Accelerating a Renewable Energy Future

As promised at the outset, the story of Selling Solar offers some 'big picture' lessons. Specifically, five lessons can be distilled to accelerate a renewable energy future. These lessons are primarily intended for policymakers with an interest in renewable energy in emerging markets. But it would not hurt for policymakers in industrialized countries to absorb these lessons as well.

Lesson 1: Entrepreneurs are central to diffusion, so support them

Entrepreneurial ventures are never easy. But entrepreneurs in the renewable energy sector of emerging markets are operating in a particularly challenging environment. Policy needs to start from this premise.

Some parts of emerging markets lack the essentials that many entrepreneurs in industrialized countries take for granted: easy access to reliable market data, customers with bank accounts, direct debit and credit cards, relatively low rates of interest, easier means of communication and reaching customers, and so on. This tends to mean more challenges for entrepreneurs in emerging markets (not to ignore the opportunities), and higher perceptions of risk by investors.

In addition, there is the challenge of working specifically in the energy sector. This sector tends to be highly regulated and state controlled. It has changed over the years, with the onset of privatization and de-bundling of utilities. But in many emerging markets, it remains a politically sensitive area, seen, for instance, in the popular backlash against removing subsidies for diesel, LPG or kerosene. In this sense, renewable energy entrepreneurs in emerging markets have their work cut out for them: politicians are under pressure to deliver cheap energy to the masses, while entrepreneurs are trying to innovate with renewable energy products that inherently have higher up-front costs but lower running costs. We saw in the case of South Africa, just how politicized support for solar became.

Yet despite these difficult conditions, Selling Solar has shown that pioneering entrepreneurs can create markets for renewable energy where before none existed. Even when existing policies were not conducive, entrepreneurs set up shop and demonstrated that customers were willing to pay commercial prices for solar. It was only on the back of this effort that policymakers started to think about how to scale up this promising new approach.

So the first lesson for accelerating a renewable energy future is that policymakers need to learn how to attract, support and retain entrepreneurs in this challenging sector. The trick, as we have discussed earlier, is to be able to 'see' the renewable energy market in question like an entrepreneur. If this can be achieved, then largely the right policies for accelerated diffusion will follow.

This may sound simple, but it is amazing how often policymakers fail to do it. This is largely because 'business' has for a long time been viewed as part of the problem, rather than the solution - perceived as working against the interests of local societies rather than with them. It also has to do with the different mindsets with which firms and policymakers approach a problem. One needs to make money from making or selling a product or service; the other simply wants a societal problem solved, and may not understand or have time for understanding what it will take for an entrepreneur to make money doing it. But to accelerate the diffusion of renewable energy technologies, it is imperative that analysts and policymakers learn to devise policies that incentivize entrepreneurs to deliver the solutions they seek.

In the case of solar, policies that helped accelerate diffusion were lower import duties, a grant per unit sold channelled directly to firms and lines of credit to be on-lent as solar loans. These were all things that either helped entrepreneurs reduce costs and improve margins, or helped them sell more solar - all of which ultimately contributed to profitable sales and diffusion in this sector. Policies that did not work were those that restricted foreign direct investment, unnecessarily increased the costs or capital intensity of doing business - such as fee-for-service in South Africa - or crowded out the entrepreneur by setting up parallel, heavily subsidized government programmes - such as those in India or the Philippines.

These sorts of policy conclusions may not initially appeal to some readers. For instance, eliminating import duties and encouraging foreign direct investment may smack of 'globalization' and corporate agendas that do not advance the interests of the poor. But as Selling Solar has shown, the lower the barriers to trade and investment in the renewable energy sector in emerging markets, the faster these essential technologies will diffuse. Similarly, the idea of channelling grants to firms participating in a renewable energy market may not sound that palatable either. But again, as Selling Solar has shown, if you want more entrepreneurs to enter a difficult sector, and remain there under difficult conditions, to deliver the renewable energy solutions that you seek, do not be afraid to incentivize them directly.

It will be entrepreneurs, and the firms that follow them, that lead emerging markets towards a renewable energy future. But it is policymakers who need to lead entrepreneurs by the nose with the right set of incentives. Learning how to 'see' a renewable energy market like an entrepreneur, and design policies that support and encourage pioneering entrepreneurs, will be one of policymakers' main challenges when it comes to accelerating the diffusion of renewable energy in emerging markets.

