One in two Nigerians have limited or no access to the electricity grid, according to the Rural Electrification Agency (REA). The majority of those without electricity are in rural Nigeria where the access rate is about 36%. As of 2016, about half of Nigeria’s population was estimated to be in rural areas. The typical scenario in many of these communities is to depend on kerosene, generator kiosk (cell-phone charging) and battery-powered torches for their energy needs. This has negative effects on their health, environment and productivity levels.
Renewable energy presents a reliable alternative, specifically solar home systems. They are not only clean and healthier, but they are also more cost-effective compared to available alternatives. Oolu Solar, an off-grid energy startup which originally started in Senegal is looking to provide rural households in Nigeria with affordable solar home systems which meet their basic power needs. Early in 2018, the company started piloting its products in South-West Nigeria states like Oyo, Osun, and Ekiti. Oolu Solar is one of the solar startups now focused on providing access to clean energy to the 150 million people in West Africa without electricity. So far it has sold more than 34,000 units to rural customers across Senegal, Mali, and Burkina Faso since its launch in 2015.
Nigeria’s Policy Environment
One of the barriers to energy access in Nigeria in the past was an incoherent policy environment. There was no holistic strategy to take advantage of power supply alternatives like mini-grids and solar home systems. In 2015, Nigeria took a major step to solve the problem by developing the National Renewable Energy and Energy Efficiency Policy. It also created the National Renewable Energy Action Plan and Mini Grid Regulations. Additionally, the Nigerian Rural Electrification Agency (REA) has put together the Off-Grid Electrification Strategy with the aim of increasing electricity access to rural and underserved clusters.
Although there has been an implementation gap, these major steps have created a more enabling environment for mini-grid developers and solar home system startups like Oolu. It has been working with the Rural Electrification Agency (REA) and its partners to ramp up the adoption of clean energy in the country. “We’ve been pleased with the conversations and work that we have already done with the Rural Electrification Agency in Nigeria. Particularly in terms of helping us better understand the regulatory impact of the environment as well as providing data that’s been helpful in launching and scaling our business here ” Dan Rosa, Oolu Solar’s CEO says. “Broadly speaking, governments in the region recognize that these solutions are essential for households whether they are urban, peri-urban or rural. They are looking to create an enabling environment although some countries have moved faster than others.”
While this is largely true, the recent increase in tariffs on solar panels has cast a shadow over the Nigerian government’s seriousness to expand access to energy in the country.
Income Levels & Energy Savings
The income levels of rural Nigerians are such that they can only spend little on energy. Their energy demand is also quite low. This is one of the reasons rural communities are typically not connected to the grid in the first place. Electricity companies do not find them as profitable. Many rural households spend about $6/month (₦2,100/month) on kerosene or battery powered torches according to the REA. The REA estimates that rural dwellers will save about $4.50/mth per household with solar home systems. One of the challenges is that clean energy products have largely been out of reach for these households.
To connect these hard-to-reach communities, Oolu builds agent networks in the countries where it operates. Its agents are full-time employees who also provide after-sales support to its consumers given their proximity to them. This means they can quickly visit a consumer’s home when the need arises. This typically reduces the amount of abandoned and failed solar systems. For grid-connected power, the experience for many in the country is that service delivery is generally poor. It’s tough to get staff members of these power companies to attend to technical issues. When they do visit, it’s usually to disconnect consumers or chase them for money.
Oolu Solar is providing two set of products that match the income levels of rural Nigerian consumers. It is also offering flexible payments options like annual and monthly payments in addition to outright purchase. This provides more rural households an opportunity to afford its solar systems depending on their income levels. Oolu is offering solar TV systems to peri-urban households and the rural ones whose energy needs are in the high spectrum.
There are questions about the profitability of solar home systems, however, this has not stopped the surge of investment into the sector. It has seen more than US$360 million in investment across the continent in the past five years. Oolu Solar itself has so far raised about $3.2 million with the latest being an undisclosed amount from GAIA Impact. Aggressive customer acquisition by off-grid solar startups means they need to provide credit to consumers. This puts a strain on operational cost and profitability. At the initial phase, companies depend on the investment they receive to fund their growth. The IFC estimates that such companies, who provide credit corresponding to 50 – 90% of the solar system’s purchase price, may do so for about 8 – 15 years before they begin generating their own cash. Some startups like Oolu are choosing to focus on specific aspects of the value chain to keep costs low. Oolu focuses on distributing solar home systems and is not involved in manufacturing them.
An important element of the pay-as-you-go (PAYG) model Oolu Solar and other solar startups offer is mobile money. It enables them to easily collect payments from their consumers. Many of these consumers are typically unbanked. In Kenya, mobile money has helped connect about 500,000 off-grid households with basic electricity. In some parts of West Africa, mobile money solutions are also now being used. Nigeria is one of those markets where it barely exists. According to EFInA, mobile money penetration in the country was 1% in 2016. Lack of widespread and efficient payment solutions has been a headache for local investors looking to finance the off-grid energy sector. It has also limited solar startups interested in serving rural customers.
Oolu Solar is attempting to work around the payment infrastructure challenge. “We are working with as many payment channels that exist in Nigeria. You have agent networks, you have banks that have USSD codes etc. So we are exploring all possible payment channels. We are fortunate that some of these agent networks are in rural areas.” Doseke Akporiaye, Oolu Solar’s Nigeria MD says. The company’s approach is to develop partnerships with the financial institutions, in some cases microfinance banks, that are closest to their consumers. Doseke further explains that there’s also a cultural issue as some customers still like to deal in cash despite the digital platforms that exist.
The payment infrastructure hurdle poses a challenge to Oolu Solar’s business. Things could, however, change very quickly with the recent introduction of Payment Service Banks (PSBs) by Nigeria’s Central Bank. The CBN has issued draft guidelines for the PSBs. Their key objective is to enhance financial inclusion in rural areas. They are expected to increase access to deposit products and payment services by leveraging mobile and digital platforms. Telcos, retail chains and mobile money operators would be allowed to set up these PSBs.
The low penetration of mobile money was due to CBN regulation which limits the provision of mobile money solutions by mobile network operators (MNO). The concern was that MNOs will threaten the retail banking business of commercial banks if they are allowed to take part in the sector. The PSBs policy framework seems like an attempt to address the issues and allow MNOs to fully participate in mobile money.
Despite the challenges it faces, Oolu Solar is optimistic about the opportunity to successfully capture Nigeria’s $2 billion a year solar home system market. It is not alone in this quest. Tanzania-based Zola Electric announced its expansion to Nigeria in September 2018. It is hoping to reach 1 million households and businesses within the next three years. The success of these companies, however, will largely depend on their ability to quickly reach as many homes as possible with their solar systems. They will also need to ensure that they put structures in place to keep payment defaults very low. Their success is very critical nonetheless. It will provide the 20 million households in Nigeria who lack basic electricity with access.