August 13th, 2020
In Selling Solar, we have seen that there were two critical forms of finance necessary for diffusion: consumer finance for customers who wanted to buy solar systems and venture finance for entrepreneurs who were selling them. Both kinds of finance will be critical to the diffusion of renewable energy in emerging markets.
When customers buy a solar system, they are essentially buying at least 20 years of power, up-front, on day one. So the up-front costs tend to be high relative to the running costs. The running costs are of course relatively low because the fuel, sunlight, is free. Many other renewable energy and energy-efficient technologies fit this description – solar thermal water heaters, small wind turbines, micro-hydro generators, LED lights, energy-efficient fans and so on tend to have higher up-front costs and lower running costs than conventional technologies. It is a beautiful concept, but it makes for a lousy price structure for entrepreneurs trying to sell the innovation. Now add to this the fact that entrepreneurs in emerging markets are selling to customers that generally have little purchasing power, and you start to see why financing the customer becomes so critical to the future of renewable energy diffusion in emerging markets.
This point was made rather well in a small, probably little-read article published in the Financial Times in December 1996. In an editorial entitled ‘High price of a green machine’, the Financial Times quoted a producer of environmental technologies who described his products as ‘nice to have, but ugly to pay for’. Because of this, he prescribed that companies like his have to be ‘creative in cracking open markets. This will mean helping clients devise longer-term payback mechanisms for companies to recoup their investments.’ And with specific reference to the emerging markets, he cautioned that:
Even when there is a demand for products in, for example, some of the richer, faster-growing economies of Asia, financing remains a problem.
If you want to go to Asia, you have to bring the money with you. You have to do everything.6
The experiences of this businessman with needing to arrange finance in order to sell an environmental technology in emerging markets are very similar to the experiences of the profiled entrepreneurs in Selling Solar, as they will be to those of any entrepreneur trying to sell renewable energy technologies in emerging markets.
Financing the user is so critical that it bears repeating. Concentrating on making this and that improvement to a technology, so as to reduce the costs by a few percentage points, without focusing on how to make it more affordable through financing, will not significantly drive renewable energy diffusion in emerging markets. Many like to focus on the costs of a technology to the detriment of focusing on how to make it more affordable. Selling Solar demonstrates how this kind of thinking can miss an opportunity waiting to happen.
But if financing the user is essential, we also saw that such finance will not occur without an entrepreneur on the ground making the product widely available. There is a ‘symbiotic relationship’ between an entrepreneurial venture being well capitalized and being able to arrange finance for the consumer. Indeed, of these two forms of finance – venture finance and consumer finance – if anything, venture finance must come first. Consumer finance for renewable energy systems will only materialize where entrepreneurs are actively selling in
the market and building a reliable market infrastructure that can promise a financial institution a steady stream of creditworthy customers, strong warranties, and high-quality installation and after-sales service. And entrepreneurs can only do this at a meaningful scale with sufficient capital.
For instance, it was only when the entrepreneur profiled in Sri Lanka had sufficient capital at his disposal that he could convince the country’s largest microfinance entity to expand their lending to solar customers. Similarly, it was only because the entrepreneur in Indonesia could bring more capital to the business than other profiled entrepreneurs that he could pioneer his own ‘inhouse’ consumer finance scheme and build such an extensive market infrastructure to serve it. Capital is very much the life-blood of the entrepreneurial ventures we reviewed, and in this sense it was also the life-blood of solar diffusion. This finding will prove to be broadly applicable to the accelerated diffusion of renewable energy in emerging markets.
In this regard, it is encouraging to note that venture capital has started to flow to renewable energy ventures in a way that ten to twenty years ago, when solar entrepreneurs in emerging markets were struggling along, was hardly imaginable. In the US, for example, venture capitalists put US$727 million into 39 alternative-energy start-ups in 2006, compared with just US$195 million in 2005.7 But this is not just happening in industrialized countries. The surging growth of China, India and other emerging markets, coupled with surging demand for energy, has encouraged venture capitalists to look more closely at funding renewable energy start-ups in emerging markets. This bodes well for accelerated diffusion, provided policymakers can also bring in the right set of policies to support, complement and enhance the flow of funding.
And again, there would appear to be a positive trend. For as more money enters a sector, so policymakers tend to listen and observe a little more intently. This has certainly happened in industrialized countries, where the ‘tech barons’ of Silicon Valley have started to lobby for energy policies that will stimulate renewable energy markets.8 And this they are doing because they have a direct stake in the outcome of these policies through their investments in renewable energy start-ups. It is a universal process that as more companies become invested in manufacturing or selling a technology, so they will lobby for policies that help support the technology in question. And policymakers will tend to listen more intently, because more money and more jobs are now on the line. It suggests that over time an increase in the flow of new venture finance could help encourage a more suitable set of policies for solar and other renewable energy technologies in emerging markets.