Lesson 5: Don’t wait for R&D; develop the markets now

Where the electricity grid is either not present or extremely unreliable, solar is competitive now. Indeed, it has been competitive for at least one, getting close to two decades. But, as with any technology, there is a period of time when the issue is not so much the competitiveness of the product as the success of entre­preneurs in making it relevant to customers and selling it.

Most people like to conclude that when an innovation is economically competitive with the substitute technologies, it will just diffuse – that the economic benefits of the innovation will mean that it just sells itself. And so the inverse is also concluded – for as long as there is not more R&D, followed by a breakthrough that leads to lower costs, diffusion will remain limited:

For all the enthusiasm about harvesting sunlight, some of the most ardent experts and investors in solar technologies say that moving this energy source from niche to mainstream – in 2007 it provided less than 0.01 per cent of US electricity supply – is unlikely without any technology break­throughs. And given the current scale of research in private and government laboratories, that is not expected to happen anytime soon.14

But this ignores that one of the best ways of attracting money to R&D, and the best minds to a technological breakthrough, is by using policy to stimulate the market first. It is only with the stimulus provided by Japan, Germany, and now the US and other markets that solar has attracted so much private capital to invest in improved efficiencies of cells, new generations of solar modules and improvements in manufacturing techniques. Moreover, by building the market infrastructure for sales, installation and service now, it ensures that when a breakthrough is made, there are already the channels in place for that break­through technology to more easily reach the waiting customer base, enabling diffusion to happen much more quickly.

We saw how some analysts, after studying the potential for solar in emer­ging markets, concluded that efforts to promote PV markets were premature, and that funding should instead go to R&D and manufacturing to bring down the costs before trying to stimulate local markets. This study, however, has arrived at precisely the opposite conclusion.

As we have seen, although solar had higher up-front costs than the alternatives, it was already cost-effective over its lifetime, was preferred by customers over the alternatives – such as kerosene lanterns and battery char­ging – and, provided that consumer finance was available, customers were willing to buy it in ever-increasing numbers. Accelerating its diffusion was not about returning to the laboratory to figure out how to further reduce the cost of the solar module. Instead, accelerating solar diffusion was reliant on entrepreneurs entering the market, learning how to sell solar effectively, learning how to arrange consumer finance in a way they could manage, learning how to extend their distribution channels without over-extending their cash position, and learning how to raise the capital they needed for expansion. In parallel, policymakers had to learn which types of policies worked best to help promote and stimulate the solar markets, and which ones did not. All of this took learning by doing, and fundamentally it took time to figure it out. Earlier in this Chapter, I referred to this as the ‘lag effect’ associated with solar diffusion.

Had the World Bank and other policymakers taken the opposite approach, and diverted all the funds just to R&D and improved manufacturing of solar modules, as we have shown, it would not have made a significant difference to the retail price of an installed solar system in a rural unelectrified home. Moreover, imagine how much further behind we would be if the world had just waited. Entrepreneurs in emerging markets like Sri Lanka, India, Bangladesh and China would still be selling in relatively small numbers, there would just be a few of them, most customers would not know about the product, banks would still be wary of lending for it, salespeople and technicians would not have been trained in how to sell and install it, and policymakers would not yet have started to learn which policies work and which don’t work in support of the technol­ogy. Instead, thanks to early action, thriving solar industries now exist selling solar to eager consumers, people understand the technology and are more aware of it, salespeople and businesses overall are better at selling it, banks have learned how to finance it, policymakers have figured out how best to stimulate the market further, and diffusion has already ramped up significantly.

Today, prominent analysts have recognized the urgency of helping emer­ging markets accelerate the diffusion of renewable energy technologies:

What is needed, [Jeffrey] Sachs and others say, is the development of radically low carbon technologies. … And time is critical, they say, as China, India and other developing nations march headlong into the modern world of cars and electricity consumption on their way to becoming the dominant producers of greenhouse gases for decades to

come.

And yet these analysts continue to arrive at the wrong answer for how to accel­erate the process. In the same article Sachs maintains that, for renewable energy technologies to take hold, it will require a commitment approaching the scale of the Manhattan Project, ‘a major overhaul in energy technology’, financed by ‘large-scale public funding for research, development and demon­stration projects’. But if anything, Selling Solar has taught us that the last priority for emerging markets is actually more R&D and demonstration proj­ects. Instead, the central message is to develop policies that incentivize entrepreneurs to sell the renewable energy technologies that exist today. If we keep downplaying the technologies that already exist, rather than supporting entrepreneurs to make them immediately relevant and available to customers, we are likely to wait too long.

Summary

When it comes to deploying renewable energy technologies to address climate change, we are in a race against time. Unfortunately, the history of technology diffusion suggests that time is not on our side. Technological innovations rarely diffuse at the rate their propagators and enthusiastic supporters hope for. That is why theories of innovation diffusion, which explain the time it takes for an innovation to gain widespread use in a society, are so relevant to meeting today’s challenge of climate change.

