment and funding, the bulk of funding. This continues the trend in which representing a gap of $15.5 billion compared to the 72% of total investment raised to date has been raised SDG7 scenario.79 Much of the anticipated financing by the seven scale-up companies.80 These companies will be used to fund replacement sales, or sales to new are currently not operating in many of the most difficult customers that are relatively easy to access, rather than markets, and if this funding pattern continues, it is likely electrifying hard to reach new customers, therefore the that currently unserved markets will remain unserved. SDG7 scenario assumes sales of more, higher cost Tier 1 77 See Annex 3 - The methodology for estimating the projected global off-grid sales. Note: This shortfall represents both new primary users, back- up users and includes people currently using below Tier 1 SEKs as these do not constitute universal access. 78 Open Capital Advisors analysis based on data used in the 2022 OGS MTR ‘State of the Sector,’ GEP data, and GOGLA data on different potential scenarios between 2020 to 2030. Note: The proportion of below Tier 1 and Tier 1+ users is based on the sales split by Tier in 2030. 79 Open Capital analysis of investment required to achieve SDG7. 80 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 32 Off-Grid Solar Market Trends Report 2022: Outlook Figure 14: Total company financing projections by scenario81 25 Investment need Investment need Investment need Investment need shortfall (in billions, USD) shortfall, $16.6B shortfall, $15.5B shortfall, $13.4B 20 15 $23.3 10 5 $9.9 $6.7 $7.8 0 Conservative Projected Optimistic SDG7 In the projected scenario, total investment of $7.8 billion Equity is anticipated to make up $3.5 billion of the total reflects the sector’s current supply and demand-side financing under the projected scenario. Equity will be constraints. The investor landscape and appetite, as needed to shore up the balance sheets for continually well as the inability of smaller and mid-size companies larger debt raises. Most of this equity investment in to attract and absorb larger amounts of funding, are the the short term is likely to focus more on mature and largest anticipated inhibitors of funding for the sector. established markets into companies that are already present. More equity funding may potentially be made Figure 15: Total company financing anticipated available to drive consolidation via the acquisition of under the projected growth scenario (in billions, medium-size players, as well as for some geographical USD)82 expansion if grants are also available to de-risk new markets. Some smaller, more local distributors already exist in such markets, underscoring the importance of (In billions, USD) 0.5 supporting those companies to succeed as much as those with major scale potential. 3.5 3.8 Grants, including RBF schemes, are anticipated to make up 500 million of the total investment under the projected scenario. This figure, which is much less than 0 1 2 3 4 5 6 7 8 required under the SDG7 scenario, includes market-entry Grant Equity Debt and scale-up grants, with RBFs anticipated to account Debt is anticipated to make up the largest proportion of for ~$0.35 billion of the total grant investment. Grants external financing needs, at a total of $3.8 billion. In line are projected to fuel the expansion not only of smaller with recent financing trends, debt is expected to take up companies, but also of established companies into harder- the lion’s share of investment, financing PAYGo portfolios to-reach customer segments, particularly through RBFs. and other working capital needs. Both large and small Other anticipated uses of grants include assistance to companies are anticipated to continue raising debt, though companies to continue to enhance their product offerings there are more options for larger companies since there into higher-capacity SEK and PUE assets. are several sector-focused debt funds that serve the sector, While unlikely to occur, in a more optimistic scenario each of which have minimum requirements that exclude approximately $9.9 billion could flow into the sector, smaller companies. 81 Open Capital Advisors analysis based on data used in the 2022 OGS MTR ‘State of the Sector,’ GEP data, and GOGLA data on financing needs for the different scenarios between 2020 to 2030. Note: Importantly, the projected, optimistic, and conservative scenarios follow historical trends in investment, whereas the SDG7 scenario estimated the need to fully reach all with Tier 1 access at a minimum, representing two different methodologies. 82 Open Capital Advisors analysis based on data used in the 2022 OGS MTR ‘State of the Sector,’ GEP data, and GOGLA data on financing needs for the projected growth scenario. 33 supporting sales growth of 7.2%. Under this scenario, investment would start to address some of the major capital gaps for small and medium-sized companies, and investors will be more risk tolerant, with new funds launched to target the sector specifically, and that Although donor interest in the PUE sector customer income levels and affordability rebound to continues to grow, the gap to reach the pre-pandemic levels. However, to reach the SDG7 goals, market potential is even starker for PUE substantially more investment is required to: i) seed or appliances. incentivize companies to both enter nascent and emerging markets as well as serve them in a cost-effective manner, such as with large amounts of subsidies; ii) upgrade the In 2021, sales of PUE appliances were estimated at nearly 343 million of users that have below Tier 1 OGS products, 223,000 units, driven largely by refrigerator and SWP while ensuring that all new customers are Tier 1 and not sales.83 SWPs have dominated PUE sales, constituting below; and iii) provide adequate financing to the small- 62% of cumulative PUE sales over the past four years, and medium-sized companies where there currently exists compared to 38% for refrigerators.84 Despite increasing a major gap. awareness of the benefits of PUE appliances, affordability As little as $6.7 billion in investment could flow into the challenges still prevent many smallholder farmers from sector which, together with other macroeconomic risks, accessing valuable products. For example, with 698 million could result in the more conservative annual growth people in SSA living below the poverty line of $1.90 a day, rate of only 2.8%. This pessimistic scenario assumes a upfront SWP prices of $400–1,000 remain unaffordable for continuing decrease in deals for small and medium-sized many.85 The sales estimates to date include household-size companies, hindering these companies from raising debt in refrigerators, but this report assumes that the true use case any substantial amount. It also assumes that grant funding to accommodate agricultural cold storage for smallholder and subsidies, including RBFs, will be not well-coordinated farmer needs will be satisfied by larger cold storage units. or deployed too late to catalyze markets before 2030. To achieve the market potential for SWPs and cold Finally, the scenario anticipates that the seven scale- storage alone in India and SSA, as described in Chapter up companies have reduced the need to raise external 2, unit sales would need to grow by 32% annually.86 To financing as they reach maturity. ascertain the required sales, this report estimates both the Across all growth scenarios in this report, it is anticipated potential market size in 2030, and the growth rate in sales, that hard-to-reach markets will require substantial starting from a base of historical sales, required to reach amounts of concessional capital. Many potential those levels. In this scenario, unit sales would reach 4.5 customers in these markets have low incomes, which million in 2030, compared to 223,000 in 2021. This growth is a barrier to market entry, and some of these markets rate is therefore not an estimate of expected sales, but of are smaller in terms of their potential given their smaller the growth needed to reach the target market size by 2030. populations. These issues are exacerbated in markets that It is also important to note that the current base of sales is also experience conflict and violence, which make it even quite low, which contributes also to the large growth rate more difficult to operate. Hard-to-reach markets exist not needed. India is a large anticipated market for PUE sales, only in nascent, national-level markets but also in certain as a large share of farmers there grow horticulture and areas of countries often characterized as mature markets, perishable crops, producing nearly 50% more fruit than such as several counties in Northern Kenya. SSA.87 India also has a large proportion of rainfed land, along with government subsidy schemes that lower the cost of SWPs. 83 Open Capital Advisors analysis of sales volumes and market trends for PUE appliances based on the 2022 OGS MTR ‘State of the Sector.’ 84 Ibid. 85 Development Initiatives (2021), Poverty trends: Global, Regional and National; Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 86 Open Capital Advisors analysis on total unit sales required to achieve the market potential of SWPs and cold storage units in SSA and India. 87 FAO (2020), FAOSTAT: Value of Agricultural production. 34 Off-Grid Solar Market Trends Report 2022: Outlook Figure 16: Comparison of SWP and cold storage unit Larger cold storage units are anticipated to make up the sales in 2021 and market potential by 203088 lion’s share of cooling solutions used in the agriculture sector, pending ways to address affordability challenges. 5.0 To truly achieve sales in line with the market need for cold storage, stakeholders will have to address the affordability SWP & cold storage unit sales 4.0 gap. Upfront prices for refrigerator systems can reach several thousand dollars, while larger walk-in cold storage units typically reach costs in the tens of thousand. (in millions) 3.0 Companies will have to refine innovative business 32% models such as Cooling as a Service (CaaS), especially for annual 4.5% 2.0 growth smallholder farmers, and stakeholders must improve links to offtake markets to maximize the value of cold-stored produce. 1.0 0 0.2% 2021 2030 Box 1: Case study on SokoFresh CaaS initiative in Kenya on off-grid solar refrigeration SokoFresh, an off-grid solar refrigeration company based in Kenya, developed a CaaS initiative that provides cold storage services to farmers, while providing access to markets through a digital market linkage solution. Currently, it has nine 5MT cold storage units in operation which have contributed to significant post harvest loss reductions and increased farmer incomes by 40% on average.89 This initiative provides cold storage services at the farm level under a pay-as-you-store model which provides farmers and traders a risk-free opportunity to maintain the quality of their produce and increase their incomes. SokoFresh aims to have 190 operational cold storage units by 2023.90 SWP sales will continue to comprise the majority of unit markets. Donors and impact investors are already sales of PUE appliances for agriculture. While the Indian interested in this sector, with ~75% of grant capital for the government has plans to downsize its subsidy program sector in 2020–2021 earmarked for PUE.92 Governments, by 50% by 2030, the greater focus on PUE from investors too, have shown interest, with Bangladesh and India and donors is likely to continue to bolster system sales, deploying subsidies to ramp up sales. Despite these both in India and SSA.91 Addressing the affordability gap is promising examples, the sector remains in its infancy and also important for SWPs, as noted previously. While PAYGo significantly more sales are required to electrify public and other consumer finance solutions may help solve institutions and PUE. For example, it is estimated that the problem, it will be equally important that companies tens of thousands of health centers alone across low- and providing these services focus on loan portfolio health and middle-income countries lack electricity.93 Consequently, risk diversification. much more funding will be required to support electrification of public institutions such as schools and The PUE segment will ultimately require substantial health centers. funding for these higher value assets. PUE assets have a higher COGS, so finance requirements will be relatively high compared to SEKs on a per-unit basis. Patient capital will be needed for companies to explore business models and identify suitable customers, particularly given the nuances of different agricultural value chains in different 88 Open Capital Advisors analysis of unit sales in 2021 and market potential of SWPs and cold storage units in SSA and India by 2030 based on the 22022 OGS MTR ‘State of the Sector.’ 89 CaaS Initiative, Off-grid cold storage for farmers in Kenya. 