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Tuesday, Jun 29, 2010
Last September I came to work with the Border Green Energy Team (BGET) on a three-month fellowship. My role was to help develop a program that BGET could run independent of grant funding. I wasn’t sure it could be done, but I was excited to apply my experience in evaluating business models toward making my own. Now, entering my last month of what turned into a six-month stay, the problems inherent in making rural electrification financially sustainable are even clearer to me, but I am confident that the scheme I have designed will become a successful venture for BGET.
The first question to ask is why we would want to do this in the first place. The advantage for BGET is obvious—we would be more self-sufficient as an organization and have income that isn’t dependent on receiving grants or contracts from other organizations.
There is also research, however, showing that distributed generation projects that include financial contributions from the end users, which is what financial sustainability would require, are more successful. End users treat the equipment with more care and are more invested, pun intended, in the project. Technology dumps, once popular, are now widely acknowledged as less than ideal.
Almost immediately I zeroed in on solar home systems (SHS) as a promising technology for my project. SHS are household-sized solar power systems, in this case providing enough power for a couple lights and one small appliance. I was particularly drawn to SHS, ironically, because almost every rural household already had one. In 2004 The Thai government decided that they wanted to use SHS to bring electrification to every household not connected to the national grid, and so went to great expense to install almost 200,000. In the intervening years, however, the warranties on these systems have expired (and rural households had a very difficult filing claims anyway) and now the vast majority of these SHS are either partially or completely broken. But in almost every case the solar panel, by far the most expensive piece of equipment, is still functioning, a huge wasted asset.
With this major advantage in hand, I began thinking about how a business like this would operate. The most important consideration is the villagers’ ability and willingness to pay for solar power. Even though rural households in the developing world are often willing to spend more on electricity than people realize, their cash flow is very low. Therefore any work BGET does would have to be paid off over time in small installments. I also realized quickly that it would be critical to limit the number of trips BGET staff would need to make to each village. Even restricting the project’s area to the border districts of Tak province (where BGET currently operates) would include some villages an entire day’s drive away considering the quality of many mountain roads and others not even accessible by car.
These two considerations led me to conclude that such a scheme would need to be run using local franchisees who would do as much of the work—customer recruitment, installation and maintenance, and fee collection—as possible. It also meant that BGET could not simply repair the broken components as we originally planned. The components used by the government were old and cheap, and so even if we fixed or replaced, say, the charge controller, the battery would likely fail before long. With our goal being to travel as little as possible, we could not afford to rely on suspect equipment. Therefore the project evolved from repairing the existing systems to installing our own with components we could trust. By similar logic we also decided that we could not use flooded batteries, which require monthly or ideally even weekly maintenance. Instead we will use maintenance-free batteries that will live up to their advertised lifespan without constant attention.
Both of these decisions increase our equipment cost but we believe that they are necessary for our scheme to work. Using more expensive batteries, we believe, even decreases the amount we will need to charge because we will not need to rely on franchisees for as much maintenance work and we will have to replace fewer batteries. Increasing the lifetime of our equipment is particularly important to our bottom line because we will be renting the systems to customers. In other words, the household pays a monthly fee for the energy service we provide, lighting and power for appliances, but never owns the equipment. If a household decides they no longer want the system or stops paying we take the system away and use it in another location. Therefore we bear the entire cost when a component needs to be replaced but we also get to use each component for its entire lifetime, as even a used piece of equipment can be put into an otherwise new system and simply be replaced when it no longer functions. The main advantage of this arrangement is that we believe it will help attract customers. Households will not be tied down to a long-term ‘mortgage’ and also will more easily be able to compare the cost of the SHS to their current energy expenditures.
Because BGET will bear complete responsibility for the systems, I realized that we needed to make sure that the customers could tamper with the equipment. In many of the households I visited that currently have government SHS systems equipment had been moved, wires had been reconfigured, or components tampered with. There is rarely bad intent, but in this situation protecting our assets is important. For this reason BGET has created a design (not that we are anywhere near the first people to have this idea) where all the electrical equipment is kept within a locked container.
