Energy projects in rural areas must consider willingness to pay

Despite at least a decade of global attention, private sector initiatives to provide electricity in rural communities have had little success. Surprisingly, evidence shows that even when disposable income is sufficient, people are often not willing to pay for energy products and services. Projects that provide appliances like solar lanterns, torches, and televisions, for example, were not sustainable within low-income clientele, due to low willingness to pay. On the other hand, sustainability and profitability are higher when energy projects provide appliances of higher tangible value in the eyes of the users. Integrating willingness to pay measurements into the initial phase of rural projects design can lead to more sustainable and profitable projects for private sector companies. In this article, we demonstrate how willingness to pay can be integrated into the process of designing a business model for a rural energy project in a community in Western Uganda.

Un-tapped rural market

Yau-Ben-Or-ENMillions of people that can benefit from electricity-enabled services and products have no access to electricity. Lack of national resources, competing for national priorities and low political interest prevents from many countries to invest in reliable and sustainable energy provision. It has been shown in numerous researches that energy provision to low-income communities can lead to improved well-being, social welfare and social aspirations for growth. This drives the motivation for exploring practices in which for-profit companies can provide the energy services and products for which low-income communities are willing to pay.

Current efforts to provide energy to rural low-income communities can be divided to two: aid-based interventions that subsidize energy provision in a community; and for-profit initiatives that sell similar services and products that are sold to relatively better of customers, in a lower quality or quality.

To date, both types are failing to be sustainable and scalable. Aid-based interventions suffer from low sustainability due to the reliance on external donor money. For-profit initiatives, on the other hand, fail to become scalable. A recent IFC report revels, energy companies trying to sell to rural communities do not manage to attract customers beyond an initial core set of users in a village. To create projects that manage to be sustainable, scalable and profitable the unique preferences of rural communities must be taken into account.

Perceived value and willingness to pay

As Karima Hirji (HEDON) put it, “most poor customers are no different from any other in how they make purchasing decisions; their limited means simply makes them extremely good at assessing risk and value”. Like any other customer segment, the key to success in the rural market lays in understanding the potential customers’ preferences, perceived values and willingness to pay. Nevertheless, the unique characteristics in the rural context require a designated framework. Dr. Stephanie Hirmer, a researcher from the University of Cambridge, developed a value-driven technic that incorporates the complexity of understanding value as it is perceived in the eyes of the rural communities. The perceived value is defined by Dr. Hirmer as: “The benefits, concerns, feelings and underlying drivers that vary in importance and act as the main motivators in the lives of the people – as perceived and defined by the beneficiaries themselves at a given time”. It was built to overcome existing disadvantages that exist in current needs assessment tools. The technic, which was developed from product design and market research methods, uses interactive group and individual activities and then codes multiple data points to gather a complete and unbiased picture of the values and needs of a given community.

Dr. Hirmer’s perceived value technique provides a comprehensive map of the community priorities; a further step, of quantifying willingness to pay, is needed to identify business opportunities. Measuring willingness to pay and comparing it to the community perceived value provide actionable insights on the business opportunities in a community.

When the community’s perceived value and willingness to pay are high, a tangible business opportunity exists, and corresponding business models can be designed and evaluated. A high perceived value and low willingness to pay signals that business opportunities are not ripe but can be available if the community is sensitized or simply with time.

A common example is clean drinking water. Rural communities will often prioritize health preservation high, but the willingness to pay for clean water that can improve health is often very low. Patient investors will gain from these cases if they position attractive offerings as the first go-to service while taking actions to accelerate market creation. In the case study presented here, we will focus on a ripe business opportunity and the business model design process.

Rural villages in Western Uganda

Following is a case study that was done in two villages in Western Uganda that demonstrate a rural business model design. Although the villagers’ income is very low (an average of US$ 2 per day), a profitable business model of 30%~ IRR can be designed. In both villages, small rural electrification projects were deployed between 2009 and 2013 respectively.

The projects were community run small-scale hydropower plant of ~ 2 kW that provided mostly lighting. The initial investment was donor funded and the beneficiaries were charged a registration fee and monthly fee. Both projects were unsustainable and at the time of this study, both were un-operational. At the time of the study, the villages were completely off-grid and most villagers were sustenance farmers. Analyzing the villagers’ perceived value and willingness to pay can shed light on the reasons for this failure and suggest how it can be avoided.

Assessing perceived value and willingness to pay

Series of 17 interviews and focus groups in the villages provided the following list of top perceived values:

  • Income generation
  • Food security
  • Health preservation
  • Knowledge attainment

This list was the base of the following willingness to pay evaluation that in this case was specific for electricity appliances. The appliances that induced the highest willingness to pay were:

  • Irrigation pump
  • Phone charging station

Irrigation pump meets the villagers’ perceived value of food security (growing food in the dry season) and of income generation (selling excess yield). The phone charging station allows charging money for phone battery charging hence generates income as well. Identifying these two appliances for which villagers were willing to pay for was the premise of business model design process.

Business model design process

An additional critical part in the process of identifying rural business opportunities is the design and evaluation of specific business models. A valuable tool for designing business models in the unique rural context is the Product Service System framework (PSS). The PSS is a type of sustainable business model. It shifts from focusing on selling products alone, to a range of offerings, usually a combination of services and products, that maximize user satisfaction. It has been used successfully by several multinational corporates like IBM and Rolls-Royce and is considered to be a promising method for achieving “sustainable consumptions and production pattern”. In a recently published book, “Designing Sustainable Energy for All”, researchers from five different universities develop the PSS methodology further and emphasize its suitability for rural electrification and its potential for low to middle-income markets. This methodology allows to explore multiple configurations of delivering the selected appliances, as a product, a service or a combination of the two. The profitability and affordability of each of the options can be simulated to facilitate decision making. Further stakeholder and risk analysis reveal whether the execution should be done by one company or a partnership of several parties.

Choose the best business model

In this case study, 16 different business models were initially considered. Of which, the seven with the best performance a comprehensive evaluation was performed. The criteria that were tested were profitability, affordability to the end user, risk, customizability and customer acquisition cost. Having both quantitative and qualitative measures, in addition to sensitivity analysis, increases the reliability of the model. The results show that in this case study, the best business model was a model of community service center, where villagers pay for use of electricity and use irrigation as a service. In this model, a local operator facilitates the operation of the system and the relations with the energy and pump providers.

Conclusions and the Romanian market

In Romania, where over 40% of the population is defined as rural, these frameworks are extremely valuable. Tools like the Perceived Value and the Product Service System can be used by companies and entrepreneurs to reduce the risk and increase the profitability of doing business in rural settings. Beyond a specific tool, the emphasis should be on addressing rural communities as active customers (and producers) whose unique preferences can be met by private sector companies. This concept enforces the global paradigm shift which couples financial profitability with social impact.

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This analysis firstly appeared in the printed edition of energynomics.ro Magazine, issued in December 2018.

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