Lesson 2: Big business is not the panacea

A movement of academics and activists is urging businesses to target the 'bottom of the pyramid' as a way of addressing chronic poverty:3 not to write off the poorer 3 billion people in emerging markets, but to treat them as a huge untapped source of future growth. This applies to energy just as much as to mobile phones, computing and so on. But within this movement there tends to be a preoccupation with larger corporations, rather than the entrepreneurial start-ups. Is it right that we should be more preoccupied with attracting big business when it comes to accelerating renewable energy diffusion in emerging markets?

If we look at solar diffusion in emerging markets, we can see that it was actually the entrepreneur, the consummate 'outsider' that pioneered the market. This is very much in line with the theories of innovation and diffusion discussed in Chapter 2. The existing industries, the established players that could in theory have propagated this innovation, decided to stay on the sidelines when faced with the opportunity to participate. This included utilities, PV module manufacturers and consumer goods companies. They did not see the same opportunity that the entrepreneurs saw in this market in the early stages, nor did they have the will or the drive to try to create it.

But is there not some point in the diffusion process when it helps if big business comes behind the innovation and promotes it? In the case of solar, we saw that when larger firms entered with more resources and a different set of capacities - such as Shell Solar - they could help accelerate diffusion. They did this by investing more, by building a stronger market infrastructure, by holding more inventory, by weathering accounts-receivable challenges more easily, and by bringing new management tools and the power of their brand to the business.

However, we should also take note that, in the case of solar, big business did not demonstrate the same staying power as entrepreneurs. For instance, Shell Solar chose to exit the solar business in emerging markets about six years after entering it. By contrast, several of the entrepreneurs profiled in this book are still at it - still working to drive diffusion onwards more than one, sometimes two, decades later. In contrast to big businesses, entrepreneurs tend to be rather single-minded individuals who, in Schumpeterian style, do not quit that easily. This is critical generally, but it is particularly critical to trying to sell renewable energy in emerging market conditions which can be very difficult at times, and which might prompt a larger corporation to pull out.

Big businesses tend to have multiple divisions and multiple streams of revenue. If their solar business is not working out, for example, but the others are, then it is easy to exit the solar business. But a solar entrepreneur cannot relax if his solar division is doing poorly, because he only has one division, one line of business. This focus means an entrepreneur will tend to develop a better understanding of the market, more determination to find a way through and a greater propensity to take risks. Furthermore, big businesses are often founded on policies that restrict quick decision-making, and are encumbered with political machinations that dilute focus. For all these reasons, big businesses are unlikely to prove the ideal vehicles for renewable energy diffusion in emerging markets.

We might note that in the broader, global solar market, this has already played out. Many of the present market leaders in the solar PV industry were mere entrepreneurial start-ups five or six years ago.4 But they invested aggressively, grew rapidly, went public to raise more capital and have since gone on to dominate the space. At the same time the larger energy companies, such as BP and Shell, which were in the top five of the solar industry when these entrepreneurs were just beginning, have either been eclipsed or have exited.

There is still a lot of excitement around the potential for large corporations to transform the world's energy infrastructure.5 But whether larger companies have the staying power to accelerate renewable energy diffusion in emerging markets over the longer term is questionable. It is easier to imagine if a large corporation can see its way clear to setting up a completely independent unit, branding it differently, funding it like an investor and treating it like a start-up. This would give employees the freedom and focus they need to develop and grow the business, and the corporation the distance it needs to be patient with the progress. But in the absence of this, it is likely that the entrepreneur will remain the stronger vehicle for accelerating the diffusion of renewable energy in emerging markets.

Lesson 3: Focus on finance

In Selling Solar, we have seen that there were two critical forms of finance necessary for diffusion: consumer finance for customers who wanted to buy solar systems and venture finance for entrepreneurs who were selling them. Both kinds of finance will be critical to the diffusion of renewable energy in emerging markets.

