Solar Home Systems in Rural Zambia

Sofia Bengtsson Ekström

Fabian Sandegård Eriksson

Bachelor of Science Thesis

KTH School of Industrial Engineering and Management

Energy Technology EGI-2018

TRITA-ITM-EX 2018:442

SE-100 44 STOCKHOLM

TRITA-ITM-EX 2018:442

Bachelor of Science Thesis EGI-2018

Solar Home Systems in Rural Zambia

Fabian Sandegård Eriksson

Sofia Bengtsson Ekström

Approved Examiner Supervisor

Date Dilip Khatiwada Dilip Khatiwada

Commissioner Contact person

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Sammanfattning

Solenergi är en förnybar energikälla som lämpar sig väl för soliga subsahariska Afrika. Samtidigt

är det svårt att leverera solpaneler till de delar av befolkningen som bor på landsbygden på grund

av otillräcklig infrastruktur och fluktuerande inkomster bland jordbrukare. I Zambia är

solinstrålningen hög men infrastrukturen begränsad och köpkraften låg hos

landsbygdsbefolkningen. För att komplettera en utvidgning av det nationella elnätet och andra

statliga initiativ har privata aktörer en viktig roll i ökningen av tillgången till el på landsbygden.

Fokus för denna studie var att finna en affärsmodell anpassad efter rådande förutsättningar i

Zambia, för att möjliggöra en långsiktigt hållbar leverans av el till landsbygdens hushåll. Slutsater

som drogs var att en lämplig affärsmodell för en privat Solar Home System (SHS)-aktör i Zambia

utgörs av en välorganiserad distributionskanal som sträcker sig hela vägen till den yttersta

landsbygden; en förståelse för vikten av kundkännedom och långsiktiga kundrelationer; en

strävan att ändra SHS-industrins ramverk av policyer; och en finansiell strategi som tar hänsyn till

SHS-företagets första verksamma år. Studien granskar SHS-företaget Vitalites affärsmodell och

dess styrkor respektive svagheter, i syfte att identifiera en lämplig affärsmodell för den Zambiska

landsbygden. Studien utfördes genom en två månader lång fältstudie, inklusive praktik, på

Vitalite.

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Abstract

Solar Energy is a renewable well suited for sunny Sub-Saharan Africa but reaching the rural

population with solar panels is difficult due to inadequate infrastructure and the fluctuating

incomes among the mostly agricultural working population. In Zambia the insolation is high, but

the infrastructure is weak and the purchasing power among the rural population is low. To

complement an extension of the national grid and other governmental initiatives, private actors

play an important role in increasing the rural electricity access. The focus of the study was to find

a business model that meet these conditions, in order to create a sustainable platform for

providing electricity to the rural Zambian households. It was concluded that an appropriate

business model for a private Solar Home System (SHS) company in Zambia is constructed by a

well-organized distribution channel of agents, stretching all the way out to the most rural areas;

emphasizes the importance of customer insight and long-term customers; strives to change the

policy framework within the SHS industry and is financially well-prepared for the first years of

business. The study reviews Solar Home System company Vitalite’s business model and its merits

and demerits, in order to identify an appropriate business model for rural Zambia. The study was

fulfilled through a two-month long field study, including an internship, at Vitalite.

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Table of Contents

Solar Home Systems in Rural Zambia 1

Sammanfattning 3

Abstract 4

Table of Contents 5

Table of Acronyms 7

Table of Figures 8

Introduction 9

Aim and Significance of Study 10

Background – Rural Zambia 10

Multi-Tier Framework 12

Solar Home System Revolution 12

Involvement of private sectors - Realizing the SHSs at Vitalite 13

Governmental Coordination of Private Companies 13

Solar Home Systems (SHSs) at Vitalite 14

The Beyond the Grid Fund for Zambia 15

Methodology 15

Setting up a business model framework 16

Review of Business Model Framework for rural electrification using SHSs 16

Cash and Carry business model 16

The Pay As You Go (PAYG) business model 17

Merits and Demerits 19

Collection of Field Information 19

Result and Discussion 20

The use of agents for rural presence 20

The Power of the Distribution Channel 24

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Support mechanism and government policies in rural electrification 24

Economic performance of Vitalite’s SHSs 27

Evaluating the performance of Vitalite’s SHSs: Customer Insight 29

The role of Vitalite in electrifying rural Zambia 32

Conclusion 34

Appendix 1. Questionnaire: Interview with Victoire Gottlieb and David Mwanambiya 35

Appendix 2. Questionnaire: Interview with John Fay 36

Appendix 3. Questionnaire: Interview with Magdalena Svensson 37

Bibliography 38

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Table of Acronyms

Acronym Meaning

BGFZ Beyond the Grid Fund for Zambia

DFID UK Department for International Development

EEP Energy and Environment Partnership Program

ERB Energy Regulation Board

FI Financial Institution

FYRP Five Year Rolling Plan

GRZ Government of the Republic of Zambia

M4D Mobile for Development

MTF Multi-Tier Framework

NEP National Energy Policy

PAYG Pay As You Go

PSDMP Power Systems Development Master Plan

PV Photovoltaic

REA Rural Electrification Authority

REEEP Renewable Energy and Efficiency Partnership

REF Rural Electrification Fund

REFiT The Renewable Energy Feed-In Tariff

REMP Rural Electrification Master Plan

RGC Rural Growth Center

SDG#7 Sustainable Development Goal Number Seven

SE4All Sustainable Energy For All

SHS Solar Home System

SIAZ Solar Industry Association of Zambia

SIDA Swedish International Development Cooperation Agency

SSR Sales and Service Representative

UN United Nation

USAID United States Agency for International Development

USD United States Dollar

VAT Value-Added-Tax

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Table of Figures

Table Page

Table 1: Multi-Tier Framework for Electricity Access. 12

Table 2: Merits and Demerits for Cash and Carry and PAYG business models. 19

Figure 3: Organization of SSRs and Agents. 21

Figure 4: Increase in customers over increase in agents, over the period Nov to Apr in 2016-2017 and 29

2017-2018.

Figure 5: Good agent performance achieves scale. 30

Figure 6: Rural Electrification Rate through Vitalite products. 33

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Introduction

In 2015, governments around the world agreed on seventeen Sustainable Development

Goals (SDGs) set by the United Nations (UN). Without access to modern energy, many

Sustainable Development Goals will fail. There will be no global rise in education, no poverty

reduction, no public health improvement. Sustainable Development Goal Number Seven

(SDG#7) therefore calls to “Ensure access to affordable, reliable and sustainable energy for all” by 2030

(SEForAll, 2018)

Today, 1.3 billion people lack access to electricity. 85% of them live in rural areas (Den

Heeten, Narayan, & Diehl, 2017). 23% of the world’s rural population lack access to electricity,

whereas in Sub-Saharan Africa the percentage is 75. Looking at rural Zambia, the lack of

electricity is as high as 95.6%. 9.5 million people without electricity are left in the darkness every

day1.

In order to enhance rural development, the Government of the Republic of Zambia

(GRZ) has stated that access to electricity is critical. The GRZs goal is to increase the rural access

to electricity from 4.4% to 51% by the year 2030. The GRZ’s action for rural electrification is

described in The Rural Electrification Master Plan (REMP); an implementation plan for rural

electrification projects between 2008 and 2030. However, if the rural electrification would

continue in the same pace as the last eight years, the rural electricity access would be 6% by 2030.

The GRZ identifies low private sector participation as one of the major challenges for rural

electrification. One of its stated strategies to increase rural access to electricity is to promote

private sector participation (Rural Electrification Authority, 2017).

