Wharton's Serguei Netessine discusses his research on the adoption of kerosene alternatives in developing nations.

Kerosene is a volatile, dangerous chemical that provides poor light, yet it continues to be widely used as a source of illumination in countries that have incomplete or unreliable electricity grids. A group of researchers wanted to know why kerosene is so popular, even though it’s more expensive than some alternative, innovative forms of lighting that are available to the same populations. Serguei Netessine, a Wharton professor of operations, information and decisions, spoke to Knowledge at Wharton about what he and his colleagues — Bhavani Shanker Uppari and Ioana Popescu from INSEAD — learned from their research, and what solutions could provide a better path forward.

Knowledge at Wharton: Your research is detailed in a paper titled, “Selling Off-Grid Light to Liquidity Constrained Consumers.” What exactly is off-grid light?

Serguei Netessine: Off-grid light is a standard way to solve the access to electricity problem in many countries where there is simply no electrical grid as we know it. Thomas Edison invented electrical lights and poles and transformers and all of those things that allow us to just plug in a lightbulb to the wall, and it works. But most countries in the world don’t have this luxury. Almost no country in Africa, for example, has a fully developed grid, so they have to create electricity in other ways. Typically, this would involve some kind of an electrical generator if a country is a little richer. The Philippines, Indonesia — these are countries with thousands of islands and are relatively wealthy, so they can afford this kind of a solution. If you take poorer countries, countries with lower GDP — countries in Africa, some countries in Asia — they cannot even afford that. What they use is a very basic solution, which is a kerosene-burning lamp.

Knowledge at Wharton: I’m assuming that’s toxic.

Netessine: There are many problems with kerosene, and toxicity is just one problem. Millions of children every year get severely burned by kerosene because they just tip over the lamp and it keeps burning. Then there are issues with the quality of light. It’s a yellowish kind of light, so if you’re trying to do homework, that’s not good for your eyes. But what I would say is the biggest problem is that kerosene is three to four times more expensive than electrical light, sometimes even more than that. This is really puzzling — that people continue using kerosene given that it’s so expensive, because we are talking about countries where people live on $2 to $3 a day. Such a significant cost difference should lead them to adopt cheaper ways to use electricity. What really led us to this research is the realization that people still use kerosene despite all of the bad things that come out of it. I don’t even go into harm to the environment. If you are living on $2 to $3 a day, maybe it’s not the biggest concern that you have. But that is a consideration as well.

“What really led us to this research is the realization that people still use kerosene despite all of the bad things that come out of it.”

Knowledge at Wharton: What alternatives to kerosene did you examine in this paper?

Netessine: There are quite a few alternatives. The one that naturally comes to mind is solar light. Let’s take countries at the equator. They get plenty of sunlight, so solar is a natural solution. The problem is that even with the cheapest solar batteries that exist now, we’re talking about $70 to $100 per battery to feed a household with electricity. That’s just unaffordable. This is two, three months’ worth of income. Remember that in these countries, people don’t save. They are unbankable, essentially, and they live on their income that they get day to day, usually from subsistence farming. Whatever they catch, they eat. And whatever is left over, they sell.

This is why a particular solution got our attention, and the solution was proposed by a startup company called Nuru Energy. Nuru Energy created a very interesting ecosystem where they would give people heavily subsidized lightbulbs with a little rechargeable battery, and then they would find what they call a village-level entrepreneur, a person who would be a little bit more wealthy and who would be willing to invest into a rechargeable bicycle. That’s a stationary bicycle that you peddle for about 20 minutes, and you can recharge five light bulbs stacked on each other. This is sustainable. This is quick. Remember, solar still requires several hours to recharge. This person typically would run a little shop in the center of the village and would own this bike. People would come to him or her and pay a small fee, typically 10 cents or so for a recharge. Five cents would go to the entrepreneur, and 5 cents would go to Nuru Energy.

Knowledge at Wharton: That sounds like a great solution. What is preventing people from adopting this technology?

Netessine: If you look at this business model, they heavily subsidized bulbs. The only way to really make money for Nuru in the long run is if people come and recharge relatively often. What we found — which was again a continuation of this puzzle that people continue using kerosene – is that people would get the bulb and they might even come once or twice, but very quickly some of them would just disappear and never come back. Or they would come so rarely that the business model would not pay for itself.