When customers buy a solar system, they are essentially buying at least 20 years of power, up-front, on day one. So the up-front costs tend to be high relative to the running costs. The running costs are of course relatively low because the fuel, sunlight, is free. Many other renewable energy and energy-efficient technologies fit this description - solar thermal water heaters, small wind turbines, micro-hydro generators, LED lights, energy-efficient fans and so on tend to have higher up-front costs and lower running costs than conventional technologies. It is a beautiful concept, but it makes for a lousy price structure for entrepreneurs trying to sell the innovation. Now add to this the fact that entrepreneurs in emerging markets are selling to customers that generally have little purchasing power, and you start to see why financing the customer becomes so critical to the future of renewable energy diffusion in emerging markets.

This point was made rather well in a small, probably little-read article published in the Financial Times in December 1996. In an editorial entitled 'High price of a green machine', the Financial Times quoted a producer of environmental technologies who described his products as 'nice to have, but ugly to pay for'. Because of this, he prescribed that companies like his have to be 'creative in cracking open markets. This will mean helping clients devise longer-term payback mechanisms for companies to recoup their investments.' And with specific reference to the emerging markets, he cautioned that:

Even when there is a demand for products in, for example, some of the richer, faster-growing economies of Asia, financing remains a problem. If you want to go to Asia, you have to bring the money with you. You have to do everything.6

The experiences of this businessman with needing to arrange finance in order to sell an environmental technology in emerging markets are very similar to the experiences of the profiled entrepreneurs in Selling Solar, as they will be to those of any entrepreneur trying to sell renewable energy technologies in emerging markets.

Financing the user is so critical that it bears repeating. Concentrating on making this and that improvement to a technology, so as to reduce the costs by a few percentage points, without focusing on how to make it more affordable through financing, will not significantly drive renewable energy diffusion in emerging markets. Many like to focus on the costs of a technology to the detriment of focusing on how to make it more affordable. Selling Solar demonstrates how this kind of thinking can miss an opportunity waiting to happen.

But if financing the user is essential, we also saw that such finance will not occur without an entrepreneur on the ground making the product widely available. There is a 'symbiotic relationship' between an entrepreneurial venture being well capitalized and being able to arrange finance for the consumer. Indeed, of these two forms of finance - venture finance and consumer finance - if anything, venture finance must come first. Consumer finance for renewable energy systems will only materialize where entrepreneurs are actively selling in the market and building a reliable market infrastructure that can promise a financial institution a steady stream of creditworthy customers, strong warranties, and high-quality installation and after-sales service. And entrepreneurs can only do this at a meaningful scale with sufficient capital.

For instance, it was only when the entrepreneur profiled in Sri Lanka had sufficient capital at his disposal that he could convince the country's largest microfinance entity to expand their lending to solar customers. Similarly, it was only because the entrepreneur in Indonesia could bring more capital to the business than other profiled entrepreneurs that he could pioneer his own 'in-house' consumer finance scheme and build such an extensive market infrastructure to serve it. Capital is very much the life-blood of the entrepreneurial ventures we reviewed, and in this sense it was also the life-blood of solar diffusion. This finding will prove to be broadly applicable to the accelerated diffusion of renewable energy in emerging markets.

In this regard, it is encouraging to note that venture capital has started to flow to renewable energy ventures in a way that ten to twenty years ago, when solar entrepreneurs in emerging markets were struggling along, was hardly imaginable. In the US, for example, venture capitalists put US$727 million into 39 alternative-energy start-ups in 2006, compared with just US$195 million in 2005.7 But this is not just happening in industrialized countries. The surging growth of China, India and other emerging markets, coupled with surging demand for energy, has encouraged venture capitalists to look more closely at funding renewable energy start-ups in emerging markets. This bodes well for accelerated diffusion, provided policymakers can also bring in the right set of policies to support, complement and enhance the flow of funding.

And again, there would appear to be a positive trend. For as more money enters a sector, so policymakers tend to listen and observe a little more intently. This has certainly happened in industrialized countries, where the 'tech barons' of Silicon Valley have started to lobby for energy policies that will stimulate renewable energy markets.8 And this they are doing because they have a direct stake in the outcome of these policies through their investments in renewable energy start-ups. It is a universal process that as more companies become invested in manufacturing or selling a technology, so they will lobby for policies that help support the technology in question. And policymakers will tend to listen more intently, because more money and more jobs are now on the line. It suggests that over time an increase in the flow of new venture finance could help encourage a more suitable set of policies for solar and other renewable energy technologies in emerging markets.