90 Ibid. 91 Efficiency for Access (2019), Solar Water Pump Outlook Report. 92 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 93 Powering Healthcare Initiative | About us 35 04 Closing the Gap to Universal Access © Source Unknown 36 Off-Grid Solar Market Trends Report 2022: Outlook rates discussed in chapter 3, the sector may still miss its target by up to 606 million people, as in the conservative scenario. Therefore, targeted action is needed to close the The OGS sector has strong growth gap. potential; targeted interventions are The last several iterations of this report have assessed needed to address key barriers to growth potential game changers. The 2020 Off-Grid Solar Market and close the electricity access gap. Trends Report (MTR) classified and prioritized OGS sector game changers based on relative impact and likelihood of influencing the sector’s growth trajectory. “Low-hanging To achieve its potential, the OGS sector requires game- fruit” and “Smaller wins” were noted as having relatively changing interventions to address existing barriers to lower impact on the market, with differing levels of growth. As outlined in chapter 2, the sector will need likelihood. “Tipping points” were assumed to be high- to reach 56 million unit sales in 2030 from 32 million impact factors that stakeholders needed to support to in 2021 to meet its target contribution towards SDG7: close the electricity access gap while “Key drivers” were serving 1.1 billion people, including 464 million newly considered more likely to occur, with similarly high levels connected primary OGS users. Given the range of growth of impact (see Figure 18). Figure 17: Recap of relative ranking of 2020 game changers for the OGS sector94 Low hanging Higher Key Likelihood Drivers fruit PAYGo Strategic investor availability Household appliance engagement availability Off-balance Specialization & sheet ʻBeyond Targeting partnerships financing energyʼ Chinese model unreliable grid manufacturer Commoditization involvement AI and IoT integration Standardized KPIs PUE appliance availability Availability of Company subsidies profitability Lower Higher Impact Impact Local currency Climate and Hardware and software debt social finance interoperability Consolidation (M&A) Targeted Market concessional enabling investments policies and Engagement of large regulations appliance manufacturers Smaller Lower Tipping wins Likelihood points Market player Technology Finance Policy Technology / consumer 94 The 2020 Off-Grid Solar Market Trends Report. 37 This version of the MTR will continue this approach, subsidies can reduce the cost of reaching the unelectrified reviewing the progress of key game changers, and in commercially unattractive markets. Cheaper and more presenting those that are needed to accelerate sector efficient technologies and hardware interoperability growth. Each of the sub-sections below details briefly the can reduce direct costs and increase company margins, progress for each game changer since 2020, defines what is while digitalization, strategic value chain partnerships, needed to achieve each, and how stakeholders can support and beyond-energy models can create operational those efforts. efficiencies that also improve margins. System modularity, another technology game changer, can also lower costs and enhance affordability of OGS products and greater availability of PAYGo and demand-side subsidies can both then directly bring down the cost for customers. Lastly, though consolidation has potential to increase market Addressing key barriers such as low concentration, it allows companies to achieve economies affordability, higher costs, and narrow of scale, attract more capital, and expand PAYGo offerings company margins can drive first-time to consumers. access and accelerate the pace towards SDG7. The OGS sector serves both a commercial market and a development agenda. Meeting development goals Addressing market-specific barriers will means ensuring that all households and institutions support efforts towards universal access are electrified, requiring companies to serve both by improving the enabling environment to commercially attractive and unattractive markets. Most further unlock the sector’s potential. of the unelectrified populace now lives in nascent and emerging markets.95 Several of these are FCV markets, and many other potential customers live in remote, harder-to- Other market-specific barriers still exist, including reach areas, including those yet to be electrified in more policy or regulatory challenges and lack of consumer mature markets. awareness. Enabling policies and regulations that are simple to implement, consistent, and well-enforced, along Given the development agenda, many OGS companies with strategic cross-sector partnerships, can improve the will face major affordability constraints and other operating environment and promote consumer awareness impacts depressing company margins. Customers that to accelerate sector development. In particular, awareness remain unelectrified may have lower ability to pay, and the of the benefits of PUE appliances across many markets cost to close the electricity access gap in nascent or harder- remains low, so awareness campaigns for these (as well as to-reach emerging markets is often higher than the cost SEKs) are still needed in diverse markets. This will increase of serving existing OGS customers, narrowing company adoption rates, driving impact beyond electricity access, margins. such as poverty reduction and climate change adaptation. These constraints have been further aggravated by the challenges of COVID-19 and shifts in the donor community. For example, global supply chain disruptions have raised component costs and reduced consumer incomes. However, companies have recently found it increasingly difficult to obtain the de-risking capital needed to provide access for all households due to the finite amounts of grant funding available for off-grid energy solutions. © Efficiency for Access Most game-changing interventions, therefore, will have to focus on affordability and company margins. The most critical interventions are those that directly scale up first-time access and increase affordability to help achieve SDG7. De-risking mechanisms, off-balance sheet and catalytic finance, climate finance, and supply-side 95 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 38 Off-Grid Solar Market Trends Report 2022: Outlook Figure 18: How 2022 game changers for the OGS sector address key barriers to development96 Finance and funding Market player Technology Products and Policy and consumer ecosystem Climate funds & carbon credits PUE availability and adoption Policies, regulation, and OGS Off-balance sheet financing De-risking mechanism and Advanced technology and Cross-sector partnerships Beyond energy models Modularity of systems Supply-side subsidies 2022 game changers integration in NEPs* End-user subsidies PAYGo availability catalytic finance Interoperability Specialization Consolidation digitalization Barriers to development Low affordability $ $ Margin shortfall $ Low capital access $ for start-ups and nascent markets Policy-related challenges Limited consumer ? awareness Varied consumer perception* These and several additional game changers are discussed in more detail below. This section covers specifics on how each can be leveraged to support the sector’s goals of reaching SDG7. © Efficiency for Access 96 Open Capital Advisors analysis. Note: *[1] NEPs - National Electrification Plans, [2] Varied consumer perception refers to the challenge whereby many consumers are yet to perceive OGS as a viable energy solution capable of providing reliable electricity to power multiple items. It differs from limited consumer awareness that covers consumer knowledge of existence and benefits of OGS products, especially PUE appliances. 39 4.1 Finance and Funding example, showing that guarantees are just as important for scale up of start-up and seed companies, is Pawame’s Game Changers 2017 debt raise through TRINE. This was secured by two guarantees, jointly totalling 50% of the principal. Despite Pawame’s recent financial difficulties, Pawame honored its debt obligations and managed to raise additional debt 4.1.1 De-risking Mechanisms after demonstrating traction following this financing.100 and Other Catalytic More catalytic finance is needed to mobilize new capital Finance for nascent markets and unlock the long-term growth needed to achieve SDG7. Covered under “targeted concessional investments” in the 2020 MTR, catalytic finance remains critical in addressing the significant gap between capital mobilized for established versus nascent markets, and in reducing the cost of electrifying harder-to- More catalytic finance, including de- reach areas in more mature markets.101 Catalytic finance risking tools, are needed to scale early- can include both funding for early-stage companies to stage companies and incentivize entry support their initial growth in markets they are operating in and funding for larger companies entering new markets into nascent markets. or testing new models. De-risking mechanisms and other catalytic finance are Foundations, philanthropic investors, DFIs, and often used to facilitate commercial investment into seed development partners will play a crucial role in providing and start-up companies or to incentivize companies to more catalytic finance and de-risking instruments. start operations in markets considered ‘high-risk.’ De- To ensure progress towards SDG7, they can partner risking mechanisms, which include collateral buy-back with funds to specifically support companies willing to agreements, match-funding, and first-loss guarantees, penetrate tougher markets or seed and start-up companies reduce the probability of financial loss for commercial in those same areas. Pooling concessional capital with investors by having a third party absorb most of the more than one funder providing upfront grants or first-loss liability in case of a loss. Other catalytic mechanisms offer guarantees to de-risk a partner fund’s investments will companies more favorable financing terms, including share risk among participating organizations. Partnerships instruments such as upfront grants, repayable grants, with fund managers early during concessional fund design patient capital, and low-interest loans with a grace can enable partner funds to successfully raise additional period.97 capital before closure and deployment. Foundations, philanthropic investors, DFIs, and development partners have historically been key sources of catalytic finance in the OGS sector. An example demonstrating the importance of first-loss guarantees for companies entering or operating in nascent FCV markets is the Facility for Energy Inclusion’s Off-Grid Energy Access Fund’s (FEI-OGEF LP) $5.9 million guarantee to back debt invested in BBOXX DRC in 2021. This was provided alongside a separate guarantee by MIGA, part of the World Bank Group, backing quasi-equity investments in © Power Africa BBOXX DRC, Kenya and Rwanda.98 Earlier on, in 2018, the company also received a 60% guarantee from the Swedish International Development Cooperation Agency (SIDA), allowing it to secure crowdfunded debt from TRINE to expand operations in Kenya and Rwanda.99 A different 97 ESMAP (2020), Funding the Sun | New Paradigms for Financing Off-Grid Solar Companies. 98 AFSIA (2021), MIGA Support Helps Bboxx Deliver Clean Off-Grid Solar Energy in Central and East Africa. 99 ESMAP (2020), Funding the Sun | New Paradigms for Financing Off-Grid Solar Companies. 100 Note: For more information on Pawame’s struggles through the COVID-19 pandemic, please refer to the 2022 OGS MTR ‘State of the Sector’. 101 ESMAP (2022), Designing Public Funding Mechanisms in the Off-Grid Solar Sector. 