By Jonathan Karl, GLOBUS Contributor
Here at GLOBUS, we’re lucky to be in close collaboration with both academics and students from the Global Sustainable Development Department. It is therefore with much excitement that we are publishing a series of selected pieces from GSD’s 3rd Year module: ‘The Energy Trilemma’, convened by Dr Morakinyo Adetutu.
The first piece in this series explores how modern tech can enlighten and be used to connect and empower communities in Sub-Saharan Africa.
Imagine yourself in a village in Kenya. It’s night, the sun has set, and an African breeze blows gently through the opened window. Imagine you are sitting in your house reading this article. But now, take the laptop onto which you are staring away and read this on a piece of paper. You would turn the light on, right? No. There is no electricity. You want to listen to the news? There is no radio or television. You want to call someone? Even if you have a phone, the battery is empty and you have no means of charging it.
The thought of this scenario sounds medieval and very far away if you are sitting in any place in a developed country. But in fact, only a few thousand kilometres down South, millions face this life every day. In many communities in the developing world, electricity a dream, nothing more; a dream of 860 million people worldwide .
The key to success in this story is access. Giving people reliable, affordable and clean access to electricity promises paramount improvements in variables such as income, well-being, gender equality, climate action or education and is, therefore, worth exploring [2, 3, 4, 5]. In other words, electricity can be the key to elevate societies out of poverty into affluence.
This is the story of how one extraordinary business model can help give more people in underdeveloped countries reliable access to clean electricity. But surprisingly, this is also a story developed countries can only dream of living.
M-Kopa – the Golden Ticket?
Our story begins in 2010 in Nairobi, Kenya, known for its innovative business landscape and rapid development. There, M-Kopa, crowned one of the 50 most innovative companies in the world by MIT in 2017, has set up operation . The infamous Kenyan Startup backed by investors such as Richard Branson, the Bill and Melinda Gates Foundation or the Shell Foundation, offers a way to circumvent all so-called ‘energy isolation barriers’ and give the world’s poorest access to clean affordable energy, off the grid .
M-Kopa, today operating in Kenya, Uganda, Nigeria and Tanzania, offers packages of appliances powered by a solar panel which customers can install on their roof themselves and a battery storing the energy generated. Appliances include for instance a mobile phone charger, LED-lights, a radio or even a fridge. The ingenuity of this business model, however, does not lie with what they sell, but with how they sell it. Most households using M-Kopa’s equipment have an income of less than USD $2 per day, meaning their customers cannot afford traditional electricity access . In response, M-Kopa has implemented a pay-as-you-go system. After customers make an initial payment of USD $26-105, depending on the package they chose, they pay as little as 50 cents per day to keep the appliances running. As long as they pay, the solar system works. Should they stop paying, M-Kopa can remotely stop the operation of its system . After up to two years, once the loan is paid off, customers own the system, enjoying access to energy, basically for free . One of the founders Nick Hughes encapsulates this business model well. In its essence, M-Kopa is an asset finance company .
In Kenya, M-Kopa’s sales figures are skyrocketing. So far, M-Kopa has electrified over 750,000 households and provided 3 million individuals with clean and safe energy solutions .
It sounds as if M-Kopa’s business model is the golden ticket out of poverty using the magic powers of the market – Adam Smith would be proud. But access is not the only dimension of an energy system. In this article, we seek to examine M-Kopa’s ability to advance Kenya’s energy system through the scope of the following three dimensions:
- Energy Security (Is energy supply reliable?)
- Energy Equity (Can all people afford and access energy?)
- Environmental Sustainability (Is the generation of energy eco-friendly?)
Together, these three constitute the famous energy trilemma, the great challenge of energy governance. Achieving one often means sacrificing the others. For instance, the generation of energy from domestically available fossil fuels and a well-developed grid can secure a country’s energy supply while keeping costs low. However, this is by no means environmentally sustainable. Should a country lack natural resources and import fossil fuels for energy generation, this pushes the costs, making it less affordable for consumers and the country more dependent on its trading partners. In other words, building an energy system which reliably provides all citizens with clean and affordable energy is a real challenge .