Lesson 4: Re-energize the World Bank

The case of solar in emerging markets has clearly shown how effective the World Bank can be in helping to accelerate the diffusion of renewable energy.

As we saw, when the World Bank entered the solar sector, it had very little prior knowledge it could draw on. Like the profiled entrepreneurs, it was a question of learning by doing. This, however, it did to quite some effect: learning the lessons in India, it developed a strong project in Indonesia that, although thwarted by the Asian economic crisis, was replicated in Sri Lanka. Here it took hold and led to the diffusion of 125,000 solar systems by mid 2008 (representing 7 per cent of unelectrified households). Then the World Bank replicated again in Bangladesh (211,000 systems by mid 2008) and China (500,000 systems by mid 2008). It is an impressive track record, and shows the potential for the World Bank to take the lead in helping emerging markets transition to a new, renewable energy infrastructure.

Why focus on the World Bank? First of all, the World Bank has the 'reach', with an infrastructure of offices and staff that extends into virtually every emerging market. Second, it has highly trained, highly skilled staff, who, if properly focused on key targets and winning strategies in the renewable energy sector, will be able to deliver unprecedented levels of diffusion. Third, it has the funding: not only does it have long-term debt capital (some of it at very low rates of interest) for lines of credit for users of renewable energy technologies, but it has access to GEF grants. The World Bank is the ideal global institution to help emerging markets accelerate a renewable energy future.

But we have also seen, in the case of solar and the Bank's rejection of the Million Solar Homes Initiative (MSHI) proposed in 2002, that there is a reluctance in the organization to seize bold targets pertaining to renewable energy and organize its staff and resources around meeting them. Partly, this is due to the inherent conservatism of a large global bureaucracy. Partly, it is because most World Bank professionals are economists, who still think that solar and other renewable energy technologies do not compete, who do not think it is their job to 'pick' winning technologies, and who focus more on economic growth regardless of the energy technologies deployed. But a major reason for the Bank's reluctance is that it remains primarily a poverty-alleviating organization.

It is true that many of the world's poorest will be hit hardest by climate change, but Selling Solar has shown that the World Bank's poverty-alleviating mission can dilute the impact of its renewable energy activities. For example, to ensure smooth passage of the Bank's second follow-on solar project in Sri Lanka, Bank staff decided to target GEF grants at only smaller solar systems, ostensibly for poverty-alleviating reasons. But GEF grants are intended for global environmental benefits, not poverty alleviation. This shift in policy from the first to the second solar project compromised the entire industry by leading more affluent solar customers towards smaller systems, and thus smaller margins for the supplying firm and less satisfaction for the user. If anything, from a global environment perspective, you want a financially strong solar industry on the ground, and you want customers to be buying bigger solar systems, so that their entire needs are eventually met with solar, their satisfaction levels are very high, and they recommend similar systems to their family and friends.

At the 2008 World Economic Forum in Davos, Switzerland, the UK Prime Minister recognized this tension in the World Bank and called for it to be overcome:

I can't see why we should not move immediately to the World Bank becoming a World Bank for the environment as well as development. ... We need a global carbon market and we need a climate change agreement ... and we need an institution that is global and can provide funds for the developing countries that want to introduce alternative sources of energy.9

For its part, when it comes to addressing climate change through renewable energy and energy-efficiency projects, the World Bank feels it is on track. It issued a press release towards the end of 2007 that proclaimed it had significantly exceeded the targets it agreed to at the Bonn Renewable Energy Conference in 2004. Its Bonn goal was US$913 million of new renewable energy and energy-efficiency projects between 2004 and 2007, and in the end it actually doubled this, delivering US$1.8 billion. Moreover, it said this represented an increase from 12 per cent in the early 1990s to 25 per cent of the World Bank's total energy-sector lending.10

While on the face of it, these are impressive results, they go nowhere near the amount of lending required by the climate crisis and opportunities for renewable energy in emerging markets. The paradigm shift towards renewable energy that one Bank employee referred to in the early 1990s is still going on. It's just not clear that the world can afford to wait any longer.

