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Soluz - Case Study
solar PV enterprises have distinguished themselves by offering their customers the option of micro-rental which has the benefits of addressing several different challenges: 1) it circumvents the obstacles associated with the lack of strong third party credit in rural areas, 2) it minimizes the risk for customers of purchasing a PV system only to have the grid arrive in the near future, 3) it allows customers with unstable income to benefit from clean energy services without having to commit to lengthy repayment terms. While the micro-rental offerings have been an important market innovation that Soluz has tested, it has not been without significant costs.
PV rentals is a risky business
Balancing the proven with the innovative
Choose the market carefully
The Policy-Enterprise-Technology Balanced Approach
The Enterprise-Customer Connection
Soluz, Inc., an American-based company seeking new strategies for PV commercialization, was launched in 1993; Soluz Dominicana, a subsidiary, was founded in 1995; Soluz Honduras in 1998.
Two Central American, market-based companies specialized in solar PV sales, service and financing
The Energy Need:
Both the Dominican Republic and Honduras had "appreciable but shrinking" unelectrified areas at the time that Soluz entered the market. The Dominican Republic embarked on a less-than-transparent, moderately ambitious national grid extension program that simultaneously resulted in an increase in new connections and decreased reliability of the power supply to those connections. Honduras' electrification program was more consistent, but its hydro capacity was susceptible to drought conditions.
Three loans totaling $434,700 were made to Soluz, Inc. and one $75,000 equity investment was made in Soluz Dominicana.
Much business development support was provided by the US-based Soluz, Inc. to its operational subsidiaries in Honduras and the Domincan Republic.
Soluz is known for pioneering its Solar PV micro-rental schemes which have allowed the businesses to operate, even in the absence of established third party micro-credit for energy purposes. In each country, they have financed more un-subsidized PV systems than any other institution.
Combined, the two Soluz companies have provided around 10,000 households with clean energy services (mostly solar PV), but currently there are only around 2,400 active customers.
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1) PV rental is a risky business
First, large amounts of capital were required for Soluz in order to provide solar home systems on a micro-rental basis, making the business model a difficult one and limiting the opportunities available for scale-up. Around $500 of capital needed to be mobilized for each rental customer which was, first and foremost, a lot to raise from the perspective of the enterprise and, second, a significant liability to carry on the balance sheet.
When the Dominican Republic was thrown into financial havoc and Honduras was ravaged by a hurricane, customers shifted away from the solar rentals in great numbers leaving Soluz with a large, warehoused inventory and a significant amount of debt service (compare this to the natural disaster that struck
). Furthermore, grid expansion programs, especially in Honduras, directly competed with customers who easily transitioned away from Soluz's solar rentals. Had it not been for these developments, Soluz may have fared much better, becoming profitable and scaling up operations.
In hindsight, there were several things that could have been tried to promote more positive outcomes. At least in the early stages, the insistence on micro-rental (or fee-for-service) appears to have pushed the business away from “organic growth.” It should have been possible to build up the core business operations with a balanced selection of customers (cash, short term credit, micro-financed and rental), testing market assumptions step by step and trying to maintain good cash flows
mustering such a large campaign to launch the new, largely untested micro-rental scheme as the primary business model. During those early stages, it could have even been possible to cultivate partnerships with third party finance institutions (compare to the work that SELCO-India undertook in this regard; see
at the end of this page) while instead Soluz determined that it was best to simply bypass them.
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2) There must be some kind of balance between what is proven and what is innovative
In this case, cash and 3rd party credit sales of PV systems represented the [relatively] "proven" approach while rental agreements were truly innovative. The Soluz enterprises, in some respects, were so intent on demonstrating a particular technique (in this case, the technique of solar rentals) that it might have come at the expense of the businesses, which required more flexibility. A sounder approach might have been to start experimenting with “what works” and then trying to grow the business more organically, moving gradually in the direction of new customer needs (compare with SELCO's strategy for innovation;
at the end of this page
This is not to say, however, that solar rentals can't be effective and appropriate in other contexts. Specifically, if a government is willing to grant energy concessions (or at least agree not to directly compete with an energy company), then the Soluz model could result in essentially a rural utility being established (fee-for-service). As a utility-type model, with such significant capital outlays, the enterprise financing terms would likely also benefit from being longer. Most utilities, for instance, can access capital by issuing bonds with maturation dates of 20 years or longer. (However, as the case of the
shows, simply having a concession agreement isn't a sure fire recipe for success either).
The model would have also benefited from having loans denominated in local currency since rental agreements can be more more vulnerable to macroeconomic shocks than purchase agreements. Renters, as opposed to buyers, have the ability to simply walk away with one month's notice and minimal consequences.
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3) Choose markets carefully and, to the extent possible, make sure that policy is "present"
Though both national settings provided a good basic environment for conducting business (allowing foreign investment, maintaining relatively low import duties, etc.), problems specific to the energy sector quickly became an impediment to the Soluz enterprises.
This was especially true in the Dominican Republic where the government suddenly began providing free solar PV systems in the immediate vicinity of Soluz's customer base. This combined with a steep currency devaluation in 2003 led to a near total withdraw of the company's active units in the area. In both countries, grid extension became highly unpredictable, often politically motivated and, in many cases, new customers were not even billed. Of course, it is not always possible to foresee these types of events, but they must be anticipated. For example, in this case, maybe it was not advisable to try and conduct business without first securing a concession from the government. Soluz's actual business structuring made it particularly vulnerable to the types of negative developments that it encountered.
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1) The Policy-Enterprise-Technology Balanced Approach
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2) The Enterprise-Customer Connection
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