There is a tendency among analysts and onlookers of renewable energy markets to concentrate on the ‘price competitiveness’ of these technologies relative to existing, conventional alternatives. If only it was less expensive than the alternatives, it would naturally diffuse. This, in turn, makes them predis­posed to recommending policies for more R&D to accelerate diffusion. But the case of solar in emerging markets has shown how such analyses can be flawed.

Of course, there is no way for a fully installed solar system to have the same up-front price as a kerosene lantern. When you buy a solar system, you are not only buying the energy delivery system, but you are also buying the fuel for the next 20-plus years. This means the only way to compare the competitiveness of renewables like solar against fossil-based alternatives is on a life-cycle basis. When doing this, we saw that by the mid-1990s, solar was already competitive in the rural markets in comparison with what unelectrified customers were other­wise using. It was not the price of solar holding it back, it was something else.

Those who have studied the diffusion of innovations have long recognized that even after an innovation is competitive with the technological alternatives, it does not sell itself. As we have seen through a review of diffusion research, and application of the diffusion framework, there are a host of barriers other than the price competitiveness of an innovation that can hinder its diffusion. In the case of solar, these barriers included the absence of consumer finance to make the up-front cost more affordable for rural customers and the absence of a market infrastructure to make the product and related services more available.

Therefore, it was not more R&D or a technological breakthrough that led to an acceleration in solar diffusion in emerging markets. Rather, it was entre­preneurs recognizing the competitiveness of this new energy innovation, and stepping into the rural marketplace to start selling it. Once they did so, there was inevitably a lag effect, during which entrepreneurs were trying to learn how to sell solar in a commercially viable and sustainable manner, and trying to raise the resources their businesses required. This lag effect lasted throughout most of the 1990s, during which time solar diffused at a very slow rate. But through their actions, these pioneers sent signals to both new market entrants and poli­cymakers that there was enormous potential in rural solar markets. In turn, new entrants helped to build the essential market infrastructure for solar and put in place more financing for solar consumers, and policymakers put in place further incentives to expedite this process, with the net result that several of the emerg­ing markets profiled in this book are now in the midst of a solar revolution.

The story of Selling Solar serves as a wake-up call in two ways. First, no longer should we be made complacent by analysts who focus only on the price competitiveness of renewable energy. Instead, we need to dig deeper and iden­tify the full range of factors that inhibit the diffusion of renewable energy innovations today. It may be that even ‘competitive’ technologies will ‘lag’ in their diffusion due to barriers other than price, and therefore any policies intended to support diffusion need to be targeted at these other barriers.16

Second, even in cases where a renewable energy innovation is not yet competitive, Selling Solar suggests that policymakers should avoid the tempta­tion of targeting their spending on R&D and waiting for a technological breakthrough. A competitive innovation that is still not attractive to customers, affordable through finance, or widely available simply will not diffuse. Instead, the lessons of Selling Solar are that policymakers should use policies to encour­age entrepreneurs to start selling and deploying the renewable energy technologies that are already at their disposal today. Entrepreneurs will have a lot to learn to address the full range of barriers to diffusion, such as how to raise capital, how to package the innovation in an attractive way for customers, how to build a market infrastructure for it, and how to work with finance partners. But having acted early, the policymaker has achieved two things: first, he has created a burgeoning market that will encourage more flow of capital towards R&D and manufacturing-at-scale than government programmes could other­wise achieve; and second, by the time these technologies are competitive in their own right, the early entrepreneurs and the firms that follow them will have already addressed the other barriers to diffusion, so that the newly competitive technologies will be able to diffuse that much more quickly.

In the end, there is no viable solution to climate change without making a wholesale shift to renewable energy technologies. This applies to both industrialized countries as well as emerging markets. But in emerging markets, the challenges are immense. By sheer force of will, some entrepreneurs will prevail. They always have done. But some entrepreneurs is not enough. If the goal is an unprecedented acceleration in the diffusion of renewable energy technologies in emerging markets, then policymakers need to encourage thou­sands of entrepreneurs to start selling these solutions today. They need to urgently orchestrate a crescendo of commercial interest, frenzied learning and a deluge of capital flows to the renewables sector. Selling Solar illustrates how policymakers who can ‘see’ a market like an entrepreneur will be best able to achieve this, and will be most successful in accelerating a renewable energy future.

[1] two and half years in, the solar project was going nowhere. The World Bank was in a fix. This would be the third solar project it had launched, and if it also

failed, that would be three in a row. It needed a success story.

At this exact time, however, the tide was turning in favour of the project. The Sri Lankan entrepreneur profiled in Chapter 5 had already signed a

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