The price of small solar systems in East Africa has fallen rapidly over the past decade, but US$70 for a two-light system is still too high for most off-grid households to pay upfront. It would be affordable for many more people with suitable financing to spread the cost, but microfinance isn’t always appropriate or available to fill this gap.
UK technology company Eight19 came up with an innovative way to spread the cost of a solar system: the Indigo pay-as-you-go solar home system that is activated by weekly scratchcard payments. The team spun out Azuri Technologies in August 2012 to promote Indigo in emerging markets.
Simon Bransfield-Garth is Azuri’s CEO. He has 25 years of global experience building rapid growth, technology-based businesses in sectors including Semiconductor, Automotive and Mobile Phones. His career includes 7 years at Symbian, the phone OS maker, where he was a member of the Leadership Team and VP of Global Marketing. Simon was founder of Myriad Solutions Ltd and was previously a Fellow at Cambridge University.
Arc Finance: Let’s begin by talking about the need. Why does Azuri exist when there are plenty of companies offering solar home solutions in the region already?
SBG: Within rural environments, with respect to energy, we have a strange market failure, which is that individuals are spending a fortune on kerosene and mobile charging. We know that for mains electricity in say the UK, the price can be US$15 cents/kWh, yet the equivalent for kerosene in East Africa is a staggering $8/kWh, and the cost of getting your mobile charged is as much as $50/KWh.
Obviously, therefore, there are immense cost savings to be realized by moving people to solar energy – aside from the well-known health, educational and security benefits. Solar can work when the pay back is a low rate, but the general problem with renewables, especially for Solar Home Systems, is paying up front. The running cost itself, though, is virtually negligible.
We know too that customers find it difficult to save, so Azuri is based on the premise that if you combine mobile phone charging and solar technology, you can substitute directly the cost of kerosene and mobile charging. With scratch cards – Azuri’s business model – it works out at up to half the cost of burning kerosene and other lighting sources.
Arc Finance: So what is the real innovation here, and how much of it is the technology?
SBG: The innovation, as we see it, is paying for solar power in small amounts. In our case, the customer pays a small up-front fee of around ten dollars to get the complete Indigo Duo solar home system, comprising a 2.5 W PV module, a long-life 3.3 Ah Lithium Iron Phosphate battery, and two 60-lumen LED lights. The battery and Indigo controller are housed in a distinctive bright yellow case with a keypad on the front, along with sockets for the PV module and lights, and a USB socket for phone charging. The packaged system also includes a bunch of common phone-charging plugs, which connect to a single USB plug.
The customer buys a scratch card from a network of agents for around US$1.50, and sends the scratch card number, along with their unit number, by SMS to Azuri, and receives back a one-time pass code, which, when entered into the unit, provides access to solar energy for a week. Each week, the customer buys another scratch card to top-up their unit. At the end of around 18 months, the customer can opt to buy out for a small amount, and then owns the home system outright.
Arc Finance: The systems are upgradable, though: does this allow for AC power too?
SBG: We don’t do AC. Our customers want modern, low voltage devices like radios and low voltage TVs. Solar power is also low voltage. So converting solar to AC, only to convert it back to low voltage is quite an inefficient way of getting power. But on the upgradability issue, when the customer gets to the buyout period at the end of 18 months, they can upgrade to a bigger system, with four lights and a rechargeable radio. We are developing other upgrade options that will include an internet tablet or TV.
Arc Finance: What percentage do you find are taking this upgrade option?
SBG: The customer has the option to trade-in their existing system to start over with a larger model. But what we have found so far is that the vast majority is choosing to buy out their existing system, and then get a bigger one as well. We believe the earlier system is often being given to another family member.
Arc Finance: If they do trade the smaller system in, what happens to it?
SBG: If they upgrade, it gets taken away, and it’s refurbished for someone else to use; but as I said: so far we are pleased to see that most are buying out the system and adding the upgrade model.
Arc Finance: Is the upgrade the same price?
SBG: It’s a bit more expensive: the scratch cards for the 4-light system with the add-ons is about $2.20 – up from $1.50. But we have no doubt this is extremely affordable to our target market, and it puts them on what we call our Indigo “Energy Escalator.”
Arc Finance: So who is this target market; who are Azuri’s existing customers?
SBG: All our customers are in rural areas; all are off-grid. Average household income is about $2-4/day, and most are small holders: they have some crops or livestock and a number may be stallholders.
Arc Finance: What data do you have on what they’re using the products for?
SBG: In terms of what they do with the products, we’re seeing a number of revenue-generating activities, aside from the revenue generated by reducing their energy costs, of course. We know that children are studying longer for on average 2.5 hours more per evening; there is more family time as well, although that is always hard to quantify in terms of benefit.
We’re seeing that many are using the systems as an income stream to charge other people’s mobile phones for a fee; we know that some use the system as a security light. And of course the quickest way out of poverty is to reduce unnecessary expenditure; before they get a home system, customers tend to be using a mixture of kerosene, candles and other sources like charcoal, wood or batteries. It’s not unusual for a household to be spending $3-4 a week on this mix. So we can reduce by up to half their energy expenditure – on top of the fact that the quality of light is so much better.