40 Off-Grid Solar Market Trends Report 2022: Outlook 4.1.2 Off-Balance-Sheet Off-balance-sheet financing offers an innovative way for larger OGS companies to raise flexible working capital to Financing finance growth beyond equity and on-balance-sheet debt financing. Off-balance-sheet financing structures allow companies to sell their receivables through a separately established special purpose vehicle (SPV). The financing is recorded on the SPV’s balance sheet, allowing the company to utilize debt funding, without affecting its More off-balance-sheet financing is leverage ratios. Typically, higher implied collateral is needed to enable larger OGS companies to required (or an equivalent higher interest rate) compared scale operations in more mature markets. to traditional debt to account for higher credit risk, since investors into an off-balance-sheet SPV often have no recourse to the originating OGS company’s receivables not transferred to the SPV (see Figure 20). Figure 19: Example of an off-balance-sheet SPV structure102 Consumer OGS product Payments Cash Loan OGS Financial SPV company institution Receivables Principal and interest Off-balance-sheet financing is mostly suitable for can also demonstrate lengthy track records for their PAYGo larger companies given the scale of receivables needed operations in an existing market–around 12 months–before to justify the high transaction costs incurred during raising off-balance-sheet financing for that specific market. the creation of securitization vehicles. Securitization Since most vehicles are successful when they sell quality structures are complex, attracting high transaction costs receivables, companies can prepare by incorporating credit that are too expensive for small companies. Furthermore, risk assessment and management practices early to limit small companies have less of a credit track record, which default risk for the selected pool of receivables. increases their riskiness and the cost of their receivables. An off-balance-sheet financing platform that aggregates As such, there have been few off-balance-sheet financing receivables from multiple small companies in more rounds in the OGS sector, and most transactions have been mature markets could help unlock more working capital led by larger scale-up companies like BBOXX (2015) and in local currency. The scale from such a model could d.light (2020 and 2022).103 The potential impact of off- justify the fund’s set-up costs, solving the challenge faced balance-sheet financing is still considered high, as it was in by individual companies with small PAYGo portfolios. the 2020 MTR, despite the limited transactions to date. Development partners and donors could fund the Large OGS companies can leverage their large, relatively establishment of an off-balance sheet financing platform to high-quality receivables portfolios to successfully raise make this type of funding economically feasible for small off-balance-sheet financing.104 To prepare for such a companies. Foundations and philanthropic investors could raise, companies can ensure receivables are strategically provide buy-back guarantees for the first round to reduce carved out during prior debt raises so that on-balance- risk and encourage investors to participate; once the first sheet lenders have no recourse on receivables that are to round is successful, subsequent rounds may require less be sold during an off-balance-sheet financing. Companies de-risking. Financiers, both local and international, can 102 Open Capital Advisors analysis and consultations; GOGLA (2016), Off-Grid Solar Investment Academy. 103 Greentech Media (2015), The World’s First Securitization of Off-Grid Solar Assets; Global Private Capital (2020), d.light and Solar Frontier Capital Announce $65 Million Local Currency Receivable Financing Facility for Kenya; African Energy Live Data (2021), Kenya: Norfund Invests in d.light Receivables Vehicle; d.light (2022), d.light and SFC Announce Industry-Leading $238 Million Multi-Currency Receivable Financing Facility. 104 Open Capital Advisors analysis and consultations. 41 take part as either senior or subordinated debt partners marketed climate mitigation benefits to climate finance to make local-currency financing available for these providers, but PUE companies have been less successful, companies. An SPV arranger with OGS sector experience despite often offering climate change mitigation and would be appointed to manage the platform. In addition adaptation benefits.109 On the supply side, investors are to planning and fundraising, the arranger would also often deterred by the limited pipeline of projects and verify receivables quality. Companies could then join the relatively small ticket sizes. Furthermore, the traditional platform on a cost-share basis, and technical assistance private institutional investors who dominate the climate could be provided to support onboarding and compliance. finance space are not yet as familiar with the OGS sector Sector stakeholders are already exploring similar and its potential to accelerate SDG7 and SDG13 goals, platforms, such as Solaris Offgrid’s PaygOps Disruptive and they are often looking for investment opportunities Receivables Finance Project.105 that can offer higher liquidity and returns compared to current opportunities in the OGS sector.110 In addition, 4.1.3 Climate Funds and Carbon companies struggle to raise funding through carbon credits due to the currently expensive monitoring and verification Credits requirements. Overall, accessing both types of climate finance remains a high-impact game changer, as was the case in the 2020 MTR. Several initiatives have been launched to overcome challenges such as the expensive measurement and OGS companies can better communicate verification processes for carbon credits and to aggregate the positive climate benefits of the sector the impact of many SEKs monitored by company to unlock more climate finance. PAYGo systems to increase ticket sizes. The Distributed Renewable Energy Certificate (D-REC) initiative, for example, was launched by multiple stakeholders to draw Climate finance refers to funds set aside to support climate revenue to the sector, by enabling the generation projects that curb the effects of climate change, either and trade of Renewable Energy Certificates (RECs) from through mitigation or adaptation, in line with SDG13.106 distributed renewable energy projects, including in OGS. Climate funds, such as the Green Climate Fund (GCF), make The initiative hopes to raise $100 million annually and debt or equity investments directly or indirectly (through is anticipated to be instrumental in replacing the use of other funds) into companies or projects that meet set kerosene and small-scale fossil fuel-powered generators climate objectives.107 Carbon credits, another mechanism with OGS products.111 Solstroem has also launched a of climate finance, are verified emissions-reduction carbon credits program that offers OGS companies access certificates awarded for projects that can be traded as to carbon markets through the generation and sale of permits that allow the holder to offset a specified amount Micro Carbon Avoidance (MCA) certificates. of GHG, thus providing an additional revenue stream for companies that have earned the credits by enabling the Moving forward, more OGS companies can leverage avoidance of GHG emissions.108 platforms that allow them to monetize their positive impact on climate change, unlocking a new source of Though OGS products offer a viable pathway to reducing non-customer revenue and improving company margins. carbon emissions and adapting to climate change, The Solstroem and D-REC initiatives discussed above make the sector has not tapped into much climate finance. it easier and more affordable for companies of all sizes to The bigger barrier is that companies do not sufficiently access financing from carbon markets. So far, mostly larger, communicate the sector’s positive impact on climate vertically integrated companies in SSA and Southeast Asia, change. A few OGS companies that sell SEKs have 105 PaygOps | PaygOps Disruptive Receivables Finance Project. 106 UNFCCC | Introduction to Climate Finance. 107 UNHCR | Carbon Financing. 108 SouthPole | Carbon Offsets Explained: What Are Carbon Credits and How Do They Work? 109 Note: SWPs and solar refrigeration appliances in particular have direct climate benefits through enabling increased adaptation and resilience to their users in the face of increasing harsh climatic conditions as well as improving mitigation through harnessing renewable solar power in place of climate-harming fossil fuel powered generators to reduce emissions from fuels and reduced food waste. For more information, please refer to the 2022 OGS MTR ‘State of the Sector.’ 110 GOGLA (2022) How to Make Climate Finance a Game-Changer for the Off-grid Solar Industry. 111 The D-REC Initiative | About the Initiative. 42 Off-Grid Solar Market Trends Report 2022: Outlook such as Sun King, ZOLA Electric and ENGIE, have registered pandemic. Governments including Madagascar, Nigeria, as program partners and are already receiving payments.112 Mozambique, and the DRC launched supply-side subsidy More companies in these markets need to utilize these programs, some with a mix of instruments to develop platforms to gain access and benefit from financing raised. different market segments and some focusing on both SEK and PUE product segments (refer to the 2022 OGS MTR To draw additional climate financing to the sector, OGS ‘State of the Sector’ for more analysis). These subsidies companies can better communicate their climate change continue to be a high priority for the sector. mitigation and adaptation impact stories to investors. Companies, investors, and development partners need to Despite an uptick in RBF disbursements, more supply- collaborate to improve and standardize the measurement side subsidies, tailored to company size and market and verification of climate change adaptation impact to maturity, are needed so that companies can serve the allow companies to demonstrate this benefit convincingly. hardest-to-reach customers while also operating a viable Companies can then work with industry associations, business. Supply-side subsidies, particularly zero-interest including GOGLA and local bodies, to improve data loans and non-repayable grant windows, are needed to transparency, so climate investors and donors can make incentivize companies to enter and unlock underserved more informed decisions.113 markets. This includes not only nascent country-level markets, but also underserved communities in mature and peaked markets.115 Grant windows are required for 4.1.4 Supply-Side Subsidies all companies in nascent markets, regardless of size, whereas in more mature markets, zero-interest loans or supply-side RBFs that include upfront payments may be better suited for smaller OGS companies that lack sufficient working capital to pre-finance installations. Last More smart supply-side subsidies tailored Mile Distributors (LMDs) will be critical in reaching remote to varying company sizes and market areas with poor infrastructure and low population density and therefore are likely key funding recipients. In general, maturities are needed to close the programs should adopt different incentives for differently electricity access gap. sized companies, based on the goals of the program and the ecosystem of potential beneficiaries of the funding Supply-side subsidies, such as zero-interest loans, grant because regularly structured RBFs alone may not unlock windows, and supply-side RBFs, incentivize companies nascent markets or support growth of small companies.116 to serve harder-to-reach, underserved markets by A combination of increased supply-side support and de-risking companies’ investments. Supply-side RBFs public procurement may be needed to accelerate — which involve payments to companies based on set electricity access in FCV countries, depending on specific performance in underserved markets — and grant windows market characteristics. Consultations with larger firms are the most commonly disbursed supply-side subsidies, show that supply-side subsidies in FCV markets may fail given their track record of successfully incentivizing entry to incentivize their market entry as fragile economies and into new, high-risk, or high-cost markets.114 difficult operating environments leave these markets at The number of supply-side subsidy programs increased the bottom in terms of market attractiveness.117 Nurturing significantly over the last two years, as governments existing local private sector companies that know how worked with development partners to increase the to navigate the tough environment would be a better pace of OGS electrification. Nearly 50% of RBF funding alternative in these markets and this would require more disbursed (or in ongoing disbursement) to the sector supply-side subsidy designs that incorporate at least since 2013 was committed in 2020 alone, as the need upfront payments. Besides supply-side subsidies, public to accelerate electricity access increased during the procurement may also be a suitable option to provide electricity access in such markets where the unelectrified 112 Solstroem | Projects. 113 Next Billion (2022), The Growing Urgency of Funding Off-Grid Solar: Exploring the Multi-Billion Dollar Investment Opportunity in Achieving Climate and Energy Access Goals. 114 ESMAP (2020), Funding the Sun | New Paradigms for Financing Off-Grid Solar Companies; ESMAP (2022), Designing Public Funding Mechanisms in the Off-Grid Solar Sector. 115 Ibid. 116 Open Capital Advisors game changers workshop. 117 Open Capital Advisors analysis and consultations. 