The latest figures for off-grid solar sales indicate a market which continues to experience robust growth across Africa and Asia, with 680,000 solar home systems sold in the first six months of the year and 2.8 million solar lanterns taking the cumulative sales of such devices past the 1 million mark.
Those were among the headline findings of the latest of the biannual Global Off-grid Solar Market Reports published by industry association Gogla and the World Bank Group’s Lighting Global program. The latest statistics illustrate booming sales for products including solar lanterns, single PV panels and solar home systems with a generation capacity of 100 W or more.
The six-month figures included the sale of 600,000 multi-light installations. The report’s authors state more than 40 MW of cumulative off-grid system capacity was sold during the six months as 4.1 million off-grid solar products were installed during the period.
East Africa remains the off-grid industry’s most important market and was the destination for 1.74 million units in the first half. South Asia has become the second biggest market, with 1.16 million units shipped during the period, although pay-as-you-go (PAYG) financing is virtually non-existent outside Africa. Other African and Asian markets lag far behind, with sales volumes ranging from 120,000 in central Africa to 410,000 in the Middle East and North Africa.
The report suggests 3.1 million of the systems shipped in the first half were paid for in cash, generating receipts of $85 million. PAYG financing accounted for 1 million systems and record sales of $216 million.
From laps to modules
The most popular items sold in the first half had a power rating of up to 3 W, indicating solar lanterns, with 2.7 million shipped. Such small units are far more likely to bought for cash with larger, more expensive systems requiring pay-as-you-go finance and the figures bear that out with PAYG paying for 3-100 W systems. Systems larger than 100 W were mostly funded in cash as they are usually targeted at small businesses, more able to afford the one-off expense.
In growth terms, systems with 50-100 W output leaped from $23 million sales in the second half of last year to $62 million in the latest window.
Gogla and Lighting Global estimate an astonishing 280 million people have benefited from off-grid solar systems since 2010, with around 110 million currently using them because of their limited lifespan. That adds up to $4.9 billion in additional income generated by such devices for their owners, the latest report claims, with $10.5 billion of energy savings recouped since 2010 and around 2.7 million people using an off-grid solar device to support their business.
Regional differences
Within the overall success story there are regional differences, dependent on local factors. For instance, the Kenyan off-grid solar market has witnessed 45% PAYG growth since the second half of 2018, buoyed by a supportive regulatory environment and expanding network of off-grid solar agents. By contrast, the market in Tanzania almost halved during the same period, with a lackluster commercial environment, customs checks delaying imports and lack of legal clarity about PAYG microfinance cited as problematic.
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This is great news for customers replacing paraffin. For investors the story is more complicated, especially those in PAYG. We now have reached *Peak Pay As You Go Solar*
Investors are cutting off these cash-hungry long-cycle loss-making businesses with negative gross margins. Insolvencies and ANIs -Acquisitions Near Insolvency -proliferate. I predict the cash sales will continue to grow while PAYG sales drop dramatically as companies focus on only those sales with positive margins. My workings are herein.
“The report suggests 3.1 million of the systems shipped in the first half were paid for in cash, generating receipts of $85 million. PAYG financing accounted for 1 million systems and record sales of $216 million.”
The cash paid systems therefore have an average price of $27, and the PAYG have an average price of $216.
Companies selling for $27 cash cannot hide their simple-to-tally costs and could not sell at that price if their COGS plus import costs were $30. These companies may have all-in cost of $24-$25 per unit for a 10-15% margin. So the whole cash solar industry has gross margin of about $10 million for the first 6 months of the year based on the $85 million sales number. SG&A would be small on these simpler business. After SG&A that may be a profit of $3 or $4 million for the cash sellers for the six months. The biggest cash-and-carry sellers, dlight and Sunking, would make up most of that. If you annualise that and then give them a generous profit multiple of 15x the whole cash selling industry has a Shadow Market Capitalisation of $100 million dollars. Modest but adding real value for customers and getting a small return for investors. Honest business with good impact.
The PAYG companies are pretending to have positive gross margins because that $216 solar home system has a COGS of $110. Then it has another $150 of promotional, fulfillment, cost-to-serve, cost-of-delinquency and cost-of-capital for the extended negative cash cycle. All those pamphlets – tshirts – ball caps – collection officers – call centres – armies of salesmen – installers – motorbikes are expensive. Total cost of $260 but harder to see below those murky waters. The ruse is that they are hiding many of these non-COGS costs in SG&A and pretending they will make up the losses on volume. Negative margin of $44 per sale on the 1 million systems sold in first six months 2016 is $44 million loss or $88 million annualised loss on margins alone. Assume that real SG&A of these higher-tech businesses are 20% of revenues and you have a sector that catapults $128 million of investor money into a fire this year. When you see the collective industry boasting of raising $128 million this year you now know where this cash went. Perhaps in the future it should go to the cash sellers. For the amount burned in one year of that PAYG pyre they could own the whole market capitalisation of cash-and-carry solar.