In 2017 the off-grid industry in Africa and Asia saw some significant progresses in terms of products, market development and investments for multinational companies.
Where is the market going to in 2018? I see six megatrends:
1. The boundaries between off-grid and weak-grid customers are disappearing
In addition to the growing number of people without grid power, the number of households and businesses that have a power connection, but in fact only unreliable and / or very expensive electricity, is also growing: weak-grid customers. So far, diesel generators were the loud and expensive alternative. However, the proliferation of solar systems in conjunction with the greatly improved storage technology is increasingly turning weak-grid households and businesses into an attractive clientele for solar companies.
Weak-grid customers have two advantages: they are usually solvent and live predominantly in urban and peri-urban regions. This significantly reduces the cost of installation and customer service. The pressure of investors on off-grid solar companies will grow, in order not to miss this segment.
This development is supported by a megatrend in the field of product technology:
2. The separation between off-grid and grid products becomes more permeable
In many industrialized countries, solar systems are increasingly being operated not only as a backup solution to the grid, but – thanks to modern storage technology – as solutions for all-round supply, which uses the network if need be as a backup.
The stand-alone systems offered in industrialized countries have an output between 1 kW and 5 kW. This is correlated with the development that off-grid SHS are becoming ever larger and now also reach the kW capacity.
This brings an important paradigm shift closer: the previous separation between the small (DC) solar home systems for poor households and the larger grid-connected (AC) solar systems for wealthy customers disappears. On the one hand, even the small SHS are being offered more and more frequently in an AC variant, on the other hand, the AC solar systems are increasingly being used like their smaller sisters: off-grid, without grid connection.
This development is a real megatrend because it breaks down the distinction between solutions for the poor and the rich: solar energy becomes a solution regardless of the pocket. This is important because a clean, safe and affordable power supply through solar energy must not be dependent on the level of poverty.
For the industry, this means that the pure off-grid industry is increasingly becoming a decentralized energy industry with far greater growth potential.
3. Productive use complements entertainment and communication as a market driver
While the beginnings of the off-grid technology were driven by the ambition to replace kerosene lamps with simple solar lamps, it quickly became clear that this was not enough for economic and social development. In a next phase followed the SHS in different performance sizes, which could operate for example a TV in addition to mobile phone charging. The since then exploding demand for solar TV in combination with a mobile phone charging option has become a much stronger market driver than the LED light before.
Although light, mobile phones and TV improve the living conditions, they rarely provide for a direct increasing income. With customers’ growing trust in solar technology, in a next step the demand for solar products, which directly boost income, will increase. A solar water pump for irrigation, for example, easily leads to a doubling of crop yields. Also, solar cooling for vegetables, fruits or fish are important and of course electrical appliances for small business owners and craftsmen.
4. Investors are getting tired about investments in PAYG from SHS
As with the solar lantern hype of earlier years, the current PAYG hype arose out of the peculiarity of international investors to plunge almost unrestrained into an investment opportunity as soon as it becomes “presentable”.
It is hoped that the PAYG hype will cool off in 2018 because it is increasingly similar to an asset bubble, which threatens to collapse at the latest at the first profit slump. This does not necessarily mean that one of the big PAYG companies will fill for bankruptcy, but the pressure exerted by investors inevitably increases the propensity for risk to increase sales. Credit and currency risks are then often neglected.
PAYG companies themselves should resist the temptation to grow too fast. Healthy growth requires careful development of internal structures. Finding the right growth rate is one of the most important tasks of a company manager. It is not surprising that the CEOs of the PAYG companies are having a hard time here. After a year-long thirsty phase in which hardly any investor was interested in them, they are now at a rich source of water. But: anyone who drinks too fast or too much gets problems
5. Local solar companies in Africa are conquering niches for decentralized energy solutions
The development of the off-grid sector in Africa is – with all its successes – ultimately unhealthy: as long as no independent structure of local SME arises and market decisions continue to be made in foreign headquarters, an essential element for a sustainable and healthy market development is missing. Fortunately, in the big Asian markets (India and Bangladesh), the situation is much better because local markets are better protected against multinational corporations.
But where will local companies find market outlets in Africa if they have the strong multinational corporations as competitors and at the same time they receive consideration neither from investors nor from banks? As in other industries, SME can make a profit by relying on what large companies cannot do: providing personalized customer support with customized solutions instead of off-the-shelf mass products.
In the field of small SHS, customized solutions make no sense, but rather for larger systems up from 500Wp. In combination with the mentioned further development to larger products, there are excellent market options for local SME: institutions, resorts, production and trading companies as well as middle class households.
And who knows, maybe even some investors in 2018 will be smart enough to create financial instruments for local SME.
6. Mini-Grids remain a niche solution
The advantage of a mini-grid is, first of all, that the producers of solar components for industrialized countries get better access to the market in Africa and Asia. After all, any company in Europe and the USA, which has developed products for nationwide electricity grids, will only be happy in developing countries if this network-based technology also exists there. If there is no nationwide power grid, then please at least a mini-grid so that the own products and knowledge find a downstream exploitation.
In fact, mini-grids significantly increase the organizational and technical effort compared to stand-alone systems. A circumstance that is more cost significant in developing countries than in industrialized countries and therefore permanently prevents significant expansion. Mini-grids remain economically attractive only as a niche solution for special applications.