The need for last mile electrification in Mexico, Latin America, and the USA
The government and regulatory setting for last-mile electrification in Mexico and Colombia
Their focus on a service offering, with a strong emphasis on customer service
(1:30) How Manuel got into the energy and solar sector; how he started Iluméxico after working at GE's wind division
(5:00) Energy access and electricity sector in Latin America, how the market differs from the energy needs in Sub-Saharan Africa and Asia
(7:15) Iluméxico's business model and product offerings:
Tier 3 & Tier 4 solar home systems for households, large energy systems that can be upgradable
Last-mile service company, with a utility business model
PAYG payment options in remote regions without connectivity requirements
Remote monitoring capabilities for energy systems
(13:10) Their decision to develop their own hardware and software solutions, or to partner with other providers; the development of their new product, El Colibri
(18:00) Their progress to date, and the impact on customers and communities; their rapid scale in the past two years, installing over 24,000 systems; their partnership with government to reach last-mile customers; productive energy use and benefits of electricity
(23:00) The benefits and drawbacks of working with government agencies: the ability to reach customers more quickly, subsidising the cost of solar systems, the emphasis on development but poorer payment rates. The actions of recent government policy changes in the energy sector, and the impact on Iluméxico
(29:00) The progress towards 100% electrification in Mexico by 2025
(30:45) About rural, remote communities in Mexico; low income, primarily indigenous communities; their current reliance on diesel and candles
(33:40) Their experience in the Colombia; their work in Colombia with higher energy users
(36:20) The need to build trust with rural communities; not taking any payments until devices are installed; avoiding affiliations with political entities
(39:10) The biggest challenges within the off-grid energy sector (there are many!); the need to focus on portfolio management, ensuring high repayments from customers
(43:30) Financing for Ilumexico, between debt, equity and grants; the unsuitability of VC funding in many contexts; the need for grants and subsidies to reach some of the most remote customers
(47:00) How to ensure higher customer repayments; looking at data (but with limited results); customer segmentation and ensuring high quality customers; focus on service provision; the need for flexible payments
(51:30) Their work around productive energy use: providing refrigeration services; agri-processing; connectivity; schools and health clinics
(53:40) Their goals for the coming years: looking to expand to other countries in Latin America, other last-mile electrification opportunities even in the USA
(56:50) Where the name Iluméxico comes from
(59:15) What Manuel does when he's not working
(1:03:00) Nancy Wimmer's Green Energy for a Billion Poor
(1:04:00) Advice for an entrepreneur or investor
(1:05:00) Predictions for the next 3-5 years: the significant impact of failure in the off-grid sector, the challenge of proving the off-grid business model; the potential for the future through partnerships
Transcribed by Isaac Ward Fine
Distributing Solar: In this conversation, we speak to Manuel Wiechers, CEO and Founder of Ilumexico. Ilumexico is a social enterprise that promotes community development through energy access with solar home systems in rural communities. They have installed over 24,000 systems in the past 8 years and are currently operating in Mexico and Colombia and looking to expand in the coming years.
We have a wide ranging conversation covering the impact of the latest Mexican government’s policies on the energy sector, the benefits and drawbacks of working with government organizations, and the challenges of last-mile electrification and reaching the most remote communities in every country.
Manuel is refreshingly open about the challenges facing the off-grid sector, the difficulties in maintaining a strong portfolio, the potential unsuitability of a VC funding model, and urges the sector to be more transparent about failures. We hope you enjoy this episode.
Distributing Solar: Manuel, welcome to Distributing Solar. You're a CEO of Ilumexico and started the company almost straight out of university in 2010-11, after spending some time in GE’s wind division after university. Could you tell us a bit about your journey? How did you know that you wanted to start Ilumexico? And how did you identify the problem that you wanted to work on?
Manuel:I was studying in the university and was a trainee at GE, was doing bids for the government with wind and thermal. And I was pretty involved during my university years, created a student group for energy and environment and was really passionate about climate change and renewables.
So I was participating in a couple of different activities, forums, trips related to this subject. And then I started doing my community service in the university in a research program that was doing solar for saline water desalination. So I was really into solar and then I had the opportunity to go to a student energy summit in Calgary, Canada. And I heard a guy named Dave from Canada that had a NGO called Light Up the World. And he was talking about the energy access issue worldwide and Light Up the World, at the time, had a lot of work in India and Peru. So immediately my passion clicked with this thing that I had related to equality and rural development in Mexico.
So I came back to my GE office and one really good friend I worked with, we had both talked about not wanting to work at a corporate forever and wanting to start a company that had something to do with renewables and climate change. So I told him about this thing that I had heard we started looking at how we could do this.
And another friend from GE told us, you guys should apply to a student entrepreneurship competition that I won with some friends last year with the coffee co-op. So we actually looked at the call for proposals, and we decided to build a business plan and also develop a small prototype because we were really into using Mexican technology at the time.
I called some friends from the university that were already doing some electrical engineering projects. They had started the company and we partnered to do this business plan. So that's how we got into the sector. The business plan was a one hour a week thing that we did for a couple of months.
And we actually got a first prize award, which gave us at that time close to $30,000. And we quit our jobs and went to our first rural community which was super fun and exciting.
Distributing Solar: And how did your parents feel about that decision? You made that at a pretty young age. Did they support you in starting the company or did they think you were going through a phase and wanted you to go back to the corporate world as soon as possible?
Manuel: No, they supported me. My family has always been surrounded by entrepreneurs. My grandma was an entrepreneur, she's 92 years old and still working. She has a coffee shop in a small hotel. And then my father has a construction company that he builds on his own as well. So it's a funny story, the day that they gave us the award, I remember my mom told me that when they announced that we were the first prize winners, my dad looked at her and said something along the lines of ‘this guy made it and I don't have to give him any more money anymore.’ So yeah, they were actually pretty happy about it and really supportive.
Distributing Solar: Latin America is often overlooked within the off grid energy access space or for electrification solutions and a lot of attention is usually paid on off-grid energy access in Sub Saharan Africa and Asia. Can you tell us more about the need for off-grid energy access in Mexico and the current electricity system? What is the gap that you're looking to solve?
Manuel: LATAM is usually overlooked and I think it's a good reason. Most of Latin American countries are only lacking electricity in the last 5% of rural areas. Some countries maybe have a little bit more but you don't find any country that has 20 or 30% energy access needs like you would in Africa or in Asia.
