Market Structure & Policy Environment SMEs for Decentralized Energy Service Provision Loyda Alonso, General Manager Soluz Honduras, S.A. de C.V. & Richard Hansen, President Soluz, Inc. Energy Week 2006

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

Rural Market – Honduras Population: 6+M Population without grid access: 2.5M Households off-grid: 500,000+

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 DebtEquity Oct 97Soluz, Inc.$50K Jan 98EEAF/CFA $50K Jun 98SunLight Power$250K Jun 98E+Co (Heinz)$100K Jun 99E+Co (IDB/MIF)$100K Jul 00IFC/SME (GEF)$400K$100K Oct 00CFA $125K$125K Nov 00SIF$125K$125K $900K$650K

Created Private Delivery Structure National Office Service Center Service Center Zone Supervisor Microcenter Customer Microcenter Zone Supervisor Service Center

Targeted Households, Micro-Enterprises

Used Payment Plans To 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” Channels NATIONAL OFFICE Service Center 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 Systems Donated Customer Pays ? 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