ANALYSIS OF THE POTENTIAL FUTURE ASSURANCE PROGRAM OF THE LIGHTING GLOBAL QUALITY

Transcription

1 ANALYSIS OF THE POTENTIAL FUTURE OF THE LIGHTING GLOBAL QUALITY ASSURANCE PROGRAM Prepared for: Office of International Affairs, U.S. Department of Energy and Global LEAP of the Clean Energy Ministerial Prepared by: Paul Waide, Shannon Graham, Dexter Gauntlet, and Rowan Watson Navigant Consulting, Inc. Navigant One Market Street Spear Street Tower, Suite 1200 San Francisco, CA th August Navigant Consulting, Inc.

2 Table of Contents Glossary... iii Executive Summary Introduction Market Analysis Pico Solar and SHS Forecasts Industry Profiles: Industry Profile Industry Profile Costs, Revenue, and Business Model Analysis Summary of Findings from the GOGLA-Navigant Survey Findings of the Quality Assurance Survey Summary of Functions and Roles Needed to Operate a QA Certification Body Certification of Products Maintenance of Test Methods and Quality Standards Provide Public Information Assist Manufacturers/Producers In-field Promotion and Market Surveillance Activities Fundraising to Support Certification Body Laboratory Accreditation Enforcement Managing Legal Risk Estimated Future Costs of Operating a QA Certification Body Implications of the Stakeholder Survey Findings on the Value of QA Business Models and Prospective Revenue Analysis SWOT Analysis Concept 1: Stay the Course (Third-party led, product certification) Concept 2: Modify the Course (Concept 1 without market surveillance) Concept 3: Alternative Course (Industry-led, product self-certification) Concept 4: New Course (Hybrid leadership, supplier certification) Conclusions and Recommendations Appendix A: Scope of Work A1. Background Potential Future of the Lighting Global Quality Assurance Program Page i

3 Concept 1: Stay the Course (Third-party led, product certification) Concept 2: Modify the Course (Concept 1 without market surveillance) Concept 3: Alternative Course (Industry-led, product self-certification) Concept 4: New Course (Hybrid leadership, supplier certification) A2. Scope of Work Market Research: Future Sales and Industry Profile Revenue Analysis: Potential for Revenue Generation to Support QA Activities SWOT Analysis: Four QA Concepts Findings and Recommendations Appendix B: Market Forecasts B1. Introduction B2. Methodology B3. Market Definition B4. Pico Solar and SHS Forecasts B5. Pico Solar Africa Asia Pacific Latin America Middle East B6. Solar Home System Forecast Asia Pacific Africa Latin America Middle East Appendix C: QA Stakeholder Survey C1. Survey Responses Questionnaire - About You and Your Organization Questionnaire on Quality Assurance End notes: The Four Concepts for a QA Organization Discussed at the GOGLA QA Meeting Held in Cologne, Concept 1: Stay the Course (Third-party led, product certification) Concept 2: Modify the Course (Concept 1 without market surveillance) Concept 3: Alternative Course (Industry-led, product self-certification) Concept 4: New Course (Hybrid leadership, supplier certification) Potential Future of the Lighting Global Quality Assurance Program Page ii

4 Glossary Certification Certification Body EOI FTE FTS Global LEAP GOGLA IEC IFC ILAC ISO LG Lighting Africa Lighting Asia LOE MFI NGO PAYG Pay-As-You-Go 1 Certification is the process through which an independent organization checks whether a certain product or service has been tested, verifies its declared performance characteristics and certifies that the declared characteristics are correct and/or that the product or service is proven to meet specified minimum requirements An organization that carries out certification Expression of Interest Full time equivalent Full time support Global Lighting and Energy Access Partnership (Global LEAP) of the Clean Energy Ministerial, Work/Initiatives/Energy-Access Global Off-Grid Lighting Association International Electrotechnical Commission International Finance Corporation International Laboratory Accreditation Cooperation International Standards Organization Lighting Global. The World Bank Group s Lighting Global program, The World Bank Group s Lighting Africa program, The World Bank Group s Lighting Asia program, Level of Effort Microfinance Institution Non-governmental organization 1 The Pay-As-You-Go business model typically uses machine-to-machine communications technology enabled by cellular networks to enable customers to pay for lighting service credits from an off-grid solar lighting product through their mobile money accounts. Customers typically provide an upfront fee or deposit and then make payments for lighting service at a rate that is less than what they would typically spend on kerosene while receiving significantly higher quality lighting service. Potential Future of the Lighting Global Quality Assurance Program Page iii

5 Pico solar QA SHS SHS kits SWOT Solar-powered products drawing 10W of power - These are entry-level lighting products that cost between $10 and $40 and include small solar modules (generally <10W) with white LEDs. These products are commonly referred to as solar lanterns and frequently also include additional capabilities such as mobile phone charging. Quality Assurance Solar Home System. A typical SHS includes a solar panel (10W-200W), a storage battery, multilight source applications with mobile phone charging outlets), and often includes DC- Powered appliances such as a radio. The entire system typically costs between $100-$500 Solar Home System kits: SHS kits are solar home systems in which all components and parts are included in a single package. Plug-and-play SHS kits, which are one type of SHS kit, are designed so that the electrical connections required during system installation can be made without the use of tools. Strengths, Weaknesses, Opportunities, Threats a type of analytical framework Potential Future of the Lighting Global Quality Assurance Program Page iv

6 Executive Summary This report presents the findings of an investigation into the factors and issues affecting the likely viability of prospective successor organizations to the current Lighting Global (LG) Quality Assurance (QA) organization. The analysis presented is intended to provide useful information to prospective applicants to the IFC s request for expressions of interest regarding the Lighting Global Off-Grid Lighting Third-Party Certification Body. It was conducted by Navigant Consulting with support from the Global Off-Grid Lighting Association and funded by U.S. Department of Energy under the Clean Energy Ministerial s Global LEAP program. Specifically the report includes: a market forecast for solar off-grid products (the sector, comprising pico solar and solar home systems (SHS)) to 2024, an analysis of the market structure and factors that affect it, an analysis of the prospective functions and costs of a global off-grid QA Certification Body, an analysis of the prospective revenue models that could be used to recover operating costs, the findings of an extensive stakeholder survey of some 38 organizations active in the solar lantern (pico solar) and solar home systems (SHS) domains, the assessment of four potential organizational models for an off-grid QA Certification Body via a strengths, opportunities, weaknesses, and threats (SWOT) analysis, and the derivation of conclusions and associated recommendations. The annual, global market revenue for pico solar and for SHS products combined is projected to grow from $538 million in 2014 to $2.1 billion in The revenue from SHSs makes the greater proportion of this in 2014, but pico solar revenues are growing faster and are expected to attain parity by Sales in Africa account for about three-quarters of the global pico solar market, which is the traditional focus of the Lighting Global QA program, while Asia, which notably includes Bangladesh, accounts for approximately 80% of the SHS market. These two regions are expected to continue to dominate the global market for off-grid solar products. Nine separate functions were identified for the QA Certification Body, of which six were a principal focus. The analysis of functions found that not all of these need to be administered by the same agency, nor do they require the same competences or scope. As such, there is potential for prospective applicants to manage part of these functions while other applicants would manage others. The cost analysis concluded that the expected operating costs of a Certification Body fulfilling all these function would rise from $1.4 million in 2016 to $2.2 million in 2018 before stabilizing at approximately $1.8 million from 2021 onward. The revenue analysis concluded that a revenue model based purely on fees collected each time a product is certified would be unsustainable and that a blend of product certification fees, annual subscription whose fees are based on annual revenue of the organization in that sector (i.e. which take into account the ability to pay and the value of QA certification to the applicant), and third-party donor funding would be necessary until about , after which the industry should be sufficiently established to be able to pay the necessary sums. Thus the ability of a successor organization to raise funds in the transition period will be critical to success. The stakeholder survey found there is: Strong support for the continuation of a QA certification program Potential Future of the Lighting Global Quality Assurance Program Page 1

7 Interest in extending the focus to cover SHS kits and counteracting counterfeit/imitation products An average estimated suppression in market growth of 28% over the next 5 years if an effective solar off-grid product QA program is not maintained Strong preference to continue with the current QA initial product certification and market surveillance model Strong preference for governance of a post-lg QA program to be via a public-private partnership Mixed feelings about the best revenue model to be applied to fund the QA Certification Body Lack of consensus on willingness to fund a program However, analysis of the stakeholder survey and Navigant market projections indicate an estimated market value from an effective successor QA certification program of equivalent to more than 48 times the cost to operate it by Thus there is an overwhelming business case for the continuation and funding of such a program, and it is clearly in the sector s own interest to support such an initiative. Effectively communicating this business case to key stakeholders that are in a position to help sustain the QA effort will therefore need to be a priority of the LG QA Certification Body successor organization. For the successful continuation and evolution of the current program it is concluded that: Analysis of prospective Certification Body revenue models shows that a model based solely on product certification fees would be insufficient and unstable. Therefore, a blend of these organization revenue-based dues and donor funding will be needed until the industry becomes sufficiently developed for it to become viable for the QA program to attain full cost recovery from industry in about Identification of a strong organization or coalition of actors with the right qualifications and motivation is essential. The organization/actors will require strong fundraising capacity. A QA Certification Body that is both equipped and willing to address legal liability issues is necessary. Ensuring the legitimacy of the organization in the eyes of key stakeholders, including industry, government, investors, etc., will require a broad-based and credible governance structure for management of the funding and legal liability challenges to be successful. IFC funding cannot be guaranteed beyond 2 years time, so decisions on how to progress the QA program need to be taken rapidly to have a reasonable prospect of a successful transition. Each of these aspects will need to be addressed for the QA program to continue and thrive. Given the range of competences and scope of functions required, it is quite likely that the most viable outcome from the expression of interest (EOI) will be the assembly of a consortium of partners that combines the capabilities of more than one body to provide the required services. Potential Future of the Lighting Global Quality Assurance Program Page 2