However, this last 5% is still a good number of families, close to 30 million in Latin America and 2 million in Mexico, that have to rely on diesel and candles for lighting and are extremely vulnerable to poverty, climate change and inequality.
So in the case of Mexico, we have a centralized energy government owned company, which is the federal commission for electricity, which is in charge of all the generation, distribution and transmission in Mexico. This company has subsidized a lot of rural electrification efforts and therefore you have a lot of rural areas where it's not cost effective to have the grid but the grid is still there. But then you have this real last mile, which are very small, very dispersed communities that do not have access to electricity or to any basic services. So that's who we're dealing with.
And our goal in Mexico is to reach that last 2-3% of families that don't have electricity and solar home systems are a great way to do that. Also a difference that we have with the African market and the larger markets is that usually these families are aspiring for a higher level of energy. So if you look at the Mexican market, you look at Colombia or Peru, families are usually aspiring to have at least half a kilowatt hour or even one kilowatt hour per day for energy. This makes the solutions to fit these very complex, offline, off grid communities, really challenging.
Distributing Solar: And can you tell us more about Ilumexico and the specific solution and your product offering that you provide? How do you work with your customers? Is it a one-off purchase solution? Tell us more about how you work with and engage with your customers.
Manuel: Sure. So this is, this has actually evolved with time and has been a really interesting learning process. When we started off, we started with 15, 25 and 50 W solar home system kits which basically allowed you to connect lights and a phone. And the 50 W system allowed you to do a TV, radio and other appliances. We started out doing loans where basically customers would purchase the systems. And eventually own them.
So this was usually a 12-24 month loan period where they would be paying somewhere between $10 and $15 a month. And this would allow them to eventually purchase their energy system. This has evolved a lot because we realized a couple of things. We realized that customers always aspired to be able to continue to scale the energy ladder.
And we didn't have a fit of how we can upgrade or sell a new product. And we also realized that maintenance and servicing was something that was pretty permanent and once the users had the system, they still needed certain support and replacements and other components. So we've shifted now to a model which we like to define in four different areas.
The first one is tier three and tier four home system. So basically we're doing 100W plus solar home systems for rural families that are easily upgradable and that are modular. So basically a family can start out with 500 Wh per month and then go to one kW then go to 1.5 or 2.
The technology offer is taking the best tech out there and integrating it in the best way so we're not doing a plug and play kit, we're actually doing a professional installation at your home. That's the first component of our offer is large systems that are catered to be able to upgrade your energy needs.
The second component has to do with last mile distribution and offering. So we're a last mile service company. We shifted the model so customers can see us as a utility and basically they're paying a monthly fee and then whenever they want to upgrade, they can upgrade their pricing group or their monthly fee.
This allows us to have a whole team of local youth that is continuously servicing these customers. So we're actually trying to take the best practices of customer service into a region where there's no cell reception and real last mile. It's an interesting challenge. We set up a hub and spoke model. We have branches and we have trained technicians that are in charge of servicing these customers.
The third component has to do with providing pay as you go options in the most complex regions. In Latin America, specifically in Mexico as well, we have no mobile money. We have no formal kind of banking services.
So we're basically setting up payment agents, which are mostly women in the communities that are offline being able to give pay as you go codes so that customers can purchase energy. And the other interesting thing is we try to do it as flexible as possible so customers can actually purchase offline with any need of a phone or a wifi they can purchase any amount of energy at the moment that they need.
And finally, we have a really important component related to how we can monitor and create IOT solutions for these remote areas. This used to sound impossible when we started and, and little by little we've been partnering with different actors. they're using LPWAN networks where basically we don't need a wifi or a phone signal and we can transmit small amounts of data to be able to monitor the systems. So today in specific regions, we're already monitoring daily consumption and any kind of risks to the system. That allows us to have lower operational costs in very complex regions.
So that's sort of an overview of the model today. We're actually in a really interesting time where we are shifting old credits loan customers with cash payments to this new pay as you go model, which is really interesting and really complex as well.
Distributing Solar: Can you tell us more about that? If I understand correctly, in the previous model, you would have a pretty hands on approach with your customers and you'd have a payment agent collecting the money and then switching the systems on as required. How does the new model work? How does the new pay as you go system work?
Manuel: Right now, everything that we do is, is structured as a service. So customers can eventually opt out of the service and we will see how long they've been in the service so we can transfer some of the assets to them.
The vision that we have as being a utility. They are doing pay as you go for a service, and we just require them to have a certain use rate every year so they can maintain their service. with this, they can upgrade easily, they can change easily, they can pay a day a week, 10 days, 15 days, three months.
And this allows them to have the flexibility to not have this loan issue or pending thing they need to finish. But it is super complex because we're still a very hands on company because we believe that the way to ensure the sustainability of our model is with great customer service and really being in touch with the communities.
We actually assign one technician for 300 to 500 customers, depending on the geography. And they have service level agreements that they need to comply with. This allows us to ensure that the families are actually engaged with us, see the value of our initiative and the value that they do have to pay. We do not have a lot of different cases of people not being able to comply with their payments, et cetera. But at the end of the day, we believe that if we create a utility, which people trust, then that will generate a really different relationship than just selling a plug and play product, and then never seeing them again, unless they go to a service center.
Distributing Solar: To what extent have you decided to develop your own hardware and software capabilities in house? There are obviously a number of providers already working within the off-grid energy access space, either on the hardware side or providing software solutions. Tell us more about the product development you've had to make within the company and what have you decided to buy in?
Manuel: That’s a question that we ask ourselves at least every quarter. When we started out, we actually built our own charge controllers. We decided we wanted to do Mexican tech and integrate the rest. We saw an opportunity in developing really efficient than different charge controllers that for the time were great.
Then as we evolved into larger systems, we started to use any commercial systems that were available and try to find the best solutions out there and integrate them in the most creative and customer-centric ways. when we started moving to pay, as you go, we were one the last of the medium to large companies that moved into pay as you go. We were really stubborn on maintaining a credit program and not cutting electricity and having families always own the systems.
And this was because one of the main reasons was that we did not have any offline functionalities for pay as you go. We didn't have more money. It was really hard to get people close to a payment agent that had reception. And that's when we found out that Angaza had developed an offline solution.