43 population targeted is small, sparse, largely remote, and extremely poor, or where the level of insecurity is so high 4.1.5 End-user Subsidies that markets fail to function properly.118 Collaboration among governments and development partners is crucial in increasing the scale of supply-side subsidies available to OGS companies. These stakeholders Availability of well-designed end-user can partner to design and launch pre-funded subsidy programs and crowd-in additional funding from other subsidies can be scaled up to ensure that donors or development partners. Notably, governments every household can afford a Tier 1 solar can deploy public funds in addition to capital provided by product. donors and development partners to increase budgets for subsidy programs. A combination of different mechanisms End-user subsidies are funding instruments designed to can be used to reach more areas and consumer groups.119 overcome the affordability barrier by directly reducing Furthermore, program managers and OGS companies can the purchase price of OGS products for end consumers. also play a crucial role by leveraging existing technology Subsidies can be disbursed through RBF – where to improve the RBF verification process, and attract more companies sell OGS products to targeted consumers at funding into subsidy programs. Leveraging Internet of a discount and receive the subsidy amount to fund that Things (IoT), and existing PAYGo software for RBF impact discount – or vouchers, as well as through direct cash monitoring and verification can improve the accuracy of transfers to qualifying consumers (see Figure 21). Delivery the process. This instills greater confidence in funders and through cash or vouchers to end-consumers is often shortens the verification and fund disbursement timelines preferred when governments and companies consider it to encourage company participation. particularly important for beneficiaries to know that prices have been subsidized.120 Such subsidies often target the lowest-income, most-vulnerable populations who risk being left behind in the push to universal access. Figure 20: End-user subsidy disbursement options121 RBF-style end-user subsidy Pays subsidized price (market price less subsidy) Provides subsidy after Sells OGS product at sale verification Targeted subsidized price OGS Subsidy end company program consumer Voucher or cash transfer end-user subsidy Tops up subsidy and pays market price Provides subsidy as cash or a voucher Sells OGS product at Subsidy Targeted OGS market price company program end consumer In case of a voucher, consumer pays subsidized price and hands voucher to company. Company uses this to claim cash from the subsidy program 118 ESMAP (2022), Designing Public Funding Mechanisms in the Off-Grid Solar Sector. 119 ALER (2021), The Mozambican Off-grid Energy Market Gave a Sign of Great Dynamism and Growth Potential Reflected in the Investment Portfolio of the BRILHO Program; ESI Africa (2020), Fund Open for Proposals to Accelerate Off-grid Solar in Madagascar. 120 ACE TAF and Open Capital Advisors (2020), Demand-Side Subsidies in Off-Grid Solar: A Tool for Achieving Universal Access and Sustainable Markets. 121 Ibid. 44 Off-Grid Solar Market Trends Report 2022: Outlook End-user subsidies, however, can distort the market, so Global, EnDev, GOGLA, and Africa Clean Energy (ACE) that they must be designed carefully. The direct reduction shares lessons from ongoing and upcoming pilots. One of end-user prices can negatively affect market pricing design element that can be explored to improve targeting dynamics during the program and upon completion if and and impact outcomes is the establishment of a centrally- when the private sector resumes sales at prevailing market managed citizen database, with technology leveraged for prices.122 Clear communication of program terms, including more accurate qualification, verification, and payment end dates, is important to the exit strategy. Careful disbursement. The databases can be built on data from targeting and verification using country-level data is also existing safety net programs that already target vulnerable important to ensure that the target beneficiaries receive citizens. The Kenya Energy Cash Plus / Mwangaza the benefit, avoiding “leakage” of program funds. Mashinani programme (MMP) pilot, for example, used data from the existing National Safety Net Programme Recently, more pilot studies have been launched by (NSNP) to achieve this.124 Finally and importantly, program companies and governments, confirming that end- implementation must have a clear exit strategy to ensure user subsidies can be successfully disbursed via PAYGo the overall sustainability of funding for electricity access. companies to improve affordability and access.123 Both ENGIE and SolarAid ran pilot end-user subsidy programs in Uganda and Zambia, respectively, between 2019 and 2022, where they sold products at a 20–25% discounted 4.2 Market Player Game price. Key lessons learned include: (i) that the subsidized fee had a higher impact on the livelihoods of the poorest Changers households compared to other low-income households and (ii) that the lowest-income households achieved affordability if the subsidy was introduced for PAYGo- 4.2.1 PAYGo Availability enabled products to reduce the installment payments to either match or fall below their regular energy spend. Successful nationwide programs and pilots have also been run in Togo and Rwanda, with important lessons learned and analyzed (see the 2022 OGS MTR ‘State of the Sector’ for Increased capital for PAYGo expansion details). Given the persistent affordability challenge of the largely underserved populace, end-user subsidies are as and innovation of PAYGo business critical to achieving SDG7 as they were in 2020. models at the country level are needed to boost PAYGo penetration and improve An increase in the scale of well-designed, substantially- funded end-user subsidy programs is therefore needed. affordability of OGS products. In the immediate short term, more pilot programs are required to inform program design and obtain impact PAYGo has accelerated OGS electrification, especially results that can attract more funding. End-user subsidies in SSA, by making SEKs and PUE appliances more should be targeted at improving the affordability of affordable. Of the two models in existence, the most basic, Tier 1 OGS products for the poorest unelectrified common is the rent-to-own model that eventually transfers households - an estimated $4.5 billion is needed to bridge ownership to the consumer whereas the rental or energy- the affordability gap (see Chapter 2 for the SDG7 analysis). as-a-service model is less common (see the Abbreviations End-user subsidies are also needed to provide access to & Key Definitions section for PAYGo definition). income-generating PUE appliances. Affiliate PAYGo sales showed resilience despite the Governments, development partners, and donors can COVID-19 pandemic, but PAYGo remains largely pool their resources to launch both new pilots and unavailable in less mature markets. This is due to a large-scale, multi-year programs. Though data drawn reliance on mobile money and limited funding available. from company-led pilots is helpful, the programs are often Affiliate PAYGo sales increased in 2021, demonstrating small-scale and impact limited. To design and launch resilience of the business model in the face of depressed more pilots, as well as larger programs, stakeholders can incomes even though some PAYGo companies received leverage knowledge shared from new initiatives such as financial support from development partners and funds to The End User Subsidy Lab created by ESMAP/Lighting 122 Ibid. 123 GOGLA (2022), End User Subsidies Lab Webinar Series: Innovative Industry Models to Increase Affordability by Subsidizing End User Prices. 124 End User Subsidies Lab (2020), Case Study: Conditional Cash Transfers in Kenya for Off-Grid Solar Energy Cash Plus / Mwangaza Mashinani Programme. 45 extend payment holidays to customers and revise payment terms. PAYGo availability, however, is still concentrated in East Africa and other markets where mobile money is available (see the 2022 OGS MTR ‘State of the Sector’ for details), and limited financing to fund PAYGo working Increased consolidation in more mature capital requirements has also limited growth in new markets and specialization, with strategic markets. partnership, in less mature markets can Companies can leverage alternative payment solutions drive operational efficiency and improve and networks to increase PAYGo availability in riskier company margins, strengthening the OGS markets with underdeveloped mobile money networks. sector. OGS companies can adapt the PAYGo model to fit their country’s infrastructure in countries where mobile money is unavailable. In Nigeria, LUMOS partnered with MTN to 4.2.2 Consolidation offer airtime-based PAYGo, whereas Sun King (formerly known as Greenlight Planet) built a cash-based PAYGo Consolidation often occurs in an industry’s life-cycle network of retailers who act as cash collection centers for as it grows towards maturity, resulting in fewer but customer payments and provide customers with ‘unlock larger and potentially more resilient companies. In some codes’ for their systems.125 These examples demonstrate instances companies willingly merge or acquire others to that PAYGo is possible without mobile money, and can be realize synergies, and in others companies are acquired made available in nascent and emerging markets. when one is struggling financially. Companies that emerge stronger from consolidation often operate at a larger scale Development partners and donors can provide flexible, and benefit from operational efficiencies and improved favorable financing to increase PAYGo availability in margins, enabling them to attract capital for growth. less mature markets and for the poorest customers. To Consolidation through acquisitions by larger companies achieve universal access, dedicated concessional debt may also help to increase PAYGo availability, by replicating financing, preferably in local currency, can support PAYGo their refined models to regions where acquired companies companies, alongside fiscal incentives such as tax and operate. subsidy exemptions, to lower the cost of scaling PAYGo companies. For nascent and emerging markets, start-up However, consolidation can increase market grants can support local LMDs to develop their PAYGo concentration and resulting companies may still not business model, particularly where large companies lack target BoP households or FCV markets. Consolidation can interest in the market. Funding can also be channeled thereby reduce competition, and there is no guarantee to PUE companies that partner with micro-finance that consolidated companies will aim to serve customers institutions to co-offer PAYGo-type agreements to lengthen with the greatest need for electrification. Without a clear, the payment period or further reduce the amount per long-term commercial opportunity, short-term financial installment to make PUE appliances more affordable. incentives may not be enough to convince companies to enter these markets, even with the larger companies’ Government institutions can introduce finance- and experience with the PAYGo model. technology-related policies that enhance the enabling environment for increased PAYGo availability in markets There are already mergers and acquisitions (M&A) taking where mobile money is unavailable. Central banks place in the sector driven by the need to strengthen can introduce or amend policies to allow non-financial company operations. In January 2022, Solar Panda and institutions, such as mobile network operators, to offer Azuri Technologies partnered through an agreement financial services. This will enable companies to easily that increased Solar Panda’s customer base by 50%, expand the PAYGo model to new markets, using the demonstrating an ability for the company to quickly scale preferred mobile-money payment method. Governments its reach.126 Solar Panda subsequently raised $8 million can also introduce tax exemptions for mobile phones to in July 2022.127 In September 2022, BBOXX acquired PEG increase affordability and penetration. This will enable Africa to scale up operations, widening its geographical growth in mobile money access and increase PAYGo presence in West Africa, and potentially supporting the availability. company in attracting more investment for its growing 125 Signify Foundation and Intellecap (2019), Mapping the Off-grid Solar Market in Nigeria; GSMA (2016), Mobile for Development Utilities Lumos: Pay-As-You-Go Solar in Nigeria With MTN; Shell Foundation (2019), Greenlight Planet Nigeria: Pilot Learnings: 2017-2019; PUNCH (2021), Greenlight Has a Bright Future in Nigeria – Tuga Omoyemi, PAYG Business Leader at Greenlight Planet. 126 Solar Panda (2022), Solar Panda and Azuri Technologies Announce Servicing Agreement. 127 CEO Business Africa (2022), PAYG Startup Solar Panda Secures US$8m Series A Funding to Increase Product Offering. 