8 1. Introduction The World Bank Group s Lighting Global initiative has been managing a quality assurance (QA) program for off-grid pico solar products since 2009, and it is the process of expanding its quality assurance coverage to include plug-and-play solar home system (SHS) kits. In approximately 2 years time, World Bank Group funding of QA activities in this sector is expected to end, and therefore there is a need to assess the importance of continuing to provide independent QA for the off-grid solar market and to examine options for a transition to a new platform. Specifically, the World Bank Group s Lighting Global program and the U.S. Department of Energy s Global LEAP initiative, in consultation with the Global Off-Grid Lighting Association (GOGLA) and other partners, are looking to establish an independent and self-sustaining international QA program for solar-powered off-grid lighting and energy systems and associated appliances. This program will build upon the existing QA programmatic activity for solar-powered lighting and energy systems developed through the Lighting Global program and its predecessor, the Lighting Africa program, in partnership with Global LEAP and other organizations. Because programmatic support from the World Bank Group will only be available for a few more years, there is a need to quickly transition these QA activities to a self-sufficient platform. To help support this process, the U.S. Department of Energy s Global LEAP initiative has engaged Navigant Consulting to conduct research and analysis of key issues pertaining to the potential future of the Lighting Global QA program, the results of which are presented in this report. This work has been conducted in close cooperation with GOGLA, the International Finance Corporation s (IFC s) Lighting Global program, and the Schatz Solar Energy Center at Humboldt State University, which currently implements the Lighting Global QA program on behalf of the World Bank Group. The findings of this work are intended to help assist potential applicant organizations to the IFC s call for expressions of interest (EOI) for the Lighting Global Off-Grid Lighting Third-Party Certification Body to understand: the market, the value of QA, the various QA Certification Body roles, stakeholder perceptions, prospective costs and revenues, prospective collaborations with other stakeholders, and the merits and demerits of different QA Certification Body organizational options. For a full understanding of the issues, this report should be read in conjunction with the following documents: Request for Expressions of Interest for the Lighting Global Off-Grid Lighting Third-Party Certification Body Lighting Global Quality Assurance Framework Past, Present, and Future Support for the Off-Grid Energy Market The full scope of work Navigant was asked to address is presented in Appendix A. Potential Future of the Lighting Global Quality Assurance Program Page 3

9 2. Market Analysis This analysis aims to provide the Lighting Global program with a reasonable forecast for both the pico solar and SHS markets over the next 10 years. The forecast is to be used to assess the ability of the key value chain players to support a global quality program. Thus the focus of the data gathering and reporting is on the number of products sold globally, the revenue, key regions, and the overall industry structure. There are two central research questions this section of the report is intended to address: What are the sales projections for 3 and 8 years into the future (by product type including lanterns and SHS kits)? What is the industry profile today and what is it likely to be in 3 and 8 years time, in terms of number of companies, composition (concentration or fragmentation), and types of key market players (i.e., affiliated with larger global company or standalone)? Given the anticipated industry profile, the analysis also considers in section 3 what are the implications for a) need and role of QA and b) the economic feasibility of providing QA services? The analysis is organized by presenting the overall market for pico and SHSs, including SHS kits. Full details including of the methodology used and with greater differentiation by market and producer are presented in Appendix B. In addition, an industry profile of the time periods and is presented. 2.1 Pico Solar and SHS Forecasts Combined global annual unit sales of pico solar lighting and SHSs are forecast to grow from 8.2 million products in 2014 to 64.3 million in Annual revenue from the sale of these products is expected to increase from $538 million to $2.1 billion over the same timeframe. Note, within the SHS segment there is an important split between SHS plug-and-play kits and the wider SHS market. The wider SHS market is currently much more established and represents the majority of sales, but the share taken by SHS kits is growing more rapidly, largely because their installation costs are substantially lower. Over the whole pico solar and SHS segments, the Asia Pacific region is expected to remain the leading market in terms of combined sales revenue through In 2019, Africa is expected to surpass Asia Pacific in annual revenue and remain the largest market through Asia Pacific is forecast to grow from an annual pico solar and SHS market of $376.5 million in 2014 to $992.3 million in 2024, while the market in Africa is expected to grow from $148.6 million to $1.1 billion. After the two key regional markets, there is a significant drop in unit sales and revenue. Latin America is expected to be the third largest market in 2014 with $7.0 million in revenue, growing to $13.8 million in The Middle East is expected to grow from $3.5 million in revenue to $15.2 million during the same timeframe. Potential Future of the Lighting Global Quality Assurance Program Page 4

10 Unit Sales ($ Revenue) Chart 2.1 Annual Pico Solar and Solar Home System Unit Sales and Revenue by Region, World Markets: ,000,000 60,000,000 50,000,000 Africa Middle East Latin America Asia Pacific Global Revenue Asia Pacific Revenue Africa Revenue $2,500,000,000 $2,000,000,000 40,000,000 $1,500,000,000 30,000,000 $1,000,000,000 20,000,000 10,000,000 $500,000, $- (Source: Navigant Research) Potential Future of the Lighting Global Quality Assurance Program Page 5

11 Revenue ($) Chart 2.2 Annual Pico Solar and Solar Home System Revenue by Region and Product Type, World Markets: ,000, ,000, ,000,000 Pico - Asia Pacific Pico - Latin America Pico - Middle East SHS - Asia Pacific 600,000, ,000, ,000,000 Pico - Africa SHS - Asia Pacific SHS - Latin America SHS - Middle East SHS Africa Pico - Africa SHS - Africa 300,000, ,000,000 Pico - Asia Pacific 100,000, (Source: Navigant Research) 2.2 Industry Profiles: The following sections provide off-grid lighting industry profiles for the time periods of and The profiles are intended to convey the overall trends that distinguish the time periods but in reality, evidence of many of these trends are visible throughout both time periods. Trends by market player, industry revenue and percentage of QA product in the market from pre-2012 through 2024 are summarized in Table Industry Profile With distributors in dozens of countries and millions of units sold each year, during the time period, the off-grid solar lighting industry accelerates its transition from a humanitarian aspiration to significant market opportunity. While off-grid solar lighting market drivers still include political and humanitarian aspects, technological advancement and business model innovation continue to gain the attention of public and private investors that result in the emergence of platform companies among both pico and SHS product providers. These platform companies, including d.light, Greenlight Planet, M- KOPA, and others, will continue to scale up operations, seek out additional investment, and aggressively expand to new markets. With initial investments and strategic partnerships made by industry leaders, including Schneider Electric, Panasonic, Philips, SolarCity and others in the time period, it is expected that several new multinational companies will enter the marketplace either through offering their own products, acquisitions, or joint ventures in the time period. While it is estimated that the top 10 companies in the SHS market accounted for approximately 60% of annual sales at the end of 2014 and even more for the pico solar segment, the top 10 companies are likely to account for as much as 75% of the market by the end of 2017 since new entrants will not have scaled up fast enough by this time to gain market share. By the end of this period, all platform companies will have numerous pay-as- Potential Future of the Lighting Global Quality Assurance Program Page 6

12 you-go (PAYG) products with a variety of payment options tailored for each market. Flexibility in payment options will increasingly be a key differentiating factor for a more competitive PAYG marketplace. For example, in 2014, approximately 20% of d.light s sales have stemmed from PAYG products, but it is possible that by the end of 2017, PAYG products could represent close to 50% of annual unit sales. The total number of pico and SHS companies actively operating in the space is estimated to be in the range of during this time, with a roughly even split between pico solar and SHS providers; although, many companies already provide both product types or are in the process of doing so. Need for QA: The need for QA during this time period is significant because the market is still in transition. In order for additional investments to be made, leading companies in the time period will need to execute on ambitious sales targets. While the momentum has definitely shifted toward quality-assured products, it is risky for the entire market to experience any reduction in QA after it has come this far Industry Profile During the time period, it is expected that pico solar and SHSs will have become ubiquitous with significant sales volumes in more than 100 countries. Annual sales revenue for pico solar systems is expected to reach $452 million, representing 300% growth compared to Annual sales revenue for SHSs is expected to reach $648 million, representing 52% growth compared to By 2024, both of those totals are expected to have roughly doubled to $860 million and $1.3 billion in annual revenue, respectively. It is anticipated that with sufficient investment during the time period, today s relatively new entrants, such as Off-Grid Electric, WakaWaka, BBOXX, and others, will successfully scale up operations to eventually be able to gain market share and be leaders in new markets during the time period. As a result, the top 10 companies are expected to reduce market share from as high as 75% in 2017, back down to 55% 60% in By this time, PAYG systems are expected to represent more than 90% of all system sales. The total number of pico solar and SHS companies actively operating in the space is estimated to be in the range of during this time, with roughly even split between pico solar and SHS providers. During this time period it is also anticipated that telecom companies will begin to offer their own pico solar and SHS products either directly or through a joint venture. Need for QA: During the time period, the threat of counterfeit and non-qa products gaining market share in mature markets such as East Africa and South Asia remains a serious challenge, especially as counterfeiting tends to increase as market value increases. Furthermore, with products now available in as many as 100 countries, the need for QA in relatively new markets will be important to avoid market spoilage in those regions. Potential Future of the Lighting Global Quality Assurance Program Page 7