In light of the Bank's demonstrated success in the solar sector, and in generally increasing its lending for renewables and energy efficiency, it is time for the majority of the World Bank's shareholders to mandate that 100 per cent of all its energy-sector lending be for renewable energy and energy-efficiency projects. Projects like the 4000 MW complex of coal-fired power plants, called the 'Ultra-Mega Complex' in Gujurat, India, would simply be off the table.11 There is no reason why such projects under normal economic conditions cannot be financed by the private sector, independent of World Bank assistance. And if they cannot, then the question should be raised whether a public-sector organization like the World Bank should be financing them in the first place.

Moreover, the Bank will also need to consider some internal restructuring. When it comes to renewable energy, the Bank needs to approach diffusion like a business: select the renewable-energy technologies with the potential for immediate deployment, select the attractive segments where there is a demand, select the strategies that have been show to work, and then allocate and drive resources towards ambitious targets, as agreed between senior management and the Bank's Board.

The suggestion that the World Bank house and manage a Fund to target 100 million solar homes by 2025 falls precisely into this category of new initiatives. Solar has already shown it is a winning technology in unelectrified areas of emerging markets. Moreover, the World Bank has also identified winning policies to help drive its diffusion forward. The key task now is to roll out a much larger programme that would meet much more ambitious targets than, for instance, 1 million solar connections by 2010 (the current World Bank trajectory). The new targets would instead call for 100 million solar connections by 2025, representing 25 per cent of today's unelectrified population and equivalent to a hundredfold increase in cumulative solar installations in emerging markets between the years 2000 and 2025. There would be annual targets to be met towards this goal, there would be a dedicated team for consistency and retained learning, and there would be a clear motivating mission and objective for all involved.

In addition to solar, for instance, you could imagine other parallel divisions that were dedicated to achieving 100,000 MW of wind energy capacity (the total current installed capacity globally) in emerging markets by 2025, or the diffusion of 100 million biogas digesters for smokeless cooking by 2025. Similar targets could be set for solar water heating, micro-hydro stations, geo-thermal units, bio-fuels and so on, and separate divisions, each with a separate executive and dedicated team, would be tasked with delivering the numbers in conjunction with client countries.12

World Bank staff will say their job is to respond to client needs, and not to push solutions on them. But the reality is that, through its negotiations for each project, it is always advocating the technologies or the approaches that are deemed best. When it comes to renewable energy, and accelerating its diffusion, the World Bank would make this implicit approach more explicit. It would become a mission-driven organization, making new technologies and approaches known to its client countries, sharing best practice and the best technological solutions known across geographical boundaries and continents, and actively encouraging the uptake and diffusion of renewable energy. There is no question that its client countries, and their populations, want these solutions. But they may not fully know about their potential, know how to deploy them, know how to accelerate their diffusion, or have the necessary funds. The World Bank would be the source both of this knowledge and of this funding.

This is not how the World Bank works today in the energy sector. But if it is to fulfil its nascent role of helping to tackle climate change, it will have to consider how to dramatically accelerate the diffusion of renewable energy across the emerging markets. In turn, it will need to reform and re-energize itself to properly address this challenge. Some politicians, such as the former President of France, have suggested the need for an independent global institution to tackle global environmental challenges.13 But when it comes to emerging markets, one already exists - the World Bank.

Lesson 5: Don't wait for R&D; develop the markets now

Where the electricity grid is either not present or extremely unreliable, solar is competitive now. Indeed, it has been competitive for at least one, getting close to two decades. But, as with any technology, there is a period of time when the issue is not so much the competitiveness of the product as the success of entrepreneurs in making it relevant to customers and selling it.

