Navigant Research Blog

Enabling Remote Microgrids in the Developing World

— April 4, 2014

In my last blog, I wrote about the success mobile network operators (MNOs) are having with electrifying rural communities in developing regions, such as Latin America and Africa, by partnering with companies that sell solar home systems.  Much credit must go to the pico systems themselves, which are a cheap and reliable way to provide for the customer’s basic energy needs (cell phone charging and lighting).  However, there are two greater forces at play that reach far beyond the business of rural electrification: MNOs have found an effective business model in pay-as-you-go (PAYG) and they have employed an effective money transfer technology, known as mobile money.

These two forces answer the question: What has enabled the exponential growth of cell phone usage in the developing world?

Phone Bank

PAYG is a prepaid mobile phone plan.  You pay for a phone with a certain amount of airtime on it and you refill the time in your account as needed.  There’s no contract or monthly rate.  If you run out of time, your service is cut off, plain and simple.  This model works well for the off-grid rural poor who live on an inconsistent daily budget and who typically don’t have bank accounts.  It should be noted that some utilities in developed parts of the world are also experimenting with PAYG meters and they are finding that it is the only model that has successfully led to a change in consumer behavior (in the form of energy conservation).  As my colleague Peter Asmus details in his recent blog, this isn’t the only example of how the developed world can learn about energy solutions from the developing world.

Returning to the unbanked poor of the developing world, MNOs spotted an opportunity to capitalize on the lack of banking infrastructure in remote communities, and they have leveraged vendor networks and mobile technology to offer basic banking services to their customers.  To purchase airtime in the developing world, customers visit their local mobile airtime vendor and pay cash upfront for a scratch card of a certain value.  They enter the code from the scratch card into their phone to redeem the value of the card as mobile money, which goes directly into the mobile money wallet in their phone.  The mobile money wallet is protected by a PIN and acts essentially like a debit account, which can be used to purchase more airtime, along with other goods and services, to send and receive money, and to pay bills.  The MNO charges the customer for transactions made, so it is a lucrative new revenue stream for them.  More significantly for nanogrids, mobile money has opened the door to provide financing to unbanked customers.

Nanogrid Frontiers

Historically, one of the greatest barriers to off-grid households purchasing solar arrays has been the high upfront cost.  Investors, whether they’re vendors, microlenders, or nongovernmental organizations (NGOs), have had a hard time offering PAYG lending schemes to consumers due to the difficulty of collecting a long stream of small payments from a remote village, as well as the inability to monitor the systems.  Mobile money can provide a platform that enables lenders to conveniently offer PAYG schemes to off-grid consumers for the purchase of nanogrids, among other things.  More importantly, mobile money could turn remote parts of the world into profitable frontiers for the nanogrid market.  Many residential solar vendors (such as Simpa Networks in India) already see them that way, and these vendors are finding investors to finance PAYG systems as well as partners to handle the mobile money transactions.

While there is some variability in what these PAYG schemes look like, the keys to success seems to be the ability to track payments and usage easily and the ability to cut off service if a customer falls behind.  To view a list of nanogrid PAYG case studies, check out Navigant Research’s report, Nanogrids, and to learn about other business models that are being used to electrify remote parts of the world, view the replay of our “Remote Microgrid Business Models” webinar.

 

Village Nanogrids Fuel Mobile Networks

— April 1, 2014

There have been numerous efforts to electrify remote parts of the developing world.  Typically, these have come in the form of philanthropic ventures, with little to no expectation of a return on investment, using distributed energy systems that were often out of touch with the consumers’ energy needs, as well as their capacity to maintain the systems.  As a result, these efforts have been largely ineffective.  More recently, some for-profit companies (mostly mobile network operators) have found that a business case exists for investing in distributed energy for rural off-grid communities – by implementing systems that are much more in tune with customer needs and capabilities.  These systems usually take the form of nanogrids, which are described in the recent Navigant Research report, Nanogrids, and in my colleague Peter Asmus’ recent blog.

