Solar energy: African economies’ secret weapon

June 25, 2013, 9:00 AM UTC
Fenix International CEO Mike Lin (left) with entrepreneurs in Rwanda

FORTUNE — In the developed world, electricity is cheap and as available as the nearest outlet. But in off-the-grid Africa, energy poverty is endemic. Car batteries are tapped to charge mobile phones. Kerosene is a popular light source — as well as a dirty, dangerous one.

With national grid expansion lagging well behind growth in demand, increasingly Africans are looking not to centralized, fossil fuel-based solutions, but to the sun.

To date, solar power plays only an auxiliary role in Africa’s energy mix, but growth in solar use is emblematic of a regional shift toward renewables. In 2004, the African renewable energy sector was valued at $750 million. By 2011, it reached $3.6 billion. Late last year, the U.N. projected that by 2020 the value of the African renewable energy sector would reach $57 billion.

Solar is particularly well-suited to sunny, equatorial Central and East Africa, where, in the words of one entrepreneur, “energy is every day beating people on the head.” In recent years, the region has become a haven for renewable energy, spearheaded by small, tech-savvy companies keen to capitalize on the global south’s hunger for energy.

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Silicon Valley-based Fenix International is one such firm. The company developed the ReadySet unit, a plug-and-play battery that can be charged either by solar panels or bicycle. While the ReadySet has a range of functions — it has USB and car cigarette lighter ports — it was primarily designed to assist mobile phone charging in off-the-grid markets.

According to GSMA, a mobile operators trade association, total mobile connections in Sub-Saharan Africa surpassed 500 million in the first quarter of this year. That number is expected to grow by another 250 million over the next five years. In Africa, more people have a mobile phone than electricity. They’re part of a global population of off-the-grid mobile users that, in 2009, was estimated at 500 million. Without access to power, that’s a lot of dead batteries.

“The growth in mobile connections in Africa is tremendous,” said Mike Lin, Fenix’s CEO and founder. “This is the canary we’re looking at.”

To date, Fenix has sold 3,000 ReadySet units in Uganda, where the company maintains its largest field office, and 5,000 total worldwide. Early adopters include entrepreneurs who use the ReadySet to provide local phone charging for a fee.

“It’s almost like a mini-franchise,” said Fenix’s Lyndsay Handler, the company’s regional director in East Africa. “It’s a simple solution that’s scalable. Right out of the box, people can produce a smooth income over the course of the year.”

Lin, who initially shoe-stringed the company with $100,000 in credit card debt, recently concluded a new fundraising round, enticing major corporate investors like Orange, the French telecom, and Schneider Electric, an energy management firm. Lin expects Fenix to reach profitability in the next two to three years.

The vast power of the developing market consumer

In The Fortune at the Bottom of the Pyramid, the late C.K. Prahalad, a prominent management professor, argued that companies can make a profit and do good by designing products and services for the “base of the pyramid” — the roughly 3 billion people who live on $2.50 or less a day.

Donn Tice, CEO of solar manufacturer d.Light, studied at the University of Michigan under Prahalad. San Francisco-based d.Light — a manufacturer of high quality, affordable solar lamps — has been for several years at the vanguard of the affordable solar industry. A 2013 recipient of the $1.5 million Zayed Future Energy Prize, d.Light sells 400,000 lamps a month worldwide.

For Tice, d.Light’s successes are proof of Prahalad’s thesis. “Solar is an opportunity to both make a big difference in the world and to do it profitably and in a self-interested way,” he said.

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Among solar entrepreneurs, the notion that market-based solutions can improve lives is a key article of faith. Kerosene often comes up. The “dirty light” source deteriorates in-house air quality and is expensive. Poorer Africans spend nearly a third of their income on kerosene; the continent as a whole annually spends about $10 billion on it. The fuel is also dangerous. One of d.Light’s founders, Sam Goldman, spent four years in the Peace Corps in West Africa and witnessed its hazards in the form of a child disfigured by a kerosene fire. Similarly, in 2009, Fenix’s Handler was working for a non-profit in rural Kenya when a kerosene fire claimed a neighbor’s baby.