Most of Kenya’s electricity is produced through geothermal energy sources (47%), hydroelectric dams (31%) and oil (20%) . Already, two of these energy sources are emitting few emissions and fall under the category of “renewables”. Nevertheless, the World Energy Council still gives Kenya the mark B on energy security . Why is that? Firstly, electricity generation from hydroelectric dams depends on rainfall. But rain does not fall consistently and is subject to weather fluctuations such as droughts hitting Kenya in early 2017 . In other words, if one must hope for rain to be able to switch the light on, then one is not energy secure .
Secondly, Kenya produces almost no oil domestically. Only this year, Kenya has moved into the petroleum industry and started oil production. Accordingly, its output so far is negligible . Therefore, all oil Kenya uses for its electricity generation is imported. This exposes the country to volatile commodity markets and international trading relationships which both infringe upon energy security.
But Kenya has an asset which M-Kopa aims to capitalise on, the sun. Nairobi, capital of Kenya and headquarter of M-Kopa, is only 199km from the equator.
In other words, Kenya enjoys very high levels of solar radiation every year, making it the prime place for solar energy generation . This would not only constitute a secure energy source but also decrease Kenya’s import dependence on fossil fuels for two reasons:
- More electricity could be generated from solar, allowing Kenya to move away from fossil fuel use.
- With M-Kopa’s business model, fewer people would consume kerosene, a petroleum product made from oil often used for cooking and lighting in rural communities in Sub-Saharan Africa. This would further decrease demand for petroleum within the country and allow Kenya’s energy transition to progress, right according to plan, the national development strategy ‘Vision 2030’ .
Security of national energy supply is not the only issue in Kenya. Reliability of distribution is another. Normally, developing the national grid is the prime way to ensure a reliable supply to households, as off-grid energy systems are easily overloaded, causing so-called brown- or blackouts . But M-Kopa also offers a solution for this. Each of their systems is equipped with sensors, tracking usage patterns and performance of devices. This enables predictive maintenance and the prevention of a system’s collapse ensuring a reliable off-grid energy supply .
However, the 1.5 million data points M-Kopa’s systems generate every month promise far greater returns than just steadfastness of supply. Understanding their customer’s use of appliances allows M-Kopa to optimise their products, add new devices if demanded and only supply what the consumer really wants .
First, the obvious question: What stops Kenya from just expanding the grid to every citizen to ensure universal access? A set of factors inhibits this seemingly simple strategy. They are known as ‘energy isolation barriers’ . First, most communities that have no access to the grid are both poor and live in rural sparsely populated areas. This increases the cost of extending the grid to one more household dramatically. Moreover, poor communities have neither the financial means to pay for electricity nor appliances to even use electricity for . This disincentives an extension of the grid from an economic and technical point of view . Further, extending the grid within urban areas is expected to yield higher financial returns, providing another economic disincentive to governmental bodies to finance the development of the grid in rural areas . Financing constitutes the last and probably most significant issue in the pursuit of extending the grid to poor rural areas. Weak political institutions and corruption make public funding for development efforts scarce, rendering the obvious strategy as impractical [25, 26, 27].
In Kenya, the median investment required to connect one more household to the grid requires twice, to many times more, the liquid capital as providing off-grid power to one additional household . M-Kopa capitalises on this and offers both appliances and energy access as their product. Making this affordable is what that truly equips M-Kopa’s business model to succeed in this market and drive energy equity in Kenya.
In rural areas, poor communities are left with biomass and kerosene as a primary source of their energy to cook and light their homes. Not only does this have detrimental effects on people’s respiratory systems and the environment, it also reinforces gender inequality and eats up a large share of households’ income [2, 28, 29]. A study by the World Bank has found that in Sub-Saharan Africa alone, annual expenditure of households on kerosene accumulates to USD $10 bn per year, with households spending as much as 25% of their income on the liquid fuel . The founders of M-Kopa realised the magnitude of expenditure on this product in the segment of the poorest communities. In turn, they offer their product just below what people used to spend on kerosene .
In the long-run, after paying the full loan to M-Kopa, customers enjoy solar energy essentially for free. This clears up a significant share of their income. In the words of Nobel Laureate Amartya Sen, M-Kopa essentially gives people the ability to expand “freedoms that they value and have reason to value” . M-Kopa enables households to decide more freely on how to spend or invest their money, empowering those living at the bottom of the pyramid.