Access to electricity is no longer synonymous with access to the grid. Solar Home

Systems (SHSs) can fulfill the basic electricity needs for the rural Zambian households, offering

electricity for lighting, radio and other basic electricity services (Van Diessen, 2008). During

recent years, technology development has led to decreasing costs of SHSs. Business model

innovations let customers pay off the system over a longer period of time and have made SHSs

more affordable, increasing the access for unelectrified populations (International Renewable

Energy Agency, 2016).

1 In Zambia, the sun goes down between 17.40 and 18.45, depending on what time of the year it is.

2 “In Zambia, any locality with fewer than 5000 inhabitants and/or in which more than 50% of inhabitants depend on agricultural activities for

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Aim and Significance of Study

In order to reach United Nation’s (UN) Sustainable Development Goal Number Seven

(SDG#7), off-grid solutions such as solar power and micro-grids are unneglectable complements

to extensions of national grids (United Nations, 2018). In Zambia, the rural electricity access is as

low as 4.4 percent. Extension of the national grid to rural areas is in the near future neither

economically nor technically feasible because of Zambia’s highly dispersed population. On the

other hand, SHSs can fulfill the basic electricity needs for the unelectrified rural households in

Zambia (Den Heeten, Narayan, & Diehl, 2017). GRZ expresses the need for private sector

participation for rural electrification and aims for a “[..] policy to reduce poverty in rural areas through

electricity supply by making use of resources of private sector.” However, no research has been found on

private SHS companies operating to increase rural electrification. It is convenient to investigate

what preconditions there are for private companies to be successful in providing electricity to

rural Zambian households and what business model is best suited for the task.

The aim of the study is to identify an appropriate business model for private SHS

companies in Zambia, to make modern electricity accessible to the rural households. What are the

preconditions for electricity access in rural Zambia? What is a good Solar Home System business model for private

companies?

Background – Rural Zambia

Zambia is a Sub-Saharan country with a population of 16.59 million people (World Bank,

2016). There are 20 people per square kilometer, making Zambia one of the most dispersed

countries in Africa (in the top 25% of all African countries) (REEEP, 2018). 60% of all people in

Zambia live in rural2 areas with poor infrastructure and only 4.4% of the rural population have

access to electricity (World Bank, 2016) (CSO, 2016). Regarding payments in Zambia, out of the

rural population above the age of 15, 23% use an account at a financial institution (FI) and 25.5%

have personally used a mobile phone for paying bills or to send or receive money (World Bank,

2014). The network coverage in Zambia is 78%3; one of the lowest rates in the world4 (World

Economic Forum, 2016). The mean monthly rural household income is USD 80 and an average

of 5.1 people live in one household (CSO, 2016). Zambia has a significant annual rural

2 “In Zambia, any locality with fewer than 5000 inhabitants and/or in which more than 50% of inhabitants depend on agricultural activities for livelihood is classified as rural.” (SIDA, 2016).

3 Assuming that urban Zambia has a 100% coverage, the rural network coverage is only 63 %, since 40% of the population live in rural areas.

4 The coverage places Zambia as 128th out of 138 examined countries.

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population growth of 2.3%, and an annual urbanization rate of 4.4% (World Bank, 2016) (CIA,

2018).

The Government of the Republic of Zambia (GRZ) has stated that rural Zambia’s access

to electricity is critical in order to enhance rural development and its goal is to increase the rural

access to electricity to 51 percent by 2030. Acknowledging the challenges of rural electrification,

GRZ formed the Rural Electrification Authority (REA) and the Rural Electrification Fund (REF)

in 2003 with the aim to ”[...] provide electricity infrastructure to the rural areas using appropriate technologies

[…]” in order to meet the goal of the GRZ. REA started off its rural electrification projects in

2006. With support from the Government of Japan, REA created the Rural Electrification

Master Plan (REMP): an implementation plan for rural electrification projects between 2008 and

2030 (Rural Electrification Authority, 2017). It is the first ever implementation plan for rural

electrification projects and it has identified 1 217 so called Rural Growth Centers (RGCs)

throughout the country that are targeted for electrification. The three main methods for

electrification stated in the plan are (i) Extension of the existing national grid operated by Zesco

(powered to 98 percent by hydropower); (ii) Construction of mini hydropower stations and (iii)

Installation of SHSs. The GRZ believes the total cost for the implementation plan will be USD

1.1 billion (annually USD 50 million), whereof the cost for implementing SHSs is estimated to

USD 58.5 million (5.3% of total) (GRZ, 2009).

Between 2009 and 2017, REA distributed 423 SHSs to rural households5. Given the

average number of people per household (5.1), REA’s SHSs have given access6 to electricity to

estimated 2160 people in rural areas. This is equivalent to an increase in rural electricity access of

0.5 percentage points. In total during this time, the rural access to electricity rose from 3.1% to 4.4%, implying that the rural access to electrification would be 6% (compared to the goal of

51%) in 2030 if the same pace would be held. The Five Year Rolling Plan (FYRP) is a plan

created by REA for the rural electrification between 2017 and 2021. It aims to increase the pace

of electrifying rural areas using different technologies including grid extension, solar mini grid,

SHSs, mini hydropower stations and other renewables such as biomass and wind. Besides REA,

non-governmental projects such as Beyond the Grid Fund for Zambia (BGFZ) is present in Zambia.

In order to increase the electricity access in rural areas and to advance the market for rural

electrification companies, in 2015 the BGFZ was set up by Renewable Energy and Efficiency

Partnership (REEEP) and is financed by Swedish International Development Cooperation Agency (SIDA).

5 The capacity of each SHS is not stated by the REA. Assuming a minimum of 20 watt per SHS, results in a total installed SHS capacity of 8.5 kilowatt (IRENA, 2016). However, to be noted is that there are SHSs with lower capacity than 20 watt.

6 Assuming that the distributed SHSs had a capacity of over 3 watt, meaning that the households reached Tier 1 (see 2.2).

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The Fund is supporting private companies whose aim is to increase the rural access to electricity7

(REEEP, 2018).

Multi-Tier Framework

In order to define electricity access, it is convenient to introduce the World Bank’s Multi-

Tier Framework (MTF). The Sustainable Energy for All (SE4All) knowledge hub has

conceptualized a multi-tier framework for defining and measuring access to energy. According to

the World Bank, energy access should be divided into three areas: households, productive

engagements and community facilities, where the latter includes e.g. street lightning as well as

health facilities. Households can in turn be subdivided into Electricity8, Cooking and Heating.

Thus, SHSs is part of the Household Electricity sub-division.

Within the Household Electricity sub-division, the World Bank defines the magnitude of

electricity access with five tiers. Tier 1 means access to a minimum of 3 watt for a minimum of 4

hours whereof one hour must be in the evening. The services that are achievable for Tier 1 is

lightning and phone charging. Reaching Tier 2 requires a minimum of 50 watt for a minimum of

4 hours whereof two hours must be in the evening. Tier 3, 4 and 5 require 200 watt, 800 watt and

2000 watt, respectively. Hence, higher Tiers than Tier 2 are not common for rural Zambia9

(World Bank Group, 2015).

Access (watt) 0 3 50 200 800 2000

Access Not Task General Tier 2 Tier 3 Tier 4 (appliances) applicable lightning, lightning, AND any AND any AND very

phone television, medium- high-power high-power

charging fan power appliances appliances

appliances

Tier 0 1 2 3 4 5 Table 1. Multi-Tier Framework for Electricity Access.

Solar Home System Revolution

A SHS is a stand-alone energy system powered by a photovoltaic (PV) panel (or solar

panel) offering electricity for lighting, phone charging, radio and other basic electricity services to

rural households often not connected to the grid. A SHS is made up by three parts: a PV panel

generating electricity; a battery and charge controller for energy storage and distribution; and 7 See 2.5.3: The Beyond the Grid Fund for Zambia.

8 Including lightning and phone charging, and for Tiers higher than 1 also other appliances.

9 Given the low rural access to electricity, the number of rural households with access to 200 watt and above are negligible.