46 Off-Grid Solar Market Trends Report 2022: Outlook portfolio.128 LMDs are also consolidating to strengthen appliances to their product portfolios without requiring operations. For example in May 2022 Solar Sister in Nigeria specialized sales teams for distribution. and Tanzania merged with LivelyHoods in Kenya to jointly Small or local companies in less mature markets can supply SEKs and other climate-friendly products to last- consider value chain specialization and adoption mile consumers.129 In 2020, consolidation was viewed as of common international product standards to low-impact and low-likelihood but is now considered both encourage strategic partnerships. Though the vertically high-impact and high-likelihood. integrated model is good for nurturing new technologies, While consolidation may occur naturally over time, specialization enables companies to maintain leaner, driven by prevailing global economic conditions efficient businesses with reduced market exposure.130 that affect company performance, companies and Coupled with partnerships across the value chain, strategic investors can seek out lucrative opportunities companies can efficiently serve a wider range of customers to accelerate the process in more mature markets. while offering better quality products and services. With Companies can find opportunities to acquire or merge with common standards, adopted widely, companies will be other businesses that align with their long-term strategies able to comfortably unbundle value chain processes, while more strategic investors could enter the market specialize in one or two segments, and form meaningful to take advantage of opportunities to conglomerate partnerships with other players across the value chain. complementary companies into a stronger, cohesive group, as ENGIE did with Mobisol and Fenix International. 4.3 Technology Game 4.2.3 Specialization Changers Specialization involves focusing on one product segment or part of the OGS value chain to gain a competitive edge in the market. Product segment specialization is 4.3.1 Advanced Technology and a popular strategy for PUE companies while value chain Digitalization specialization is common among small or local distribution companies without the financial muscle or capacity to operate along the entire value chain, or for companies choosing to offer a niche service along the value chain, such as software. Companies can adopt technological Specialization is an ongoing trend in the OGS sector with advances such as Internet of Things, and companies now cropping up to provide niche services that cut across all sector players. Over the last two system interoperability and modularity years, companies have cropped up to provide specialized to unlock benefits that strengthen sector services to OGS companies, such as e-waste management, development. after-sales services including warranty, repairs and maintenance, and digitalization to improve credit risk Internet of things (IoT) and Artificial intellige (AI) are management and the customer experience. Specialization technologies that enable OGS companies to capture data is still considered a high-impact game changer. that can be analyzed to increase operational efficiency PUE companies can continue to build specialist expertise and improve services whereas grid-compatible OGS in their respective niches. PUE appliances are complex systems enable power source optimization for weak- and often require a much more technical team to provide grid consumers. IoT is a network of sensors that enables product-specific advice on sales or after-sales support. exchange of consumer data between OGS devices that Due to this, most companies offer one or few types of companies analyze to predict customer behavior and appliances, such as solar cooling or solar water pumps. improve PAYGo company payback outcomes, after- This additional complexity with PUE also makes it difficult sales services, and predictive maintenance. Subsidy for traditional, SEK-focused companies to simply add PUE program managers can also use the data for remote 128 BBOXX (2022), Bboxx Consolidates its Market Leading Position by Acquiring Solar Energy Frontrunner PEG Africa. 129 Solar Sister (2022), Better Together! Solar Sister Announces Merger With Livelyhoods Kenya. 130 UNEP DTU Partnership & Strathmore University Energy Research Centre (2021), Local value Capture From the Energy Transition: Insights From the Solar PV Industry in Kenya; Global Distributors Collective (2021), The Growth and Fundraising Journeys of Last Mile Distributors (LMDs). 47 verification.131 Closely related is AI, the simulation of can expedite the claims process for subsidy programs human intelligence by machines, that OGS companies like RBFs, making these programs more compelling for use to digitize processes, optimize product performance, companies and funders to participate, given the positive assess consumer credit risk, and improve pricing.132 Grid- impact on company cash flows and impact monitoring. compatible systems, another advancement in technology, Donors can fund more research and development on are those that allow for OGS integration with the national making grid-compatible OGS systems more affordable to grid through inverter-based networks to improve power better target all weak grid areas. Setting up such systems supply quality and reliability in unreliable-grid areas.133 is expensive and not yet accessible at scale. Since many Application of these technologies is still fairly new but weak grid areas are rural, where ability to pay is often is already playing a critical role in driving sector growth lower than in urban areas, it is vital to bring down costs by improving credit risk management processes and and increase affordability. OGS companies can also partner reducing operational costs. Large companies such as with utilities to identify better-paying customers and BBOXX, M-KOPA, and SunCulture, to name a few, are consumer profiles in these areas, enabling them to make applying IoT and AI to better understand consumer more sales through PAYGo and reduce their credit risk. behavior for improved credit risk assessment and management, and to optimize inefficient processes, while LMDs are doing the same through outsourced digitalization 4.3.2 Interoperability services from specialized Software-as-a-Service (SaaS) Interoperability refers to standardization of connectors companies (refer to the 2022 OGS MTR ‘State of the Sector’ and digital protocols which allow consumers to pair for more details).134 IoT has also been a key feature in SEKs and appliances from different companies and management of grid-compatible OGS systems, enabling enable companies to save on research, development, the system to communicate with the grid to optimize and manufacturing costs. This increases consumer energy source utilization depending on the state of grid choice by reducing switching costs from one company power supply or weather conditions affecting OGS power to another and fosters healthy competition that drives supply. AI and IoT integration remains high-impact for market efficiency and growth as OGS companies will have the sector and targeting unreliable-grid areas is now to maintain active and relevant competitive strategies to considered high-impact, compared to 2020.135 sustain customer loyalty.136 However, for interoperability to More companies can adopt AI and IoT technologies to deliver these benefits, adoption needs to be widespread. digitalize processes that reduce credit risk, improve While software interoperability is in its early stages of margins, and increase access to financing. With investor adoption, hardware interoperability is yet to take off focus now clearly on PAYGo credit portfolio health, due to concerns around repayment risk and quality companies can leverage AI and IoT technologies to better assurance. SaaS providers of PAYGo platforms - including assess and manage credit risk before and after client Angaza, PaygOps (by Solaris Offgrid), and Paygee - are onboarding. The same technologies can also be applied pioneering adoption of software interoperability. However, to making operational processes such as after-sales use of the standardized universal plug developed by the service and sales management, more efficient to improve ‘Connect Initiative’ to promote hardware interoperability company margins. With healthy credit portfolios and rising is not yet common.137 OGS companies continue to develop margins, OGS companies will be in a better position to proprietary hardware and software applications, citing attract investment for serving new customers. risks that guaranteeing a high level of after-sales service Subsidy program managers can work with companies to and quality of systems performance may be difficult if leverage IoT for more accurate impact monitoring and they were to make their products interoperable. There is faster verification. IoT allows for remote verification, which also a perceived risk that PAYGo customers may also fail 131 Oracle | What is IoT? 132 Dalberg & The World Bank (2022), Africa Energy Access Flagship report (forthcoming). TruQC | Digitization vs. Digitalization: Differences, Definitions and Examples; Note: ‘Digitalization’ refers to the use of digital technologies to transform business processes, creating efficiencies and potentially increasing margins. It differs from digitization, which is simply converting processes from analog to digital form. 133 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 134 GDC | Digital Service Catalog. 135 Dalberg & The World Bank (2022), Africa Energy Access Flagship report (forthcoming).. 136 GOGLA (2021), The Connect Initiative Whitepaper. 137 Solaris Offgrid (2020), PaygOps, Paygee and Angaza are Becoming Interoperable! 48 Off-Grid Solar Market Trends Report 2022: Outlook to complete payments (refer to the 2022 OGS MTR ‘State interoperability, to improve consumer choice while also of the Sector’ for more details).138 Unlike in 2020 where reducing risks to their brands and loan books. interoperability was viewed as a ‘small win’, it is now seen as a lever to increase company margins and OGS electrification demand by improving consumer perception. 4.3.3 Modularity of Systems More OGS companies can partner with interoperable Modularity is a technology feature that makes it possible SaaS providers and further consider hardware to increase the capacity of SHS or PUE appliances by interoperability. 18 brands that already utilize services adding battery and PV module capacity.139 System of the three aforementioned interoperable SaaS PAYGo modularity can enable consumers to climb the energy platforms will adopt software interoperability as soon staircase with rising incomes and greater energy needs. as the SaaS companies officially become interoperable; Paired with PAYGo, this can increase affordability of more companies can easily adopt software interoperability electricity access beyond Tier 1 and enable consumers by using any of these three platforms to make adoption to see OGS as more than just a temporary electricity more widespread. OGS companies, through industry solution before grid arrival. Further, leveraging modular association-led programs such as the ‘Connect Initiative’, SHS to create a mesh-grid, a system of connected SHS that can find solutions to the concerns around hardware enables energy sharing and trading, could also enhance community-wide benefits of solar systems (see Figure 22).140 Figure 21: Illustration of mesh-grids leveraging modular SHS in an off-grid community141 Conductor Modular SHS Can be inter-connected once a neighbour purchases an SHS Availability of modular SHS has increased impressively Solego products from SolarworX), Solaris, Niwa, Fosera, over the last few years while modularity among SolarNow, among others, while Okra Solar and SolarworX PUE appliances remains nascent. Companies selling have successfully set up mesh-grid projects in Cambodia, modular SHS include SolarworX, Solar Kiosk (selling Nigeria, Haiti, Philippines, Zambia, and Cameroon.142 138 GOGLA (2020), Connectors: The Low-hanging Fruit for Interoperability. 139 Everything About Solar Energy (2015), Modularity. 140 Okra Solar (2022), Do the Costs of Mesh-Grids Weigh Up? 18 Months Later for Steung Chrov; SolarworX | DC Microgrid. 141 Okra Solar (2022), Mini-Grids vs. Mesh-Grids; Note: Image inspired by OKRA Solar mesh grid. 142 InnoEnergy, Modular Solar Home and Business System; Angaza (2020), Angaza and Solarworx Bring Modular Solar Solutions to Africa; Solar Kiosk, Solar Solutions for Frontier Markets; Solaris Offgrid (2017), Eternum Energy becomes Solaris Offgrid; Niwa (2014), Niwa – Next Energy Products Releases Family of Modular Solar Systems; Angaza (2018), Fosera GSM Solar Home System is Angaza Pay-As-You-Go Ready; Business Call to Action | Case Study, Solar Now: Affordable Solar Home Systems; Okra Solar (2022), Do the Costs of Mesh-Grids Weigh Up? 18 Months Later for Steung Chrov; SolarworX (2021), DC Microgrid Successfully Piloted in Zambia; Okra Solar | Projects; SolarworX (2022), Solarworx Launches DC Microgrid in North Cameroon. 