We reached out and started to identify if they could be a good partner. Once we decided that we wanted to integrate with the Angaza pay as you go (PAYG) solution, because our philosophy was that all of our investment was very focused on the distribution and the solar side then in doing the tech, we then started looking for the hardware to back the Angaza solution.
So the thing that happened is that we didn't find any solutions for these larger systems. So you have a ton of technology and hardware that's either Angaza or other like pay as you go options, but that are for maximum hundred watt systems. Looking at our installations, which the average installation today is 300W systems, we really didn't find a solution that fit our needs.
That's when we decided to integrate or to create our own hardware only for the pay as you go meter. So our pay as you go meter that we created is branded El Colibrí. And what we did was a pay as you go meter that also thought about the other issues that customers and that companies have when dealing with larger systems and AC systems.
We integrated a series of different protections and customer centric uses so that we're now able to have more security that inverters won't be damaged if people are connecting whatever they want. So we can protect the inverse before they have falls or damage a fuse.
We're also giving customers a daily energy budget which they now learn to manage and respect, and that allows you to extend the battery lifetime. And we're also being able to predict when each battery, according to that customer consumption, has to be replaced. And the final thing that we were able to integrate into the Colibrí was this LPWAN network where now we have a small modem and an antenna, and these can basically communicate with us and tell us how the customer is behaving related to his consumption, his payments, et cetera. And this can be in a completely offline region.
So we develop the hardware for this. We think that developing hardware is easier because hardware lasts longer and you don't have to update it as much as you do sort of software solutions and full stack solutions.
So we're doing this hardware solution, but we've partnered with Angaza for the pay as you go. We have a partnership with Salesforce for CRM. We have a partnership with Taro Works for all the offline agent data collection. Our philosophy is to use the best that's out there and integrate in the best way.
And sometimes when we've found that we don't have the solution, we do have the in house capabilities to innovate. We actually hired a great cooperative in the US called Just Design and a Mexican company for the design and we launched the Colibri a year ago and it's been pretty successful.
Distributing Solar: And is that a product that you've primarily sold to your own customers? Or do you think there's a market also for selling it to other parts of the world to other companies we're also working in the off grid space.
Manuel: We definitely think there's a market. We want to be really sure and prioritize first our customers.
We still have a large rollout of these retrofits that we have to do to our own customers. And we want to be really sure that this product works for us before we set it out there. But we think that it is a pretty good product for LATAM specifically because of the offline monitoring component, but also for companies who are taking their customers from, let's say, a pico amp to a small solar home system and then to a larger solar home system. We think there's an opportunity there. We're not extremely focused on capturing that opportunity because we want to be really sure that it's working at full scale in our own operations.
Distributing Solar: Along those lines, can you tell us more about the traction and the progress you've made to date? How many systems have you deployed? How many customers do you have as well on the broader impact it has on the communities you work in.
Manuel: We've been working for 10 years. March 16th was our 10 year anniversary. We haven't celebrated, or we did celebrate via zoom, but we haven't been able to celebrate because of COVID. But 10 years went by so fast and I think the next 10 years are what's really gonna define us and how we become like a key actor in the space.
In these 10 years, we've managed to install close to 24,000 solar home systems. In the first eight years we installed 11,000 and in the last two years we've done the rest. So double the amount of systems in two years. It's been hectic. This provides energy to over a hundred thousand people.
We're right now a hundred full time employees, almost 300 people if you count trained electricians and payment agents. And we've displaced close to 4,000 tons of CO2. So that change that has happened in the last two years is basically related to our ability or our luck to influence public policy in Mexico where the universal energy access fund was launched.
We were one of the only companies in the space that had the experience in rural solar. And we were invited to a lot of open groups for discussion on public policies. And I think this was something that we influenced in one way or another, but the policy was very well structured in the sense that it required companies to permanently service the users and it required customers to pay a fee for their systems as electricity.
So it basically started a market for small scale solar utilities. So we were actually one of the largest bidders of this program. And we were awarded a contract of close to 8,000 systems for two years.
Basically we shifted to a larger operation, larger systems. And that has allowed us to have a lot more impact. So of the 24,000 systems that we have installed right now, 13,000 of those are sold on credits. So it's basically customers that already have a solar home system that we service.
Occasionally, some of them are upgrading, but not a whole lot. And then we have 11,000 customers that have a large system and that have a permanent service contract with us. Of those 11,000, we've installed close to 2000 in the pay as you go solution. And we still have to deploy and roll out the rest. So we're in the middle of a hectic rollout and then COVID so we're kind of behind but it's a really interesting moment to be in.
The impact of energy is really clear and a lot of people have seen them. You being able to turn on the light of a family for the first time with them and celebrating when the lights turn on is one of the best experiences I've had. And it's something that keeps fueling me and my team every time that we do it, but really seeing how more energy can provide families with different opportunities is great.
We've seen a lot of women entrepreneurs that once they have more energy, they start a small shop. They start being able to refrigerate protein and sell it so people can have better nutrition. We're seeing people that are doing really creative things with the use of energy, and we're also seeing different benefits of having that extra energy.
In the end, I think the key of off grade distribution is being able to ensure that the systems that you were installing have this long term effect. I would say that the last two years that we've shifted our model to full service, we're seeing that more and more. And then it's a complicated turnaround to see what we're going to do with those 13,000 customers that have a system already but that are not growing their system and that potentially we would like to move to a sort of energy as a service space. That's super interesting and we're still learning a lot on how to do that and how people continue to grow on the energy ladder.
Distributing Solar: The 11,000 systems that you have recently won the contract for that was with the federal commission for electricity that you had mentioned earlier.
Manuel: Actually the energy ministry, but they're closely related. So the electricity commission basically says, this group of communities will not be served through traditional methods and this group will be served through other methods like solar. And then the energy ministry hires another government institution to provide a government bid. So we actually participated with 16 other companies. And we were awarded 40% of the whole contract.
Distributing Solar: And you've mentioned that you have a very strong partnership with a number of government ministries and agencies. And this sounds like part of what you've just been discussing. Can you tell us more about how you've been working with the government agencies? Are they primarily supportive of what feels like independent utilities or what are progressing to become independent utilities. And do they see that as a threat potentially to their utility model? Is there a vision in the longer term that they want to bring everything under their control or are they very happy to let independent utilities work separately?
