As a complement to our class on Energy Efficiency solutions in US Commercial Real Estate, I thought I would share my experience of working with a residential energy efficiency solution provider in Cape Town, South Africa. We worked on a consulting assignment with a start-up looking to introduce energy efficiency solutions (smart metering and energy auditing services) in Cape Town and came across a number of issues – some of which are similar to our discussion in class while others that were more specific to Cape Town but can be generalized to other developing cities.
A bit of background – South Africa suffers from an acute power shortage which has had a negative impact on economic growth, in particular stunting the growth of the country’s mining sector. Hence, there is increasing focus on implementing energy efficiency solutions in addition to expanding power capacity. 38% of the country’s power demand comes from domestic use and so to use our class analogy, there are a lot of pennies lying around that could be picked up in that segment of the market alone. Eskom is the national power monopoly in South Africa and is responsible for upstream generation and nationwide grid management. However, city municipalities are responsible for delivering electricity to their residents after purchasing it wholesale from Eskom. This intermediary role of municipalities perverts incentives – while it is in the interest of both Eskom (to shave off peak demand) and the end consumer to reduce power usage, the municipalities earn a large chunk of their revenues through the mark-up on electricity tariffs and hence are not keen on reducing demand. In fact, based on our discussion with Cape Town City officials it became clear that the most powerful department was the one responsible for electricity distribution and it was not inclined to support large-scale adoption of energy efficiency solutions.
In the absence of a motivated intermediary that might have helped our client push through mass-scale adoption in the city, direct-to-consumer (DTC) approach seemed the only viable way. However, in order for a solution to work it had to be both affordable and provide tangible benefits to the end-user. While high-income households had the highest power consumption and the ability to afford a solution, we ran into a similar issue to the one we saw in the Edward Lundberg case –middle and high-income households spent on average about 3% of their annual income on electricity and so a solution offering to shave a certain percentage (we estimated this to be around 10%) of consumption was not really worth the household’s time and effort. On the other hand, lower-income households spent about 25-30% of their income on power consumption and were likely to benefit most from energy efficiency solutions – however the cost was not palatable.
We proposed a couple of options to get around the above issues. The first one was to focus on eco-conscious high-income households with the hope that this would have a cascading effect through their network. We also proposed using local entrepreneurs in low-income townships as franchisees to promote the company’s products. The townships are dense communities with strong social bonds so if the company could enable a certain number of local entrepreneurs to act as energy auditors in those communities it could easily cover a large segment of the population at a relatively low cost (the idea was not too different from Sarvajal’s water franchising model).
After having listened to the discussion in class, one area we should have explored was using financing solutions. The company could have looked at opportunities to partner up with capital providers and other complementary product providers (water heaters were generally the biggest source of power consumption) to provide total solutions that could potentially overcome both issues of time commitment and hassle (applicable to high-income households) and affordability (applicable to low-income households). It will be interesting to see if the US energy efficiency market can overcome some of the issues facing it today and whether some of those solutions can then be replicated in other parts of the world.