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energy load, meaning the electrical appliances. Since the early 1990s, commercial markets for

SHSs have developed as a result of maturing technology and decreasing costs. Simultaneously,

developing countries have realized the economic challenges to extend nationals grid to rural areas

and SHS projects have been rousing. Though, many projects have seen systems breaking down

and faced maintenance issues due to harsh conditions in the surroundings and deficient after-

sales services (Van Diessen, 2008).

Today, universal electrification is no longer synonymous with universal access to the grid.

A shift in how energy services are consumed has been generated by the emergence of lower cost

distributed technologies (Levin & M. Thomas, 2015). Distributed SHSs can fulfill the basic

electricity needs for the world’s unelectrified population, achieving the SE4All goal of universal

access to modern energy systems (Den Heeten, Narayan, & Diehl, 2017). The majority of SHS

sold in Africa are in the 20 watt to 100 watt solar panel range and offer electricity up to Tier 1

and Tier 2. Lowering upfront costs of SHSs has been made possible by the PV panels decreasing

in price by around 80 percent between 2009 and 2015 (International Renewable Energy Agency,

2016). During the period, the price for the battery box stayed roughly the same making it the

absolutely most expensive part of a SHS. The upfront cost of a SHS suitable for powering lights,

radio and 19” TV is around USD 570 (Den Heeten, Narayan, & Diehl, 2017).

Recent SHS business model innovations let customers pay off the system over a longer

period of time and have made SHSs more affordable, comparable in price with solar lanterns

limited to electricity generation between Tier 0 and Tier 1. Innovative business models together

with decreasing prices give potential to skip the expensive deployment of the grid in rural regions

which in many cases take several years to carry out (International Renewable Energy Agency,

2016). An appropriate business model for private SHS companies in Zambia is therefore vital to

make SHSs accessible and affordable to rural Zambian households. The importance of the

objective of the study - identifying such a business model - is emphasized by the fact that SHSs

have the ability to fulfill the basic electricity needs for the 96 percent of the rural Zambian

population that do not have access to electricity.

Involvement of private sectors - Realizing the SHSs at Vitalite

Governmental Coordination of Private Companies

The Ministry of Energy was created by the GRZ in the 1990s as a first step to liberalize

the energy sector. The Ministry formulated the National Energy Policy (NEP) to guide

developments in the energy sector. The GRZ coordinates the activities of private energy

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companies through the Energy Regulation Board (ERB), that was created by The Ministry of

Energy in 1995 for liberalization and to enable private sector participation in the energy sector.

The ERB’s role is to balance the needs of energy companies and consumers, and it “[…] ensures

that all energy utilities in the sector are licensed, monitors levels and structures of competition, investigates and

remedies consumer complaints”. ERB is responsible for setting tariffs and ensuring reasonable return

on investments for utilities (Energy Regulation Board, 2005).

In addition to REMP, the country has developed the Power Systems Development

Master Plan (PSDMP). NEP has identified that the two plans, seeking to develop the

hydropower potential and electrification of rural areas, are mainly based on large scale projects

with capacity of 30 megawatt and above. NEP has therefore required additional strategies to

increase the uptake of renewable energy and created The Renewable Energy Feed-in Tariff

(REFiT). The REFiT is an initiative to accelerate private investments in small- and medium sized

projects up to 20 megawatt, ensuring cost-effective tariffs through competition and transparency

in the sector. REFiT will contribute to 100 megawatt non-hydropower generation through a

three-year program, starting 2018. For solar projects in particular, there will be tenders where

bidders with the lowest tariff will be selected for power purchase. The bids have to be lower than

what is established by the ERB as the REFiT levels. The projects will be given Feed-In Tariffs;

payments to companies proportional to the amount of power generated (Ministry of Energy,

2017).

Solar Home Systems (SHSs) at Vitalite

Vitalite Zambia Limited (Vitalite) is a private company that was founded in 2013 to

increase rural electrification in Zambia and states that it positively contributes to the objectives of

the UN’s SE4All Initiative as well as the GRZ’s sustainable policies. Vitalite’s mission is to “[…]

make quality products and services accessible and affordable to all Zambian households”. They offer SHS,

cooking products and agro-innovations. The SHSs come in three different varieties with a solar

panel of 6 watt, 20 watt or 50 watt, priced at USD 134, USD 371 and USD 536, respectively. The

kits all include lamps; a battery; a radio a phone charging set; an infrared remote control and

customer care service. The two latter ones also include a TV. The two smallest systems offer

electricity up to Tier 1, and the largest one up to Tier 2. In order to make its Solar Home Systems

affordable, Vitalite was the first SHS company in Zambia to introduce a so-called Pay As You

Go (PAYGO) model, offering its customers to purchase the SHS for a small deposit and pay the

remaining balance over a period of either 12 or 18 months. The products can also be paid for

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upfront. Vitalite offers a three-year warranty on their products (all apart from the radio on which

it offers a one-year warranty). (Vitalite, 2018)

The Beyond the Grid Fund for Zambia

In September 2017, Vitalite became part of the Beyond the Grid Fund for Zambia (BGFZ).

The BGFZ was implemented in 2016 to inter alia increase the electrification rate in Zambia by

financially supporting private companies that works to electrify rural areas. The fund is managed

by the Renewable Energy and Efficiency Partnership (REEEP) and financed by SIDA. REEEP

is “[…] an international non-profit organization that advances markets for clean energy in developing countries to

reduce greenhouse gas emissions and build inclusive economic growth”.

The requirement for being part of the BGFZ fund is a weighted sum of several parameters.

The company should be relevant to the embassy objectives; be able to achieve market

development; have a satisfying financing structure; have potential for sustainable commercial

success; have a decent level of market understanding; have good management; have good

implementation as well as professionalism and presentation of proposal. Also, the acceptance to

join the BGFZ is based on what value the company returns. This value is a measure of how well

the company electrifies Zambia; partially how they electrify Zambian households. In order to

measure this, the BGFZ summarizes the number of electrified households with weight on what

tier the households reach. Tier 1 is weighted 0.5, Tier 2 is weighted 1 and Tier 3 is weighted 2.

This suggests that the value is dependent on the number of households electrified by the

company as well as to what degree the households receive electricity access. Based on this

decision the BGFZ provides Vitalite with financial support equal to USD 2 425 418 within the

framework of a four-year long contract.

Methodology

No research on private SHS companies operating in Zambia has been found. The research

gap was discovered through a literature study on the published information on rural

electrification in Zambia. Thus, in order to achieve the objective to identify an appropriate

business model for private SHS companies in Zambia, a nine-week field study was carried out at

the company Vitalite in Lusaka, Zambia. In addition to this, a business model framework was set

up in order to map out and successfully apply the identified business model on the private SHS

sector.

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Setting up a business model framework

To identify an appropriate business model for private SHS companies in Zambia, it was

convenient to form a framework of current business models in the SHS industry. The framework

consists of two business models currently present in Kenya and Zambia, respectively. The merits

and demerits of the business models have been summarized for understanding and being able to

identify Vitalite’s business model in the framework. Within the framework, Vitalite’s business

model has been mapped out in order to understand how it operates in relation to other business

models. The mapping is done through an overall perspective but aspects such as distribution and

financing were key targets in the process. Given the preconditions in rural Zambia and Vitalie’s

characteristics as a private SHS company, the business model has been applied to a general

private SHS company in Zambia. This is to provide answer to the research questions anchored in

the aim; to reveal if this business model is adequate for electrifying rural Zambia.

Review of Business Model Framework for rural electrification using SHSs

In order to identify an appropriate business model, a conceptual framework consisting of

two currently operating SHS business models has been set up. Today, two existing business

models within SHS are the Cash and Carry model and the PAYG model. The merits and demerits

of each model is presented in section 2.6.3.