Within academia, the belief that there are tensions between energy security and climate change prevails. M-Kopa proves that an intelligent application of affordable technology in the right place can unwind these frictions. Researchers at the University of California Berkeley found that households moving from using kerosene to off-grid energy systems led to dramatic reductions in environmental impacts, driving low-carbon, “inclusive energy systems” . In other words, M-Kopa enables households to go emission-less, challenging conventional knowledge held by many that one must make a hard choice between progress on energy access and the climate.
It seems M-Kopa does an exceptionally fine job in progressing all three dimensions of the energy trilemma. Today, the world’s eyes are looking at this business model, eager to find out how it came to such success and curious to know where it might appear next [6, 11, 16, 18, 19, 30, 35, 38]. After all, it appears for 860 million people M-Kopa truly can be the golden ticket to live the same dream Nikola Tesla woke up with every morning.
Drivers of M-Kopa
M-Kopa’s success is to be accounted for by a set of factors reaching from a favourable policy environment, low electrification rates, an efficient sales agent network, low-cost solar panels, high-efficiency end-use devices to its underlying technology M-Pesa (Swahili for “mobile money”).
First, the policy environment. Among other factors, weak political institutions can obstruct the extension of the grid. But developing countries are not asleep. Several countries in Sub-Saharan Africa, such as Kenya, Uganda, Nigeria, Zambia and Zimbabwe have set up rural electrification agencies to promote the implementation of renewable decentralised energy systems and electrify rural communities . In other words, policymakers paved the way for M-Kopa and its business model.
Second, low electrification rates as a market. In 2010, when M-Kopa was founded, only 7% of Kenya’s rural population had access to electricity . With growing opportunities for the consumption of energy, most notably mobile phones, this demonstrated that M-Kopa’s product had a market in Kenya. Rural Electrification rate today? 57% (ibid.)!
Third, an efficient sales agent network. M-Kopa didn’t put their website online and sit around waiting for people to realise that their product could change lives. Early on, they established a network of sales agents across the country to promote their product, raise market awareness about its benefits and spread the word that kerosene expenditure could come to an end. Today, over 500 new customers purchase M-Kopa‘s solar system every day .
Fourth, low-cost solar panels and high-efficiency end-use appliances. In the past years, the cost per watt generated with solar panels has dramatically plummeted . This, in connection with LED lights and mobile phones which offer unprecedented energy-efficiency, has enabled the functionality of M-Kopa’s solar energy system .
Fifth, M-Pesa. The mobile payment system facilitates the daily transactions made by M-Kopa’s customers, leapfrogging physical bank transfers into the digital age . During his time at the telecommunications giant ‘Safaricom’, M-Kopa co-founder Nick Hughes noticed the surging rate of mobile phone subscriptions all across the developing world and found a way to utilise this trend to fix low levels of access to conventional financial services, M-Pesa. With Kenya’s Central Bank allowing “regulation to follow innovation”, the mobile payment system took off as an unseen success. Today, M-Pesa processes almost half of Kenya’s GDP in value, more than £29 billion. More than 180,000 agents across the country allow the conversion of cash into e-cash, empowering tens of millions of Kenyans to purchase M-Kopa’s solar packages .
In sum, M-Kopa benefits from a great range of factors, elevating its success and impact as time moves. Now, as mentioned before, the world wants to know where the next M-Kopa might arise. We might have an idea…
The message M-Kopa spreads to entrepreneurs and investors across the world is uncommon. It seems the world’s most desolate countries can be the most attractive ones for innovative business models like M-Kopa’s . In order to support this message and incentivise projects to spread this business model, we believe it to be useful to understand if M-Kopa might succeed in even countries. The following variables are to be considered to determine a potential market for this concept:
Lastly, we believe that kerosene expenditure as a share of income and total expenditure per capita is crucial to find one’s market and verify the viability of a business’ value proposition. However, no universal dataset for this variable exists yet. If one could compare kerosene expenditure with production costs and regional availability of solar equipment as well as end-user appliances such as LED-lights or radios, one could understand the potential profitability within a market. After some data mining, we have found that Zimbabwe might be good place to start looking for this. The country provides an eligible business landscape (Score: 54/100), faces rapidly growing rates of mobile financial transactions (7,765 per 100 adults per year), has negligible access rates to traditional financial services (5% have saved money at a financial institution) as well as exceptionally low rural energy access rates (19%) [34, 39, 40]. M-Kopa is already proving to be the golden ticket out of the energy trilemma in Kenya. But it won’t stop there.
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