Manuel: So that's a really interesting debate, especially with our new government. And we've seen different things, for example, in Colombia and in Mexico, where Mexico is most of our operations, but we're starting to look at different opportunities there.
Here in Mexico, we've been able to partner at different moments in time with different government agencies. Whenever you have the government involved that has a lot of benefits, but it also has a lot of complications. The biggest benefit of government involvement is that you can roll out quicker and that families will have to spend less amount of cash for a larger solution.
And this is great for everyone. Right now we're able to give a 300W solution with the large subsidy to families for less than $10 a month. So this basically allows us to scale really quickly because this is really attractive for families. And also having the government funding sort of allows you to do a quicker deployment.
At the end, there's an issue, obviously, when families know that there's government involvement, the seriousness that they take a service contract with a private institution is quite different now. So we have obviously a lower payment rate when the government is involved and when we're working directly with customers. But at the end of the day, the thing that we've done with government citizens is we have worked with states, with federal entities that mostly their motivation is not necessarily like an energy thing, it's more of a social development thing.
So most of these are social programs aimed at improving livelihoods of the most isolated and marginalized communities. And then this is the reason why we've gotten this government investment. We do see in Mexico that the electricity commission is prone to wanting to be the owner of most of the distribution, but they've also realized that this last 1-2% is pretty impossible and not cost effective to manage.
On the other side, if you look at Colombia where the regulation is pretty different and you have all of these public service companies, then there's a huge opening for small companies to participate and actually become a public service company. So in Mexico, actually, there's no regulation for you to become a utility so legally it's more of a financial rental system than a service fee.
And also in Mexico, we're actually leasing the systems. We're not selling energy and people pay us by the day. It's super interesting when you have government because you also have the ability to reach these customers that will not be able to purchase, in any shape, way or form, a solar home system because of their economic possibility.
Basically the government allows you to get more universal coverage with all of the disadvantages that this could have in the payments and the actual long term operations.
Distributing Solar: You mentioned that there are quite a few changes potentially coming through with the new government and new announcements that they've been making.
If I recall correctly, there were some recent announcements on the intention to bring at least some part of the electricity sector that are currently under private control under a public control. Does that affect what you've seen? And I guess, what are your broader thoughts on that shift in the government strategy?
Manuel: At the end of the day, the current government has done some measures that we still don't understand the reasons behind. They have severely limited the possibility of investing in new, large scale, renewable projects.
I'm hoping this is a temporary thing because of an oil issue that is currently happening and like the sovereignty thing with COVID. However, the truth is that we really don't know. The largest consequence of this is that the private companies, which are really efficient and high quality energy producers, are highly disincentivized to continue to invest in Mexico.
So this leaves us with our federal electricity commission that has to step up. And unfortunately, I wouldn't say that it doesn't have the investment, the technology or the resources that these other companies do. That leaves us, as a country, vulnerable to different risks and not moving towards renewables, I think is not the best way forward.
However, how this affects us directly is still to be seen. Distributed solar is not being penalized at the moment and actually there's a lot of government interest. This current Mexican government has rural areas and off grid development on the front line.
There's a lot of subsidies for rural areas. There's a lot of programs aimed at rural areas and part of the policies that we have still not seen the positive effects of are related to providing every Mexican with electricity and continuing this program of, improving livelihoods of the poorest, families.
So this is something that I think, if this government does well, could define the government, but we haven't seen anything yet. So our biggest issue specifically with this new policy is that a lot of the large energy companies are prone to partner with us because where they have projects they're interested and, by law, they're also forced to invest in social development programs.
So we partnered with a couple of large energy corporates and they have been also partially subsidizing capex so we can solve large systems for families and generate the same utility model that we're doing with the government.
And we're actually looking to influence this current government through a partnership with government, large energy companies and ourselves. Another social enterprise is to go towards SDG 7 and have electricity for all. So the fact that the government is now publicly saying that they will not accept new investment is sort of, putting this initiative at risk, which is a really nice concept having government companies and small entrepreneurs work towards having universal energy access in our country.
Distributing Solar: And I believe you had the goal to have no Mexican without light by 2025. How are you tracking or, how is the government and the country as a whole, tracking towards that? Do you think that will be achieved by 2025 or is progress perhaps slower than you had hoped?
Manuel: We're still positive. I'm pretty optimistic about this still being a possibility. Obviously the regulation will influence if we do it or not. And even if we were to do our best and scale as quickly as we can, I think that there's still some public policy needed.
And I would say this is true to any country for universal energy access. There has to be favorable public policy and government involvement. However, I think it's still achievable. There's right now close to 400,000 homes in Mexico without electricity. The electricity commission will probably reach half of those and then the other half is up to us, other companies and these government programs to attend.
So we believe like with Ilumexico, we can be 25 to 30% of that goal. And we need the whole sector to evolve. It was evolving really positively the last two years. And then this year there's been no new news on these programs.
So that sort of puts it at risk, but we are positive and very optimistic on that. We have to find a way for this to happen and hopefully be the first country in Latin America to be able to say that we have a hundred percent energy coverage and soon.
Distributing Solar: That's an exciting prospect. I'd love to hear more about the communities that you are currently working in. Which are currently lacking electrification solutions. Can you tell us a bit about these communities? What are the main economic activities in these areas? Tell us more about the communities you're working in and the potential of electricity in these areas.
Manuel: The last 2 or 3% in Mexico, that last mile, are communities that are extremely isolated, dispersed and poverty stricken. Most of them are in very mountainous regions.
Then you have in the Southeast, a lot of them that are like deep into the jungle. These communities are in the most beautiful landscape that you've ever seen. But the contrast with their quality of life is huge. Most of these are in a 12 to 15 house community where each house has maybe 400, 500 meters away from each other.
They are primarily indigenous, more than 60% of our customers are indigenous. And we actually speak within our team 11 different indigenous languages. And they are large families that have an income of less than $80 a month, which translates roughly if you have a five person family to less than a dollar a day.
So they are definitely worldwide at the bottom of the poverty line. And most of them rely exclusively on agriculture for sel-production and they sell some of their products. And more than half of them, most of their income relies on government support. So the government has had, since the nineties, conditional cash transfers for the poorest families and most of our customers actually rely on this for most of their income.
