New Financing Models Bring Greener Products to Developing Countries
Rice paddies and colorful tractors are common sights in remote parts of south India. So, too, are small shanties, brightly painted shops and coconut palms. But nowadays, in some villages, solar panels have also become part of the landscape, covering shingled roofs and competing with the palms for sunlight.
The panels are helping to catapult energy-poor villagers – who previously had no, or only very limited, electricity – into a more sustainable future. This leap to renewable energy is the result of an innovative business model that’s being rolled out to low-income communities in the state of Karnataka.
The company behind this new model is Simpa Networks, a technology company that aims to make sustainable energy affordable to all – even those who make less than $2 a day. In particular, Simpa targets customers who have limited access to electricity and use kerosene lanterns, which can pose health and safety risks, to illuminate their small homes. It also targets customers with little, if any, disposable income, who can’t afford to buy its solar products for $200 to $400 each – even though Simpa claims its system could yield significant savings over its 10-year lifespan.
How can it make money from these low-income customers? Simpa has turned to innovative product financing, one of the business-model innovations identified in Model Behavior, a report I co-authored that SustainAbility released last week.
Instead of paying the full price upfront, customers make a small initial down payment for a high-quality solar photovoltaic system and pre-pay for the energy service, activating their systems in small increments using a mobile phone. Each payment for energy also contributes toward the final purchase price of the system. Once fully paid off, the system unlocks permanently and produces free energy for the rest of its life.
The model is based on the concept of solar leases, which many US-based businesses are deploying to install solar panels on rooftops across the nation. SunEdison, SolarCity, Borrego Solar, Sunrun and Sungevity, among others, provide solar panels to commercial customers via power-purchase agreements. The solar companies install and maintain the solar-power systems, while customers pay for the electricity they use – and investors buy into the systems to take advantage of the 30% federal tax credit for renewable energy.
The idea is similar to the various financing and credit options offered at car dealerships or for home buying. Now the model is also being applied to other products aimed at low-income consumers in developing countries. Vestergaard, a company that produces health interventions like mosquito nets and fly screens for low-income populations, is experimenting with a new financing model to bring cleaner water to communities in Kenya. One of its products, the LifeStraw Family water filter, provides safe drinking water to families without access to piped water.
In 2011, Vestergaard delivered 880,000 filters to 4.5 million families in Kenya’s Western Province, spending $30m on distribution, preparation, training and support for the program over its 10-year life cycle. Instead of selling water filters directly to families, Vestergaard hopes to recoup its investment by collecting carbon credits from the Kenyan government. It will be eligible for these credits if enough families use the water filters instead of burning firewood to boil and purify water, which emits carbon into the atmosphere.
These products and business models are not without critics, and some are skeptical of the LifeStraw’s utility. It will still be years before the effectiveness of its carbon-credit model, and the viability of its proposed partnership with the Kenyan government, can be evaluated. Meanwhile, some remain wary of US-based solar leasing companies, which retain ownership of the solar panels, thereby keeping the federal tax credit rather than allowing homeowners to benefit.
However, most of these criticisms tend to be focused on the product or the policies related to that product, rather than the model itself. In the case of the LifeStraw Family, a 2010 randomized control trial in the Congo showed that a majority of recipient families were using the filter, but continued to drink untreated water as well, which reduced the effectiveness rates of the filter in preventing diarrhea. The model, however, has received accolades for its innovative design.
Product financing is not a new business model; rather, it is being used in new ways to get environmentally friendly products into the marketplace. Because these products can be more expensive, novel or untested, innovative financing schemes can help companies overcome barriers to adopting new technologies, which is key to securing a more sustainable future.
This article was originally published in Guardian Sustainable Business. For more information on this topic, please review Model Behavior: 20 Business Model Innovations for Sustainability, our latest report.
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