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Market Structure & Policy Environment

SMEs for Decentralized Energy Service Provision

Loyda Alonso, General ManagerSoluz Honduras, S.A. de C.V.

&

Richard Hansen, PresidentSoluz, Inc.

Energy Week 2006

SOLUZ


Rural Electrification – Market for PV

PV is viable for pre-electrification, for:

• Dispersed households and enterprises,

• With low energy needs,

• Seeking high value from more energy at a lower cost per unit of energy

Household Density (HH/Km2)

Ho

use

ho

lds

Ser

ved

PV and grid costs are equal

MV grid extension is least-cost

PV systems are least-cost

Adapted from Cabraal, et al., "Accelerating Sustainable PV Market Development", World Bank


Rural Market – Honduras

• Population: 6+M

• Population without grid access: 2.5M

• Households off-grid: 500,000+


Honduras - 1998

0%

20%

40%

60%

80%

100%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Expenditures ($US)

Pe

rce

nt

of

Ho

us

eh

old

s a

bo

ve

Median = $5.60

Target

Monthly Energy Expenditures


Initial Policy Environment

• Structure: open market, off-grid/private• Business benefited from national policies:

– Foreign investment law

– Reduced import tariffs

– Decent access to utility planning information

• Company engaged under international policy:– “Subsidized Venture Fund” Intervention Model

– Mismatched to rural energy delivery sector, “Base of the Pyramid” (BOP)


Attracted International Financing

Debt EquityOct 97 Soluz, Inc. $50KJan 98 EEAF/CFA $50KJun 98 SunLight Power $250KJun 98 E+Co (Heinz) $100KJun 99 E+Co (IDB/MIF) $100KJul 00 IFC/SME (GEF) $400K $100KOct 00 CFA $125K $125KNov 00 SIF $125K $125K

$900K $650K


Created Private Delivery Structure

National Office

ServiceCenter

ZoneSupervisor

Microcenter

Customer

ServiceCenter

Microcenter

ZoneSupervisor

Customer Customer

ServiceCenter

Customer Customer

Microcenter


Targeted Households, Micro-Enterprises


Used Payment PlansTo Reach Into the Rural Pyramid

• Cash (2-3%)

• Micro-Credit (5-20%)

• Micro-Rental (20-50%)


PV Rental Penetration


• Raised $1.55M investment • Built innovative business model • Reached >5,000 rural customers with unsubsidized offers:

– Cash

– Micro-credit - >1,300 systems sold• Company-financed (no MFI)

– Micro-rental - >2,500 customers served• ~100,000 payments collected - >$1M

• Total collections - >$2.6M

Soluz Honduras – Progress since 1998


• 1998/1999 – Survived Hurricane Mitch unassisted– but it slowed roll-out– consumed company capital (lost $400k by 2000)

• January 2002 – Reached 1500 rental customers– Experienced significant customer turnover – Grid extension, customer’s economic instability

• July 2003 – Began financial/business restructuring– To address “venture fund” debt obligations

• May 2005 – Reached restructuring MOU– Lenders required liquidation of rental assets to pay debt– Focus on cash sales/“cream-skimming” for profitability

Soluz Honduras – Challenges


Under MOU:• Company is decapitalizing

– >$550,000 paid out on debt obligations– Final $125,000 due June 2006

• Company has dramatically reduced local rural service capacity (rural agents and employees)

• Company is selling on cash basis– Moving “up the pyramid” – Over wide area, through dealers– Profitable

Soluz Honduras – Challenges


Expanded “Cash Sales” ChannelsNATIONAL

OFFICE

Service Center

Service Center

DEALER

DEALER

DEALER

DEALER

DEALER


Evolving Policy Environment

• Increased government interest in potential of distributed renewable energy for rural areas

• Movement toward “Government/WB Project” intervention model– Top-down planning (2 yrs so far)

– Consumer subsidies for poor

– Lessons drawn from other WB activity such as Sri Lanka (engage MFIs & companies)

– Goal: 5,000 households with PV over 4 yrs


Anticipated Effects on Business

• Positives (not clear)– Government Coordination-could reduce risks– Consumer Subsidies-may increase affordability– Consumer loan capital-perhaps through MFIs– With OBA-perhaps move down the pyramid

• Negatives (not clear)– Gov. Specs.-may lose service flexibility– Bureaucracy-high sales cost/transaction times– Subsidies-could distort market


100%0%Cost Recovery from User

SystemsDonated

CustomerPays

?

The Subsidy Factor


• Where government provides consumer subsidy:– Use private-sector capacity, market-driven approach– No more than 50% of small system– Fixed subsidy, target poor over many years – Divert kerosene subsidies to PV

• Integrating the subsidy into the sale– Customer buys at least the battery – Government provides indoor components (donated)

• wiring, controller, lamps, etc., plus installation– Private sector provides PV module (at market price)

• cash, micro-credit or micro-rental with clear ownership

Recommendations – Subsidies

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