13 Table 0.1 Off-Grid Solar Lighting Industry Profile Summary Tables: Pre Market Size Annual Market Size: Pico Solar N/A $100 -$150 million $200 -$400 million $600 -$900 million Annual Market Size: SHS N/A $400 -$500 million $700 million - $1 billion $900 million $1.3 billion QA Product Percentage 5%-40% 60% 70%-75% 80%-90% Geography Regional Market Expansion India, Bangladesh, Kenya, Nepal are leading markets Further scale-up in South Asia, expansion beyond Kenya in East Africa Growth in West and Central Africa; Middle East; Latin America Activity in 100 countries Role of Key Stakeholders Government Provides subsidies; Bangladesh, Morocco, India, Brazil Continues to provide subsidies; Some governments announce kerosene phase-out or solar lighting deployment targets Phase-out of solar lighting subsidies in high-penetration markets; establishment of subsidies in new markets Growth of kerosene phase-out and offgrid solar deployment goals; significant reduction in kerosene subsidies Non- Governmental Organizations (NGOs) Distribute free lighting products Transition to marketbased/social entrepreneurship models Consolidation leads to growth in market share for leading social enterprises; business models continue to be refined Nearly all solar lighting products are sold; very few NGOs distributing for free; lighting as a service model is ubiquitous Potential Future of the Lighting Global Quality Assurance Program Page 8

14 Pre Microfinance Institution (MFIs) Experiment with microcredit for SHSs, mostly in Bangladesh, India Expand lending to solar entrepreneurs Expand geographic activity, scaling up in Africa Expand financing to appliances; remain active in lowest income brackets Investors Development banks (loans and grants), some foundations (mostly grants) Development banks, foundations, impact investors, bilateral donors provide seed money for social enterprises (USAID) Public and private capital continues to expand by ~30%-50% per year; PAYG companies receive growing share of investment Private investment expands; cost of capital is reduced Corporates Not Active Strategic investments in market leaders as investors look to test the water Successful scale-up of market leaders attracts further investment/strategic partnerships from large lighting, consumer electronic, appliance companies; telecom companies also more aggressively enter the marketplace Off-grid appliance market grows rapidly; telecom companies become major players in lighting market (Source: Navigant Research) Potential Future of the Lighting Global Quality Assurance Program Page 9

15 3. Costs, Revenue, and Business Model Analysis This section provides potential applicants to manage the QA Certification Body with information needed to assess likely costs, revenues and business models expected to occur during administration of the program. It presents analysis of these elements but begins with a summary of the findings from the GOGLA-Navigant stakeholder survey conducted in the spring of Summary of Findings from the GOGLA-Navigant Survey The Global Lighting and Energy Access Partnership (Global LEAP) provided support for an analysis conducted by Navigant Consulting in collaboration with Lighting Global and GOGLA to survey organizations active in the off-grid solar lanterns and SHS kit fields. Some 38 organizations active in the off-grid solar power product field completed the survey in the period from March 2015 to May The goal of the survey was to determine the views of key stakeholders with respect to the importance of QA in the sector and the future evolution of the World Bank Group s Lighting Global Quality Assurance program. Navigant further incorporated some of the findings from this survey with respect to expected market growth, with and without an effective QA program in place, into their own market analysis to estimate the expected value of QA to the development of the off-grid solar products market. This section presents a summary of the findings and analysis. Findings of the Quality Assurance Survey The full survey questions and results are presented in Appendix C, while a summary of findings is presented below. Composition of the surveyed parties The survey participants were comprised of: 19 manufacturers and 2 others that also manufacture as a secondary business activity 5 distributors (noting 6 of the manufacturers are also distributors and 3 distributors are also foundations or NGOs) 5 investors 3 NGOs/foundations (noting 3 other distributors are also NGOs) 6 other types of organizations Of these organizations, 30 were directly involved in solar lanterns, 31 in SHS kits, and between 13 and 15 were involved in any of: large SHS kits, off-grid solar system components, appliances, and other off-grid services and products. Direct sale and sales under a bulk purchase agreement were the most common routes for delivering products to market, followed by PAYG /energy as service models and others. Some 83% of the commercially active respondents had annual revenue for off-grid products and services of up to $15 million per year, while 17% had revenue of over $15 million per year. The importance and value of QA There is a strong preference among most procurers or investors in off-grid solar products for products to be QA certified under the IFC s Lighting Global (LG) program Most producers recognize this and seek to have their products QA certified under LG The preference is more pronounced for solar lanterns but is still appreciable for SHS kits, as well Potential Future of the Lighting Global Quality Assurance Program Page 10

16 Low-quality products are seen to be a significant problem for both solar lanterns and SHS kits, but are a somewhat bigger problem for lanterns Counterfeit products are also seen to be a significant problem for both solar lanterns and SHS kits, but are a somewhat bigger problem for lanterns The strength of concern regarding counterfeiting is not as widely felt as concern regarding product quality; nonetheless, it is a major concern for market leaders and will likely to be a growing issue for others as the markets mature Having an effective product QA program is seen to be a highly significant element in supporting the development of the off-grid solar product market for both lanterns and SHS kits 93% of respondents believe that having an effective QA program will help bolster market growth for both solar lanterns and SHS kits On average, respondents estimate revenue growth in the solar product market will be suppressed by ~29% in 5 years time if an effective QA program is not in place (~28% for solar lanterns and ~29% for SHS kits); most respondents opted for the 20% 40% or 0% 20% ranges for revenue suppression The importance and evolution of the LG QA program There is a strong consensus that the LG QA program is helping to improve product quality There is less consensus that it is useful for helping to address counterfeiting/imitation products 40% thought it had little or no use and 60% thought it was very useful to somewhat useful with respect to counterfeiting Many other elements are thought to be useful QA mechanisms aside from a QA certification program; in particular, warranties, customer education, brand reputation, and affiliation with trusted intermediaries Most parties would like to make some changes to the LG QA program, with common suggestions being shortening the certification time period, extending product range to include SHS kits and appliances but moving to component testing, adding testing facilities in China, using commercial labs to save time and costs, and lowering certification costs for revisions or updates The strong majority preference is for governance of a post-lg QA program via a public-private partnership involving commercial entities, public entities, and philanthropic organizations There is a very strong preference for continuation of the current focus and management of the LG QA program (i.e., third-party led, product certification, and market surveillance) Respondents were relatively evenly split between a model for future funding based on a fixed fee per product, a blend of fixed fee per product, and a sliding fee based on sales volumes/value, and other factors (seeking fresh donor funding was most commonly mentioned here) Willingness to pay for QA is more problematic only 55% stated they were somewhat likely, likely, or very likely to pay for QA in the future this dropped to 50% if their preferred management model was not adopted Potential Future of the Lighting Global Quality Assurance Program Page 11

17 3.2 Summary of Functions and Roles Needed to Operate a QA Certification Body The LG QA certification program currently undertakes the following tasks, and it is therefore likely that any successor organization would need to undertake all or most of these tasks in order to fulfil the required QA function: Certify products Maintain global quality standards and testing methods Assist manufacturers/producers Provide public information In-field promotion and market surveillance activities Fundraising to support Certification Body In addition, the LG QA management organization also supports accreditation of laboratories to be eligible for quality assurance testing in support of the program, manages enforcement processes, and manages the legal issues associated with the QA certification program. Each of these roles are now described in turn. Certification of Products Product certification involves: Processing applications from producers to have a product certified, including issuing certificates Ensuring product samples are taken at the point of production in accordance with the specified sampling process and sent to an accredited test laboratory for quality measurement and assessment Assessing, based on the test results, of whether the product passes the program s quality standards or not Notifying producers of the status of their application and addressing their queries when a product does not pass or a test result is questioned Maintaining a website of certified products and posting the details of certified products on line and/or removing delisted products from the website in the event that a certified product does not pass the market surveillance process (see below) Provision of a certification mark (i.e., provide certified companies with quality mark when available or other program symbol) and issue use guidelines Management of testing conflicts and disputes Related functions are overseeing accreditation of testing laboratories and the implementation of market check testing (i.e. market surveillance), both of which are discussed below. Maintenance of Test Methods and Quality Standards Over recent years, the body managing LG s QA certification process has been very proactive in developing product test methods and quality standards in conjunction with key market stakeholders. In order to help build legitimacy for the test method and quality standards, they have supported the migration of these elements into an International Electrical Committee (IEC) technical specification, IEC/TS :2013(E) 2. The IEC is the world s leading standardization organization concerned with 2 IEC TS :2013 Potential Future of the Lighting Global Quality Assurance Program Page 12

