Will electricity in developing rural areas spread more like cell phones than land lines? These startups think so.
After years of fits and starts, startups and big businesses are finally starting to pay attention to the solar market in rural corners of the developing world.
Over the past few months, a number of high profile investors have backed startups selling solar panels to off-grid customers across regions like Africa, India, and East Asia. Meanwhile, big solar companies have created divisions focusing on rural customers in the same areas.
That this market is now starting to mature shows how solar is increasingly affordable to people who earn less than $2 daily. At the same time, it highlights how business can lead social development—electrification, in this case—in ways that some non-profits have failed.
For the most part, wealthy countries like the U.S. and Germany have been the ones to adopt home solar panels. Home owners typically buy their solar systems out right or lease them from a third party like SolarCity SCTY . These solar systems tend to plug into the broader power grid.
But in regions like rural Africa, where the power grid is lacking, an entirely new strategy has had to be developed. These new solar products have relied on new types of financing, have ridden on the back of mobile technologies, and have depended on the emergence of cheap batteries. Will this type of solar product become the norm in rural off-grid areas?
One of the rapidly growing startups tackling this market is M-Kopa, based in Nairobi, Kenya. The company was founded nearly five years ago by Jesse Moore and Nick Hughes, who was one of the original creators of mobile payment system M-Pesa. If you haven’t heard of it, M-Pesa is one of the world’s most successful mobile payment services. By some estimates, 95% of Kenyan adults use it to buy goods and services, and a third of Kenya’s GDP flows through it every year.
Moore and Hughes’ idea was to use a mobile payment system like M-Pesa as the backbone for offering credit to people who didn’t have bank accounts or full-time jobs. They decided to use it to create a pay-as-you-go financing system for solar panels, efficient lights and other appliances that piggy backed on the existing payment system, wireless networks and software.
Customers pay for the solar system, which costs about $200, with a small up-front sum followed, usually, by daily micro-payments for a year. If the customer stops paying, M-Kopa can turn the solar system off remotely.
Because customers can pay in small increments, it ends up making solar panels more affordable than kerosene, the traditional source of energy in rural areas. Off-grid rural home-owners have little choice but to burn kerosene indoors at night to light homes after dark, leading to respiratory problems and fires.
The average off-grid Kenyan spends $272 a year on energy, which includes $164 on kerosene, $36 on charging a cell phone (often times at charging kiosks), and $72 on batteries, as Bloomberg reported. M-Kopa says that its customers can save $750 over four years by switching to its solar kit.
They are not alone. Off Grid Electric, a startup founded in 2011 and based in Tanzania, has a similar plan to bring pay-as-you-go solar panels that run off of cell phone systems and networks to Africa as does Azuri Technologies. In India, Simpa Networks and Mera Gao Power are making a similar push.
A big business?
In recent months, investors have started to place bets on some startups that have made solid progress. Earlier this month Generation Investment Management, a London-based fund started by investors David Blood and former Vice President Al Gore, led a round of $19 million for M-Kopa. Generation has invested in energy companies like solar installer SolarCity and smart thermostat maker Nest, now owned by Google parent Alphabet GOOG .
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M-Kopa’s round also included funding from Virgin’s Richard Branson and Steve Case, founder of AOL. Using the funds, M-Kopa plans to expand its business to reach 1 million homes in East Africa by the end of 2017. To date, M-Kopa has sold solar to about 280,000 homes in Kenya, Tanzania, and Uganda.
D.Light, meanwhile, has raised $40 million over its lifetime from investors including Draper Fisher Jurvetson, Omidyar Networks, Nexus India Capital, and Acumen Fund. The company has sold 10 million solar lanterns, which are stand alone solar devices that store solar energy, in contrast to the pay-as-you-go solar panels, which electrify an entire home.
Last week, Off Grid Electric announced that it had raised $45 million in debt financing from the Packard Foundation, Ceniarth, Calvert Foundation and other family offices to deploy its pay-as-you-go solar system across Africa. Off Grid Electric says the debt funding was the first of its kind to help deploy off-grid solar in Africa.
The company’s funding comes on the heels of $25 million in equity backing led by DBL Partners, which has also invested in Tesla TSLA and SolarCity. Other investors in Off Grid Electric included SolarCity itself, Zouk Capital and Vulcan Capital, the fund of Microsoft co-founder Paul Allen.
It’s not just startups that are eying this emerging market. Clean energy giant SunEdison SUNE earlier this year hired Cathy Zoi, a former assistant secretary of energy efficiency and renewable energy with the U.S. Energy Department. She runs SunEdison Frontier Power, a division that focuses on electricity for developing countries. Challenges remain with finding banks that will provide debt financing for rural utilities customers that are at a higher risk of default on payments, Zoi said at Fortune’s Brainstorm E event earlier this year.
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The market for solar panels in off-grid areas of developing countries is still relatively small. If M-Kopa hits 1 million customers in 2016 that will still be a tiny fraction of the 2 billion people that are estimated to need off-grid electricity.
But down the road, the power grid could be pretty helpful, too. Big cities in Africa are expanding the number of homes with electricity, transforming areas that had previously dependent on kerosene lamps.
Yet off-grid solar services like M-Kopa’s prove to be cheaper than expanding the power grid and the technology could be an example of what the future of electricity would look like in rural Africa, India and Asia. At the same time, many wonder whether these regions will bypass the power grid in the same way that many of them were connected to cell phones networks without first having landline phones.
Wireless communications was not only cheaper, but also better in many ways than wired communications. Will off-grid electricity and solar emerge the same way?
This article referred to Off Grid Electric as Off-Grid Solar in several places and was been updated on December 22 at 3:40 pm pst with the correct reference.