7 answers to your questions on profitability in the off-grid solar sector

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Image: Little Sun

GOGLA, along with Solarplaza is gearing up for Unlocking Solar Capital (USCA) in Dakar next week.

In the run-up to the event, we organized a webinar to unpack investors’ perspectives around the path to profitability in the sector. Together with Leslie Labruto (Acumen), Eda Henries (Persistent) and Geoffrey Manley (CDC), we discussed some of the sector’s most prominent topics, including sustainability, sector unit economics, scalability, and growth.

The webinar left us with some pressing questions from you, our audience. In this blog, Eda Henries from Persistent, picks up some of the unanswered questions, talking about investments and market demand in the off-grid solar sector, business models and growth of companies within the sector.

1. From an investor’s perspective, what are your thoughts on defaults from some of the 1st generation off-grid solar companies? Is it likely to affect the cost of capital?

While there has been some initial pullback on the heels of the recent defaults or insolvencies, funders do remain largely committed to the sector. A few things we have seen changed – increased scrutiny around the path to profitability (particularly cash profitability) and increased openness to funding smaller and more unbundled second-generation players. The impact of the latter is yet to be seen given the dearth of early-stage capital we’ve seen in the sector. However, the fact that capital allocation has largely been concentrated with the larger players is increasingly being challenged.

2. How would investors and lenders see a market demand when 90% of people are below the poverty line? How would solar home system companies be profitable and especially in cash terms?

Better product-customer fit along with more patient and concessionary capital is needed to address affordability. Current product costs and the cost of building large distribution networks are still high enough that many low-income customers will require subsidies. Failure to acknowledge this fact and put into place the proper frameworks that allow these customers to be reached will likely stymie the large-scale aspirations of energy access.

Eda Henries

3. Do you prioritize some business models over others? Which distribution models are more attractive, in-house distribution network or using existing ones?

In-house distribution networks have typically been more successful in the PAYGo sector than third parties. Most third-party distribution networks (e.g mobile network operators (MNO) solely in telecoms businesses) are generally not currently set up to do the type of last-mile, door-to-door, inventory and service-heavy ops that retail PAYGo solar requires. In the case of MNOs, they, for the most part, sell data and voice credits (no inventory) and can do that pretty efficiently through current agent networks and other channels (e.g., banks). Selling hardware at scale in an operationally intensive way is a very different business that they would often have to work through. Some of these organizations, typically much larger and more organizationally complex than PAYGo startups are in the process of establishing and scaling business units for PAYGo that leverage their existing infrastructure. The success of these operations at scale would have to be seen as the sector matures. That said, many third-party distributors are very well capitalized, have long-standing relationships and brand recognition in the markets in which they operate. PAYGo companies who enter into distribution partnerships with these organizations have to weigh the value of brand recognition and a network that they would have to retrain and reconfigure for hardware distribution against the cost of building in-house. Many have often chosen the latter and it’s worked for some.

4. How much do you value the number of connections vs revenue generated? Are there any other metrics that you focus on to evaluate whether a company is successful or not?

While both connections and revenue generated are both very important metrics, they should be viewed within the context of profitability. A growth-only focus is not sustainable in a sector with high and disparate service delivery costs and limited capital.

5. How do you overcome the challenge of being able to accurately calculate your unit economics to account for fully loaded costs, including fixed costs?

Integrated IT systems (CRM, accounting, inventory, etc.) play a significant role in capturing operating costs efficiently. The upfront investment in such a platform is highly important.

6. If companies start thinking about profitability from the beginning, do you think it should then take them a shorter time period than 7-10 years?

Yes – some of our investees have reached profitability on a smaller scale in under 5 years.

7. What kind of KPIs or financial information has to be in the slide deck of an entrepreneur with a solar home system business when seeking finance to show the profitability or the potential for profitability?

Cash receipts relative to opex and debt service typically provides a strong (and simple) picture of how a business is doing from a cash profitability perspective.

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