Then we have close to 30% of customers that have some sort of relationship with animals and livestock. Mostly, maybe five to six goats or pigs or cows, which they use for their own use and then sometimes sell. And then we have 10% of customers that have some sort of commercial activity, or that has to work in the city.
You have a lot of migration, you have a lot of people going to the U S so you have a lot of families that have a migrant father that supports them once in a while. And at the end of the day they are really hard working and really nice people. Today as they don't have electricity, they rely on, as we said, candles and diesel for lighting, and this can be up to $10 to $15 a month that they spend. This is over 10% of their income in most cases.
Then you have in every community, you have sort of a different balance of people. You usually have two or three people who own the smaller shop and that have a little bit extra income, but still, these are sort of a fire for a little bit more energy, but still are really limited in their possibilities. Most of the homes have their floors. We have zero penetration of toilets, showers, even gas stoves.
Most people are cooking on open stoves so it's also a huge issue for energy related to cooking and the water supply is usually a spring, or they have to buy bottled water in the nearby town, which is really expensive as well.
Then we also have some experience in the Colombian context, which is very similar in the last mile, but then you have some communities that, since there's not a central grid and that most of the public service companies are not privately incentivized to service them, they have a diesel subsidy and they have four hours of electricity per day through a small diesel mini grid. So these families usually have a little bit more employment and more possibilities, but still have a huge lack of energy.
So I would say that's the landscape in America of the last mile and the off grid situation, and depending on the country and the regulation you would have, sometimes people with a little bit larger income that still don't have energy in other countries, but in general, in Mexico, any community with more than 500 people and with medium or low income already has electricity, where dealing with that lowest part, we call it the basement of the pyramid, not only the base.
Distributing Solar: And for the communities with diesel generations, these are presumably separate from what you're working on, but you're looking to see how you could work with them
Manuel: No. So we've started working with them. We actually launched this year a joint venture in Colombia called Soluna Energía and we are working, or we already have our first 30 customers, we're closing in on 50 in the next two months and we're working with these types of communities as well.
So the interesting thing here is that these communities are aspiring to have larger users of energy. Having a 300W system solution and making it modular to grow to 600W has allowed us to cater their energy needs. So we're actually getting customers in Colombia that are consuming over one kilowatt hour per month. Some of them are even at the two kilowatt hour per month limit, and these solar solutions allow them to have 24 hour availability of energy and allow them to not rely anymore on the inefficient diesel subsidies, which they usually have maybe seven or eight months a year they have diesel and they only have four hours for nights. Other days they have no system or the plant is not working and nobody's gonna repair it.
And when they do have electricity, they can only turn on their small fridge or their TV from 5:00 PM to 9:00 PM. So there's a huge and a very positive reception towards these larger scale solar home systems because it will allow them to have 24 hour availability of energy.
Distributing Solar: You've mentioned the difficulty and the challenge of reaching some of these communities because there's a skepticism towards companies bringing new solutions because of previous scams. Can you tell us more about these challenges and how have you changed or adapted your go to market strategy and your customer engagement strategy to overcome some of these issues?
Manuel: This is a huge issue because in the past, both companies and the government have promised things in communities and have not delivered.
Also, you have cases where a company goes to a community and says that if they all chip in with $20, they will bring a new water system and then everyone goes and takes their hard earned income, gets to gather this full of money, get it to this person, and that person never comes back.
So there's a huge mistrust of anyone who's coming from the outside to offer any kind of services. And we really think the way around this is gaining their trust through repetition. So we usually don't market or sell in our first visit in pretty much any place that we are, unless we're already pretty well established and well known in the region.
We basically start out in our process with an evaluation of the community and getting to know them and sort of telling them who we are, what we do, and asking them if they will allow us to come back one day and they can meet so we can tell them about our solar solution. So the fact that you come one day and then come back two weeks is already like a first step of, okay, these guys are maybe serious, et cetera.
The second thing we do is we are very clear that we are not coming from any political party. And that we will not ask for any money until their system is placed in their home. We're also trusting them in the sense that if you sign up, then we will deploy logistics and purchasing to have your system here and you will not pay your upfront fee or any energy fees until we're here.
So this is a risk we have to take from our side, but it also builds trust with the community. And once you're there, the basic idea that we have is that we need to promise you a certain service level and comply with it.
We're usually visiting your community in the first month, maybe once every six or eight weeks after that on a need to come basis, or every, at least once every semester, but still it's a really hands on model because we need them to trust us and trust the, sort of the base of our work there.
It's a longer process and probably costs are related to customer acquisition costs. But at the end of the day, it allows us to set a long term relationship with these families and also really improves the whole care that they have of their system and the whole relationship they have with their payments, because at the end of the day, if they start trusting you and they realize that it's in your best interest for everything to work smoothly, then they will eventually get to trust you and take care of their system more and be more aware that they need to pay on time and these kinds of benefits that we need in the operation.
Distributing Solar: And what have you found to be the greatest challenges when building the business and growing the business in the past 10 years? What have you found to be surprising challenges and what has been much harder than you expected it to be?
Manuel: I think that the whole off-grid solar industry is super complex and I don't want to pass judgment on other industries, but at the end of the day where we're having to do a ton of things well, at the same time. So we have the whole financing, financial inclusion, payment component, which if you were to do that only that's very complex business. Then you have the whole technology sourcing improvements, et cetera, like adapting solutions to your customer, which is also a complex issue.
Then you have the whole distribution and logistics, which we are having to build pretty much our own logistics in the last mile, because there is no logistics company that will do this. Having to build a huge logistics network as well. And then we're having to do a whole service company because we have to be there on time, we have to reply to any technical issues in less than 15 days.
So this is also another like complex business that on its own would be really complicated. So I think all of these challenges are super hard. I think that the biggest challenge for us has been getting us and all of the team to move towards a utility minded business as compared to a philanthropic foundation.
There's a huge social component to what we do, and most of what moves us has to do with what I mentioned about turning on the lights for a family for the first time. However, if you don't do this as a very structured, process oriented, and disciplined company, the most likely scenario is that you'll be losing money and that you won't be able to really reach the impact that you want.
So actually being profitable in this industry where we need to do so many things well, where every little thing can build up a lot of costs and where each family that you are working in is a different universe and a lot of rural customers because of how they've been treated in the past because of different bad habits that they've had throughout the years are really bad pain.
