The Solar market in rope halters

Tinsaye Tenaw, a farmer living in the middle of Abay Bereha (part of the Blue Nile gorge located between Goha Tsion and Dejene towns), never had electricity at his home. To his dismay, officials of the Zonal branch of the Ethiopian Electric Utility (EEU) have not been willing to connect his hut with the electric tower nearby that runs electricity to bigger towns. 

“Just because we are poor and thus not potential customers, there is little willingness to provide us with electricity. I heard about solar lamps from friends but that is also expensive. I barely get extra money as we eat everything we produce,” said Tinsaye.

In Addis Ababa, the central marketplace for imported goods, a solar lantern that can illuminate a room for more than five hours costs around 3500 Birr, while more than 12,000 Birr is required to purchase a solar home system that can provide power for DC appliances such as light, radio and charging phones. 

The price of the item varies across regions and it is more expensive in rural towns because of transportation costs and the lengthy supply chain. With contraband market players commanding a higher market share, however, there are also cheaper items with less quality and lower durability. Experts fear such a situation could damage the whole market.

“There is a huge opportunity in the market, even though contraband poses a huge risk to the real market players,” said Henok Assefa, Managing Partner of Precise Consult, which has recently published a report on standalone solar investment map for Ethiopia. 

A study conducted two years ago by USAID, which runs Power Africa Off-Grid Project, found out that 14.6 million households in Ethiopia are dependent on non-grid lighting sources. A large majority of these households dependent on off-grid sources use solar lantern or pico system with a power level of under 10 watts, which is lower than the target set to be achieved by authorities.

These households make up 67 percent of the country’s population, while majority of them live in rural areas where percentage of population relying on off-grid lighting sources reaches as high as 90 percent. Majority of them use battery power, kerosene lamps, or solar energy, and spend about 10 dollars (412 Birr based on current market price) per year on energy costs, which includes expenditures related to the purchase of kerosene, charcoal, firewood, and electricity, according to the USAID.  

With over nine million households expected to satisfy their electricity demand using standalone solar solutions in the next four years, it is easy to understand the huge market opportunity in the sector. Even though there are many private investors who are aware of such benefits, turning this into a meaningful return had not been easy.

Of course, many companies joined the sector to supply off-grid solutions, particularly solar lanterns, pico solar, and larger solar home systems with few companies being involved in minigrid solutions because of tariff issues. Despite an increase in private investment, however, their direct participation in the sector has been limited to projects backed by donors.

The World Bank, which has played a big role in increasing access to solar items in a project run with the Development Bank of Ethiopia between 2012 and 2019, provided concessional forex loan to 31 companies that have distributed over a million standalone solar products. Except for the time when the project was under implementation and other donor backed projects were active, private companies have been hesitant to invest in the sector.

Precise Consult, in its latest Standalone Solar Investment Map Report, attributed the low appetite of the private sector to the restrictive regulatory environment that exists in Ethiopia. Particularly, “forex policies prohibit businesses from possessing and using foreign currencies, restrictions around vertical integration create a fragmented supply chain, and regulations concerning mobile services limit adoption of scalable models like Pay-as-you-go,” the report explained.

The biggest challenge faced by suppliers of solar products is foreign currency shortage, which has been wreaking havoc on the country’s macro economy. Approval for letter of credit takes a long period of time; businesses have to wait more than half a year to get foreign currency under normal condition, while it usually takes more than a year in most cases. While this has pushed many suppliers of solar products to shift to other sectors, there have been very few brave new entrants into the market.

“Forex shortage being the top challenge, access to finance is still an issue impacting businesses involved in the market. If they want credit, they need to present between 150 and 170 percent collateral of the borrowed amount,” says Henok. He added: “This is a problem faced by suppliers on top of policy and regulatory challenges.”

The government has estimated that USD 1.7 billion is required between 2019 and 2025 to accomplish 9.2 million off-grid connections. Despite such an ambitious goal, there has been an implementation gap because of low access to finance for standalone solar supplying companies.

Businesses need forex to import items, working capital to widen their distribution network and operating capital to expand the supply chain and built other market infrastructure, according to the study by Precise Consult. The consulting company recommended that smaller local companies get grant or long term finance to reach commercial viability and prove their business models.

“Access to working capital is very critical. It is possible to set up cash guarantee facility for the businesses whereby they present half of the amount to be held as collateral and the rest would be covered by donors. The donor would guarantee payment of unpaid loans in case businesses fail to pay them; however, defaulting is very unlikely in the sector based on current market experience, which indicates non-performing loans are very low,” says Ahmedin A. Abdurahman, Program Manager for the Ethiopian Energy Market Accelerator (EMA) Program.

Experts also recommend the government encourages businesses willing to assemble solar products locally. “Currently, there is no incentive for assemblers of standalone solar products. For instance, the end product is free from tax but a high level of tax is levied on the components. If tax exemption is applied on semi-knockdown solar items, it could save more than 20 percent of foreign currency as it reduces shipping cost and other logistics expenses,” Ahmedin added.

Be that as it may, consumers financing mechanisms have to be applied to avert financial challenges faced by households, according to Tigabu Atalo, an Expert who has been actively involved in the energy sector for almost 15 years. “The demand has to be created equally and households need to get finance for a subsidized rate,” he said.

Under Market Development (for Renewable Energy and Energy Efficiency) Credit Line, which is run by the Development Bank of Ethiopia with loan secured from the World Bank, households need to pay an interest rate of 25 percent when they borrow money from microfinance institutions to buy solar lantern.

As a result, dependent on seasonal income generating activities, farmers started considering the item as luxury due to the high-interest loan that exceeds their capacity to pay. “This is discouraging and it can even impact businesses involved in the sector and discourage new entrants, even those willing to open an assembly,” Tigabu remarked.

On top of demand side interventions, Precise Consult also recommended that SAS companies be allowed end-to end control over importation, distribution, and after sales services in the interest of quality assurance and improved service delivery.

“Companies can collect valuable customer feedback and usage data that informs product development and promotes high repayment rates,” it recommended.