How You Can Build A Great Solar Energy Business in Nigeria

How You Can Build A Great Solar Energy Business in Nigeria

The energy sector is a $6 trillion per year business. Over the last four decades, the cost of solar panel materials has dropped 250x as a result of innovations in materials science, according to Singularity University. Shell predicts that peak oil demand will arrive sometime between 2021 and 2029. Simply, we will still have fossil but photons and electrons will be the future of energy.

If you put ALL the cumulative energy possible from coal, natural and oil together, just 5 days of energy the sun delivers to the earth is more than that. If man could harvest 0.017% of available solar energy, we would meet 100% of all our energy requirements.

Within the next 5 years, I expect the consumer solar energy market in Nigeria to pick up. Yes, the regulatory uncertainty with regards to the metering and integration to national grid will mature.

As the world moves into the digitization of solar technology, price of solar will continue to crash in exponential ways. You need to have new business models to play this game in Nigeria. Here, I provide new business models after looking at current solar business models in Nigeria that could help solar entrepreneurs.

Preamble

Solar power business is a growth area in Africa. There are already many entrepreneurs in this space across the continent. But solar power business is still at infancy with entrepreneurs trying many business models to discover the best. We provide two cases of two successful solar power businesses in the world which solar power entrepreneurs can mimic as they build their businesses. One is a U.S. company and another is an African company. In each, they have common traits which can be used to deliver value to customers and build a respectable solar power business.

Current Solar Power Business

  • Sell solar product to customers: Here, the customers buy the products, and own them. This scares some customers because despite not having to find money to buy the solutions, they have to handle the maintenance element which includes seasonal change of batteries, solar panels etc. Owing to that decision inertia, many have not become solar believers. In this model, the customer is investing in the equipment. Two cost elements are noticeable
    • Initial equipment cost
    • Maintenance cost throughout product life
  • Hire purchase: In this model, customers receive the solar equipment with options to make payments via installment plan. At the end of the installment plan, the customer owns the solution. The entrepreneur may increase the product cost to cover the extended payment plan. One challenge with this model is that the customer is investing in the equipment and not just focusing on getting the electricity. Two cost elements are noticeable
    • Installment payment for equipment
    • Product maintenance cost post-payment (usually the maintenance happens after the payment plan has been completed)
  • Lease 1: Here, customers are never given the option to ever own the equipment. The solution is leased to them and the cost of the electricity consumed is also charged to them.
    • The customer pays for the equipment but with no intention of ever using it (this is similar to a U.S. home broadband company renting the modem which the customer pays monthly. But the day the service is cancelled, the customer must return the equipment to avoid being billed the product full price)
    • The cost of electricity consumed is charged to the customer.
  • Lease 2: Here, customers are never given the option to ever own the equipment. The solution is leased to them but no cost of the electricity consumed is charged to them. The cost of electricity is included in the equipment lease amount
    • The customer pays for the equipment but with no intention of ever using it (this is similar to a U.S. home broadband company renting the modem which the customer pays monthly. But the day the service is cancelled, the customer must return the equipment to avoid being billed the product full price)
  •  Energy-as-a-Service: A potential winning model that can scale massively could be delivering electricity to customers, with no requirements for them to buy equipment. They pay for what they have consumed and the company owns all its equipment. You may need to get a contract where the customer must commit to use the solution under defined Key Performance Indicators. Once the customer signs, you take your equipment and install in the customer residence, at no cost to the customer. You make money by billing for electricity consumed.  With this, the customer does not have to invest in any equipment. Also, risks move to the entrepreneur who is now incentivized to make sure the equipment works, as without it working, there will not be any electricity to bill the customer. Yes, all maintenance costs are not concerns of the customers.

Two Cases to Consider

M-KOPA: Established in 2011, M-KOPA provides solar home systems that innovatively couple machine-to-machine technology (M2M) with a micro-payment solution. The system includes embedded GSM technology for monitoring and metering usage, while its pay-as-you-go service carries the advantage of no large initial
cash outlay. After an initial deposit, customers pay daily instalments via a mobile money service (M-Pesa) until paying off the balance. Once this repayment is complete, customers own the unit outright. Importantly, this solution is cheaper and healthier than the alternative, kerosene. M-KOPA solar is currently available
in 750 outlets nationwide in Kenya through the Safaricom distribution network.

SolarCity: This company executes something close to the Energy-as-a-Service business model noted above. It is a company that is partly owned by Elon Musk, the South Africa-born founder of Tesla, the pioneering electric car company. It raises money from banks which it uses to finance the implementation of the solar services in customer offices and homes. SolarCity has the following core models which are relevant to Africa:

  • Lease and PPAs

Revenues from operating leases consist of proceeds from both leases and PPAs (power purchase agreements). Lease and PPA terms range from 10 to 20 years, and SolarCity recognizes revenue from leases evenly over the term of the lease. The company recognizes revenue from PPAs as it generates and sells electricity.

  • Systems and component sales

This revenue stream comprises of a broader range of products and services, from outright solar system sales to cash-paying customers and long-term solar energy system sales contracts. Sales contract revenue is recognized on a percent-of-completion basis, which depends on the percentage of labor cost-to-date versus the total project labor cost. Revenue from systems financed under MyPower contracts is also included under this category.

  • Others

In addition, this revenue stream consists of other energy-related products and services, including order fulfillment for solar system mounting hardware, which SolarCity has integrated as revenue following its acquisition of Zep Solar, and solar cells and modules, which it has overseen since its acquisition of Silevo.

 

NB: Acknowledgement to Abundance by Peter Diamandis on the section before the Preamble. My Practice works with energy entrepreneurs on business models and strategies across Africa; we would be happy to speak with you.

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