And also you also have to work with your portfolio, which something that I criticize a lot about the industry is that none of us are really publishing or talking a lot about our portfolio. The fact is that we've always had more than 50%, even 60% of our customers constantly lagging on their payments.
So I have a portfolio at risk of 60 days of over 60% of our customers. We've managed to get 89% of whatever we've done as loans recovered, which I think is pretty nice. But now that we're a service company, this payment lag is huge. And then you have all this hacking issue where customers that are not paying are trying to hack into your system.
So then you have to also invest in technology and physical protections and all this like cyber security things, which luckily where we're doing that with third parties. But the physical safety things have to land on our side. So I think it's a huge challenge to sort of find the right model to make this work and make it profitable.
So, I think there's a lot of hard work involved. There's a lot of luck involved. There's a lot of the fact that we're also, I think, one of the only companies that has consistently been able to partner with governments to have partial subsidies as well is a really important component, but then you have like the investors of the sector saying that if you're partnering with government, we're not likely to invest because we need this to be, market-based. There's a lot of different things going on in the ecosystem.
And there's also like in the last two or three years these stories about failure that we're not really talking about. What happened with Mobisol, what's happening with these other companies that are not able to be profitable. And how does that look for asset larger scope in the sector?
So I really believe that we're going to find the formula and that we need to, because this is a really good cause. It has a lot of social benefits but it's also super challenging.
Distributing Solar: I'd love to discuss more about the financing component, as you mentioned. I think it is such a challenge within the off-grid energy access space to find the right mix of financing, be that between equity, funding, debt funding, grant funding, government funding. How have you approached that and how have you structured your financing to make it work for your customer base and the work that you're trying to do?
Manuel: I think one of the key realizations that we've had related to this is that sort of the venture capital mentality of quick returns is not really adapted or adequate for solar home system companies. Slso, we're looking at returns that have more similarities to boring infrastructure projects, like building a road. At the end of the day, unfortunately, the people who are funding those boring infrastructure projects are very large funds whose priority is not social impact.
So there's sort of a disconnection on that. We're seeing more and more funds you have, like Acumen has really patient capital or investors like Engie and Iberdrola are really aligned. We have a Mexican investor as well, Promotora Social, who's also very aligned with us, but at the end of the day, it's really complex to manage venture capital expectations with this industry and how our customer base is behaving.
I think there's a need for all of the companies to focus on a market-based strategy because market-based strategies make you more efficient, make you focus on giving the best solution for the customer and make you focus on being profitable.
But at the end, I think there is a large percentage of customers that we will not be able to serve in any country if there's not some sort of subsidies by philanthropy or by government. Also, it's also complicated to say that when you're looking at a VC, because VCs, usually don't like to hear that your model for it to be really successful, relies on a government that's so volatile or on philanthropy?
At the end of the day, I do think there's a mix. I think it's okay that we say it publicly and that we acknowledge that. And also I think that every government in the world has the incentive or the idea that they want to extend basic services to their population.
So then another day, if entrepreneurs are doing solar home systems, we're able to give a solution to the government where you're ensuring them, that you will provide a long term solution that you are setting up operations, that you are co-investing with them. It's pretty reasonable to think that governments will start supporting these kinds of initiatives.
I think that the financing thing is super interesting. I don't think I have the solution or the adequate mix or whatnot, but I do think there are some components that are key, which is, it has to be very patient capital. It's clearly very capital intensive. The returns are long term, so we should shift our expectations and then having public policy in your favor and maybe turn that around also.
Just like, as an example, in our case, we've, we've had some form of government involvement pretty much through our 10 years, some years, more than others. In 2016 and 17, we actually had EBITDA positive with minor or zero government involvement, but then 2018 and 19 were amazing years because the government got really involved.
Also, we managed to grow close to 300%. We managed to install double of our total capacity. We managed to get over 20%. And then that makes us a more sustainable business and being able to invest in better talent, better tools, better infrastructure. So at the end of the day, it's sort of a mix of all this we'll make the sector, I think successful.
Distributing Solar: And you mentioned the challenges around managing the portfolio of customers and I guess the difficulties around it that aren't so widely talked about within the industry. What do you think about that and what has been the measures or approaches that you've taken on or tested to try and improve portfolio health? When people talk about big data and applying machine learning, AI strategies to the data or collecting more data, how have you thought about that and what are your approaches to it?
Manuel: That's a super interesting question because definitely we've seen and done a ton of stuff. And then at the end of the day, it's really hard to get a really concrete answer or concrete correlation. So I think a lot of the companies that are really data focused and we're one of them, we love our data, et cetera.
We've done tons of studies and then the most rigorous ones always end up saying that there is no clear correlation to anything related to payment? No. So at the end of the day, we're, we're really focused on, I would say three things. And also the first one is being able to filter customers from the beginning and understanding that not everyone is going to be a good payer. How you filter them is super complex and we don't have the answer, but at the end of the day, there are some things that we could do to filter them.
So if you choose a bad customer, it's really hard then to manage the portfolio correctly. The thing again with the industry and like this VC mentality that we need to report, our top line on how many new customers and how much revenue we're getting.
So this is sort of complicated in the sense that, who do you pick? Another thing that's complicated in the sense is that if it's a customer that doesn't have electricity, you obviously want to provide them with a service. And also we used to have this policy that said that we will give a loan to anyone as long as they're not drunk in the meeting.
And I remember one time I gave a drunk man that a loan because his whole family was there and they needed the electricity. Now, he obviously didn't didn't pay. So at the end, what we're trying to do much more at the beginning and I think that the key thing that we're doing is making the process look very formal.
And that has helped us more than like any sort of filter or social demographic data. So if the process looks really formal and you actually need a show of faith from the customers, then we're starting to see that those customers are a little better at paying.
So that I think it's the first thing they have to payment. The second thing would be the service side. Customers need to see and feel that they are getting their money's worth because sometimes people even say that I could get that solar panel at a hardware shop and then that's for free.
So they still see it as a product, not as a service. So changing that is super complicated. So we're really investing time and effort in the whole product really feeling like a service. We do a professional household installation with all the norms and quality installs. And then this whole like customer service center and visiting them every once in a while doing NPSs.
So sort of, they feel that the process is right on the customer level will allow us to have better payments. And then I think the third one really has to do with adapting your expectations to the family's income. Pay as you go is starting to be able to adapt to this because it's flexible in the way that you pay.