18 electrotechnical standards and has national members from 83 countries. The principle function of the IEC is to develop and maintain international standards for all electrical, electronic, and related technologies. A decision of whether or not to use an IEC standard is voluntary unless it has been legally referenced in a specific regulation within a jurisdiction, thus the fact of there being an IEC standard does not of itself oblige market actors to test their products in accordance with the standard. Nor does the IEC concern itself with laboratory accreditation (the process of verifying that a laboratory is capable of testing a product in accordance with a test standard and that it follows appropriate management procedures) other than to jointly issue with the International Organization for Standardization (ISO) methodological standards specifying how such accreditation should be carried out (most importantly standard ISO/IEC 17025:2005). While IEC product testing standards will always specify the test methodology to be used when testing a product, including which parameters are to be tested and reported, they do not impose mandatory minimum requirements. They may, however, include nonbinding annexes that specify recommended minimum requirements, and this is the case for IEC TS , which includes the LG Quality Standards (the LG minimum quality requirements) as an annex for information. Each IEC standard or technical specification is developed within a Technical Committee (TC). In the case of IEC/TS :2013(E) this is TC 82. Thus a clear role of the Certification Body will be to provide input to TC82 in order to maintain the current IEC/TS :2013(E) but also to broaden the scope so that this, or potentially new IEC standards, are suited to measuring and communicating the quality of other solar off-grid products such as SHS kits, SHS systems, components, and appliances. Provide Public Information Communication of the scheme, i.e. the certification program, results and value, to the public at large and to specific targeted stakeholders within it is a key role for the Certification Body. This is needed to help build awareness of the scheme so that market actors become familiar with it, understand its value, and communicate this through the supply chain. If this is conducted effectively it will help to distinguish certified products from non-certified products and help inform market actors of the risk associated with the supply/purchase of products that have not passed through the QA framework. Lighting Global IEC (description continued): Recommendations for small renewable energy and hybrid systems for rural electrification - Part 9-5: Integrated system - Selection of standalone lighting kits for rural electrification. IEC/TS :2013(E) applies to standalone rechargeable electric lighting appliances or kits that can be installed by a typical user without employing a technician. This technical specification presents a quality assurance framework that includes product specifications (a framework for interpreting test results), test methods, and standardized specifications sheets (templates for communicating test results). The intended users of this technical specification are: - Market support programs; - Manufacturers and distributors; - Bulk procurement programs; - Trade regulators. The main changes with respect to the first edition are: - Overall, shifted from narrow focus on the needs of bulk procurement programs to a wider framework for structuring quality assurance using appropriate methods for a range of stakeholders including governments, manufacturers, buyers, and others; - Revised structure of document with modular methods (located in annexes) that are applied using four distinct test regimes; - Added a framework for categorizing products based on the arrangement of components. Potential Future of the Lighting Global Quality Assurance Program Page 13

19 currently communicates information about product quality to supply chain actors, government officials, investors, and other interested parties through a website. Lighting Global's affiliated programs Lighting Africa, Lighting Asia, and Lighting Pacific also use consumer awareness campaigns in specific country markets to deliver information about quality to end users. In the future, additional communication tools such as a quality label or seal could be used to deliver information to the market. Assist Manufacturers/Producers Product manufacturers submitting or considering submitting products for certification will need assistance in understanding the requirements their products will need to meet, understanding the certification process, receiving guidance with respect to how their product design and production methods may need to be amended to comply with the QA requirements, receiving guidance on what claims they are allowed to make with respect to the program and their products, interpreting product testing results, and determining how to replicate product testing processes in their own internal labs so that they can conduct accurate tests on products prior to submitting them for certification. The Certification Body will therefore need to be able to address such needs. In-field Promotion and Market Surveillance Activities The Certification Body will require a strong in-market presence in order to: Conduct market surveillance such as taking product samples at random from the market place for QA verification testing (i.e., testing to verify that the certified products as sold in the market meet the program s QA requirement this is also known as market check testing) Promote the program among bulk buyers, governments, and investors Engage with end users/last-mile vendors to ensure the scheme meets their needs Market surveillance via verification testing of product samples sold in the field (i.e., the destination markets) is an indispensable step to ensure that there is no systemic manipulation of the QA certification process through the use of doctored samples and also to ensure that manufacturers have not made changes to products post certification that may lower their quality. To be able to conduct such surveillance necessitates that the Certification Body should have staff able to take product samples from the place of sale and thus will require a presence in key regional markets. This presence can also be used to help promote the QA certification program among key local stakeholders such as governments, bulk buyers, distributors/retailers, and investors. These stakeholder outreach activities include engaging with government regulators to encourage them to harmonize their standards with those of the program and promoting the QA program with supply chain actors, financial institutions, investors, and other relevant stakeholders. A local market presence can also be used to support important liaison with product end users and so-called last-mile vendors to gather feedback and ensure that the scheme is being implemented in a way that is consistent with their needs. Fundraising to Support Certification Body As is shown in Sections 3.3 and 3.4 below, it is anticipated that the Certification Body will not be able to recover its operating costs simply through application of product certification fees and thus will need to find additional sources of funding. While in the longer term it will need to move to full cost recovery from industry beneficiaries in the nearer term (i.e., approximately the next 6 years), it is likely to need additional funding from non-industry parties (third-party donors). IFC is likely to be able to support this until mid-2017 but thereafter the entities that take on the role of managing the Certification Body will need to raise third-party funds in order to cover the expected funding gap. This implies that the entities Potential Future of the Lighting Global Quality Assurance Program Page 14

20 that aim to manage the program should have a proven ability to raise third-party funding for socially, developmentally, and environmentally worthwhile activities. Laboratory Accreditation Currently the team managing LG s QA certification process is also responsible for ensuring that test laboratories used within the program are qualified to test products in accordance with the IEC TS test methodology and meet appropriate quality control requirements. This laboratory accreditation function could be supplied in the future by national accreditation agencies operating within the ILAC 3 framework, but there would need to be a transition period to permit this to happen and in the interim the process would need to be supported by the Certification Body. Furthermore, it should be noted that while ILAC requirements will always require laboratories to meet the specifications under ISO/IEC 17025, they do not necessarily require cross testing of products between laboratories to verify that a lab seeking accreditation will produce the same results as those that are already accredited. Producing acceptable results within such a round-robin testing program (where all labs in the program verify that they are producing similar results through testing of the same sample) is a requirement within the current LG QA program. Enforcement Management of the Certification Body will require development and implementation of enforcement procedures in the event of products failing to meet minimum requirements. Depending on the number of times (and severity) a manufacturer fails to meet minimum requirements, sanctions can range from delisting of products found not to meet the QA certification requirements after market surveillance verification checks to the exclusion of a manufacturer from the program. There is also a need to provide legal defense of the program s integrity in the event of false claims with respect to QA under the scheme made with regard to products operating either within or outside the scheme. Managing Legal Risk Operating any certification program carries legal risk in the event that program certification decisions taken by the Certification Body may be subject to legal challenges on the basis that they could have harmed sales in a given market. This may especially be the case for markets where carrying the QA certification has been made a legal condition for the right to sell a product within that market, (e.g., as is the case in Kenya currently). Any entity that will take on the management of the Certification Body will thus need to be prepared to manage this legal risk. 3.3 Estimated Future Costs of Operating a QA Certification Body The future costs of operating the LG successor QA Certification Body will depend on what choices are made regarding its functions and structure; however, by way of guidance Navigant has produced a theoretical cost structure that is predicated on the QA Certification Body fulfilling all the functions set out in Section 3.2. The level of effort anticipated under this structure is set out in Table International Laboratory Accreditation Cooperation, Potential Future of the Lighting Global Quality Assurance Program Page 15

