Here Comes the Sun
How downstream solar players can capture the Pakistani solar market
The solar industry is quickly becoming a growing market with considerable global reach. In recent years, the exponential growth of global photovoltaic (PV) panel manufacturing capacity has coincided with a decline in the cost of PV panels, approaching $0.50/kW from $4.00/kW in 2006. These plummeting prices have forced upstream players to tighten their belts in an industry that frequently sees new startups rapidly outpace their own growth. However, inclement conditions for manufacturers prove to be favorable for downstream players (i.e. procurement companies and system integrators) as the levelized-cost (net installation cost divided by its expected lifetime energy output) of ownership for solar projects continues to decrease. Solar is starting to make both environmental and economic sense in many developing countries as the cost of solar power systems become increasingly affordable relative to diesel and uninterruptible power supply generators. Worth mention, definitively, is Pakistan.
Darkness in Pakistan
Pakistan is currently facing a genuine energy crisis with national demand outstripping supply by a record 40% in 2012. This is not only adversely affecting the nation’s GDP growth but also its domestic stability, as exemplified by a wave of violent protests throughout the summer of 2013. Pakistanis, who in some areas face regular blackouts lasting upwards of twenty hours, are forced to rely on costly diesel generators to power their homes and businesses during power outages. Pakistan’s current shortfalls in electricity generation (up to 4000MW/day) cannot be met by domestic providers in the short-term without significant investment in the nation’s energy infrastructure that will prove both costly and labour-intensive. The gap between the dwindling supply and ever-increasing demand in Pakistan must be met by foreign investment until the government can repay the energy industry’s massive accumulation of circular debt.
Growth in the solar markets of developed economies has been predominantly driven by feed-in-tariff policies guaranteeing fixed-rate investor returns. However, the Pakistani government has not yet enacted similar solar subsidies. Though the present lack of governmental support may prevent companies from immediately developing capital-intensive, utility-scale solar farms, there exists enormous potential for pursuing relatively low-cost distributed generation projects in niche markets. Downstream players, namely those companies that specialize in distribution, system integration, and installation, can profit immensely from a multi-pronged strategy to better sustain their long-term success.
For prominent North American players in the system integration industry to transition successfully into servicing the downstream market in Pakistan, they must familiarize themselves with the existing policies concerning solar energy and local culture. This daunting task can be accomplished by hiring the necessary staff locally. In addition to generating domestic jobs, companies will be better positioned to devise a long-term, holistic strategy based on developing customer relationships. Incoming companies must segment the overarching market in a sequential process, as not all target markets can be captured simultaneously. Growth will begin organically in urban areas and eventually trickle down into off-grid, rural regions.
Targeting the Urban Rich
Middle class and high-income families in urban centers, long-accustomed to receiving grid electricity before the energy crisis, have showcased their willingness to pay a premium for standalone solar systems during desperate times. Solar system sales, largely driven by the influx of both domestic and foreign startups hoping to capitalize on the desperation of local Pakistanis, have nearly doubled year-over-year in the first nine months of 2013. Still, solar systems should be marketed as a cost-effective solution, and not merely an expensive means by which families can avoid an energy outage.
Incoming entrants must quickly establish credibility in the market by creating high-quality solar systems tailored to the local environment. Incorporating a thick Ethylene Vinyl Acetate (EVA) film will ensure both the quality and reliability of solar panels, as will the use of solar inverters that can withstand both the high temperatures and fluctuations in grid voltage present in Pakistan. Since Pakistan boasts one of the highest solar irradiance levels in the world, the use of high-quality panels has the opportunity to be exceptionally efficient.
Solar is Good for Business
Companies entering the Pakistani solar industry can pursue a number of opportunities in distributed generation by honing in on lucrative segments beyond residential, such as gas stations and the telecommunications industry. Within major urban centers such as Islamabad, small businesses comprise a market segment that is brimming with untapped potential. Not only can foreign entrants sell systems to small businesses, they can also enter into dealership agreements that would offload a majority of the risks inherent in geographic expansion onto the dealers. Homegrown distributors would retain a portion of the revenues generated from selling the foreign supplier’s products. While the local distributor would oversee daily in-store operations, the foreign entrant would be largely responsible for ensuring product quality and providing after-sales services and training. This would allow the downstream solar companies to expand their geographic reach organically by capitalizing on pre-existing relationships that the local distributors have already established.
An example of a common dilemma faced within the contemporary Pakistani solar market (and the potential solution provided by solar) can be seen in the case of a customer who drives into a gas station during an extended period of load shedding – when the government redistributes electricity among different areas in a city due to a shortage in energy supply. In this scenario the owner is confronted with two difficult options: power the station using a costly backup diesel generator at an average cost of 32 Rupees (Rs) per kWh (compared with solar energy at approximately Rs 14.40/kWh) to allow the customer to fill up on gas at great expense to the owner, or turn the customer away. Effectively, the energy deficit forces businesses to close during power outages, and eventually forces many into bankruptcy. By financing the installation of a standalone or hybrid solar system over an extended period, small business owners can continue to operate their business even during load shedding while earning additional revenues from their extended working hours.
And Also the Urban Poor
Standalone, direct current solar systems are optimal for locations where the typical energy requirement per household ranges from 50-100W. Innovations in PV technology have made solar kits viable due to their portability, customizability, flexibility of application, and ease of installation. To successfully market to the urban poor, proving the effectiveness of these systems is imperative. Given the enormity of the market, initial penetration should be targeted towards low-middle income families that are already paying a premium for diesel generators or actively seeking alternative sources of energy. Companies should further segment by geography. Households living on the fringes of major urban centers, compared to those living in the outskirts of rural areas, have a higher per capita income, making them more likely to purchase/meet the payment obligation of these systems.
Subscribing to Solar
Companies hoping to tap into the urban poor segment must be aware of two risks: the inability of individuals to pay for a full-cost solar system, and the uncertainty of payment collection. It is unlikely that consumers with limited knowledge on the effectiveness of solar systems will pay for the full cost upfront. Additionally, these consumers likely do not have the means to invest in standalone systems as per capita income in impoverished areas is lower than the national average. These barriers can be overcome by targeting entire communities instead of individual families. Instead of paying an amount, which would be approximately equal to their annual income for a residential home solar system, the urban poor would pay a subscription to gain access to the community solar farm. Given that lower-income urban neighborhoods are densely populated, the system will be funded by an average of 50 families per community. This centralized system would entail foreign downstream players to act as an Independent Power Producer. However, customers would pay a flat rate in addition to their electricity consumption to cover the shared maintenance, warranty, and after-sales service costs. The supply will be closely monitored to ensure system reliability and accurate payment metrics.
Companies establishing standalone solar in rural regions can expect to receive an unlevered IRR in the mid-teens over the 40-year life of the asset. These returns could be improved by the addition of modest debt levels, especially if financing from the World Bank or other development agencies is available. This return is initially modest, but will allow companies to enter the undeveloped market and establish themselves in the communities, generating a sticky customer base with associated long-term recurring cash flows. Margins will widen as operations expand to further communities and Pakistan’s GDP expands.
Riding the Solar Wave
It is a common axiom that companies best positioned for success do not follow market opportunities as they arise. Rather than going where the growth is, they create growth in rapidly emerging markets. New entrants hoping to capture a young market brimming with potential must act early in anticipation of future growth. The sands of the solar industry are shifting quickly, painting a new landscape that will see considerable change in the next decade as companies move from developed to emerging economies, pursue distributed instead of centralized distribution projects, and continuously innovate to target high-growth, under-saturated rural markets plagued with energy poverty.