Most people like to conclude that when an innovation is economically competitive with the substitute technologies, it will just diffuse - that the economic benefits of the innovation will mean that it just sells itself. And so the inverse is also concluded - for as long as there is not more R&D, followed by a breakthrough that leads to lower costs, diffusion will remain limited:

For all the enthusiasm about harvesting sunlight, some of the most ardent experts and investors in solar technologies say that moving this energy source from niche to mainstream - in 2007 it provided less than 0.01 per cent of US electricity supply - is unlikely without any technology breakthroughs. And given the current scale of research in private and government laboratories, that is not expected to happen anytime soon.14

But this ignores that one of the best ways of attracting money to R&D, and the best minds to a technological breakthrough, is by using policy to stimulate the market first. It is only with the stimulus provided by Japan, Germany, and now the US and other markets that solar has attracted so much private capital to invest in improved efficiencies of cells, new generations of solar modules and improvements in manufacturing techniques. Moreover, by building the market infrastructure for sales, installation and service now, it ensures that when a breakthrough is made, there are already the channels in place for that breakthrough technology to more easily reach the waiting customer base, enabling diffusion to happen much more quickly.

We saw how some analysts, after studying the potential for solar in emerging markets, concluded that efforts to promote PV markets were premature, and that funding should instead go to R&D and manufacturing to bring down the costs before trying to stimulate local markets. This study, however, has arrived at precisely the opposite conclusion.

As we have seen, although solar had higher up-front costs than the alternatives, it was already cost-effective over its lifetime, was preferred by customers over the alternatives - such as kerosene lanterns and battery charging - and, provided that consumer finance was available, customers were willing to buy it in ever-increasing numbers. Accelerating its diffusion was not about returning to the laboratory to figure out how to further reduce the cost of the solar module. Instead, accelerating solar diffusion was reliant on entrepreneurs entering the market, learning how to sell solar effectively, learning how to arrange consumer finance in a way they could manage, learning how to extend their distribution channels without over-extending their cash position, and learning how to raise the capital they needed for expansion. In parallel, policymakers had to learn which types of policies worked best to help promote and stimulate the solar markets, and which ones did not. All of this took learning by doing, and fundamentally it took time to figure it out. Earlier in this Chapter, I referred to this as the 'lag effect' associated with solar diffusion.

Had the World Bank and other policymakers taken the opposite approach, and diverted all the funds just to R&D and improved manufacturing of solar modules, as we have shown, it would not have made a significant difference to the retail price of an installed solar system in a rural unelectrified home. Moreover, imagine how much further behind we would be if the world had just waited. Entrepreneurs in emerging markets like Sri Lanka, India, Bangladesh and China would still be selling in relatively small numbers, there would just be a few of them, most customers would not know about the product, banks would still be wary of lending for it, salespeople and technicians would not have been trained in how to sell and install it, and policymakers would not yet have started to learn which policies work and which don't work in support of the technology. Instead, thanks to early action, thriving solar industries now exist selling solar to eager consumers, people understand the technology and are more aware of it, salespeople and businesses overall are better at selling it, banks have learned how to finance it, policymakers have figured out how best to stimulate the market further, and diffusion has already ramped up significantly.

Today, prominent analysts have recognized the urgency of helping emerging markets accelerate the diffusion of renewable energy technologies:

What is needed, [Jeffrey] Sachs and others say, is the development of radically low carbon technologies. ... And time is critical, they say, as China, India and other developing nations march headlong into the modern world of cars and electricity consumption on their way to becoming the dominant producers of greenhouse gases for decades to come.15

And yet these analysts continue to arrive at the wrong answer for how to accelerate the process. In the same article Sachs maintains that, for renewable energy technologies to take hold, it will require a commitment approaching the scale of the Manhattan Project, 'a major overhaul in energy technology', financed by 'large-scale public funding for research, development and demon-strati on projects'. But if anything, Selling Solar has taught us that the last priority for emerging markets is actually more R&D and demonstration projects. Instead, the central message is to develop policies that incentivize entrepreneurs to sell the renewable energy technologies that exist today. If we keep downplaying the technologies that already exist, rather than supporting entrepreneurs to make them immediately relevant and available to customers, we are likely to wait too long.

Key Principles For Entrepreneurs

Key Principles For Entrepreneurs

If you're wanting to learn how to set goals now for tomorrow's benefit. Then this may be the most important letter you'll ever read! You're About To Learn All About Growth Potential Without Potential Waste And How To Manage Your Money Principles, No Matter How Much Time You Have Had To Prepare! It doesn't matter if you've never experienced entrepreneurship up close and personal, This guide will tell you everything you need to know, without spending too much brainpower!

Get My Free Ebook

Post a comment