21 Table 3.1 Estimated Level of Effort to Operate the Off-Grid Solar Product Certification Body from Cost Units FTE-e Fte FTE-j Fte FTE-l Fte FTE Subtotal Fte Where: fte = full time equivalent -e = expert staff level -j = junior staff level -l = local (i.e., in region of product sales) staff The detailed breakdown of estimated costs in terms of level of effort by staff type, travel, and service costs is shown in Table 3.2. Note, the totals by Full Time Equivalent (FTE) sum the fixed and variable level of effort (LOE) values per activity, where the variable values are a function of the number of products being certified each year (the assumed number is shown in the first row). These values assume that the number of solar lanterns (pico solar) products per year certified remains constant but the number of SHS kits certified grows from 25 in 2016 to 40 per year in 2019 and remains constant thereafter. For some of the functions, the need for expert staff is assumed to be higher in the initial years than later years due to them successfully managing to train more junior staff to manage parts of the functions. The maintenance of the standard function has slightly higher needs in the near term due to an expected effort in further developing an IEC standard applicable to SHS kits. Service costs for public information peak in 2017 due to expected fees necessary to set up a website. Similarly, external services costs for assisting manufacturers are assumed to be slightly higher in earlier years than those in later years due to expected higher demand when the certification of SHS kits is a new certification service. In-field promotion and market surveillance costs are assumed to ramp up to a peak in from a lower base in 2016, due to the program expanding into more markets and addressing more product types, requiring a greater proportion of in-field staff, which plateau off at 9 FTE from 2018 onwards. The cost of external services is also assumed to peak in 2018 and 2019 due largely to an assumption that legal costs will be highest in this period as the transition away from the World Bank Group occurs and the program tackles new markets with new product types (e.g., SHS kits). After 2019, these costs are assumed to decline as the program beds in and legal issues costs move to a lower base. However, this is not a certainty and many certification bodies find such costs continue at a relatively steady level. In general, it should be noted that some of these functions and associated costs could be taken on by other organizations than the lead Certification Body management organization, in which case the costs incurred by the lead organization would be less than those shown here. Potential Future of the Lighting Global Quality Assurance Program Page 16

22 Table 3.2 Estimated Level of Effort to Operate the Off-Grid Solar Product Certification Body from and Cost of Travel and Services by Activity Unit No. new products certified each year FTE-e FTE-e Fixed Certify Products FTE-e Variable FTE-j FTE-j Fixed FTE-j Variable FTE-l Travel $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 Services $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 FTE-e Maintain Standard FTE-j FTE-l Travel $10,000 $10,000 $10,000 $5,000 $5,000 $5,000 Services $50,000 $50,000 $25,000 $25,000 $10,000 $10, Provide Public Information FTE-e FTE-j FTE-l Travel $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 Services $25,000 $75,000 $25,000 $25,000 $25,000 $25,000 Potential Future of the Lighting Global Quality Assurance Program Page 17

23 Unit FTE-e FTE-e Fixed Assist Manufacturers /Producers FTE-e Variable FTE-j FTE-j Fixed FTE-j Variable FTE-l Travel $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 Services $50,000 $50,000 $50,000 $25,000 $25,000 $25, In-field promotion and market surveillance activities FTE-e FTE-j FTE-l Travel $74,000 $74,000 $74,000 $74,000 $74,000 $74,000 Services $50,000 $200,000 $250,000 $250,000 $150,000 $100,000 FTE-e FTE-e Fixed Raise Funds to Support Certification Body FTE-e Variable FTE-j FTE-j Fixed FTE-j Variable FTE-l Travel $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 Services From these estimates, it is projected that the cost of operating the Certification Body will be as set out in Table 3.3. Potential Future of the Lighting Global Quality Assurance Program Page 18

24 Table 3.3 Estimated Cost to Operate the Off-Grid Solar Product Certification Body from Activity Certify products $370,800 $522,800 $549,800 $444,550 $427,050 $427, Maintain Standard $96,250 $96,250 $71,250 $66,250 $42,500 $42, Provide Information $81,250 $131,250 $81,250 $81,250 $90,000 $90, Assist Manufacturers $237,100 $254,850 $272,600 $256,475 $206,250 $206, In-field promotion and market surveillance $542,750 $842,750 $1,117,750 $1,117,750 $1,017,750 $967, Fund Raising $82,750 $86,500 $90,250 $92,125 $92,125 $92,125 Total $1,410,900 $1,934,400 $2,182,900 $2,058,400 $1,875,675 $1,825,675 Share of total costs by activity 1. Certify Products 26% 27% 25% 22% 23% 23% 2. Maintain Standard 7% 5% 3% 3% 2% 2% 3. Provide Information 6% 7% 4% 4% 5% 5% 4. Assist Manufacturers 17% 13% 12% 12% 11% 11% 5. In-field promotion and market surveillance 38% 44% 51% 54% 54% 53% 6. Fund Raising 6% 4% 4% 4% 5% 5% 3.4 Implications of the Stakeholder Survey Findings on the Value of QA Navigant s market research projects that the global pico solar market will grow from $205 million in 2015 to $544 million in 2020 assuming a third-party QA scheme continues at its current level of effort. If the program does not continue, it is estimated that the market in 2020 will be $461 million, or $83 million (15%) less than if the QA program were to continue. If the QA program is expanded to cover a greater proportion of the global market, it is estimated that pico solar revenue would attain $612 million in 2020, or $68 million (13%) higher than if the current level of coverage were to be maintained (see Chart 3.1 below). This differentiation in sales revenue, for the cases with and without a successor to the current LG QA program but also depending on the efficacy of the successor program, is derived from the responses to Question 10a in the stakeholder survey, which found that on average stakeholders estimated the global market revenue growth rate of pico solar products would be 28% less in 5 years time without an effective QA program in place. Potential Future of the Lighting Global Quality Assurance Program Page 19

25 Chart 3.1 Navigant Global Pico Solar Product Revenue Market Projections Based on Stakeholder Survey Estimates of the Average Impact of QA on Sales, Global: (Source: Navigant) Navigant s market research projects that the global SHS market including SHS kits will grow from $472 million in 2015 to $792 million in 2020, assuming a third-party QA scheme continues at its current level of effort and scale. Unfortunately, there is a dearth of data on the proportion of the SHS market taken by SHS kits, but sales of the latter are known to be growing at a faster rate. Navigant s market research currently projects that the global SHS kits market will grow from approximately $21 million in 2015 to $57 million in 2020 and $107 million in 2023 assuming a third-party QA scheme continues at its current level of effort. If the program does not continue, it is estimated that the market in 2020 will be $51 million, or $6 million (11%) less than if the QA program were to continue. If the QA program is expanded to cover a greater proportion of the global market, it is estimated that SHS kit revenues would attain $68 million in 2020, or $11 million (18%) higher than if the current level of coverage were to be maintained (see Chart 3.2). This differentiation in global SHS kits market revenue growth rates for the cases of with and without the presence of an effective QA program is again derived from the responses to Question 10b in the stakeholder survey, where on average respondents estimated the market growth rate in 5 years time would be 29% less without an effective QA program in place. Potential Future of the Lighting Global Quality Assurance Program Page 20

26 Chart 3.2 Navigant Global SHS kit Product Revenue Market Projections Based on Stakeholder Survey Estimates of the Average Impact of QA on Sales, Global: (Source: Navigant) As discussed in Section 3.3, Navigant estimates that a QA certification program of a similar scale and focus to today s LG program but with a somewhat greater degree of certification of SHS kits could be operated for approximately $2 million per year in addition to the cost of testing. Through spending this $2m per year to support QA sales revenue is expected to be $96m higher in 2020 (a factor of 48 times greater than the cost of the QA program) than were there to be no QA program (see Chart 3.3). Thus, there is an overwhelming business case for the continuation of a QA certification program, as the effect it has in suppressing market poisoning is very likely to be worth considerably more than it costs to operate. Cumulatively from 2016 to 2023 it is projected that the QA certification program would cost $15 million to operate but would increase product sales revenues by approximately $557 million (i.e., have an average benefit to cost ratio of 37). This increase in sales revenue is proportional to an increase in product sales and a commensurate increase in adoption of solar-powered products in off-grid communities. Potential Future of the Lighting Global Quality Assurance Program Page 21

27 Chart 3.3 Estimated Value in Terms of Product Sales Revenue of an Effective QA Successor Program and Estimated Cost to Operate Such a Program: Business Models and Prospective Revenue Analysis (Source: Navigant) The current LG QA certification program operates through a blend of product certification fees 4 applied when the product is first placed on the market as a certified product and through third-party donor funding. The latter is a much more significant component than the former. In addition, manufacturers are charged the full testing fees at cost for testing required for the initial product certification. These testing fees are typically around $5,000 $6,000 for pico solar products and $8,000 $10,000 for SHS kits. After IFC support finishes in the summer of 2017, the successor Certification Body will need to have established a business model that generates sufficient revenue to cover its operating costs, provisionally estimated to be between $1.4 million and $2.2 million annually from 2016 to 2021 (see Section 3.3). In principle, it is conceivable that these revenues can be generated from the sources of: Off-grid solar product manufacturers (industry) Commercial stakeholders (commerce) Third-party donor organizations (usually governments and philanthropic organizations) 4 These are $1000 per product, comprised of $500 to cover the cost of sample collection and $500 to cover a small portion of the cost of administering the testing and verification process. Potential Future of the Lighting Global Quality Assurance Program Page 22

