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May 09, 2011

Sierra Club India: A Radical Affordability Solution

There are now 48 million people worldwide who have a mobile phone, but no connection to the grid. These un-electrified, mobile phone users are expected to increase to 138 million by 2015, marking the intersection between mobile phone and off-grid lighting technology that is spawning a number of innovations shaping the future of rural electrification (such as community power via distributed renewable energy installations that piggyback on the rapidly expanding off-grid base station network in South Asia and sub-Saharan Africa).

One of the most recent and exciting innovations comes from start up social enterprise Simpa Networks. Simpa is focused on creating "Radical affordability" for bottom of pyramid (BOP) households through mobile phone enabled "Pay-as-you-go" solar home system (SHS) technology. The Simpa approach represents a potentially ground-breaking opportunity to utilize off-grid mobile phone penetration to more quickly, efficiently, and cheaply do the job of putting end-user finance along with electricity in the hands of the people.

Ask any renewable energy practitioner working in the field of micro energy the challenges they face and inevitably affordability and end-user financing will dominate the conversation. The trick to solving these vexing issues is matching the often small and erratic cash flows of BOP households with the cash requirements needed for purchasing an SHS; Not an altogether simple or straightforward task when BOP consumers may actually have the total cash needed just not at the right time (in one lump sum for a down payment, or in the form of fixed monthly payments).

Due to this mismatch in cash flows, BOP consumers end up relying on dangerous and costly fuel based lighting that can devour up to 30% of their income. This is, in essence, a financial penalty that owning an SHS would alleviate saving hundreds of dollars for the average BOP household over its useful life.


To compound matters, a lack of land title, sufficient collateral, or even identification leaves a large portion of the un-electrified market outside the formal finance sector.  For those that do enjoy access to formal financing, until recently, there have been limited, rigid and insufficient options as financial institutions have largely not catered to the very different cash flows and circumstances of poor households.

Moreover, branch managers at Financial Institutions as well as Microfinance Institutions have perceived solar home systems and other modern energy products to be high risk investments. As a result, they are often unwilling to lend to clients even if an "energy loan product" has been established. When they are willing to lend they attach a price premium for the risk they perceive to exist. The net effect is that financial institutions create a financing hurdle (not unlike those unable to secure formal credit that are forced to rely on pay day lenders, for example) that forces the poor to waste billions annually on kerosene and mobile phone charging.

Enter Simpa Networks' Progressive Purchase pricing. The Simpa pricing model solves these issues by enabling BOP households to purchase and take home an SHS (they are currently partnered with SELCO-India to install and maintain the systems) with a small down payment. They are able to pay off the balance by purchasing pre-paid energy consumption credits from their mobile phones or scratch cards. Simpa's proprietary hardware enables use of the SHS for the prepaid energy credit (Wh) and disables the use when credit is expired - similar to a prepaid electricity meter. 

In Simpa's pricing model, each prepaid energy credit payment deducts from the customer's overall balance, so the SHS permanently unlocks when the system is fully paid off. An important aspect of this financing method to not is that it's not compounding, financing is "baked-in" to the cost of the product, so consumers do not find themselves in a downward spiral of compounding debt.

This "Pay-as-you-go" mobile phone technology enables customers to overcome cash flow issues while empowering them to control their energy consumption by deciding how much energy they need and when. Just as customers "top-up" their mobile phone minutes, they can easily recharge/top-up energy credits via Simpa's cloud-based revenue management system- enabling both radical affordability, and radical democratization of energy.

The example of Simpa's first customers perhaps the best demonstrates the stark contrast between the vast possibilities of micro-energy services and the oft noted and painful failures of traditional grid expansion efforts. About a month ago Simpa signed up a collection of around a dozen families in an informal settlement of Bangalore, India. The families were displaced after the 2006 earthquake in Gujarat and lack a title to the land where they presently live - a small parcel of land squeezed between a petrol station and a five-story apartment building. As a result, they are faced with the daily possibility of eviction.

In addition, to this daily threat, a lack of title to their land, means these families can't set up a grid connection for their households, let alone access formal consumer finance (without land as collateral) to purchase technologies, like solar home systems, that are readily available in the market to electrify their homes. Instead, they resort to buying kerosene for lighting, and occasionally pay to charge car batteries at local grid connections to power TVs, lights and radios for small amounts of time. 

Where these families fell through the cracks of the system, Simpa's affordability solutions and SELCO's quality product and after sales service have stepped in. In contrast, the billions of dollars and years of construction that will go into expanding the grid will do nothing for the situation of families like these. Instead they become yet another faceless statistic in a long line of reports that mark the failure of imagination embodied by the continual pursuit of centralized grid expansion.

If we truly care about improving the lives of families like this, along with the hundreds of millions of others like them, it's time we support innovative efforts like Simpa's. It's clear that the old way of doing things won't work - it's time we all got to work on solutions that will.

-- Justin Guay, Sierra Club International Program


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