Cash and Carry business model

One way of delivering SHSs to customers is through the Cash and Carry Model. The SHSs

are paid upfront and the customers immediately become owners of the systems. The customers

have installation, operation and maintenance responsibility. A service provider using a Cash and

Carry Model is operating at a low financial risk due to a small amount of invested capital (Koirala,

Ortiz, & Modi, 2011). Zambian solar power company SunnyMoney is using this type of business

model. SunnyMoney is owned and financed by the international UK based Non-Governmental

Organization (NGO) SolarAid. The company started out as a charity but in order to achieve scale,

it developed a profitable business model and is currently operating as a social enterprise.

SunnyMoney targets both rural and urban customers with an income of less than 3000

USD (Esper, London, & Kanchwala, 2013). The company does not manufacture its own solar

products but works as a distributor. It sells six different products for lighting and charging in

Zambia, offering electricity supply up to Tier 1. The prices range from around 10 USD for the

smallest single lamp of four-hour lighting capacity per day, to 87 USD for a solar home system

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including a 6-watt solar panel, three lamps and USB ports enabling dual mobile phone charging

(SunnyMoney, 2017).

The sales are mainly done through school campaigns. SunnyMoney works closely with

education authorities and markets the products to schools in geographically defined regions. School

teachers and headmasters are provided with market materials for them to distribute to the children, in

order for them to forward the positive aspects of the solar products to their parents. The parents are

given two weeks to purchase the products. After the school campaigns, SunnySolar staff members are

performing after-sales visits and deliver the products to the students. Additionally, SunnyMoney works

with already existing business owners in city centers and small rural communities selling the products

from their shops (Esper, London, & Kanchwala, 2013). The shop owners either pick up products

from SunnyMoney head office or staff members bring products to the shops (Esper, Heather; London,

Ted; and Kanchwala, 2013). For products sold through school campaigns, the payments are brought

from the parents to the children, from the children to the teachers and from the teachers to

SunnySolar staff members. To shop owners, customers pay directly at the counter. Most people in

Zambia do not have bank accounts and the payment system is therefore cash-based (Esper, London,

& Kanchwala, 2013).

The Pay As You Go (PAYG) business model

The Pay As You Go (PAYG) business model is providing installment payment plans for

their sales of SHS, meaning that the SHS is paid off on a regular basis for a longer period of time.

What distinguish PAYG companies from other installment using companies is, firstly, that they

internally handle all technical, financing and after-sales service concerns. This means that the

company is in charge over the interest rates and technical support themselves. Secondly, they

focus on having a good distribution network as a strategy for handling the often-poor

infrastructure. Moreover, they tend to have longer customer relationships using add-on products

and closer as well as more frequent communication (Rolffs, Ockwell, & Byrne, 2015).

Kenyan PAYG actor M-Kopa has successfully been meeting the challenges of rural

electrification in sub-Saharan Africa. M-Kopa’s most basic SHS system features a solar panel of 8

watt. Products included are a rechargeable torch, a radio, a USB-charger and LED-lights. M-

Kopa also offers a more powerful SHS with a solar panel of 20 watt. In addition to the products

in the smaller one, the SHS includes a TV and also multiples of the products in the 8-watt SHS

(M-Kopa, 2018). This means that the buyers reach Tier 1 when selecting the 8-watt SHS or the

20-watt SHS, respectively. The sales are mainly performed by sales agents operating in rural areas

(Rolffs, Ockwell, & Byrne, 2015). Given the high usage of mobile money in rural Kenya (80%)

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and due to a close collaboration with mobile money company M-Pesa, payments are collected

digitally (M-Kopa, 2018)10. This simplifies the logistical issue, bearing in mind that payments

otherwise had had to be collected manually. The sales are done through daily payments over one

year. For the 8-watt SHS there is a deposit of USD 35 and the daily payment is USD 0.6. For the

20 watt SHS they are USD 93 and USD 1.4, respectively. If the buyer can no longer afford the

daily payments the SHS can be returned to M-Kopa in exchange for the initial deposit, why M-

Kopa promotes the deal as risk-free. Correspondingly, if a customer stops paying the daily top

ups, the SHS automatically stops working due to remote technology (M-Kopa, 2018). 10 To properly derive the high usage of mobile money in Kenya is out of the scope for this study. However, it can be mentioned that the cost of having a mobile phone in Kenya is 3.9% of the average monthly income in the country, whereas in Zambia it is 7.4%. Also, the 3G coverage is 89 % in Kenya, compared to Zambia’s 78 % (World Economic Forum, 2016).

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Merits and Demerits

The matrix below sums up the merits and the demerits for the business models, respectively.

Cash and Carry PAYG

Merits ● Low risk due to upfront ● Affordable for more

+ payments ● Good and long term customer

● Low costs for after sale support

●

services

Logistical Simplicity

Demerits ● High upfront cost for ● High Risk

- customers ● High costs for after sale

●

services

Logistical complexity

Table 2. Merits and Demerits for Cash and Carry and PAYG business models.

Collection of Field Information

In order to cope with the research gap, a field study has been done at Vitalite’s head office

in Lusaka, Zambia. The field study partially consists of interviews with the co-founder and

director John Fay, the customer care head of department David Mwanambiya and project

manager Victoire Gottlieb (see Appendix 1). John Fay was interviewed for close insight into the

company’s distribution and financial strategy and information on governmental policies (see

Appendix 2). David Mwanambiya and Victoire Gottlieb provided customer insight and sales and

payment statistics. Additionally, an observational study has been done through an internship11

meaning close contact with all departments at the head office. Also, field trips to rural areas were

done. Furthermore, an interview was held with Magdalena Svensson at the Embassy of Sweden

in Lusaka, Zambia (see Appendix 3). Magdalena is Project Manager for Energy and was

interviewed for information on the collaboration with Vitalite and the financial support the

company is provided from SIDA through BGFZ. Finally, John Fay and Victoire Gottlieb

provided information on the historical economic performance of the company. Combined with

key interview findings, estimation on future economic performance could be made. The results of

the study have been validated using questionnaire surveys with the above stakeholders. When

interviewed, stakeholders have also provided supporting statistical data. In the Result and 11 The internship consisted of writing Standard Operating Procedures (SOPs) for Vitalie’s nine departments.

19

Discussion section, the interview findings are presented and discussed. The questionnaires for

the interviews are attached at the end of this thesis.

Result and Discussion

To make renewable and modern energy accessible and affordable to all Zambian

households, Vitalite is providing SHS to rural Zambia through mainly PAYG and partly Cash and

Carry sales. Vitalite has three key external partners: 1) Lumiter, a backend energy-payment

solution; 2) Air Tel Money, a company offering mobile money services and 3) Fosera; a German

SHS manufacturer. The company operates through three channels for distribution. Firstly, small

businesses (e.g. local grocery or hardware shops) or individuals referred to as agents. Secondly,

already established distributors (e.g. cooking fuel distributors, marketing organizations). Thirdly,

retail sales at outlets and hubs operated by Vitalite. The agents and distributors allow Vitalite to

rapidly increase its access to rural markets and are therefore key for the company’s scale-up

strategy. The by far most established and important of the three is the agent channel for

distribution.

The use of agents for rural presence

In order to meet the challenge of the dispersed Zambian population, for the last mile

distribution of SHS Vitalite has a network of 250 agents in eight of Zambia’s ten provinces:

Copperbelt, Central, Lusaka, Northern, Southern, Eastern, Muchinga, and Luapula. Each

province is divided into several regions. In each region, the agents are serviced by a so-called

Sales and Service Representative (SSR). The agents in each region are not Vitalite employees but

on one-year contracts that can be prolonged. The agents are operating small shops, in their

villages or from home, from which they market and sell SHS. The SSR makes weekly visits to

their agents providing any needed service. Their responsibility is to continuously provide their

agents with SHSs, making sure they do not run out of stock, as well as with marketing and other

required office material. SSRs operate at a maximum radius of 75 km, often travelling by

motorbike. At Vitalite head office there is an agent care. The agent care consists of one employee

collecting calls from agents providing further help and service.