Yet local dependence on fuels like kerosene will not be alleviated by grid expansion, which lags too far behind demand. This is a global problem. Populations in developing economies are getting richer and are demanding more power. More people with more income equals rising consumption of energy.

“It creates a powerful demand generation loop,” Tice said. “Supply can’t possibly keep up. The centralized grid system is broken. Nuclear is too capital intensive, and high risk.” Solar, he said, offers a scalable, affordable means to alleviating energy poverty.

A few kinks …

Yet in the near term, a number of challenges will check this ambition. Affordable solar is in a nascent stage. Adoption is still quite low. According to Tice, in most of the countries in which d.Light operates, solar use doesn’t top 5%. Nowhere is it greater than 10%.

This is a typical business challenge: How do you convince customers to try something new? For solar companies in Africa, this is aggravated when fly-by-night competitors dump cheap knockoffs into the market. “We’re seeing more Chinese generics show up,” Lin said. “You have fake batteries being sold. And fake solar panels. That kind of garbage undermines the market.”

Even when customers are willing to buy solar products, these companies face a sales challenge: purchasers may not have enough cash on hand. For example, Fenix’s ReadySet costs about $150. For an average Ugandan, that’s a serious investment. According to the World Bank, Uganda’s 2011 Gross National Income (GNI) per capita, adjusted for purchasing power parity, was $1,320. In villages, income levels are even lower. In the rural north, according to 2009-2010 data from the Uganda Bureau of Statistics, annual income is less than half the national average.

Companies have responded by developing “pay-as-you-go” plans or in-house financing. Fenix recently started to offer microloans to customers purchasing the ReadySet. According to Lin, the company has to date extended $50,000 in credit.

For solar companies in Sub-Saharan Africa, among the most vexing problems is distribution. In many rural areas, customers are hard-to-reach and may have had little exposure to solar power. Where solar companies can, they team up with established retailers. But this has its limits. For example, while MTN, Africa’s largest telecommunications provider, sells the ReadySet through its retail outlets, those outlets are for the most part concentrated in urban areas.

“Only a very small percentage of potential customers are using solar,” said Handler.

At least for now, she said, familiar energy solutions, like kerosene, remain king.

“We’re having to create a whole new market,” said Tice, acknowledging the challenge. “We’re creating from scratch entirely new distribution channels.”

Solar Africa meets Avon?

When Katherine Lucey founded non-profit Solar Sister, she wanted to empower female entrepreneurs in countries like Uganda, while simultaneously distributing affordable solar products in the countryside.

“About five or six years ago, lots of solar companies started designing for the base of the pyramid,” she said. Prices were coming down, products were getting better, more reliable, and there was a plethora of supply. The problem: not enough investment in distribution.

Lucey is a former New York investment banker who specialized in financing large energy projects. With Solar Sister, Lucey built a grassroots distribution network modeled on direct sales firms like Avon. The ideal salespeople for solar products, Lucey said, are local women.

“In these communities, women are the customers for energy, they manage household energy needs … so they can evangelize about the product,” Lucey said. Women’s extensive personal networks allow Solar Sister to reach deeper into the bush than traditional retailers, and Solar Sister provides training and start-up financing.

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“This approach embeds distribution deep down in the community,” Lucey said.

The organization recently expanded from Uganda to Tanzania and Nigeria. At present, Solar Sister supports 400 female entrepreneurs. Within three years, Lucey plans to grow that number tenfold — though with more resources, she said, “we could explode it by a hundred.”

According to Lucey, the demand for solar among off-the-grid Africans makes the Sub-Sahara a natural candidate for the large-scale expansion of alternative energy. “We look for that tipping point where green energy competes economically with the electrical grid,” Lucey said. “In Africa, we are so far past that point.”