28 It is important to recognize that despite many years of rapid growth the industry is still nascent and even the largest companies are relatively quite small (i.e., with annual revenues of less than $30 million). While the stakeholder survey results are quite compelling in illustrating the value of QA to the growth of the sector, they also show that stakeholders (and industry) are somewhat reluctant to cover the cost of the QA effort. It is equally true that small companies are likely to be less willing and able to pay for a QA Certification Body if the revenue business model is based solely on a fixed fee per product certified. For a company with annual revenue of $0.5 million and a portfolio of three products, the cost of certification with full cost recovery would be about $33,000 per year (assuming one product is certified per year), which represents 6.6% of revenue. For a company with six products and annual turnover of $20 million, the cost of certification with full cost recovery would be about $66,000 per year (assuming two products are certified per year), which represents 0.033% of revenue. Were this the only option for funding the Certification Body, it is likely the small producers would cease to participate and that revenue would be seriously compromised (note, manufacturer revenues are only very weakly correlated with the number of products they offer). A more realistic proposition entails a business model that combines some blend of: A modest (i.e., generally affordable) fixed fee per product certified Fees that are scaled according to the producer s annual revenue Third-party donor funding Chart 3.4 below presents one illustration of how this could be achieved through a combination of a levy of $3000 per product certified, a fee of $0.008 per U.S. dollar of annual revenue (i.e., of 0.8% of revenue) and third-party donor funding, which peaks at $760,000 in 2018 declining to zero in 2023 (at which point the market is sufficiently mature for producer fees only to cover the Certification Body costs). Whether this scenario is the one which is implemented or not it is clear that a business model which relies solely on fixed-fees per certified product will not be viable in the next 5 8 years. There are too few products requiring certification each year and too many small producers that cannot afford to pay the amount necessary to provide full cost recovery for the Certification Body. Thus an interim business model based on a blend of revenue sources seems to be necessary. The following section compliments this cost and revenue analysis through the application of a SWOT analysis to consider the merits and failings of the four potential Certification Body organizational frameworks considered in the GOGLA QA session held in Cologne in Potential Future of the Lighting Global Quality Assurance Program Page 23

29 Chart 3.4 One Scenario of How the Cost of Operating a Certification Body Could be Recovered Through a Business Model Combining Product Fees, Revenue Fees, and Third-Party Funding: (Source: Navigant) Potential Future of the Lighting Global Quality Assurance Program Page 24

30 4. SWOT Analysis A SWOT (strengths, weaknesses, opportunities, threats) analysis was conducted for each of the four QA management concepts that were outlined at the GOGLA QA session held in Cologne in 2014 and set out below. Concept 1: Stay the Course (Third-party led, product certification) Concept 1 suggests building on the current QA framework (third-party product certification). As the market matures, third-party certification could include elements of self-certification (by companies with a proven capacity and reliable track record). Two questions remain open for consideration: What elements of the current QA framework are essential and affordable in the short and medium term? Is medium-term financial viability feasible? Concept 2: Modify the Course (Concept 1 without market surveillance) Concept 2 suggests keeping the existing QA framework but without the surveillance function (and also without the various technical assistance/knowledge services which currently are provided) in order to keep the cost low. This concept anticipates the future obsolescence of market spoiling prevention as the market evolves. The industry would handle some functions of QA but the QA framework would shrink over time leaving only quality certification and test method. Four questions remain open for consideration: Will a minimal version of the QA framework effectively address the needs and interests of the market and associated stakeholders? What is the timeframe for deconstructing the QA framework? What are the milestones? Can a deconstructed framework be sustainably funded by the industry? Will the absence of surveillance undermine the validity of the QA process? Concept 3: Alternative Course (Industry-led, product self-certification) Concept 3 suggests adding additional elements to the current QA framework, including both productand company-related parameters. Self-certification by manufacturing companies should be developed and promoted. The responsible consortium should be industry-led and self-funded within 3 years. Four questions remain open for consideration: Is the off-grid lighting industry ready to own and self-police a label/certificate? What are the implications of including a number of company-related parameters in the QA framework? This suggests at least a partial shift from product certification to company/process certification? What are the risks and challenges? Is medium-term financial viability feasible? Would it be possible to make a smooth transition from the existing QA framework to this proposed approach? Potential Future of the Lighting Global Quality Assurance Program Page 25

31 Concept 4: New Course (Hybrid leadership, supplier certification) Concept 4 suggests moving from product certification to supplier certification. This implies winding down QA for products, creating a supplier certification process, and establishing a third-party audit body. The concept foresees a self-certification process for products and proposes a hybrid approach during transition. Four questions remain open for consideration: Does this create high barriers to new entrants? How does this integrate and accommodate new entrants? Who would manage and fund? Can the complexity be managed effectively? Schematics of the findings are shown for each concept in the four figures on the following pages. Concept 1 emerges as the clear leading candidate from this analysis. Some of the principal reasons for this are: It has much higher support in the stakeholder survey and hence is more likely to maintain adherence of industry, governments, NGOs, funders, and investors The inclusion of product entry testing backed up by in-field market surveillance verification testing presents the surest means of ensuring product quality of any of the concepts and thus is the most effective at countering market poisoning; as the value of the extra QA provided to the market is likely to be between one and two orders of magnitude greater than the incremental cost, this concept offers the greatest benefit to cost ratio for the sector As a direct continuation of the existing QA framework it presents the least uncertainty and hence the lowest probability of transition difficulties, since it does not require a complete redesign It is likely to be the most attractive option to third-party funders. Nonetheless the analysis of opportunities and threats for Concept 1 indicates that there is still scope to improve its efficacy, relevance, and value for money. Efficacy can be improved through implementing measures to reduce the certification throughput time, widening the number of labs accredited to provide the testing service, and refining some of the procedures. Relevance can be improved by broadening the scope to be active in more product sectors (beginning with SHS kits but potentially also components, appliances, and maybe SHSs); increasing the effective geographical coverage (principally by broadening engagement with the program in the Indian subcontinent and Southeast Asian markets); and by adapting the program to better address product counterfeiting. All of these measures will help improve the financial viability of the Certification Body. Increasing product coverage increases the number of products being certified each year and hence increases the total annual value of the product certification fees at a rate that is greater than the commensurate increase in the Certification Body s operating costs. The same is true from deepening the program s geographical penetration in the Indian Subcontinent and East Asia. By adapting the program to better counteract product counterfeiting, the value of the program will increase for the larger market players that tend to be a preferential target of counterfeiters. As a result, the value of the program to the market leaders will increase and their willingness to support a Certification Body revenue model based on a fixed percentage of annual turnover or some other formula reflecting the ability to pay will also increase. Thus all these measures should be countenanced as a means to improve the program and its viability. Potential Future of the Lighting Global Quality Assurance Program Page 26

32 Lastly, the governance framework adopted for the successor Certification Body is also likely to be critical to its success. On the one hand, a lean and non-bureaucratic structure will be needed that will facilitate effective decision-making. On the other it will be important for the governance to reflect both commercial and wider societal interests if it is to maintain a high integrity and broad-based support. The governance structure chosen will not just need to have a high integrity in practice but will need to be perceived to have a high integrity by all key stakeholders if their support is to be given. In the near term, this will be important to maintain adherents and to raise third-party funding during the transition period. Over the longer term it will be important to deepen geographical scope and country cooperation. Some additional remarks on Concepts 2 to 4 are presented below. Concept 2 is similar to Concept 1, but by excluding in-field market surveillance, it considerably weakens the caliber of the QA provided this will lead to greater market poisoning than in Concept 1, while the benefit of reduced operating costs will most likely be greatly outweighed by the loss of market revenue due to increased market poisoning. It has much less stakeholder support in the survey than Concept 1. By moving to self-certification, Concept 3 relies on manufacturer honesty and removes one of the main mechanisms of ensuring QA (third-party administered initial [entry] certification). Such an approach would either weaken the caliber of QA provided and hence increase market poisoning or would oblige a significantly greater market surveillance and check testing effort to attain the same level of QA overall. The latter option would be more costly than the blend of entry level and market surveillance-based testing foreseen in Concept 1. Concept 3 does have the advantage of certified products being faster to market but this is less relevant if: a) steps are taken to speed up the certification process in Concept 1 (note several steps in this direction are being undertaken by the LG QA program) and b) if the perceived value of the certification mark is diminished by the move to self-certification. The stakeholder survey indicates that Concept 3 has much less stakeholder support than Concept 1. Concept 4 envisages a move away from product certification toward supplier certification. In principle this could result in some costs and certification time savings, as it would imply self-certification of products. However, this would come at the cost of reduced certainty of the quality of each product carrying the certification mark, which would both risk increasing market poisoning and lowering confidence in the program. Additionally, the program implies a much greater transition than Concept 1 (which is essentially the continuation of the current LG QA process) and this carries additional risks due to the need to manage the development and shift to a new focus while picking up where the LG QA program left off and keeping stakeholder engagement and confidence in the program high. Experience so far has also shown that currently very few producers are able to have their products pass the LG QA certification at the first attempt, and this suggests that the sector is not sufficiently mature or established to merit a shift toward supplier-based certification. Supplier certification would also necessitate a greater effort on market surveillance-based check testing, and thus the product entry testing cost savings would be more than taken up by extra market surveillance costs if market poisoning was not to be significantly increased. Confidence in this concept does not appear to be high and it has much less stakeholder support in the survey than Concept 1. Potential Future of the Lighting Global Quality Assurance Program Page 27