SSRs Agents

Customers Deep rural Rural Presence

presence

Figure 3. Organization of SSRs and Agents.

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The number of SHSs each Vitalite agent has sold range from just a few to hundreds. An

agent has to continuously collect payments from its PAYGO customers, who count for 97.8

percent of all present sales. Cash and Carry sales count for the remaining 2.2 percent (Gottlieb,

2018). Close to all first-time customers buy the PSHS7500 SHS, giving them electricity access up

to Tier 1. For this SHS, the customer pays a deposit of USD 18. The remaining payments are

then USD 14 every month for 12 months or USD 11 per month for 18 months, whereas Vitalite

estimates the comparable monthly rural Zambian energy cost to be USD 21. For the SHS to

function, the customer needs to follow the payment plan. Just like in the PAYG business model,

the SHS is remotely shut off as soon as the customer stops paying. The majority of Vitalite’s

customers go to the agents to perform payments (top ups) in cash. Due to the lack of mobile

payments, Vitalite agents need to collect cash and manually keep track on how all customers are

paying. This logistic around cash payments is characteristic for Vitalite’s agent model. Vitalite is

using a backend payment solution called Lumiter to which all agents are connected through their

mobile phone in order to make mobile payments, using float on their own mobile money

account. Every sold SHS has a so-called PAYGO-ID connected to the SHS’s battery box. In

Lumiter, each customer gets registered through this number when signing up for a PAYGO

SHS. The agent receiving a top up is able to transfer the top up amount through their phone by

entering the amount and the matching PAYGO-ID in an SMS. Within a minute, the agent

receives a token (a code) to provide to the customer. The customer uses a remote control to type

in the token to the battery box. The system is then up and running for the number of days

corresponding to the specific top up amount.

As in the PAYG business model, Vitalite uses agents to distribute its products. However,

it is reasonable to claim that the conditions for having a PAYG business model are better in

Kenya than in Zambia. The population density is four times higher in Kenya, implicating easier

distribution, and Kenya’s road density is three times Zambia’s. Thus, Vitalite needs to pay

attention to the issues related to the dispersed population and lack of infrastructure to a greater

extent than Kenyan companies like M-Kopa. In addition to this, 80 percent of the rural Kenyan

population have access to mobile money whereas in Zambia the number is 11.2 percent (CGAP,

2013). Also, in many rural Zambian villages there is no 3G network, why mobile money is not

even an option. The presence of Vitalite agents in different provinces are therefore of great

importance in order to reach the rural households; to enable payments, marketing and customer

service.

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One big challenge for Vitalite is to ensure agents have float in Lumiter. When a customer

pays a top up in cash, the agent transfers money from their mobile money account to the

customer’s Lumiter account. This means there is risk that the agent has no float in their account

when the next customer wants to perform a top up, since the agent might not yet have deposited

more money into their account. In the common case that the customer has walked long distances

to perform the top up they might choose to pay the agent in advance to avoid having to walk that

same distance again. Occasionally, the agent promises the customer to top up their system, but

instead spends the money. This is another challenge for the company. Vitalite is therefore very

strict on receipt writing and repeatedly informs customers that they have to make sure they get a

receipt every time an agent receives money from them.

Another challenge Vitalite is facing is that many agents do not properly keep track on the

payment status of their customers. As many agents do not have a smartphone (but a feature

phone), they cannot access the customer’s payment status in Lumiter through their phones and

therefore they need to keep track manually. Vitalite is right now in the position of letting SSRs

distribute lists to their agents, generated through Lumiter, so they know how each of their

customers are performing and can contact them accordingly (Gottlieb, 2018). Another issue

linked to usage of features phones, is that errors occur when agents send texts to perform top

ups. The agent is required to enter the customer’s PAYGO-ID but not the name of the

customer. Occasionally, this leads to that the wrong PAYGO-ID mistakenly is entered and the

top up is not performed. The mistake often stays unnoticed until the week after the text is sent.

Vitalite has realized that agent characteristics are of great importance for a successful

distribution of SHS. Vitalite states that one of the most important agent characteristics is

business experience. In the past, the company has tried to recruit agents described as “not

economically active”, meaning agents in the rural communities who do not work and may never

have been employed. They were put into agent training, but the outcome of agents that were

ready to distribute SHS was very low. Vitalite wants agents that already got a job, selling other

products, and have proven they have what it takes to run a small business. Since an agent who is

selling various of products have a diverse revenue stream, the risk of the agent having no float on

their mobile money account decreases. Certainly, this is very positive.

Other characteristics and requirements have been identified to ensure agents will

successfully distribute SHS and to avoid money disappearing. In addition to showing business

drive, the agent should feel motivated to work for Vitalite and to electrify rural areas in Zambia.

This is an important step to be able to ensure a long-term relationship with the agent. The reason

for long-term agents being important for Vitalite is that the longer they have been active agents,

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the greater is their increase in customers. Also, the experience is valuable for understanding the

logistics around customer payments and servicing as ensuring efficiency and avoiding errors.

Vitalite’s strategy is to go deep into the rural areas through presence of agents. In order to

ensure this a strength - to reach out to as many customers possible - the agent present need to be

locally renowned and have good knowledge of the area. Since electricity is general, and SHS in

particular, is something new and unexplored to rural households, it is important that the agent

has influence and is trustworthy for people to be willing to invest in the product. The first

customers that an agent registers are a bottleneck. The interest for SHSs can then increase in a

community as soon as people see others using them, and the sales can enlarge in scale.

To expand the agent network, the SSRs are continuously looking for new agents in their

regions. Identifying agents with all the right characteristics and requirements is an important and

equally challenging task. As Vitalite has realized motivation being a key agent characteristic, a

motivational letter is a recently added requirement for applying agents, whereas earlier just a few

words were required. It is difficult for Vitalite to confirm that the agent prospect has written the

text themselves and occasionally it turns out that the agent is not capable of writing when

progressing in the recruitment process. However, if an application is accepted, Vitalite performs a

phone interview to confirm as much important information as possible. An accepted phone

interview means the agent prospect gets to participate in an agent training, write a final test and

eventually might end up as an agent.

Materially, it is required for the agent to have a phone, a mobile money account and USD

60 to invest into Lumiter. The reason for the USD 60 is to ensure an agent having float as soon

as they start distributing SHS. Education wise, it is required for the agent to have completed

grade 12 and also, as a newly added requirement, a graduation certificate. Many who actually have

completed grade 12 do not possess a certificate, which might make it a challenge finding agents

that fill this requirement. Yet, Vitalite believes it is not worth the risk of hiring too low-educated

people.

Vitalite greatly supports its agents in different ways because of the importance of keeping

them motivated. The agents are offered commission for every cash and carry sale, registration

and top up made. Cash and carry sales give the highest commission. They are also offered to sell

different SHSs, making it possible to find more customers and extend customer relationships.

Since close to all first-time customers choose the smallest SHS, there is a possibility to offer

customers larger systems in the future. The commission for registering a customer increases with

the power of the system, which motivates a good customer relationship that can last long. Finally,

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the agents are retrained every six months and whenever there is an update to the SHS. Offering

this type of support is to ensure the long-term relationships with the agents, vital for successful

distribution of SHS. Vitalite’s support strategy seems to be working well, since 70 percent of all

agents recruited since 2015 are still active.

