With over a quarter of a billion people gaining access to energy from off-grid products over the last decade and a six-fold increase in capital invested in the sector from 2012 ($21 million) to 2018 ($352 million), it’s hard to resist celebrating the extraordinary accomplishments of the energy access sector.
However, rather than counting the numbers of lives reached or dollars invested, we should instead be asking how low-income communities are benefiting, or not, from these new, pioneering solutions and the surge in funding. At the end of the day, success is not about units sold or big checks written. It’s about how much value is created for the poor.
Recently, 60 Decibels, an impact measurement company whose Lean DataSM approach was spun out of Acumen in 2019, took on the challenge of understanding the depth and breadth of value being created by the off-grid energy sector, and how companies in this field were impacting their customers. The 60 Decibels team gathered a massive data set of off-grid customer insights, leveraging 35,000 customer interviews from 49 off-grid companies operating in 17 countries, and released its findings in their latest report Why Off-Grid Energy Matters.
The report, which includes data from the customers of 19 Acumen portfolio companies, dives into who off-grid energy companies are truly reaching (by income profile and gender), what customers value most about energy access and how satisfied customers are with their product or service, among other metrics. The report also examines more nuanced issues such as whether over-indebtedness is an emerging concern and whether off-grid products are malfunctioning too quickly to deliver long-term impact.
The main findings of the report that made the most profound impact on us were:
- Energy access is making a positive difference in the lives of low-income families. About 88 percent of customers said their quality of life had improved thanks to their energy product or service. This bodes well against other sectors where customers and suppliers reported 70 to 82 percent quality of life improvements in agriculture, education and financial inclusion.
- Solar lanterns yield the most impact bang-for-your-buck. While lanterns are often dismissed as low margin and not “real power,” these small but mighty products provided the greatest quality of life improvements for the poor. They directly replace dangerous, expensive and pollutive kerosene and are the first step in the modern energy ladder. In a similar vein, the proverbial energy ladder is real: 72 percent of customers have moved from worse provision of energy to better (i.e. transitioning from a kerosene lamp to a solar lamp, or solar lamp to solar home system).
- The sector is at risk of leaving the poor behind with 37 percent of off-grid customers living in poverty. As companies grow, on average, they begin to focus on higher-value upmarket customers and less on serving poorer customers with lower-margin products, though bigger companies may still reach larger absolute numbers of low-income customers. If all the concessional grant capital and “impact investing” dollars that have gone into this sector continue to leave 63 percent of the poor behind, then the mission we’ve all set out to achieve will be left unreached.
- Customer service and battery quality is a concern in the short term while over-indebtedness remains a concern in the long term. A whopping two-thirds, or 67 percent, of customers said their product or service challenges had not been resolved. 34 percent of customers reported system challenges, and battery failure topped the list of problems experienced. Issues companies need to address to retain customers in the short-term. In the long-term, however, all eyes should be on customer over-indebtedness. While we were relieved to learn that just 4 percent of families said their energy payments were a heavy burden, that’s still 4 percent too many. These results were driven from a concentrated number of companies with high over-indebtedness, however, so we are keeping a close eye on when this becomes an issue within our own portfolio.
What do these findings mean for the sector and for Acumen as an investor?
First, Acumen believes the off-grid energy sector can confidently dismiss the argument that off-grid solutions aren’t good enough. From The Economist’s 2019 piece claiming off-grid power has “little effect on adults’ welfare” to impact investors suggesting that the energy ladder may lead to “nowhere,” this new report documents the voices of those who are actually experiencing energy access first hand, rather than relying on misinterpretations from academic studies or opinions, to quantify the meaningfulness of off-grid energy.
Second, we’ve learned that we need to continue to prioritize first-time energy access and income generation in order to create long-term benefits for low-income customers. At Acumen, we believe in scaling energy access. The basic building block of energy access, the solar lantern, is the most affordable product for the poor to achieve first-time access and provides meaningful benefits as customers transition away from other fuels such as kerosene. We will also continue to encourage our solar home system companies to sell lanterns. We commend leaders like d.light entrepreneurs Ned Tozun and Sam Goldman, who have consciously kept the A2 solar lantern in their product portfolio to ensure low-income customers have access to solar products, even though it delivers the lowest profit margin. At the same time, we are also committed to investing in new companies that are reaching the poor with affordable “productive use” appliances such as water pumps, refrigeration and mills that reduce labor and improve livelihoods for the poor.
Third, we need to see more public funding for smart subsidies to incentivize companies to reach hardest-to-serve customers, and we need to see impact investors willing to take their “concessions” more seriously by encouraging companies to continue to commit to reaching the poor, even as they scale.
Lastly, focus is needed to improve customer service and product quality. If neither of these are addressed, then off-grid customers will only reap short-term benefits from their product or service, greatly undercutting the promise of long-term clean energy solutions. We are encouraged to see GOGLA’s Consumer Protection Code; and we need to see it being enforced. We believe that supporting companies with strong customer service engines are worthy investments both socially and financially.
At Acumen, the work of 60 Decibels is shaping our investing strategy at large. Since we started conducting Lean DataSM studies for our portfolio companies, we’ve seen a 14 percent average increase in poor customers reached. We’ve also gotten better at saying ‘no’ to companies that aren’t reaching the poor or that don’t deliver quality customer service, even if their sales numbers are growing.
We are not only using the information in this report to push our companies, but we are also using it to understand how we can do better in reaching the poor. As venture capitalists and investors inch their focus towards profit over purpose, and government programs risk subsidizing companies for selling larger systems in poorer, marginalized counties, Acumen is rethinking how our capital can be used in new ways to ensure the poor are not being left behind. As 60 Decibels raises the voice of customers, we are committed to listening and to doing better for the poor.