But then we have families that I dunno for three months will not be able to pay because they have no income and then they sell a cow in the first month and then they can pay for four months up front. So what we don't want is for when they don't have money for them not to have electricity and when they do have money for them to have electricity.
This is something we've debated a lot and that it's really complicated to deploy, but we're looking into how we can actually allow customers to pay according to their incomes and their stationality of those incomes and not leave them without electricity, which is one of the reasons that we did not go into pay as you go as quickly as we should have because we were afraid that we would leave a lot of people without electricity when at the worst moment in time for them.
So we were starting to pilot some things in the technology, on giving people a grace period, giving them some days on loan, which they can pay later. But we still really haven't found the right form of that either.
I think these three things are what I would consider are the key to getting a healthier portfolio. But really at the end of the day, I think we should also model our expectations and maybe even get some like warranties or subsidies from public institutions that will compensate for these natural losses that we're all having, knowing that we're not really talking about when talking about how customers are paying.
Distributing Solar: And you seem to have done some work around productive energy use and looking at how you can support your customers in either growing a business or developing, other means of increasing their income. What has been your work to date around productive energy use and supporting more on the commercial side?
Manuel: The biggest things that we've done have to do with community infrastructure, with small businesses, and with connectivity. So the thing we've done the most is refrigeration solutions for small shops. And we have women that used to sell $200 a month and they would make like a 10% margin out of that.
They're now closing in like $3,000 a month and they're getting 15% out of that. So they're, they're being able to sell more and more diverse. The thing with that is that you're probably just redistributing wealth within one place so that's also complicated when you're doing a productive use of energy for one person or for a group of families within the larger town.
We're also doing some mills for corn. So people are being able to like mill their corn to their tortillas. We're starting to look more and more into connectivity, but again, it's sort of having a point of connectivity in the region to a partnership really gives more income to one family and then the others are now connected and maybe that can give them additional income.
And then we've also done a lot of interventions in schools, health clinics, community centers, which doesn't necessarily improve income. These are also highly subsidized as well. But I think that the model of having a couple of productive uses for community does help your overall sustainability of the model, but it's sort of a complicated debate in the sense that we don't want that just to be a like income redistribution thing within a region. We want additional resources to flow in because of this.
Distributing Solar: That's certainly what we've seen in other places too. I guess to start thinking more about the future and your goals as a company, what are your goals for the next five years as a company? And I believe you're also looking to move from Latin America to the USA. I would love to hear more about your plans and goals on that side.
Manuel: The first goal that we have is, has to do with the question you asked about 2025 being the year that we can say that every Mexican has electricity.
That doesn't mean that our job in Mexico is over because definitely we still need to be servicing, upgrading and improving our operations. We're starting to see a ton of opportunities in other countries in Latin America. As I mentioned, we launched a joint venture with a local company in Colombia for setting up a rural utility in Colombia.
We think regulation is pretty favorable and that also the market based model could be pretty profitable. Because we have a little bit larger tickets than here because of the larger energy consumption. And we see that as it will make it go on as a group that we are developing a capability to service the larger space of the energy access tiers, or energy access ladder, but also the last 3% to 5% of any country.
That means that we're generating the capabilities to operate in the most complex conditions. I mean this by like geographical conditions, no formal banking or mobile money, no connectivity and no sort of traditional access. So this allows us to have capabilities that we think are useful in finding that last 5%, 10% in any country and also supporting other companies that are wanting to do this last mile utility model.
So you have, for example, in Peru, you have great regulation and tons of companies that are managing an off grid customer base, but that haven't really invested in the technology and the tools to do this. So we for would love to see a scenario where we're supporting production companies in the systems, the offline appliances and the hardware, and all these payment structures and even the operating structure to be able to increase coverage and better serve them.
And we're also seeing, for example, the US part where you have different Native American reservations, still some families without electricity. It's a very small market, but it's still, that's like last, I don't know, 0.5% and won't be served by the government. And we're looking into partnerships with local companies to be able to offer a service model for these customers.
Obviously, in the US you have more appliances, larger energy aspirations. So that, that requires us to go to the tier four applications and make sure they work. Both at our hardware and pay as you go level, but also in the operations and the servicing. Our vision is to become that sustainable last mile expert and have intervened either directly in the operations or like a SaaS model where we're providing hardware and software and operating support for the region.
That would be where I hope and I work every day towards reaching where we have a fairly large customer base in the Americas that's well-served, that has as much energy as they need and that is sustainable.
Distributing Solar: That sounds really exciting. And I would love to move into the section in this conversation where we find out more about you as an individual and hear a bit more about the background of Ilumexico. And I would love to start by asking you, how did you come up with the name Ilumexico?
Manuel: So actually the founders sat in my living room and started putting out names and none of us are creative people. So we just put out all these names and were combining different words. So I guess Ilumexico was the one we voted the best. We've had a lot of issues with the name. I mean, I love it and the team loves it, but apparently people can't really pronounce it even Spanish.
We usually get in any interviews, or we were even in a reality show, people would always call us Illumimexico or Ilumex or some different way. And then once we were going international, well, Ilumexico doesn't really work. So now we, we actually, for the Colombia venture, we hired a brand company and we came up with the name, Soluna Energia which has a play of words, like the sun and the moon, which are always present and then like only one energy, which is Soluna Energia. So that we like.
Distributing Solar: That's great. I love the new name too. I love the idea of a sun and a moon to show the consistency and continuity of energy too. Perfect. And what about El Colibri?
Manue: El Colibri has a couple of things. First of all, it’s an homage to the person in our team, who’s called Morgan.
She actually founded a solar home system company in Nicaragua a couple of years back and she was doing an amazing job there. And then because of the crisis and the insecurity, she had to leave the country and we had close relationships some years back. We met her at a conference and then we were in touch when she told me about this, I told her that she should think about coming to Mexico and continuing this work.
And luckily she accepted. So she's been really involved in our transition to pay as you go. And she's been key and critical for us to reach this. So, we sort of it as a homage to her, previous name and her involvement.
But the Colibri is a hummingbird, which is a bird that actually pollinates flowers that very little other birds or animals are willing to pollinate. So it has this double meaning as well that we are reaching those places where nobody wants to go.
Distributing Solar: That's wonderful. I also really like that. And our next question. What do you do when you’re not working?