The Power of the Distribution Channel

As Vitalite’s agent network evolves, the company obtains a powerful distribution channel

in rural Zambia. Naturally, the network promotes the sales of Vitalite’s but it also becomes one

of few rural and fully integrated distribution channels in Zambia. The struggle of last mile

distribution is not specific for SHS but is rather interprofessional in Zambia, why the agent

network may be looked on as a valuable asset itself. This opens up for collaborations with other

companies. As Vitalite is operating at high risk, offering PAYGO SHS to customers that often

struggle to pay, these types of collaborations are valuable for the company since they would

require no initial investments.

Vitalite has introduced its first add-on product and is internally planning to further utilize

the power of the distribution channel as it prepares to apply more products. As soon as a

customer has finished its first payment plan, the add-on product will be offered and payed off at

the same rate as the previous product. Vitalite suggests that the chances are higher that the

customer will be able to pay for this product since the same payment rate already has been tested.

It is also likely that customers will be willing to buy add-on products since they are familiar with

the payment rate. These strengths come from offering products with payment plans and is a

PAYG business model characteristic. The first add-on product, a smart phone, has recently been

introduced. This opens for the customers to sign up for mobile money, which would ease

Vitalite’s collection of payments significantly.

Support mechanism and government policies in rural electrification

Vitalite offering PAYGO naturally means high initial investments. This is aligned with the

PAYG business model. The facts that Vitalite agents are present deep in the rural communities

and are greatly and continuously serviced by the SSRs, give additional high upfront costs. Vitalite

is using an asset financing approach for the PAYGO SHS, meaning the customer pays a deposit

for the SHS and is charged interest when paying off the remaining balance. This is another

characteristic for the PAYG business model. It includes higher risk than selling products Cash

and Carry, where the risk is minimized due to upfront payments.

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However, due to the remote technology, Vitalite has the ability shut off the SHS if the

customer does not follow the payment plan. This encourages customers to pay, as well as it

lowers the costs included in chasing non-paying customers. Thus, this feature decreases the

otherwise high risk implied by the asset financing strategy. Vitalite believes that the SHS has such

a high positive impact on people’s lives that this remote technology is highly effective, meaning

that people are willing to change their, in other cases, habitually inadequate payment routines.

The greatest ability to encourage customer payments is with customers that do not have any

substitute source of electricity. This is a major reason for Vitalite to only target customers not

connected to the grid. This type of customer targeting is not relevant for a Cash and Carry

business model, as customers pay the total amount upfront.

As of today, Vitalite is dependent on financial support. The company does not partner

with the Zambian government in any way. Its ongoing financial support is coming from SIDA,

United States Agency for International Development (USAID) and GSMA Mobile for Development (M4D)

Utilities Innovation Fund, where the grant from SIDA is by far the largest one. Support from The

Energy and Environment Partnership Program (EEP) led by Ministry for Foreign Affairs of

Finland was the one that got Vitalite up and running in 2014. EEP does not provide the largest

grants, but take huge risk investing in projects as long as the company in question meets its

demands on rigorous reporting. Since 2014, Vitalite and EEP have had a very good relationship

where Vitalite has received a couple of different grants. As EEP is opening up a new round for

financing in May 2018, there is chance Vitalite is provided a new grant very soon.

In total, most support Vitalite has gotten is from the Swedish Government. At the

earliest stage of business, SIDA offered Vitalite start up support and office space. For the

financial support from SIDA through the BGFZ, Vitalite presented the financial support needed

to deliver a certain amount of SHS, as well as its business plan to meet the targets. What Vitalite

signed up to do, was to distribute 95 350 SHS to rural Zambia between August 2017 and August

2021. This means Vitalite needs to follow the rules of the contract and deliver the target amount

of distributed SHS but is free to operate its chosen business plan and strategy throughout the

four years. The company is also free to update or add on appliances, as long as the overall targets

of the contract are not interfered with. By the end of January 2018, half a year after the contract

started, Vitalite had reached 51 percent of the year one target and was four percent above the six-

month target. The company had sold 4671 SHS, compared to the targeted 4492. So far, the

collaboration is a success.

Through one of its key distributor partners, Vitalite is looking at a first partnership with

REA in the northwest of Zambia. REA, in line with GRZ’s wish for private sector participation

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for rural electrification, would buy SHSs Cash and Carry from Vitalite and offer subsidized

products to the rural households. 80% would be paid by REA and 20% by the customers. There

would be no incentive for agents selling the products at such a discount, as commission would be

very low (Fay, 2018). Clearly, this is good for Vitalite’s revenue. Though, since SHSs would be

sold without presence of Vitalite Agents, the company has no opportunity of building customer

relationships and strengthen its distribution channel.

Beginning of 2017, the ERB provided guidance on taxation for solar panels. Vitalite

proposed to the ERB that no tax should be added to panels of 10 watt or below, to reduce the

effect of taxation to the poorest rural households. The ERB accepted the proposition and

decided on a tax of 0.5% to be added to solar panels above 10 watt. The guidance is enforced but

Vitalite is not yet paying the tax, as Fay states “[…] Zambia has been progressive in intention bus has

issue in execution”. However, since only a small percentage of Vitalite’s products are above 10 watt,

the taxation would have very little effect at the moment but rather be of impact if Vitalite was to

offer more solar panels of higher power in the future.

There is a tax exemption for importing solar and battery technology called zero rating,

where no Value-Added-Tax (VAT) (16% of consignment) and duty (25% of consignment) is

added to the imported shipments. It was put in place in 2008 when the technology was hugely

different. Vitalite and other companies report that the exemptions have been inconsistently

applied. This is partly because statutory instrument defining the products that come in through

customs is out of date and ambiguous, as it has not kept up with SHS and Solar Lantern

products. For example, solar lamps are defined as energy efficient fluorescent lights (instead of

LED lights); a definition that does not make much sense today. It is also noted that the

application of the exemptions differs from one point to another as customs officials have their

own way of interpreting the exemption (Kuungana Advisory Limited, 2018). The exemption does

not cover appliances like solar TVs and solar radios, and whether Vitalite has to pay for those

appliances is up to the discretion of the customs official. At this point in time, there is no

recourse if the custom applies it.

Because of the uncertainty related to the process, Vitalite does not budget for paying

VAT and duty. Since VAT and duty add up to as much as 41% of the value of the consignment,

there is uncertainty for investors evaluating the Zambian market in general and Vitalite in

particular. Clearly, this is not ideal. UK Department for International Development (DFID) analysis

suggests there are clear incentives for the GRZ to improve implementation of the import tax

exemption. As it would increase the uptake of off-grid technologies, the net benefit to the GRZ’s

budget would be USD 35.3 million over the next 20 years (Kuungana Advisory Limited, 2018).

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Recently, Vitalite’s donors, in particular SIDA and USAID, have worked to create

an off-grid task force that will work together with governmental authorities to coordinate the

sector. The purpose of the off-grid task force is to provide clear guidance for the solar sector in

Zambia as many are involved: customs, tax authority, authorizations processes. The task force is

to gather and share all knowledge and data from various funding programs and to create

awareness of funding opportunities for off-grid solutions (Svensson, 2018). Vitalite is a member

of one of two groups that form the Solar Industry Association of Zambia (SIAZ), through which

the company newly has started taking part in the coordination. In particular, USAID is

supporting DFID on consistent enforcement of VAT and duty on imported SHS products

(USAID, 2018). The task force and SIAZ are working with the government to redefine the

statutory instrument, creating and up to date and accurate framework for taxation, in line with

what is proposed by DFID. What appliances will be included in the exemption is still uncertain,

but Vitalite hopes the new framework will be in place by the end of 2018. This would bring

clarity to Vitalite’s budgeting and reduce investors’ uncertainty. Furthermore, it would increase

the uptake of off-grid technologies and benefit the GRZ’s budget.

Economic performance of Vitalite’s SHSs

Vitalite’s intent is so be financially sustainable, and to run its business without grants.

