Although it is still too early to fully understand the global impact of the novel coronavirus, it’s clear enough to see that, alongside the human tragedy brought on by COVID-19, there will also be a massive fallout for the world economy. Every country and every sector will, in some capacity, be affected by the pandemic of our era.
The State of Market Today
When we examine the off-grid energy sector, what are we seeing across our solar Pay-As-You-Go (PAYG) portfolio and the sector as a whole? Our observations cover demand for solar systems, customers’ ability to pay, production and supply chains, sales activity in times of social distancing, and investor attitudes toward providing funds.
Demand. During these times when individuals and families are forced to stay at home, some markets are seeing an increase in demand for solar products, such as solar lighting, charging capabilities and home entertainment systems. We are also seeing that solar is qualifying as an essential good in many countries, enabling off-grid companies to continue operations notwithstanding current stay at home requirements.
Payments. As unemployment continues to rise, however, customers’ ability to pay, particularly in rural areas, will be affected. For employees fortunate to retain their jobs, salaries are being delayed, which will consequently affect timely payments on PAYG contracts. Migrant workers around the world will also face the brunt of the economic downturn, impacting their ability to send money to families back home.
Logistics. The COVID-19 pandemic has also affected production and movement of goods worldwide, due to lockdowns and lower available transport capacity, and this of course includes solar products. Although many overseas facilities are back up and running after China’s bout with the virus, in Africa we expect to see delays in shipping at ports and with inland transportation due to reduced staff and movement restrictions. Overall, logistics will become more expensive and most companies expect to see significant out of stock situations within a few months’ time at the latest.
Sales. In addition to logistics of moving solar products, social distancing restrictions will affect companies’ ability to engage in sales activities and payment collection critical to PAYG businesses. As noted above, we see quite a few countries classifying solar energy as an essential service, which will exclude them from prohibited movement restrictions. Nonetheless, the need for “contactless transactions” is making the conduct of PAYG businesses more challenging, slowing the rate of sales and consequently likely increasing transaction costs.
Investing. As the whole world awaits what comes next in the corona pandemic, most investors and lenders have taken a “wait and see” attitude. Naturally in such an unsure time, investors have become more cautious, and even some previously committed funding has been put on hold. Others have seen their processes slowing as, for example, physical due diligence is impossible to conduct in the current situation. Yet, most off-grid companies, including those in Persistent’s portfolio, are still in the scale up phase and, in order to reach profitability, they require additional debt and, in some cases, equity investment. This makes the current crisis a double whammy: widening cash burn due to lower revenue generation driven by slower sales and lower collections, and widening funding gaps as investment capital has dried up.
That said, we are seeing key lenders in the sector showing great flexibility in extending payment terms. This flexibility is greatly appreciated across the sector.
Surviving the Pandemic
Moving forward, the central goal is to ensure operations are interrupted as little as possible. While this is easy to say, it is much harder to do in this challenging environment. Here are some measures that best in class companies are taking:
Essential service classification
- Obtaining classification of solar products and services as essential services in the respective country or region of operation is key to continued operation.
- Focusing on the safety of teams and customers by training teams on safe operations and procedures, and providing adequate safety equipment and, where possible, requesting help from technical assistance facilities in this regard
- Offering “hazard pay” to front line employees, to set a tone of respect for staff and boost morale
Remembering that cases of the virus in your workforce are not only unfortunate but can adversely impact one’s company’s reputation
Digitizing the business model
- Moving to online marketing channels and social media to promote products where possible (often most feasible for customers interested in larger systems who own smartphones)
- Encouraging cash pay customers to finally move to direct payment through mobile money channels, offering promotional discounts for digital payments
- Moving more stock to rural stock points to avoid outages due to local transport restrictions
- Taking into account longer supply chain times when ordering stock where funding is available
- Having upfront conversations with suppliers about current insecurities around sales and financing impact of crisis and discussing risk-sharing mechanisms to mitigate risk of stock outs post crisis. This can help with several month lag times from order to arrival of shipments.
Cash flow management
- Employing tactical cash flow improvement measures like restructuring pay plans to provide more incentives for customers to pay on time or even pre-pay
- Collaboratively with their teams discussing ways to save operating costs while avoiding negative long term effects where possible
- Using the crisis as an opportunity to fundamentally question and reduce a company’s cost structure, and focus on becoming highly efficient, focusing on the right markets etc.; and not being afraid to question even the most basic assumptions
- Focusing current fundraising efforts on existing investors expecting not to be able to raise significant funding from new investors for the next 12 months
- Where discussions with new investors are ongoing, having upfront discussions about their true intentions and expected timelines under the new reality
- Negotiating debt restructurings to delay principal and interest payments as much as possible
- Always being clear and transparent with existing and potential investors and lenders on the impact of the crisis, measures taken and how additional funding can impacts the company
Sector Wide Relief
As an additional resource to off-grid energy companies during the COVID-19 pandemic, we are working together with Acumen, Shell Foundation and the CDC and many others to launch a sector wide relief fund: the COVID-19 Energy Access Relief Fund. This fund will bridge the gap to maintain the sector’s progress in bringing energy to all.
The EUR 100 million targeted concessionary debt fund seeks to enable off-grid energy companies in Sub-Saharan Africa and Asia to both maintain their customers’ existing energy services and retain the staff required to deliver future services to these customers.
By providing emergency capital to off-grid energy companies, the COVID-19 Energy Access Relief Fund aims to protect the progress already made towards achieving Sustainable Development Goal 7. By stabilizing economies in emerging markets and providing security for up to 370,000 jobs, the fund will also ensure that the sector can continue to grow after the crisis.
Persistent remains active and growing. We are available to consult with any company during the crisis, whether or not it is a Persistent partner company.
For further information, please contact email@example.com.