For mobile network operators (MNOs) in emerging markets, such as MTN, Vodacom, and Safaricom in Africa and Digicel in Latin America, the challenge is that there are millions of mobile customers without access to the electricity grid; approximately 259 million, according to a recent GSMA report.  For these customers, the cost of charging their phones can represent up to 50% of their total mobile expenditures (airtime plus charging costs), so their phones are only turned on when absolutely necessary, in order to conserve battery life.  Since MNOs make money when the phones are in use, it’s in their interest to make charging convenient and inexpensive enough that conserving battery life becomes an afterthought.  MNOs are quickly finding that distributed nanogrids, such as 10 watt solar home systems (SHS), are the cheapest, most effective way to maximize cell phone usage by existing customers, as well as to bring more customers online.  To stimulate the spread of these systems, MNOs are starting to form commercial partnerships with local vendors of portable solar products.

Friendly Local Utilities

In Uganda, MTN has partnered with Fenix International to provide MTN airtime vendors with a Fenix ReadySet solar-powered battery kit that charges phones and provides LED lighting for the vendor station, allowing them to stay open longer.  The ReadySet has turned MTN vendors into micro-utilities in their communities, creating additional revenue from phone charging and increased mobile money transactions, as well as savings for the vendor from using the LED light.  MTN is also repackaging the ReadySet as the ReadyPay Power System, which is now available to all its customers on a pay-as-you-go basis.  Similarly, Digicel Haiti partnered with Solengy in 2011 to install over 400 solar-powered street lamps and phone charging stations across Haiti.  Each station is operated by an airtime vendor that sets up shop below the LED street light and manages the phone charging service.  Other examples include Vodacom and Mobisol in Tanzania and Safaricom and M-KOPA in Kenya.

Forming the backbone of this transition are pay-as-you-go business models and mobile money, which I’ll explore in my next blog.

 

Lighting-as-a-Service Hints at Major Industry Shifts

— January 31, 2014

In November, Philips signed a 10-year performance lighting contract with the Washington Metropolitan Area Transit Authority (WMATA) to provide lighting-as-a-service in 25 WMATA parking garages.  Over 13,000 lighting fixtures are being upgraded to a custom-designed LED lighting solution at no upfront cost to WMATA.  The cost of the project will be paid for through the estimated $2 million in energy and maintenance savings the project will yield per year.  Energy usage is expected to be cut by 68%, or 15 million kWh, per year.  Philips will also monitor and maintain the system during the life of the contract, allowing WMATA to redirect approximately $600,000 annually in labor and material resources.  As part of the 10-year maintenance contract, Philips will also reclaim and recycle any parts of its system that must be replaced.

The implications of this business model are significant.  WMATA gets a top-of-the-line lighting system essentially free.  In fact, if Philips charges anything less than $2 million per year (or whatever the annual savings are), WMATA is making money on the project.  Throw in the maintenance contract and how could a potential customer say no?  The only potential downside would be if Philips welches on its customer service agreement and fails to perform adequate maintenance.  This would be a problem for Philips as well, as it would mean that the firm underestimated the resources needed to fulfill the maintenance contract and is missing its cost goals.

Reuse, Recycle, Re-Profit

According to Philips, lighting-as-a-service (or Pay per Lux) is their model moving forward, and that could be extremely disruptive.  While the fine details of the agreement have not been made public, it’s likely that WMATA agreed to pay Philips a percentage of the actual energy savings per year (compared to WMATA’s energy usage in a base year) as opposed to a flat rate.  This incentivizes Philips to maximize the efficiency of the system, which benefits everyone.  In that way, WMATA is truly paying for performance.

Echoing the theme of my last blog on cradle-to-cradle circular economies, Philips could also capture cost savings by recycling the lighting components, thereby turning a waste stream into a supply line.  Even if the upfront savings are small, they would provide an incentive for Philips to streamline the recycling process by designing products for disassembly, using fewer raw materials, and expanding relationships with recycling facilities, perhaps even acquiring them.  Then, if lighting-as-a-service starts to gain traction and the amount of material being recycled gains critical mass, the savings could become very real.