49 Most companies that sell modular units on PAYGo access beyond Tier 1. Consumers can earn an income allow customers the flexibility of adjusting their PAYGo through the sale of excess energy to neighbors and from agreements once they increase capacity. Modular agro- PUE appliances powered through the higher energy processing appliances like solar rice hullers are available in capacity made available.144 With these added benefits to Southeast Asian markets but generally, sales of such PUE consumers, as well as modularity making gradual system appliances have largely been bespoke, based on needs of capacity upgrade possible without having to replace the purchaser.143 Modularity of systems is a newly added existing installed systems, companies can more easily and game changer in this report. affordably upsell higher-Tier systems. More SEK companies can apply lessons learnt from PUE manufacturers, funded by development partners mesh-grid pilots to explore similar projects, unlocking and donors, can accelerate the commercial availability enhanced benefits of modular SHS to increase of modular PUE appliances. With concessional financing, affordability and upsell beyond Tier 1 electricity companies can conduct and conclude research and access. Since modular SHS are now fairly available, more development, and produce and distribute modular companies can consider leveraging this technology to technologies to enable the sector to benefit from create mesh-grids that enable these benefits for electricity modularity in PUE. Box 2: A world with widespread adoption of interoperability and modularity Applied together, interoperability and modularity can more easily enable a transition to higher Tier systems in more mature markets. Systems that combine both interoperability and modularity can allow consumers to increase the capacity of their SHS from “Company A” and use it to power an appliance purchased from “Company B” or “Company C,” and so on. This could be a gamechanger for consumers if, for example, Company B’s appliances were more affordable for the same level of quality or if Company C sells appliances that Company A does not have. The fact that most PAYGo platforms allow for remote activation and deactivation of SHS, and appliances can help mitigate the risk of failure to complete payments by PAYGo customers. Companies could benefit from being able to upsell systems and appliances to consumers who were not their first- time customers, which could increase competition and drive innovation that could lead to further company growth and sector development.145 Company A Month 1 Month 6 1 3 Purchases a modular, Stacks battery to upgrade to interoperable system a higher-capacity system Consumer 2 4 Purchases an Purchases an interoperable TV interoperable fridge Month 2 Month 12 Company B Company C 143 Engineering FOR CHANGE | Solar PV Rice Huller. 144 Okra Solar (2021), What Productive Power Looks Like. 145 PaygOps | Open PAYGo Link. 50 Off-Grid Solar Market Trends Report 2022: Outlook 4.4 Products and emissions.146 The beyond-energy model is a potential game changer in supporting company sustainability. However, Consumer Game for it to be game-changing the expansion in product mix must not come at the expense of reaching unserved Changers populations. Positive application of beyond-energy models is needed to improve company margins and sector performance, 4.4.1 Beyond-Energy Models while also continuing to reach unserved areas. By opening up their established distribution networks for sale of other products in response to consumer demand, companies can increase profit margins. Better performance attracts the investment necessary to scale operations and provide electricity to previously unelectrified households. Positively-applied beyond-energy For better chances of successfully incorporating these models can strengthen the sector models, companies need to ensure that they: (i) opt for by helping companies to continue to highly demanded products, (ii) can leverage new products supply OGS products and services as a to access additional sources of financing such as clean result of improved overall margins and cooking appliances and e-bikes for climate finance, and (iii) onboard specialized technical sales agents to effectively profitability. distribute complex products such as e-bikes. Beyond-energy models involve the sale of non-OGS products as a way to improve company margins for 4.4.2 PUE Availability and profitability, thus strengthening the sector. This model is already common in more mature markets where market Adoption penetration among core, commercial customer segments is nearing saturation. Companies leverage their existing PAYGo infrastructure, sales agents, and distribution networks to sell non-OGS products as a means of income Increased use of PUE appliances for diversification and growth, but continue to serve the OGS income-generation is required for market as achieving universal access remains their core economic empowerment of consumers goal. and can drive energy affordability in the More companies have adopted beyond-energy long-term. models in the last two years to explore new growth avenues, sources of funding, and potential pathways to sustainable profitability. Scale-up companies such as PUE, in this report, entails the use of electricity from OGS BBOXX and M-KOPA as well as LMDs have begun (i) selling to power appliances for income-generating activities. smartphones, LPG gas and other clean cooking solutions, PUE adoption can increase consumer incomes, for and electric motorcycles on PAYGo; (ii) partnering with example for farmers that increase productivity and yield telecommunications and media companies to sell with a solar water pump or for farmers, dairy herders, complimentary services like cable television and internet fisherfolk, wholesalers, and retailers that increase incomes access; and (iii) selling financial services like health while reducing food loss with cold storage. These two insurance and education loans. This has enabled them solutions ranked highest in potential to boost economic to diversify income streams, optimize use of distribution development and reduce poverty in the short term, channels in the hope of improving margins, and unlock according to an Efficiency for Access Coalition (EforA) other forms of financing. For instance, in 2022 BBOXX survey.147 Increased income results in higher disposable received debt financing of $5.5 million from the Africa Go incomes, which can improve the affordability of electricity Green Fund (AGG) to expand its PAYGo-enabled LPG gas access. offering and mitigate approximately 760K tonnes of CO2 146 BBOXX (2022), Africa Go Green Fund Signs a $5.5 Million Loan With BBOXX to Support the Rollout of Renewable Energy and Clean Cooking Systems Across Africa. 147 GOGLA (2019), Productive Use of Offgrid Solar: Appliances and Solar Water Pumps as Drivers of Growth; Efficiency 4 Access Coalition (2017), Global LEAP: Off-Grid Appliance Market Survey. 51 Across most markets, rising demand has driven more companies to sell PUE appliances, and multiple efforts 4.5 Policy and have been made to increase their availability and adoption. For instance, 35% of the Global Distributors Ecosystem Game Changers Collective (GDC) members (LMDs) reported selling PUE products in 2021, up from 6% in 2019, and another 21% expressed their interest to start, with SWPs being the most popular appliance.148 Sales volumes of SWPs and cold storage appliances remain low but recent initiatives have 4.5.1 Cross-Sector Partnerships been launched to increase access to OGS for productive uses, such as (i) PUE innovation competitions such as Powering Renewable Energy Opportunities in SSA, (ii) tailored financing mechanisms targeting PUE such as Acumen’s Pioneer Energy Investment Initiative Phase II, (iii) Partnerships between the OGS programs to promote PUE awareness and adoption such stakeholders and those in other sectors as EnDev’s Promotion for Solar for Productive Use, and such as agriculture, healthcare, and (iv) government-led subsidy programs for PUE appliances such as PM-KUSUM in India (see the 2022 OGS MTR ‘State of education can increase consumer the Sector’ for more details). Increasing availability of PUE awareness and uptake of PUE appliances appliances continues to be a high-impact Game Changer. and SEKs. Increasing access to and uptake of PUE appliances is critical in raising income levels of BoP households and Cross-sector partnerships, in this context, refer to consequently energy affordability. PUE appliances have collaborations that encourage clean and reliable potential to increase incomes and often increase savings electricity access through OGS in addition to by reducing use of expensive fossil fuels. They also can development goals in other sectors. Agriculture, improve reliability, eliminating reliance on unreliable healthcare, and education are some of the important grid connections, and reducing exposure to fluctuating sectors that, in addition to generating huge demand fossil-fuel prices. However, any solar-powered appliance’s for energy services, could mutually benefit from these availability is dependent on the solar resource. Higher partnerships as (i) the majority of farming activities take incomes can be channeled to various uses, including place in rural areas where electricity access is limited, and potentially higher energy budgets and demand. (ii) many off-grid healthcare centers and schools also lack access to electricity. To increase PUE availability and adoption, sector players can explore more financing options beyond the typical Cross-sector partnerships between OGS, and agriculture PAYGo model to make appliances more affordable. and healthcare sectors have continued to strengthen Companies can explore providing PAYGo with longer in SSA and Southeast Asia, largely involving PUE payment tenors or that account for seasonal variations appliances. Governments in India, Bangladesh, and in income. Proving out models in different country Togo have supported the uptake of SWPs among off-grid contexts will require grant funding from development farmers and solarized existing diesel powered pumps, partners. End-user subsidies, provided by governments reinforcing the potential for cross-sector partnerships.149 and development partners, can also increase affordability Companies such as Ecozen in India, ColdHubs in Nigeria, for lower income groups. Entrepreneurship training and and Savana Circuit and Baridi (by Tree_Sea.mals Ltd.) in support for building off-take markets can also help ensure Kenya are also building informal partnerships by working that PUE appliance operators are successful in generating with farmers and traders across different agriculture steady, long-term income. On the supply-side, donors can value chains to provide complementary services such avail more capital to fund R&D that can make products as online marketplaces, collect feedback to improve cheaper in the long run. appliances, and conduct trainings to improve appliance utilization and reduce food loss.150 In 2020, governments and development partners helped foster healthcare 148 The Global Distributors Collective (2022), State of the Last Mile Distribution Sector 2022; The Global Distributors Collective (2022), Webinar: Selling Productive Use of Energy (PUE) Products at the Last Mile: Top Tips and Common Pitfalls. 149 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 150 Ecozen Solutions | Home; ColdHubs | Home; Savanna Circuit Technologies | About Us; Baridi | Product. 