33 Concept 1: Stay the Course (Third-party led, product certification) Strengths Weaknesses Comprehensive QA provided (at product entry and when on market) Widely understood with high level of stakeholder support Incumbent program with proven track record High integrity the CB management organization has no interests aligned with commercial interests in the sector High level of credibility with key stakeholders IEC QA framework in place for pico solar products Will be relatively straightforward to transition as new design is not required Per product revenue model insufficient Little focus on anti-counterfeit measures Certification time could still be reduced QA measurement standards not yet available for all SHS types Needs to transition to new ownership Opportunities SWOT Analysis Threats High stakeholder support increases first- and third-party funding options Could increase market surveillance activity Can be extended to address counterfeit products may increase funding from market leaders Can be extended to SHS kits and SHSs Broadening geographical focus Could amend IEC QA standard to include SHS kits Options to increase throughput speed Options to use more commercial labs including in China Existing third-party funding will end needs new sources in near/middle term Needs to evolve to new business model less reliant on third-party funding Reduced funding could curb effectiveness and credibility The transition from LG to a new body/structure may not run smoothly Potential Future of the Lighting Global Quality Assurance Program Page 28

34 Concept 2: Modify the Course (Concept 1 without market surveillance) Strengths QA provided at product entry Slightly lower operating costs than Concept 1 Widely understood Adapts incumbent program IEC QA framework in place for pico-solar products High integrity the CB management organization has no interests aligned with commercial interests in the sector Will be relatively straightforward to transition as new design is not required Opportunities SWOT Analysis Weaknesses Reduced means of deterring the sale of poor quality products market poisoning effect increases and sales of quality verified products expected to decline Low stakeholder support Low support reduces third-party and firstparty funding options No ability to verify performance after initial samples taken Little focus on anti-counterfeit measures Per product revenue model insufficient Certification time could still be reduced QA measurement standards not yet available for all SHS types Needs to transition to new ownership Threats Could re-introduce market surveillance once third-party funding is secured Could be extended to address counterfeit products may increase funding from market leaders Could be extended to SHS kits and SHSs Could have a broader geographical focus Could amend IEC QA framework to include SHS kits Options to increase throughput speed Options to use more commercial labs including in China Low stakeholder support may undermine the program Reduced credibility may undermine the program Existing third-party funding will end needs new sources in near/middle term Needs to evolve to new business model less reliant on third-party funding Reduced funding could curb effectiveness and credibility The transition from LG to a new body/structure may not run smoothly Potential Future of the Lighting Global Quality Assurance Program Page 29

35 Concept 3: Alternative Course (Industry-led, product self-certification) Strengths Minimum certification time QA provided at product entry Lower operating costs than Concept 1 or 2 IEC QA framework in place for pico solar products Opportunities SWOT Analysis Weaknesses No means of deterring the sale of poor quality products market poisoning effect is high and sales of quality verified products expected to decline Low stakeholder support Low support reduces third-party and firstparty funding options No verification of performance after samples taken or in the market Low credibility and relevance to stakeholders Little focus on anti-counterfeit measures Per product revenue model still likely to be insufficient QA measurement standards not yet available for all SHS types Needs to transition to new ownership Threats Could be extended to address counterfeit products may increase funding from market leaders Could be extended to SHS kits and SHSs Could have a broader geographical focus Could amend IEC QA framework to include SHS kits Options to use more commercial labs including in China Low stakeholder support likely to undermine the program Reduced credibility likely to undermine the program Existing third-party funding will end needs new sources in near/middle term Needs to evolve to new business model less reliant on third-party funding Reduced funding could curb effectiveness and credibility The transition from LG to a new body/structure may not run smoothly Potential Future of the Lighting Global Quality Assurance Program Page 30

36 Concept 4: New Course (Hybrid leadership, supplier certification) Strengths No delay in product placement due to certification Potential for lower operating costs than Concept 1 IEC QA standard in place for pico solar products Hybrid leadership could be appealing to third-party funders Opportunities SWOT Analysis Weaknesses Reduced certainty in deterring the sale of poor quality products market poisoning effect increases and sales of quality verified products may decline Low stakeholder support Low support could reduce third-party and first-party funding options No verification of performance when product is first placed on the market Uncertain credibility and relevance to stakeholders Little focus on anti-counterfeit measures Revenue model is uncertain and unlikely to be insufficient QA measurement standards not yet available for all SHS types Threats Could facilitate adoption of anticounterfeiting focus may increase funding from market leaders Could be extended to SHS kits and SHSs Could have a broader geographical focus Could amend IEC QA standard to include SHS kits Options to use more commercial labs including in China Low stakeholder support likely to undermine the program The transition from Lighting Global s current framework to a new body/structure may not run smoothly and will be complicated by need for complete new design Less certain credibility may undermine the program Existing third-party funding will end needs new sources in near/middle term Needs to evolve to new business model less reliant on third-party funding Reduced funding could curb effectiveness and credibility Potential Future of the Lighting Global Quality Assurance Program Page 31

37 5. Conclusions and Recommendations In summary, the stakeholder survey results found there is: Strong support for the continuation of a QA certification program Interest in extending the focus to cover SHS kits and counteracting counterfeit/imitation products An average estimated suppression in market growth of 28% over the next 5 years if an effective solar off-grid product QA program is not maintained Strong preference to continue with the current QA initial product certification and market surveillance model Strong preference for governance of a post-lg QA program to be via a public-private partnership Mixed feelings about the best revenue model to be applied to fund the QA Certification Body Lack of consensus on willingness to fund a program However, analysis of the stakeholder survey and Navigant market projections indicates an estimated market value from an effective successor QA certification program of equivalent to more than 48 times the cost to operate it by 2020, thus there is an overwhelming business case for the continuation and funding of such a program and it is clearly in the sector s own interest to support such an initiative. Effectively communicating this business case to key stakeholders that are in a position to help sustain the QA effort will therefore need to be a priority of the LG QA Certification Body successor organization. For the successful continuation and evolution of the current program it is concluded that: Analysis of prospective Certification Body revenue models shows that a model based solely on product certification fees would be insufficient and unstable therefore, a blend of these organization revenue-based dues and donor funding will be needed until the industry becomes sufficiently developed for it to become viable for the QA program to attain full cost recovery from industry in about Identification of a strong organization or coalition of actors with the right qualifications and motivation is essential The organization/actors will require strong fund raising capacity A QA Certification Body that is both equipped and willing to address legal liability issues is necessary Ensuring the legitimacy of the organization in the eyes of key stakeholders including industry, government, investors, etc. will require a broad-based and credible governance structure for management of the funding and legal liability challenges to be successful IFC funding cannot be guaranteed beyond 2 years time, so decisions on how to progress the QA program need to be taken rapidly to have a reasonable prospect of a successful transition Potential Future of the Lighting Global Quality Assurance Program Page 32

38 It also needs to be recognized that it is unlikely that a candidate successor organization will be available that is currently able to fulfil all the functions required of the Certification Body (see Section 3.2), and therefore prospective applicants should consider which functions they are well suited to provide and which they would need to be teamed with other agencies to provide. It is quite likely that the most viable outcome will be a consortium that combines the capabilities of more than one body to provide the required services. Each of these aspects will need to be addressed for the QA program to continue and thrive. Potential Future of the Lighting Global Quality Assurance Program Page 33

39 Appendix A: Scope of Work The IFC s Lighting Global program and the U.S. Department of Energy s (DOE s) Global LEAP initiative, in consultation with GOGLA and other partners, are looking to establish an independent and selfsustaining international QA program for solar-powered off-grid lighting and energy systems and associated appliances. This program will build upon the existing QA programmatic activity for solarpowered lighting and energy systems developed through the Lighting Global program and its predecessor, the Lighting Africa program, in partnership with Global LEAP and other organizations. Because programmatic support from the World Bank Group will only be available for a few more years, there is a need to transition these QA activities to a self-sufficient platform. IFC/Lighting Global intends to issue a call for EOI for organizations or coalitions of organizations that are interested to play a role in delivering QA services in the off-grid lighting and energy systems market. Selection of organizations will be based on the bidding consortia s capacity, the sustainability of its business model, and other related criteria. To help inform the EOI and to support potential applicants in framing their submissions the DOE, in collaboration with the IFC, Global LEAP, and GOGLA engaged Navigant Consulting to provide relevant evidence and analysis to help inform thinking about how best to establish an independent and selfsustaining QA organization that would manage the principal required quality assurance tasks. This report will present the findings of this work. The document will be written to inform potential bidders about key aspects of the off-grid lighting and energy systems market, the potential to generate revenue from the industry through the provision of QA services, and other information related to the development of a successful QA framework. A1. Background The scope of work described below in this document builds upon discussions and analysis previously conducted by IFC and its partners (including the World Bank, GOGLA, the DOE, GIZ, and the Schatz Energy Research Center) and in particular takes into consideration: Analysis conducted by Navigant funded by the DOE in close collaboration with IFC/World Bank on potential strategies for establishing a sustainable off-grid lighting Certification Body Discussions regarding the potential future nature of QA for off-grid lighting that occurred at the GOGLA Quality Assurance Symposium held in Cologne, Germany on April 2 3, 2014 At this GOGLA Symposium it was recognized that: The main stakeholders of an off-grid lighting QA framework are manufacturing industry, distributors, global development organizations, NGOs, regional aid agencies, governments, financial institutions, and end users. The key purpose of the QA effort is to build confidence in the solar off-grid market by signaling product quality to market actors in a clear, transparent, and trustworthy manner such that product buyers/procurers can make an informed choice. Potential Future of the Lighting Global Quality Assurance Program Page 34