An efficient recycling process could lead to other opportunities.  For example, Philips could provide upgrades to WMATA’s system, increasing energy savings and customer satisfaction, more frequently and at lower cost without creating any waste.  If no material is being wasted, suddenly planned obsolescence doesn’t sound so bad.

I suspect any company that offers a technology that can pay for itself with annual savings is taking a long look at this business model.  If not, they should be.  The residential solar industry is already capitalizing on a similar leasing model.  If leasing and maintenance contracts become the norm in these industries where savings pay for the product, and customers begin paying for light as opposed to a lighting fixture, it could mean that hardware companies like Philips and Samsung will have to differentiate themselves more on customer service than on their physical products.

 

The Circular Economy Rolls Forward

— January 15, 2014

In 2002, Michael Braungart, a German chemist, and American architect William McDonough published a book called Cradle-to-Cradle: Remaking the Way We Make Things.  The book put forth a manifesto for how to achieve closed loops in the lifecycles of both technical and biological materials.  Put another way, the book uses the concept of “waste = food” to outline strategies for creating an economy where the need for landfills and incinerators is minimized (also called the circular economy).  As the authors put it, the recycling system of today is actually one of downcycling, which only postpones most materials from ending up in a landfill.  The authors see this as a design problem: products are currently designed for their usable life with no thought of what happens after they’re discarded.

Instead, Braungart and McDonough argue, products should be designed to be easily broken down into their raw materials, which can be cycled back into the manufacturing process without any degradation.  In fact, the authors point to opportunities for the quality of materials to even be upgraded in the recycling process.  Today, a number of organizations, such as the Ellen MacArthur Foundation, are trying to implement some version of the circular economy.  In fact, the U.S. Green Building Council has added the Cradle to Cradle Certified Program to its LEED Version 4 Rating System.

In order to achieve a circular economy, you have to be able to sell businesses and consumers on the (monetary) benefits of making such a transition.  There’s no point in designing a good to be infinitely recyclable if you don’t have a practical, cost-effective system in place to collect and process it at the end of its usable life.  According to the Ellen MacArthur Foundation, circular business models present a significant financial opportunity. However, defining what a circular business model actually looks like has remained largely speculative.

Lease, Rent, Return

In Cradle to Cradle, the authors propose using a leasing model for technical (non-biodegradable) goods.  Instead of paying for ownership of the product, consuming it, and throwing it away, the customer pays for performance of the product without ever owning it.  The company maintains ownership and collects the product when the customer is done with it. The leasing model has taken off in the residential PV industry, and it is beginning to show up in LED installations, such as with Philips’ Pay-per-Lux concept and Duke Energy’s Outdoor Lighting Services.  While it’s not necessarily Cradle to Cradle (C2C) principles that are driving adoption of leasing models in these industries, having a leasing model in place could make companies more likely to adopt C2C principles.

Leasing adapts well to the circular economy; however, it doesn’t work in every situation. For example, I don’t see leasing working for most consumer goods, especially the less expensive ones. Can you imagine paying a monthly fee for everything you possess?  Luckily, leasing isn’t the only option.  An obvious alternative to leasing is pay-as-you-go renting, and this model is manifesting itself in new ways that are gaining popularity, such as in carsharing services.  For products with shorter lifespans, such as consumer electronics, it might be more practical to let consumers retain ownership but offer them strong incentives to return products at the end of their usable life. A trade-in policy would be a natural fit for cell phones as well as for a myriad of other products. Tesla is experimenting with a battery-swapping program that it may end up turning into a battery-leasing program. These kinds of programs, which are just new takes on old business models, could lead to serious customer lock-in and a new level of consumer/producer interaction. Stay tuned for future blogs in which I’ll talk about some of the new takes on old business models that are already being implemented in more detail, and for more information about smart materials use, refer to Navigant Research’s Materials in Green Buildings report.

 

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