52 Off-Grid Solar Market Trends Report 2022: Outlook partnerships by launching programs for OGS companies is still a major barrier. More funding is needed to build to provide solar cooling solutions for vaccines and other awareness on topics including the benefits of solar- medications. One example is UNICEF’s Solar Direct Drive powered products over diesel or grid-powered alternatives. Refrigerators and Freezers program.151 Agriculture-focused PUE companies could also improve awareness and product servicing by partnering with OGS electrification of remote schools, clinics, and agriculture-based organizations that already have a wide government buildings has also been a key development reach of end users who work in agriculture. area, reinforcing partnerships with education and healthcare sectors, and government institutions. In 2022, the Ghana Mini Grid and Solar Photovoltaic Net Metering project was launched, targeting institutional electrification of 400 schools, 1,100 public buildings, and 200 health centers, through SHS and mini-grids.152 Currently, several projects have been approved under the World Bank Group’s Lighting Africa Program, such as the Regional Off-Grid Electrification Project (ROGEAP) approved in 2019 to electrify public institutions, schools, and health centers beyond households and businesses in West Africa and the Sahel region, using OGS solutions.153 This game changer is new to this report, as a newly identified enabler of public institution electrification, PUE, and higher-tier electricity access. Development partners can launch more cross-sector partnerships to increase beyond-household electricity access. PUE companies have leveraged smaller scale partnerships for years. Large-scale partnerships are now needed. Development partners from both the energy and agriculture, education or health sectors can partner and co-develop programs that can achieve mutual goals. Companies would ultimately benefit from larger volumes of sales, as these partnerships open up more potential markets with use cases such as solar irrigation to improve production, cold storage to reduce food losses, and health center and school electrification improving health and education outcomes. Government ministries can co-fund programs that develop multiple sectors simultaneously. One example is the recent collaboration between Zambia’s ministries of health and energy, whereby a joint action plan was drafted to electrify health centers that lack reliable electricity © Power Africa access; the plan provided both for energy systems and PUE appliances.154 Cross-ministerial collaboration is essential, requiring that ministries no longer operate in silos. Companies, governments, and industry associations can also create awareness on benefits of partnerships between two sectors. For PUE appliances, awareness 151 UNICEF (2020), Cold Chain Support Package: The Solar Direct Drive Refrigerators and Freezers. 152 AfDB (2022), Ghana Signs Grant Agreement With African Development Fund, Government of Switzerland, to Support Development of Mini- grids and Solar PV Net Metering. 153 Lighting Africa (2019), Press Release: World Bank Provides Over $200 Million to Help Increase Access to Electricity in West Africa and the Sahel Region. 154 Sun-Connect (2022), Zambia Charts New Path for Powering Unelectrified Health Facilities With Solar to Improve Delivery of Essential Services. 53 4.5.2 Policies, Regulations, and Sector’ for more details). These changes were not well- communicated and created uncertainty in the OGS market. OGS Integration in NEPs In countries without robust electrification plans, governments, supported by development partners, can show strong commitment to electricity access by integrating OGS policies into NEPs. It is best practice to ensure that NEPs are adequately resourced, and that Consistently implemented and enforced implementing agencies and ministries have adequate policies and regulations favorable to OGS capacity to deliver on set OGS targets. Such actions can improve investor confidence to channel more financing to sector development can drive sustained scale electricity access in those countries. private sector investment and enable sector growth. Governments can improve enforcement of favorable policies and regulations, as simply introducing them is insufficient to enact change. Governments can improve enforcement by conducting capacity building across Enabling policies and regulations such as inclusion of government bodies involved in implementation of off-grid OGS targets in NEPs, favorable tax and duty exemptions, electrification policies and regulations, from ministries to and quality standards are directives by country specialized agencies, tax and customs agents, and bureaus governments that, if introduced, encourage private of standards, to ensure that they have enough well-trained sector participation to improve electricity access. The agents for consistent enforcement. In addition, though key objective of government policies and regulations regulations need to be firm and consistently applied; is to increase market participation while encouraging national electrification plans can allow for some flexibility, competition, with the goal of providing minimum cost, both in their implementation and for future updates, quality electricity access to citizens. One way of doing to accommodate changing market dynamics and other this is to incentivize the market entry or scale-up of unforeseen developments. The plans can be dynamic, for OGS companies by reducing costs through tax and duty example using OGS as pre-electrification for areas that exemptions for reliable and quality assured products.155 are scheduled to be grid-electrified at later stages. Lastly, Leveraging international quality standards ensures that policies need to be simple to interpret and execute by customers have a favorable experience with OGS products companies to improve compliance. and that funds are well spent. Market-enabling policies and regulations are still seen as vital as they were in 2020, and specific needs vary on a country by country basis. A growing number of countries have recently introduced enabling policies and regulations but inconsistency of implementation is high. Many governments, mainly in nascent and emerging markets, have recently introduced tax and duty exemptions, or adopted international quality standards or included OGS targets in their NEPs. This indicates positive progress in global OGS sector development.156 However, this progress has also been impaired by instances of poorly communicated revocation of tax and duty exemptions, and of unsatisfactory enforcement of quality standards due to capacity constraints. For instance, in 2020 Kenya unexpectedly reintroduced and increased VAT on solar equipment, driven by a government commitment to raise tax revenue, © Baobab+ then reintroduced elements of exemptions in 2021, while Zambia voided exemptions given in previous years, which required OGS companies to pay taxes retrogressively from multiple years back (see the 2022 OGS MTR ‘State of the 155 ESMAP (2022), Designing Public Funding Mechanisms in the Off-Grid Solar Sector. 156 The 2020 Off-Grid Solar Market Trends Report; RISE 2020 data and Open Capital Advisors analysis. 54 Off-Grid Solar Market Trends Report 2022: Outlook 55 © Efficiency for Access 05 Conclusion © Power Africa 56 Off-Grid Solar Market Trends Report 2022: Outlook schemes; or by funding consumer awareness programs. To increase electrification of public institutions and promote PUE appliance growth and associated increases in incomes, governments can coordinate Closing the electricity access gap requires across ministries to jointly finance and then administer coordinated action by OGS sector projects between the energy sector and other sectors, stakeholders. Addressing barriers to such as agriculture, education or health. growth by actualizing the game changers • Development partners and donors: As frequent is vital. sources of catalytic grants, de-risking mechanisms, and subsidy programs, these partners can collaborate to ensure that funding reaches currently underserved 2030 is fast-approaching, and the OGS sector must markets; operating in nascent markets requires a accelerate sales to achieve its development goals. In higher risk-tolerance than currently exhibited by 2020, 733 million people were still without access to many development partners. They can also provide electricity, and this report estimates that the sector will concessional capital to innovative funds that crowd- need to grow unit sales from 32 million in 2021 to 56 in the commercial investments needed to drive million in 2030 to provide electricity access to 1.1 billion sector growth. Development partners and donors people and meet its target contribution towards SDG7, can support governments through co-funding and including providing first-time primary access to 464 million technical assistance to pilot, launch, and successfully people. execute national electrification plans, as well as specific All stakeholders will be required to make a coordinated initiatives such as subsidy programs. push to implement game-changing interventions that accelerate electricity access. This includes OGS • Impact investors, development finance institutions, and other financiers: These financiers can actively companies, governments, development partners, donors, create innovative financing mechanisms, such as and investors. These interventions help to increase an off-balance sheet financing platform, alongside both Tier 1 and higher levels of electricity access, while development partners. They can actively manage or supporting overall sustainability of the sector. participate in those opportunities. They can also seek • OGS companies: Companies can access financing to work more with de-risking capital allowing them to by positioning themselves favorably and leveraging support early stage companies. Companies cannot rely advanced technologies that improve their credit risk on grant funding alone to achieve scale. management, operating margins, and monitoring There is an urgent need to accelerate electrification with and demonstration of climate impact. They can OGS, particularly in currently underserved markets. also leverage beyond-energy models and subsidies The sector now has over a decade of learnings, in that to improve company margins, while reaching new time developing high-quality and affordable products, electricity users. In markets where PAYGo is limited, demonstrating successful business models, and identifying they can work with other stakeholders to pilot and adequate policies and regulations needed at the country rollout innovative forms of PAYGo. Finally, companies level to help the sector flourish. Significant investment will can seek out opportunities to build long-term, cross- be required to reach the sector’s development goals, but sector partnerships to increase the adoption of PUE the path to success is clearer than it has ever been. appliances. • Governments: Governments that have not yet done so, and that still have high electricity access gaps, can adopt OGS as a component of their national electrification plans and international quality standards for OGS products. Once policies and regulations are in place, they can focus on adequate enforcement. Where support is needed, together with development partners, governments can also launch supply-side and end-user subsidy programs, making it a national priority to deploy public funding alongside donor ©Power Africa funding for electricity access. In addition to co-funding subsidy programs, governments can also promote private investment, for example by taking on some up-front risks through catalytic grants and guarantee 57 Annexes © Power Africa 58 Off-Grid Solar Market Trends Report 2022: Outlook Annex 1 - Definitions of Key Household Product Segments and MTF level Product Definition Power Range Indicative Price MTF Level Example Category (Wp) Range ($)157 Portable Single light only 0-1.49 $4 - 40 Enables Tier 0 lanterns Single light & 1.5-2.99 $6 - 51 (or partial Tier 1) mobile charging Electricity Access for an individual person d.light S3 Multi-light Multiple light & 3-10.99 $37 - 208 Enables Tier 1 systems mobile charging Electricity Access for at least one person and up to a full household SunKing Home 200X Entry-level Three to four 11-20.99 $33 - 333 Enables Tier 1 SHS lights, phone Electricity Access for a charging and household powering a radio BBOXX Flex 40 Basic- As above, plus 21-49.99 $40 - 686 Enables Tier 2 capacity power for a Electricity Access for SHS television, more a household when lights, appliances coupled with high- & extended efficiency appliance capacity StarTimes Solar S100 Medium- As above, but 50-99.99 $50 - 1100 Enables Tier 2 capacity with extended Electricity Access for SHS capacities a household even using conventional appliances BioLite SolarHome 620 Higher- As above, but 100+ $248 - 2862 Enables Tier 2 capacity with extended Electricity Access for SHS capacities a household, even using conventional appliances JUA H4G-300 157 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 59 Annex 2 - Definitions of Key Household and Productive Use Appliance Segments Household / small business appliances Product Category Application Indicative Price Example Range ($) Televisions Television sets provide access to $34 - 325 entertainment, educational content, and news. Most televisions sold as part of SHS kits are DC-powered, although AC-powered sets can be used with DC-AC solar inverters. NIWA Solar ELED TV 23.6” Fans Fans improve household comfort, especially $14 - 65 during hot seasons. fosera. POWER LINE Standing Fan 12V Refrigeration units Off-grid refrigeration units reduce the $72 - 1817 (up to 300L capacity) risk of food contamination and preserve perishable produce and beverages for both households and small shops in rural, remote communities. Koolboks Refrigerator Other Other, smaller appliances include radios for Variable households and multi-port phone chargers for small businesses. Sun King Radio 60 Off-Grid Solar Market Trends Report 2022: Outlook Annex 3 - Methodology Methodology for Estimating the Projected Global Off-grid Solar Sales • Determine the growth rate required to achieve the