Plus, the Azuri distribution chain provides local income and employment for dealers, installation technicians and scratchcard sellers.
Arc Finance: What stage of growth are you at now? When did this begin, and can you give some recent figures and projections?
SBG: We have 21,000 systems right now, either in the hands of customers or in the supply chain. We’re anticipating 50-70,000 systems by the end of the year. We started in small quantities in 2011 and really started to going in early 2012. That was 18 months ago, so the first customers are now reaching the upgrade point, and as I said before, most are buying out and then getting a larger system.
Arc Finance: What do you see as the main drivers and barriers to scale?
SBG: There are two defining factors in reaching the scale we want: first is last-mile distribution in Africa. That is a question of bringing operational effectiveness to those distribution chains. Our task, working with our channel partners, is to achieve distribution at scale.
The second factor is access to working capital finance to roll out units in those volumes. Right now we’re seeing 100% growth per Quarter. So the number of people we are deploying to is very large compared to our previous or existing customer numbers. Managing rampant growth is a challenge for any nascent company, so we must be mindful of being able to manage distribution networks to cope.
Arc Finance: And production, presumably?
SBG: No, not really. We have relationships in Malaysia with a partner for production and are confident of capacity for production growth. I don’t think producing systems will be the challenge; the challenge is distributing and supporting them here in Africa.
Arc Finance: You mentioned working capital; where is your existing funding coming from?
SBG: Our funding is a mixture. We secured a £1 million (US$1.6m) loan from Barclays, a US$1 million grant from USAID, a US$1 million grant from the African Enterprise Challenge Fund, some funding from High Net Worth individuals, and funding from our own founders’ equity as well.
Arc Finance: And future funding to meet a working capital shortfall?
SBG: We’re putting together loan finance Special Purpose Vehicle companies. Ultimately, we need to create a new asset class of distributed PAYG solar, but it needs structuring to make it work.
Arc Finance: At the recent Ashden Awards in London – at which you were a winner – questions were raised by audience members as to the security of the Indigo meter: How do you reduce the risk of people hacking into the unit so it will work without scratch card code input?
SBG: We can choose to protect against it by making it like Fort Knox, which is expensive in itself, or by making it so the customer doesn’t want to break-in in the first place. We’re focused on the latter, since if they were to sell the bits to someone else, that other person would still have to be making purchases to activate the system. Moreover, the nature of the communities we work in is such that if a customer is undermining the payments, they are also not reflecting well in the eyes of the village community. Most individuals are happy to continue to pay the weekly fee as the alternative is higher costs and low quality kerosene.
Mostly, though, our cloud-based management system means we have real-time information in the cloud, which we can share with distribution partners, if people are not topping up. Each scratchcard that is sold to a dealer is also recorded, and the date of redemption and the system on which it is used is automatically added to the database. If weeks pass without a top-up, the customer is contacted, and potentially the system could be repossessed if it falls into disuse.
Arc Finance: What are the levels of dormancy you’ve seen – are customers topping up regularly?
SBG: Our business model is a rent-to-own; the power system doesn’t belong to the customer until they buy it out after 18 months, so we can potentially take it away if the customer ceases to purchase scratch cards over a sustained period. But we exercise discretion. If a customer has missed four weeks of payments because of harvest problems, that’s a very different situation than if they’re just choosing not to pay. For the former, we will make as many allowances as we can.
Arc Finance: Arc’s experience with distribution of solar lanterns or home systems is that providing trustworthy after-sales services is arguably the single most important factor in attracting customers – particularly with solar home systems. What’s Azuri’s process for this?
SBG: After-sales service is key to the success of our business model as the business model for pay-go means that if the system isn’t working, the customer cannot and will not activate, so the service provider doesn’t get paid. The incentives are therefore built-in to ensure systems are maintained or fixed expediently. We rely on our distribution chain to provide the after-sales service, and we can and do regularly monitor top-ups of all systems we’ve provided, so we are always aware whether our distribution partners are doing this aspect of their job.
We also have responsibilities of our own: we provide detailed specifications to our in-country dealers on how Indigo systems should be marketed and installed, and what level of service and support must be provided. Dealers are also provided with distinctive branding for shops and advertising. We find our partners are proud to wear the Indigo brand and we are committed to supporting them grow their business.
Arc Finance: What about the initial service, at installation? How is quality control maintained?
SBG: Systems have to be installed by an Azuri-trained technician, to ensure that the installation is done correctly (the Indigo box needs to be mounted out of reach of children, lights cabled to the two selected locations, the PV module fixed securely on the roof and un-shaded) and also that the owner needs to understand how to top up and use the system. Getting all this right at installation avoids problems for the owner, and also for the dealer who is responsible for support and repair under warranty for the first year.
Arc Finance: Are you planning to introduce other products besides the Indigo system in the near future?
SBG: Our first priority is achieving scale with the existing products. Over time we will add products to the Energy Escalator, focusing on providing access to the knowledge economy. When we’ve grown more, and are satisfied with the distribution chain, we’ll look at what further products customers want and need to improve their lives and livelihoods.