Developing a competitive supply and distribution chain for deployment of off grid solutions such as solar Pico PV is always a challenge. This challenge is further aggravated with socio-economic, human induced problems as well as through market distortions, caused by sub-standard products. How can we overcome this challenge?
Indeed, several remedies can be applicable to these problems; however, a systemic cure can be achieved by creating a competitive business environment for deployment of micro-scale renewable energy solutions like solar lantern, which would be promoted by providing ex post financial incentive to manufacturing companies and entrepreneurs through result based finance fund (RBF).
It is expected that RBF can be linked to manufacturing companies and eventually to retailers and distributors. These retailers and distributors will have access to the financial incentive system of RBF fund, which could be received by them on completing pre-determined sales targets of stoves/solar lanterns. It is expected that these retailers and distributors will also facilitate post installation care and support the end-users (customers) for ensuring timely repair and maintenance of solar lanterns.
In this whole supply chain, one shall ensure a healthy competition amongst the companies, manufacturers, distributors and retailers which will eventually ensure long term sustainability of micro-scale renewable energy technologies such as lighting solutions.
There is an urgent need to breakdown the currently prevailing ‘subsidy driven, grant or aid linked inertia’ of project developers in the renewable energy sector and will eventually yield a truly commercial lighting sub-sector, which attracts private investment and debt or credit from financial institutions after the completion of this RBF funding.
For this blog posting, an indicative, generic design on RBF incentive and its effect on market is proposed. It is visualized that the RBF funds can be used to carry out key activities and to establish a business model that is: (a) profitable: at each level, the margins and incentives are clear and sufficient; (b) commercially viable: self-sustaining without requiring continuous external support or subsidy; (c) environmentally sensitive: recycling of batteries will be developed and addressed in partnership with the solar PV central distributors, and; (d). scalable: the model can be expanded to new areas and the product range can grow as new products and product innovations and improvements become available.
The RBF design shall lead to the creation of commercial partnerships between manufacturers, local wholesalers, distributors, retailers and financial institutions. (a). private sector funding to manufacturers and central distributors is key, which can be disbursed as ex-post based on achieving pre-determined sales targets. Private sector actors invest their own funds upfront for manufacturing, market development and promotional activities; (b). an ex post premium to project promoters (e.g., PicoPV distributors and retailers) on completing pre-determined volume of sales of solar lanterns (maximum up to 20 % of the monetary value of the stoves and Solar Lanterns sold, which exceeds the pre-determined target. The sales target will be determined based on actual baseline and market study in the project areas.). This premium will be paid at two levels of the supply chain, viz., (i). at the central distributor level This fund will cover as ex-post payment to distributors, for establishing a working capital system for pre-financing the retailers with its own funds. and; (ii), at the last-mile entrepreneur retailers level ( which will enhance their demand and ability to buy higher volume of solar lanterns) upon meeting sales target and creating more demands. Most individual retailers cannot shoulder first move costs and risks associated with penetrating undeveloped lighting markets. The RBF progarmme will work to significantly reduce these risks and build industry confidence. , Lastly, (c). a ‘voucher’ finance mechanism, which will be provided to households upon fulfilling pre-agreed conditions like taking responsibility for maintenance of their solar lantern (battery recovery) as well as completing a successful operational lifetime of the appliance and to be used for either replacement of the existing lantern or for the purchase of an extra lantern. The monetary value of the redeemed vouchers would be transferred to the bank accounts of the retailers and distributors.
The theory of change of this proposed business model is built upon five key inputs: mobilize private sector funding with RBF as an incentive instrument; catalyze the RE sector and broker partnerships between private sector, development agencies, retailers, distributors and government; promote quality solar lanterns; develop an enabling business environment for private sector actors at national and sub-national level and create/share knowledge in the region and globally. By means of this approach, the RBF business model will promote market-based learning amongst micro-scale RETs manufactures, distributors, retailers and local NGOs in the supply chain as their participation in the program will require for (i) formalizing business to business relations amongst manufacturers, distributors and retailers (contracting, record based billing), (ii) initiating sales strategies based on higher turnover and attaining premium (iii), ensuring better use of solar and other micro-scale RETs at domestic level by users and redeeming the voucher, and (iv) profit management for investment amongst retailers and distributors. This way, RBF contributes to building up distribution lines for both products, reducing transaction costs and bringing structural change in the local market by paving the way for the private sector to further penetrate the household cooking and lighting market.
Keshav C Das
August 24, 2015