SDG7 scenario • Determine a target number of people using SEKs by 2030. This assumes that Tier 1 is the minimum threshold for electrification, so system sizes below Tier 1 are not eligible. This figure comprises: • The number of people needing a first-time SEK energy connection, based on analysis from the Global Electrification Platform (GEP) “Low Demand” scenario • An estimate of the share of SEKs that will be serving as backup systems alongside the main grid, based on data on historical share of weak grid users and scaled across different market types158 • Maintaining the access of current SEKs users by replacing systems as they reach the end of their asset life • Starting from the current split of SEK sales by system size, mapped to the ESMAP Tiers, project the expected evolution of sales by three system sizes: (1) below Tier 1, (2) Tier 1, and (3) Tier 2+. The target SEK users number is used to set a sales trajectory that would reach all of the target population with a Tier 1 SEK by 2030, accounting for different asset lives of systems of different sizes (Tiers). The assumed mix of sales by 2030 in this case (comparable to the below projected scenarios), is: 70% of SEK sales would be Tier 1, 30% above Tier 1 • Determine growth rates for the other scenarios: projected, optimistic, and conservative • Project plausible growth in both (1) unit sales and (2) evolution of the relative shares by system, size, based on historical trends in SEK sales • To determine the ‘projected’ unit sales growth rate this report uses the average of the growth rate of affiliate sales between 2015-2019 and 2016-2021 • To determine the upper bound ‘optimistic’ unit sales growth rate, this report uses the growth rate of affiliate sales between 2015 and 2019 as these years experienced fast growth • To determine the lower bound ‘conservative’ unit sales growth rate, this report uses the growth rate between 2016 and 2021 as these years experienced accelerated growth, a decline due to impacts from COVID-19, and then a rebound in growth in 2021 • In each scenario, project the evolution in the sale of units by size, which are based on historic affiliate sales: • In the ‘projected’ scenario: by 2030, 30% of SEK sales would be above Tier 1, 36% Tier 1, and 34% below Tier 1 • In the ‘optimistic’ scenario: by 2030, 35% of sales would be above Tier 1, 45% Tier 1, and 20% below Tier 1 • In the ‘conservative’ scenario: by 2030, 25% of SEK sales would be above Tier 1 43% Tier 1, and 32% below Tier 1 • Carry out these unit sales projections for the total SEK market, and for nascent, emerging, mature and peaked markets separately Methodology for Estimating the Investment Need to Achieve SDG7 and Projected Investment To estimate the global investment need for the off-grid solar sector to achieve SDG7 • Classify companies into small distributors, mid-sized companies, and scale-up companies, and determine the proportion of each in nascent, emerging, mature and peaked markets • Assume splits between small distributors, mid-sized companies and scale up companies in each type of market • Determine the proportion of debt, equity, and grant that each type of company may require to finance its operations • Assume splits of debt, equity and grant for each type of company and market type 158 Lighting Global/ESMAP, GOGLA, Efficiency For Access, Open Capital Advisors (2022), Off-Grid Solar Market Trends Report 2022: State of the Sector. 61 • Determine the prices charged by different companies, the costs incurred, and operating margins • Assume a constant price across all company types • Assume lower COGS and higher operating margins for larger companies • Calculate the revenues and costs to determine the investment need based on projected sales To estimate the projected investment • Following the approach taken in the Off-Grid Solar Market Trends Report 2020, estimate the historic investment raised (recorded by GOGLA Deals database), and compare this to the unit sales recorded by GOGLA. This gives an investment raise of $17 per unit sold • Next, to account for both changes in unit volumes and changes in the type (size) of SEK sold in the future, convert the above factor to an investment raise per dollar of value sold in 2022, the starting year of projections, which comes to around $0.23 investment needed for each $1 of sales • Next, use the estimated prices of below-Tier-1, Tier 1 and Tier 2 systems from the 2022 OGS MTR ‘State of the Sector,’ and apply these to our projected unit sales pathways, to estimate a value of sales between now and 2030 • Then, apply the investment multiplier ($0.23 per $1 of sales) to estimate the investment that would be required to achieve the projected sales turnover • Finally, determine the composition of debt, equity and grant based on historical trends Methodology for Estimating the Affordability Gap The approach to estimating the affordability gap for off-grid solar products is based on the approach described in 2022 OGS MTR ‘State of the Sector’. The approach is summarized again here, focusing on the adjustments and assumptions made to project the affordability analysis forward to represent the period 2022-2030 • Estimate the affordability gap for all new primary electricity access connections needed from off-grid solar technologies, for the projected population in each country that would be best served by OGS as their primary form of electrification between now and 2030 (described earlier in this annex) • Estimate the ability to pay on a country-by-country basis for all countries with a remaining electricity access gap. For each country: • Obtain the distribution of consumption expenditure for each country from the latest available year of data in The World Bank’s PovcalNet, which gives us the shape of a demand curve for each country • Obtain an estimate of the total income across each national population, using GNI per capita (GNI, Atlas method, current $) for 2020 • Aggregate per capita demand into household demand, using household size per country from the Population Research Bureau • Extrapolate these values forward to 2026 as a representative mid-period year, by using the latest IMF GDP growth forecasts per country, and adjust for population growth projections from the UN Population forecasts • Estimate the affordability gap based on an allocation of 5% of monthly consumption expenditure to off-grid solar products based on two approaches to provide an upper and a lower bound: • Conservative - bottom up: assumes the electricity access gap between 2022 and 2030 is concentrated among the poorest strata of the population. For example, for a country with 100 million people, of which 20 million still lack access to energy, the demand curve is based on the estimated income of the poorest 20 million people only • Maximum - nationwide income distribution: here the national income distribution is used, so the customers (and therefore ability to pay for off-grid solar products) are evenly distributed across the nationwide income distribution • Compare these two demand curves (“conservative” and “maximum”) for each country to the price of accessing a Tier 1 off-grid solar product. This is assumed to be around US$ 95, an estimate for the current estimated price of an off-grid solar product achieving full Tier 1 electricity access for a household 62 Off-Grid Solar Market Trends Report 2022: Outlook • Finally, assume that 30% of sales offer PAYGo end-user financing, while 70% are cash over-the-counter sales. While PAYGo can significantly boost ability to pay by spreading payments over for example 12 to 24 months, it is both costlier (increasing total cost of ownership) and may not always be practical in the context of customers who do not currently have electricity access, many of whom live in fragile and conflict affected regions. To provide a reasonable estimate of the affordability gap, in each country it is assumed that 30% of the sales will be made using PAYGo Methodology for Estimating the Market Potential for Cold Storage in Sub-Saharan Africa and India To estimate the total potential market size for cold storage in SSA • Estimate the number of rural SHF households in SSA in 2021: 33 million SHFs based on data from the International Fund for Agricultural Development159 • Estimate the number of SHF households across the horticulture, dairy and fish value chains. This is a conservative estimate and assumes that SHFs in these value chains have the greatest demand for cold storage. Leverage UN population growth projections between now and 2030 as a proxy to estimate the growth in SHFs across the key value chains160 • Estimate the number of SHFs who will require a cold storage unit by 2030 across the key value chains by: • Assuming the potential demand for cold storage will comprise the off-grid SHF population in those value chains • Leveraging World Bank data on the proportion of rural population with access to electricity to estimate the off-grid rural population, assuming this proportion to remain constant from now to 2030161 • Determine the potential number of cold storage units required by the off-grid SHFs by: • Leveraging World Bank data on the proportion of rural population with access to electricity as a proxy for the off-grid SHFs • Leveraging data from a sample of CaaS companies on the number of farmers that each cold storage unit can serve Estimate the total potential market size for cold storage in India • Estimate the number of rural dairy SHF households in India in 2021; 70 million rural dairy SHFs based on estimates from the Indian National Investment Promotion and Facilitation Agency162 • This is a conservative estimate on cold storage demand based on the assumption that the dairy segment of the agricultural sector in India has the highest demand for cooling services given its highly perishable nature163 • Leverage UN population growth projections between now and 2030 as a proxy to estimate the growth in SHFs across the key value chains164 • Estimate the number of SHFs who will require a cold storage unit by 2030 across the key value chains by: • Assuming the potential demand for cold storage will comprise of the unorganized SHF population (Note: Larger organized farmers are assumed to have access to reliable grid and thus access to cold storage solutions) • Determine the potential number of cold storage units required by the off-grid SHFs by: • Estimating the number of farmers in each dairy cooperative by leveraging data from the National Investment Promotion and Facilitation Agency of India165 159 IFAD (2021),The IFAD Field Report. 160 UN populations data portal. 161 The World bank data portal. 162 National Investment Promotion and Facilitation Agency NIPFC (2021), The Indian Dairy Landscape. 163 Ibid. 164 UN Population data portal. 165 National Investment Promotion and Facilitation Agency NIPFC (2021), The Indian Dairy Landscape. 63 Methodology for Estimating the Market Potential for SWPs in Sub- Saharan Africa and India Estimate the total potential market for SWPs in SSA • Estimate the total number of SHF households in SSA by: • Leveraging UN population growth projections as a proxy to estimate the growth in SHFs households166 • Leverage Pew research center estimates on the number of people in each household as a proxy to estimate the number of SHF households167 • Estimate the number of off-grid rural SHFs • Leverage the World Bank estimates on the share of rural households and population with access to electricity as a proxy to estimate the number of off-grid households168 • Estimate the number of SHFs that would be best served by SWPs by 2030 by: • Assuming the number of SHFs growing cash crops and with access to water as we consider these are the target consumers for irrigation by leveraging data from The Market Opportunity for PULSE in sub-Saharan Africa report by Lighting Global on the proportion of SHFs cultivating cash crops in SSA169 Estimate the total potential market size for solar irrigation pumps in India • Estimate the number of smallholder farmers in India • Leverage UN population growth projections between now and 2030 as a proxy to estimate the growth in SHFs170 • Estimate the number of SHFs that would be best served by SWPs by 2030 by: • Assuming the number of SHFs in rainfed areas and are growing high priority/value crops that require irrigation • Assuming the proportion that would actually use SWPs by considering the utilization of SWPs by users. (Note: These SHFs are likely to attain greater benefits from irrigation services given that access to water is the main driver for irrigation.) 166 UN Population data portal. 167 Pew Research center: Household size. 168 World bank data portal: Rural population (% of total population) in SSA. 169 Lighting Global (2019), The Market Opportunity for PULSE in Sub-Saharan Africa. 170 UN Population data portal. 64 Off-Grid Solar Market Trends Report 2022: Outlook 65 © Alison Wright 66 Off-Grid Solar Market Trends Report 2022: Outlook