Manuel: I've personally gone through a transformation in my relationship with work, where the first years I was extremely obsessed and focused on work and I would work every minute of the day, weekends, et cetera.
I would sacrifice very little things for any other components of my life. So this, obviously took a toll, on different things with friends, et cetera, and sort of evolved into more of a balanced lifestyle, which I don't think I have yet, but still on the way. I think it's really important to find the thing that you like that doesn't make you think about work or anything.
Also, in my case, there's a couple of things, I mean, sports. I used to play a lot of football, then I'm becoming older and my knees are not being able to play as much football. So now I'm into yoga.
So having a space where you regardless of what happens, you will leave work and do your thing is super important. Then I got really into meditation and in the past I did a couple of 10 day silent retreats, which sort of shifted my perception in a lot of things. And related to work, I think after those 10 days when I came out on day 11, I thought hell would have broken loose and it turns out my team really didn't need me.
On the day to day, we're really worried about the ‘if I don't get this done, if I don't do this, if I don't like get into this, if I don't help them decide this, then something's going to happen’. And the truth is that it's not really the case.
So that's a really nice realization where you can see that, first of all, that you have to trust your team. And second of all, that you are not that crucial in what you're doing and that everything can wait if there's something like your personal life and your emotional mental health needs tending.
Distributing Solar: And how was your 10 day silent meditation? I've always been a bit tempted to try a silent meditation, but it seems pretty intense. Did you do quite a lot of meditation beforehand?
Manuel: So the funny thing is I had never meditated one minute in my life before did this and I, when people ask me why did you go, I have some theories but really no clue on what was the thing made me go. I just felt that I wanted to go and wanted to disconnect and wanted to see how that felt. It was fantastic.
The silent thing is not even the biggest of the issues. The issue is meditating all day long and being in your head. So I would imagine Ilumexico burning down. I would imagine everything. And then at the end you realize that that's not the case. And so one of the things that helped me the most was realizing that, and this maybe sounds kind of catchy, but it's just that everything passes and that it's okay.
So you usually have a lot of stress and anxiety about work. Last year, we grew so much that everything that you can imagine happens. One of our trucks fell down a mountain. We've got a whole trailer stolen from us with like 80 full systems. And then at the end of the day, it's how you react that really defines your emotions and how the whole company sees that. And so at the end of the day, great moments will pass and awful moments will pass too.
It's more important to observe them and to be able to be an economist and calm through them instead of being really low when things are low and being really high when things are high. And that was one of the things that this 10 day sort of pushed us.
Distributing Solar: Are there any books that have changed your thinking about the off-grid sector or that you would recommend to our listeners?
Manuel: Related to books, Nancy Wimmer’s Green Energy For A Billion supported our model change radically. She lived and studied the Grameen Shakti model and has an amazing book on how she builds that out. Related to the sector, that's the thing I would recommend the most.
Then you have all these readings that are amazing on the classical MBA books, but then I would also recommend having just a novel that you read and don't think about work all the time, which is something that we also do.
Distributing Solar: And we've had another guest already recommend Nancy Wimmer’s book, so it's clearly quite a favorite.
Manuel: It's fantastic.
Distributing Solar: And if someone is looking to get involved in the off grid sector, either as an entrepreneur or as an investor, what advice would you give them?
Manuel: I always joke about telling entrepreneurs not to do this, but joking aside, I think if this is your passion, whatever passion you have, obviously, and you want to be an entrepreneur, the world needs more entrepreneurs, but also there's a lot of missing links for us to build upon what we're already doing now.
So I usually tell people, if you want to suffer and then have to do jobs that you don't like, so other people can do the jobs that you do like then become an entrepreneur. But if not, just find wherever or whoever's doing the things that you're passionate about and try and join them. And then if you don't like that, then become an entrepreneur.
That's sort of my take on entrepreneurship, but I mean, I would never disincentivize anyone from wanting to become an entrepreneur cause it's a great ride and it's super exciting and it's fulfilling, even though it's super lonely and you're the one in charge of always getting people's emotions up and really nobody's in charge of your own emotions but yourself.
But I guess it's definitely fun and we need more people in this space and the only way we're going to reach universal energy access is if we create the success stories and the platforms for many people to want to do this.
Distributing Solar: Great. And finally, what are your predictions for the off-grid solar sector in the next 3-5 years?
Manuel: I have my negative one and my positive one. I hope that this Silicon Valley, quick customer acquisition and grow as fast as we can thing works out because I think that the sector has a very different responsibility than, for example, an app. If you find out that Uber is bankrupt, then you will move to DiDi and your life will continue.
And probably all of Uber's drivers will move to DiDi. And all of the people that Uber will get great jobs. But if we fail, then you're leaving a lot of people without electricity, with a bad service and a lot of, also, I would say at risk youth without a job opportunity. So I think that the cost of failure is much higher in our sector.
And that makes me be very wary or careful about this model where we have to grow regardless of sustainability, profitability, and having the operations right. I think that that will take us sort of a more consolidated sector. We're seeing it now with Engie and Fenix and Movisol and all these larger groups we're really rooting for. Engie is also an investor so we root for them double.
But I think it's super complex. So at the end of the day, I hope that this bet works out in the sector and if not, if we have the capacity to react and not let those companies that didn't make it die and obviously communicate this and learn from what went wrong so we can do it better.
But I think it's definitely also in the next five years, we can start hearing, hopefully, these success stories where these companies that were doing the off grid were actually pretty attractive next frontier market for a lot of energy companies. And if we manage for an energy company like Engie create a success story where their whole Africa operations become profitable and then they can grow and integrate others and continue to improve their service,
then that would be a really nice story. I'm also sort of scared of the story, but I think it's also something that we can see in the horizon where companies like us, where we're not necessarily designed to have a next day and then like go public or whatever. But if we're able to partner or find a way that we can ensure that we're going to permanently stay there with the customers and ensure that the energy access that we are providing is on the long term, that will be a fantastic story to tell.
Distributing Solar: We certainly shared that hope and we'll keep our fingers crossed. Fantastic. Well, thank you so much Manuel. It has been fantastic to have you on Distributing Solar. Thanks for your time.
Manuek: Likewise, it was a great conversation, really exciting. Sorry if I talked too much and it was really nice to share a little bit about what we've learned with you and congratulations on the podcast. I'd love to see what you're up to next.