Thus we settled on the scheme as it stands now. We will install a SHS consisting of all BGET equipment save the panel and will retain ownership of the equipment, requiring the households to pay only a monthly fee for the energy services the system provides. We will use local franchisees as sales representatives, installers, repairmen, and fee collectors. But there are many aspects of the scheme that are still unsettled and will go a long way towards determining whether it will be successful.
The first major question is what our relationship with the local governments will be. After the government systems were installed the national government gave ownership of the systems over to the sub-district governments (a sub-district might have between 200-1000 households in it) and so we will need to have some sort of arrangement with them to work on these systems at all. We are hoping, however, to get more than just permission to operate from the local governments, because they could provide significant logistical assistance even if they cannot contribute monetarily. With their local ties they could help us find reliable franchisees, who could even be government employees. Their office would be a convenient location for equipment storage, and government officials could be involved in fee collection. We hope we can secure their help not only because will be running a program that will provide a service to their constituents, but also because we can offer to run the program as a partnership.
We also have yet to determine the best relationship we can establish the franchisees. There are two related questions: what the best way is to compensate the franchisees and how much responsibility we can safely give them. To begin with the latter issue, we are expecting our franchisees to handle customer recruitment, installation, and basic maintenance. But it would perhaps be beneficial to have franchisees be in charge of fee collection and more complicated repairs as well. While it would help us logistically, there are possible concerns about how effectively franchisees could be trained and whether we’d be willing to trust them with large sums of money. These concerns could partially be allayed depending on how the franchisees are compensated. It is important to encourage franchisees to recruit and keep as many customers as possible by aligning their incentives with our own. Therefore we will give them a portion of each monthly fee paid by their customers. The question is whether they will also receive an annual salary. A salary could make the job more attractive and perhaps remove temptation to steal money if franchisees are doing fee collection.
In the coming months we will hopefully be operating a pilot project in one sub-district and we will be able to test out different components and franchisee arrangements. We will also start to get a sense of the biggest unknown, how much households are willing to pay for electricity. Until we get a better idea of what fee we might be able to charge, however, all we can do is try to make the cost as low as possible.
Having made a financial spreadsheet that includes all of our costs and revenues over the first ten theoretical years of the project I am able to see clearly, even without exact values for some variables, where our main expenditures are and how changes to our scheme would change costs. Unsurprisingly equipment costs will be an important element throughout the project’s life, as we will need to continually be buying new equipment. By the later years, however, salary costs for our franchisees will likely far surpass equipment as our main expenditure. The conclusion that can be drawn from this is that, if franchisees are going to be paid any kind of annual salary, we will need to make sure that they each still accumulate a large number of customers. In other words we will still need to make sure their incentive to find customers is strong. To compound the incentive of receiving a portion of customer fees we could also offer prizes to top sellers or offer to raise the annual salary of franchisees who reach certain benchmarks.
Other significant costs include needing to buy a truck at the outset of the project and possibly pay back a loan over time if we need to take a loan out at first. We will probably need a loan because we will incur large equipment costs upfront and only recoup those costs in the form of monthly fees years later. Because we are an organization that pursues funding from project to project, it is important for the project not to stray too far into the red at any point, even if it will be profitable in the long run. Therefore it is important for the scheme to install some systems immediately to begin generating revenue but also grow slowly enough that by the time the money from the initial loan has been spent, enough revenue is coming in from existing systems to pay for further work.
So the ultimate question remains of whether, even after we’ve done all we can to make the systems affordable, we will be able to find customers. The prospect is a little bleaker because these households have previously received solar power for free and therefore and may not want to pay now. We are also, with good justification I believe, using higher quality components than we could and scrapping some existing equipment that could at least temporarily be operable. At this point, without receiving any grants or government assistance, my guess is that our product will only be within the reach of the wealthier village households. This obviously doesn’t mean the scheme isn’t worth running, because it still would provide power to those who do not have it currently, and maybe within a few years, as incomes grow, we might find wider interest. It does mean, however, that we will pursue funding options that will allow us to lower our price.
And even if that means that the project cannot be strictly defined as financially sustainable it will still provide many of the advantages we originally sought. The end users will still have a stake in the project’s success, and BGET will have a stable source of revenue. And, of course, households currently relying on candles or battery-powered headlamps would have access to clean, reliable, solar power, which is what we’re here trying to achieve.