Looking at the numbers for 2017, the company would have had negative net profit if the grant

had been removed. There are a couple of reasons for this. Firstly, the company has only been

operating since the year 2014 and is missing out on economies of scale. Secondly, the company

has high upfront costs due to the PAYGO business model and the agent model for distribution.

Following factors have been identified to impact the net profit margin. First of all, it is

expected that the company can increase the total of sold SHSs to 100 000, compared to the

present 12090, without increasing its overhead costs at the headquarters. This means Vitalite’s

target to distribute 95 350 SHS to rural Zambia between August 2017 and August 2021 could be

met with fixed overhead costs, and thereby improve the net profit margin. Furthermore, the

company believes creating a predetermined overhead structure could be devastating as the sector

is constantly evolving. Therefore, Vitalite keep its lock-in costs extremely low. Another factor

that positively impacts the net profit margin is good agent performance. Each agent is included

with a recruiting and service cost. The cost per SHS is heavily lowered as the agent succeeds

distributing SHSs to customers with long-term payment ability. As mentioned in the discussion

regarding agent characteristics, the increase in customers is greater the longer an agent has been

active. This means ensuring agents staying active for a long time is key for improving the net

27

profit margin. Short-term agents are very expensive since they account for the same high upfront

cost but contribute little to sales. The graph below shows the increase in customers over the

increase in agents over the time period Nov to Apr in 2016-2017 and 2017-2018, respectively.

Figure 4. Increase in customers over increase in agents, over the period Nov to Apr in 2016-2017 and 2017-

2018.

This means that the number of customers per agent has increased. Reasonably, this can

be regarded as Vitlite achieving scale. Furthermore, as the number of customers are increasing

more than the number of agents, the sales are increasing more than the costs, since the costs are

much consisting of setting up agents. The graph below shows that when Vitalite’s sales increase

due to good agent performance, the cost per sale decreases.

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Figure 5. Good agent performance achieves scale.

What distinguish Vitalite’s business model from both the PAYG and Cash and

Carry business models presented in the framework, is the great focus on the distribution channel

as an asset. Vitalite is describing itself as a Distribution Service Company, rather than a solar

company. As earlier mentioned, the distribution channel opens up for collaborations with other

companies that would require no initial investments for the company. Operating as a distribution

service for other companies, using the agents active in rural areas, could therefore improve

Vitalite’s net profit margin. As of today, Vitalite has created an agriculture savings account through

partnerships with agriculture companies, selling farming inputs. The savings account enables

smallholder farmers to save and pay for inputs needed for farming seasons. Vitalite does not

invest in the products, put profit from serving as a distributor. Furthermore, as the company’s

own add-on products will be offered only to customers who have shown good payment ability, it

is reasonable to believe donors will be willing to provide the required initial investments.

Evaluating the performance of Vitalite’s SHSs: Customer Insight

Vitalite has realized the importance of analyzing agent and customer performance, in

order to find the appropriate strategies to electrify rural Zambia in a long-term successful way.

The company performs the analysis through the department Customer Insight. The most important

findings are presented below.

Vitalite’s target customers are households lacking reliable modern energy access.

Naturally, rural (and partially peri-urban) households become a key target market due to their lack

29

of access to the grid. Furthermore, the alternative energy expenditures for these households are

high, due to poverty tax. Vitalite estimates the yearly energy cost for a rural Zambian household

to be USD 250, counting for 25 percent of their yearly income. Based on this alternative cost, the

scheduled payments for Vitalite’s SHS lead to a customer pay-back time of 3 to 5 months,

depending on which product and payment plan they choose. Yet, constraints and fluctuations in

rural households’ cash flows make it difficult to fully take on a relatively expensive and long

payment12.

In order to find customers who are capable of maintaining a longer payment plan,

Vitalite, through its agent model, seeks customers who have working experience and who are

driven. Experiences in any full-time employment or capability of taking care of animals are

examples of good indicators of these characteristics. However, it has proven to be difficult to

find these customers. There is often a lack of willingness and encouragement to complete a

payment plan. Predominantly, this is due to the weak culture around savings and investments. It

is rare that rural Zambians have a long-term plan for their expenditures, implying that the

threshold for completing a 12 or 18 months long payment plan is high. Vitalite has noted that the

longer the payment plan, the more difficult it is to keep the customer aware and involved in the

payment process, leading missed out payments. This led to the company removing the previously

offered payment plan of 24 months.

Vitalite aims to regularly have a dialog with its customers in order to understand and learn

from their payment behavior, as well as support and motivate the customers to complete the

payments. This is why it is so important for the agents to keep track on payments and

continuously communicate with the customer. Today, the customer’s payment behavior cannot

be quantified because of lack of data but in the long run data analysis will be an important tool

for this task. However, Vitalite makes a clear distinction between missed payment days that are

cumulative and consecutive, respectively. The sooner, meaning that a customer has missed

payment days that are spread out over a longer time, is better, since it may indicate that the

customer has the willingness to pay but finds it hard to keep up financially. On the other hand,

cumulatively missed out payment days indicates that the customer does not have the willingness

of paying and is therefore undesirable. Vitalite uses a number of 30 days consecutively non-paid

as the limit when defining a bad customer. The number of consecutively non-paying customers is

used as a key measure of how the overall SHS business is going. Currently, 2274 customers that

should have payed have not paid for 30 days or more, whereof more than 50% is estimated to

12 Since the mean rural household income is USD 80, twelve monthly payments of USD 11 is considered a large investment.

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never be able to pay the amount left, based on that they have 120 cumulative days missing. This

can be put in relation to the number of customers that have completed a PAYGO session, which

is 1730 (Gottlieb, 2018).

Additionally, the customers income is lowered during the rainy season which stretches

from November to May. This is due to the fact that most of the customers work with agriculture

and during this period, they have recently spent money on seed and are waiting for crops,

implying a weaker income. There are examples of SHS companies who schedules lower payments

during this season and higher payments during the rest of the year, but in Vitalite’s case this is

not the course of action. On the contrary, Vitalite claims that consistency and simplicity is the

key. Consistency meaning the same amount same month and simplicity referring to that the

payment plan should be easy to understand and thus follow. Instead, Vitalite offers discounts for

customers completing their payments before November, to prohibit payments plans stretching

into this low-income period.

Previously, Vitalite used to offer the highest commissions to their agents when registering

a customer for the 12-month payment plan, to encourage them to choose it. Customer insight later

found many customers lacking to keep up with the pace of the shorter payment plan, and the

company therefore changed their commission system in January 2018. Vitalite now offers the

same commission to its agents no matter the agent plan, but a higher commission for the systems

offering higher power. As the commission system changed so recently, it is not possible to tell

the effects on customer payments. Though, the idea is that the agent tries to get a sense of the

customer’s payment ability and to find the appropriate payment is higher with the new

commission system. To further encourage the agent choosing the most appropriate payment

plan, the commission system also provides the agent with a bonus, three months after registering

a customer. The less days of missed payment days for the customer within the three months, the

higher the bonus.

Regarding the issue of low mobile money usage in rural Zambia, Vitalite is taking some

action. When a customer calls customer care department asking for payment assistance, they are

encouraged to use Mobile Money. Furthermore, Vitalite offers screenings in rural areas to

increase the knowledge about mobile money. These efforts, along with customers personal

incentives to use mobile money, has led to that 23% of Vitalite’s customers is using mobile

money, twice as high as the average rural Zambia. It is clear that there are incentives for Vitalite

to have this approach since it simplifies the collections of payments.

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In March 2018, Vitalite made further changes to their commission system to encourage

the agents to market mobile money to their customers. Previously, there was no commission

given to agents when customers performed top ups using mobile money and clearly no incentive

for them to market it. Now, they are offered the same commission for a top up no matter the

payment method of the customer. It is reasonable to believe this will have an impact on the

mobile money usage among Vitalite’s customers.