40 The QA messaging objective should focus on product quality and performance for affordable off-grid lighting and energy systems, and it may also cover aspects such as ecological, social, and ethical benefits. The target groups of such a QA framework may be B2B (business to business), B2G (business to government), and B2C (business to consumers). A QA framework could be communicated through print and electronic media, on-package information, webinars, and conferences. Key success factors for a QA framework include: A comprehensive approach for managing QA The alignment of all major stakeholders Clear standards and procedures A clear strategy for communication of quality to B2B, B2G, and B2C audiences Enforcement and surveillance A lean organization with financial stability and the utilization of existing activities of market players as much as possible A motivated organization that is committed to delivering core QA services, even when funding resources are limited Established revenue streams that enable the sustained delivery of QA services to support the industry s growth going forward Potential implementing entities could include an existing certification house, an industry organization or manufacturers association, or a new independent Certification Body or consortium. Potential partners could include industry, multinational agencies, state or national governments, NGOs, distributors and retailers, among others. The eventual QA framework should include a plan that allows for a smooth transition from the existing Lighting Global Quality Assurance program in order to minimize disruption within the industry. During discussions among the GOGLA Symposium delegates concerning the future of the QA framework, the following four different concepts emerged: Concept 1: Stay the Course (Third-party led, product certification) Concept 2: Modify the Course (Concept 1 without market surveillance) Concept 3: Alternative Course (Industry-led, product self-certification) Concept 4: New Course (Hybrid leadership, supplier certification) These four concepts are described briefly below. Concept 1: Stay the Course (Third-party led, product certification) Concept 1 suggests building on the current QA framework (third-party product certification). As the market matures, third-party certification could include elements of self-certification (by companies with a proven capacity and reliable track record). Two questions remain open for further discussion: Potential Future of the Lighting Global Quality Assurance Program Page 35

41 What elements of the current QA framework are essential and affordable in the short and medium term? Is medium-term financial viability feasible? Concept 2: Modify the Course (Concept 1 without market surveillance) Concept 2 suggests keeping the existing QA framework but without the surveillance function (and also without the various technical assistance/knowledge services that currently are provided) in order to keep the cost low. This concept anticipates the future obsolescence of market spoiling prevention as the market evolves. The industry would handle some functions of QA but the QA framework would shrink over time, leaving only quality certification and test method. Four questions remain open for further discussion: Will a minimal version of the QA framework effectively address the needs and interests of the market and associated stakeholders? What is the timeframe for deconstructing the QA framework? What are the milestones? Can a deconstructed framework be sustainably funded by the industry? Will the absence of surveillance undermine the validity of the QA process? Concept 3: Alternative Course (Industry-led, product self-certification) Concept 3 suggests adding additional elements to the current QA framework, including both product and company-related parameters. Self-certification by manufacturing companies should be developed and promoted. The responsible consortium should be industry-led and self-funded within 3 years. Four questions remain open for further discussion: Is the off-grid lighting industry ready to own and self-police a label/certificate? What are the implications of including a number of company-related parameters in the QA framework? This suggests at least a partial shift from product certification to company/process certification. What are the risks and challenges? Is medium-term financial viability feasible? Would it be possible to make a smooth transition from the existing QA framework to this proposed approach? Concept 4: New Course (Hybrid leadership, supplier certification) Concept 4 suggests moving from product certification to supplier certification. This implies winding down QA for products, creating a supplier certification process, and establishing a third-party audit body. The concept foresees a self-certification process for products and proposes a hybrid approach during transition. Four questions remain open for further discussion: Does this create high barriers to new entrants? How does this integrate and accommodate new entrants? Who would manage and fund? Can the complexity be managed effectively? Potential Future of the Lighting Global Quality Assurance Program Page 36

42 A2. Scope of Work The effort will be led by Navigant with oversight from the IFC Lighting Global QA program. In addition, GOGLA provided specific assistance in reaching out to its industry members and reviewing draft material to provide an additional perspective reflective of the off-grid lighting industry. The consultant aims to gather information and conduct analyses to assess the most viable pathway for effective continuation of QA for off-grid solar lighting and energy products and appliances in a world where support from the IFC for QA is only likely to continue for a few more years. The consultant aims to seek to address a set of key research questions that relate to the anticipated development of the off-grid lighting and energy systems market, the potential for revenue generation to support QA activities from within the industry and from other sources, and the implications of expanding the current QA framework to encompass other market segments such as SHS kits and appliances designed for use in the off-grid sector. A SWOT analysis is also needed to analyze the viability of the various concepts. The key research questions, most of which were identified at the GOGLA Symposium, that the consultant will undertake are set out in the following four tasks when making this assessment: 1. Market Research: Future Sales and Industry Profile Task 1 focuses on defining at a high-level what is possible in terms of market growth over the next 3 (near-term) and 8 (medium-term) years. This work will focus on developing three scenarios and identifying the possible configuration of the industry with respect to the degree of consolidation or fragmentation over the same periods. This market research is not intended to be comprehensive and extensive, but rather is intended to set create alignment between key stakeholders on the likely size and composition of the off-grid market, and set the foundation for reasonable business planning for a QA effort based on the industry size and profitability. Specifically, the work in Task 1 will address the following questions: a) What are the sales projections for 3 and 8 years into the future (by product type including lanterns and SHS kits)? Global projections are to be provided. When available, regional breakdown can be added, but is not required. The timeframes of 3 and 8 years is required for programmatic decision-making. Project segmentation includes quality-assured products in two categories: lanterns (i.e., pico solar) of systems 10 watts or less and SHS kits, including systems 10 W 150 W. b) What is the industry profile today, in 3 and 8 years time, in terms of number of companies, composition (concentration or fragmentation), and types of key market players (e.g., affiliated with larger global company or standalone)? Based on the anticipated industry profile, what are the implications for a) need and role of QA and b) economics feasibility of providing QA services? Potential Future of the Lighting Global Quality Assurance Program Page 37

43 2. Revenue Analysis: Potential for Revenue Generation to Support QA Activities Task 2 focuses on fleshing out the four potential revenue models for a self-sustaining QA effort. Central to Task 2 is a willingness-to-pay survey followed by a smaller set of stakeholder interviews. Task 2 is where most effort is concentrated in this SOW. As discussed by GOGLA, IFC, HSU, and Navigant in Dubai, the stakeholders to be included in the outreach are as follows, including the approximate numbers for the survey and interviews: Table A.1 Stakeholder Types Targeted For QA Survey Category Sub-Category Survey Target Number Manufacturers Interview Target Number Small lighting 10 2 products Kits and systems 5 1 Buyers Distributors 5 1 Enablers Bulk purchasers 3 PAYG model 4 1 Government and 4 Foundations Financiers 4 TOTAL 35 5 The survey was designed by Navigant and GOGLA. GOGLA conducted the survey for its members and Navigant for non-gogla stakeholders. In addition, Navigant also conducted interviews among market players with the highest market share. Specifically, the work in Task 2 is designed to address the following questions: a) What revenue models are possible and what are the implications of each? b) What is the industry s willingness to pay for QA? What are companies willing and able to pay for QA in the long run? Are industry leaders willing and able to pay more for QA than smaller firms and early market entrants? If so, what would they require in return? Which organizations, beyond firms active in the industry, might be willing to fund QA for the off-grid lighting market and what are their motivations for doing so? c) Is there potential for expanding revenue or scope? What new or additional revenue streams beyond solar lantern certification are viable? What segments of the off-grid energy market could be covered by the QA framework? (e.g., pico solar, SHS kits, appliances for off-grid applications, and/or other segments of the offgrid renewable energy market). Potential Future of the Lighting Global Quality Assurance Program Page 38

44 3. SWOT Analysis: Four QA Concepts Task 3 assesses the four concepts using a SWOT framework (Error! Reference source not found.). In an effort to streamline the work, Task 3 is performed at a high-level and discussed with the project participants. What are the strengths and weaknesses of each concept (internal environment), including: What elements of the existing QA framework are essential and add value? Financial viability with respect to revenue generation and costs (i.e., the viability of the business model) Effectiveness in delivering adequate QA to minimize market poisoning and allowing the most rapid development of the solar off-grid lanterns and appliances market Ability to support existing market players while also enabling new entrants to successfully join the market Potential governance structure? What are the opportunities and threats to each concept (external environment)? When reviewing implementing partners, the work will also consider what organizations are already active in other relevant segments of the market. Where other organizations are active, consider the potential for synergistic engagement rather than unnecessary duplication. Figure 1: Definition of SWOT Potential Future of the Lighting Global Quality Assurance Program Page 39