This was a bit puzzling, because the price difference is pretty monumental. We are talking three, four, five, eight times in certain cases, because kerosene is usually only sold on the gray market. The prices have nothing to do with world oil prices, and they fluctuate a lot day to day. On the other hand, here you have a sustainable, clean, high-quality light solution, which does not have fluctuating prices, which does not have any of those minuses of the kerosene, but people were still not recharging as much as the company wanted them to.

“People would go and buy a little bit of kerosene, which would bring them even further away from recharging the light bulb, and this is kind of a vicious cycle.”

We looked into this issue and discovered what might seem like an obvious conclusion, but it was not obvious to us in the beginning. Imagine you have a very uncertain income. You don’t know if you’re going to have an extra 10 cents or 20 cents today or tomorrow. Of course, light is not your priority. You first spend on food and maybe on health. Whatever is left, you spend on light. The problem with electrical recharges is, unless you have a certain amount [of money left over] — the cost of a recharge — you just don’t have enough. Even when people get a bulb and decide, “I’m going to accumulate a bit of money to go recharge next week” — next week comes, and they don’t have this money. The kids need to do homework. You need to do some work in the backyard after sunset. What do you do? You say, “Well, maybe I’ll go and buy kerosene just this one time.” You can buy a little bit of kerosene [with the money you have]. You can buy a gallon, an ounce, any fraction. It’s just a matter of price.

People would go and buy a little bit of kerosene, which would bring them even further away from recharging the light bulb, and this is kind of a vicious cycle. That’s what really has been happening. The rechargeable bulbs were just not flexible enough. You could not pay for them in tiny little increments. Even paying 10 cents was a lot for them.

Knowledge at Wharton: What are some ways of overcoming these obstacles?

Netessine: There are some technological ways. For example, the way the bulbs originally were designed, you can either charge the whole bulb for 10 cents, or not at all. Technologically, it’s not very hard to add a little [charging] indicator, so consumers could say, “I don’t have enough money for the whole bulb. Let’s get a half-bulb, a quarter of a bulb, or one-eighth.” That’s a relatively cheap solution. The bulb would cost a little bit more because of the indicator, but it’s not a deal breaker.

There are other solutions, too. It has been shown that you can help people in those countries save money if, for example, you can get them to prepay. Whenever they have a cent left, they send this cent to the company and it accumulates. Otherwise, people in this kind of economy don’t really have the culture or the mechanisms to save. But they do have pretty ingenious payment mechanisms. For example, the company M-Pesa handles a significant percentage of GDP of many African countries, and all you do is you transfer money using SMS. They can transfer one cent at a time, and over time it will accumulate. It becomes like a savings mechanism.

Knowledge at Wharton: Based on your research, are you hopeful that this business model could work down the line?

“People in this kind of economy don’t really have the culture or the mechanisms to save. But they do have pretty ingenious payment mechanisms.”

Netessine: Most definitely. Our paper was a bit more on the theoretical side. In practice, you run into many other behavioral and adoption issues. As a follow up, what we are doing now is running, in cooperation with The University of Cape Town and a couple of other institutions, a huge, randomized control trial where we play with various terms of engagement.

For example, should you give this village-level entrepreneur 50% of the fee or maybe 60% or 40%? Maybe he’ll work harder if he had a bigger stake in the game and say, “I’ll just go around and collect the bulbs and bring them to the charging bicycle and pedal.” We’re experimenting with that. We’re experimenting with habit formation. Maybe if you give people the first three or four charges for free or at a very highly discounted price, they’ll get into this mold. We are also looking at the cost of other issues such as gender issues. Usually, people who suffer most from lack of light are women who work at home versus their husbands who might be working somewhere in the field. We are looking at educational issues because children are affected a lot. They come from school and need to do homework, and they don’t have the light.

Knowledge at Wharton:  It sounds like there’s a lot more to explore there.

Netessine: Most definitely. It’s a big experiment with about 240 villages in Rwanda involved, with the support of the government and a couple of international organizations. It’s very hard to predict whether a particular business model, especially such a novel one, would work in an economy like Rwanda. When you see [a model] in your first-world economy and try to come up with something that would work in Africa, you can come up with all kinds of crazy things. But the only way to know is to experiment and see if it works.

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