The role of Vitalite in electrifying rural Zambia

When trying to contribute to a significant change in the rural electricity access, a

permanent challenge is the population growth; it is difficult to cope with the demand as the

population increases. Within the BGFZ, Vitalite has signed up to deliver 95 350 SHS before the

middle of 2021. Vitalite’s current results are in line with the agreement and if the results would

stand until 2021, the company would electrify over 5% of rural Zambia.

Figure 6. Rural Electrification Rate through Vitalite products.

Orange curve: current rural electrification rate. Blue curve: Rural electrification rate through Vitalite’s products.

The diagram shows a forecasted percentage of rural Zambian population electrified by Vitalite. The forecast is

based on a 2.3% rural population growth rate; a current rural population rate of 6%; a current total population of

16.59 million; Vitalite’s current number of sold SHSs (12000); The BGFZ’s forecast of Vitalite’s customer

increase between 2018 and 2021 and an average of 5.1 people living in one household. Each year’s forecasted

percentage is forecasted to by the end of that year.

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This implies that Vitalite by 2021, alone, would be able to keep the rural electrification

rate above today’s 4.4%. In absolute figures, this means that Vitalite by 2021 will have provided

electricity to 500 000 people in rural areas. Today, 440 400 people in rural areas have access to

electricity, whereof 61 000 (13%) have it due to a Vitalite SHS in the household. By the end of

2018, according to the BGFZ’s forecast, Vitalite will have provided 95 000 people with electricity,

whereof 6 700 during 2018. Given the current population growth, Zambia will increase its rural

population with 230 000 people, implying that Vitalite’s contribution to the overall supply is yet

moderate. The population growth increases the demand for SHSs, meaning there will be market

shares for upcoming private SHS companies to grab. In addition to the forecasted steady increase

in demand, the SHS industry includes an opportunity to keep overhead costs low, as Vitalite

does. This implies a great potential in the long term gross profit as long as the upcoming

companies succeed in establishing during the initial years and begin achieving scale.

As population is growing, particularly first-time customer demand will grow with it.

Looking at first-time customer demand for Vitalite, customer register for the PSHS7500 SHS

which includes a solar panel of 6 watt and give them electricity access up to Tier 1. This implies

that private SHS companies entering the market will be able to mainly distribute SHS excluded

from taxation, since ERB has decided no tax is added to solar panels of 10 watt or below. This

increases the incentive for private companies to enter the SHS market.

In order to be successful on the private SHS market in Zambia, a company must want to

make a social impact. As many customers are struggling to follow payment plans, the company

needs to think long term and, instead of cutting off customers, understand customer

circumstances and what is affecting their ability to pay. Besides, the cost of losing a customer is

high (Mwanambiya, 2018). Customer insight is vital for success, and only a company that actually

wants to see long term rural electrification will put enough effort into it. For private SHS

companies in Zambia, there will be no financial success without a social mission.

Achieving scale in the SHS industry is not an easy task. From the start, it is critical to

have a plan handling weak infrastructure and low network coverage. Rarely paved road and an

undeveloped road network mean inevitable expenses that arise before any steady revenue streams

have been established. Furthermore, the low network coverage in rural areas decreases the

potential in collecting payments remotely (using mobile money), which in other locations could

have been one measure to mitigate the investments in infrastructure. Financial support in terms

of grants might be one key to manage these costs.

33

What challenges the grants to private companies is the outdated tax exemption. The

exemption is being inconsistently applied, and companies cannot budget for VAT and duty. This

causes uncertainty for investors evaluating the Zambian market. An improved implementation of

the tax exemption would decrease investors’ uncertainty and, in turn, increase the chances for

private SHS companies entering the market. Since the off-grid task force and SIAZ have been

working with the GRZ to redefine the statutory instrument and create an accurate framework for

taxation, clear tax regulation is under way. When put in place, there are greater chances for

private SHS companies receiving grants from investors. The fact that donors have created an off-

grid task force in Zambia implies they are interested in financially supporting private companies

and want to contribute to rural electrification. Moving forward, the SIAZ will likely be a powerful

tool for private companies to share what lessons have been learned in rural electrification. If

SIAZ and the task force continue to collaborate and to work to impact the GRZ, there will be

clear sector guidance and decreased market uncertainty for investors. In turn, the chances for

private SHS companies achieving scale increase.

Conclusion

The preconditions for electricity access in rural Zambia have been found to be imperfect.

They include: 1) a highly dispersed population suffering from bad infrastructure and network

coverage; 2) low use of mobile money; 3) no savings or planning culture; and 4) an outdated and

inaccurate taxation framework for importing solar and battery technology. A good SHS business

model for private companies in Zambia: 1) uses a well-organized distribution channel of agents,

present in the most rural areas where they are well renowned, and technology that shuts off the

system if the customer stops paying; 2) ensures long-term agents that are continuously served by

the company; 3) puts tremendous effort into customer insight to understand its customers and

thereby ensure long-term relationships and customer savings and payments; and 4) strives to

change the SHS policy framework. It is financially difficult for a private SHS company to provide

electricity to rural areas without any support since the required distribution network is included

with high initial costs. Therefore, the company needs to be financially prepared for the first years

of business. In the case that a private SHS company manages to establish a distribution channel,

e.g. with grants, the company has clear chances of achieving success in the long run, if the

company can keep overhead costs fixed as sales are increasing and lock-in costs low as the

market is evolving. There is great power in the distribution channel, as the company can add on

more products to their existing customers and act as a distributor for other companies.

34

Appendix 1. Questionnaire: Interview with Victoire Gottlieb and

David Mwanambiya

1. Since the start, how many SHSs have been sold?

2. How does the number of customers vary over time?

3. Currently, how many customers have started but not yet finished a PAYG plan?

4. What is the average number of customers per agent?

5. How many customers have mobile money?

6. Please describe the particular importance of understanding your customers when

operating in rural Zambia.

7. How does Vitalite forecast that a customer has good payment ability?

8. How many PAYG payment (excluding deposits) are done during a year?

9. What percentage of first-time customers choose the smallest SHS?

10. How is Vitalite meeting the challenge of tracking payments when working mainly with

cash?

11. How well do customers follow the scheduled payment plan?

12. Is a recurrent customer more likely to follow the payment plan than a new customer?

35

Appendix 2. Questionnaire: Interview with John Fay

1. Describe the situation and preconditions for rural electrification in Zambia, compared to

other African countries.

2. Describe Vitalite’s model for SHS distribution and all its vital parts.

3. Describe the greatest challenges for the company, and how the company meets them.

4. On the subject of customer insight, describe what the company believes is needed for

long-term success.

5. Describe Vitalite’s financial strategy.

6. Describe the rules and regulations impacting Vitalite.

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Appendix 3. Questionnaire: Interview with Magdalena Svensson

1. What is the Swedish Embassy’s role in rural electrification in Zambia?

2. What is the Swedish Embassy’s role in the Beyond The Grid Fund for Zambia?

3. Describe the contractual relationship with Vitalite, including the set targets and support.

4. How is Vitalite performing? Are targets being met?

5. Explain the strengths the Swedish Embassy sees in Vitalite, and the reasons for

providing financial support to the company.

6. What are the private company advantages (over NGOs etc.) when it comes to

rural electrification in Zambia?

7. Is there a task force coordinating the SHS sector?

8. What changes and actions (in terms of legislations, frameworks, initiatives etc) need to

be made in order for the SHS sector to improve?

9. If you compare Zambia to other African countries, are there any significant differences

regarding preconditions for rural electrification?

10. What are the greatest challenges distributing SHSs to such a dispersed population?

11. Do you see a future without grants for private SHS companies in general, and Vitalite

in particular?

37

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