August 13th, 2020
As promised at the outset, the story of Selling Solar offers some ‘big picture’ lessons. Specifically, five lessons can be distilled to accelerate a renewable energy future. These lessons are primarily intended for policymakers with an interest in renewable energy in emerging markets. But it would not hurt for policymakers in industrialized countries to absorb these lessons as well.
Lesson 1: Entrepreneurs are central to diffusion, so support them
Entrepreneurial ventures are never easy. But entrepreneurs in the renewable energy sector of emerging markets are operating in a particularly challenging environment. Policy needs to start from this premise.
Some parts of emerging markets lack the essentials that many entrepreneurs in industrialized countries take for granted: easy access to reliable market data, customers with bank accounts, direct debit and credit cards, relatively low rates of interest, easier means of communication and reaching customers, and so on. This tends to mean more challenges for entrepreneurs in emerging markets (not to ignore the opportunities), and higher perceptions of risk by investors.
In addition, there is the challenge of working specifically in the energy sector. This sector tends to be highly regulated and state controlled. It has changed over the years, with the onset of privatization and de-bundling of utilities. But in many emerging markets, it remains a politically sensitive area, seen, for instance, in the popular backlash against removing subsidies for diesel, LPG or kerosene. In this sense, renewable energy entrepreneurs in emerging markets have their work cut out for them: politicians are under pressure to deliver cheap energy to the masses, while entrepreneurs are trying to innovate with renewable energy products that inherently have higher up-front costs but lower running costs. We saw in the case of South Africa, just how politicized support for solar became.
Yet despite these difficult conditions, Selling Solar has shown that pioneering entrepreneurs can create markets for renewable energy where before none existed. Even when existing policies were not conducive, entrepreneurs set up shop and demonstrated that customers were willing to pay commercial prices for solar. It was only on the back of this effort that policymakers started to think about how to scale up this promising new approach.
So the first lesson for accelerating a renewable energy future is that policymakers need to learn how to attract, support and retain entrepreneurs in this challenging sector. The trick, as we have discussed earlier, is to be able to ‘see’ the renewable energy market in question like an entrepreneur. If this can be achieved, then largely the right policies for accelerated diffusion will follow.
This may sound simple, but it is amazing how often policymakers fail to do it. This is largely because ‘business’ has for a long time been viewed as part of the problem, rather than the solution – perceived as working against the interests of local societies rather than with them. It also has to do with the different mindsets with which firms and policymakers approach a problem. One needs to make money from making or selling a product or service; the other simply wants a societal problem solved, and may not understand or have time for understanding what it will take for an entrepreneur to make money doing it. But to accelerate the diffusion of renewable energy technologies, it is imperative that analysts and policymakers learn to devise policies that incentivize entrepreneurs to deliver the solutions they seek.
In the case of solar, policies that helped accelerate diffusion were lower import duties, a grant per unit sold channelled directly to firms and lines of credit to be on-lent as solar loans. These were all things that either helped entrepreneurs reduce costs and improve margins, or helped them sell more solar – all of which ultimately contributed to profitable sales and diffusion in this sector. Policies that did not work were those that restricted foreign direct investment, unnecessarily increased the costs or capital intensity of doing business – such as fee-for-service in South Africa – or crowded out the entrepreneur by setting up parallel, heavily subsidized government programmes – such as those in India or the Philippines.
These sorts of policy conclusions may not initially appeal to some readers. For instance, eliminating import duties and encouraging foreign direct investment may smack of ‘globalization’ and corporate agendas that do not advance the interests of the poor. But as Selling Solar has shown, the lower the barriers to trade and investment in the renewable energy sector in emerging markets, the faster these essential technologies will diffuse. Similarly, the idea of channelling grants to firms participating in a renewable energy market may not sound that palatable either. But again, as Selling Solar has shown, if you want more entrepreneurs to enter a difficult sector, and remain there under difficult conditions, to deliver the renewable energy solutions that you seek, do not be afraid to incentivize them directly.
It will be entrepreneurs, and the firms that follow them, that lead emerging markets towards a renewable energy future. But it is policymakers who need to lead entrepreneurs by the nose with the right set of incentives. Learning how to ‘see’ a renewable energy market like an entrepreneur, and design policies that support and encourage pioneering entrepreneurs, will be one of policymakers’ main challenges when it comes to accelerating the diffusion of renewable energy in emerging markets.