PAYGO Approaches: Overhyped or Justified

Overview

Since the PAYGO market got a lot of attention during the past years and exponentially more money is lend to push the market, it seems that PAYGO approaches were hyped by the media and within the energy access sector.

In March 2017, a blog post explained what was wrong with this hype about PAYGO. A few days later, two blog posts responded to the 5 critiques on PAYGO. This article summarises all three articles in bullet points. Ceniarth shifted its investments away from PAYGO and dared to explain why. GOGLA and Persistent Energy Capital LLC strongly disagree with Ceniarth’s analysis.

Furthermore, an overview table allows to see the arguments side by side.

Why PAYGO is overhyped

Blog by Ceniarth: “An Impact Investor Urges Caution on the ‘Energy Access Hype Cycle’”

Ceniarth points out that they do not like the current commercial dynamics in the energy access sector. They name 5 reasons:

1. Investments grow too fast, “for a sector that still has not fully solved core business model issues and may struggle under the high growth expectations and misaligned incentives of many venture capitalists”.
2. This hype will have negative effects on the PAYGO customers, while many companies are “operating in a grey area of regulation”.
3. Sensitivity to a capital-intensive venture model applied to rural, physical last-mile distribution: service infrastructure is not profitable for rural, poorer customers.
4. Without an (increasing) income, customers might increase their consumption (and/or their level of credit lines) leaving them more vulnerable than before.
5. Focus on specific sectors (like energy access) has proven to be arbitrary and unnecessarily limiting for Ceniarth to reach the last mile customers.

Read more at: Ceniarth’s Blog: Neichin, Greg, Diane Isenberg, and Mary Roach. ‘An Impact Investor Urges Caution on the “Energy Access Hype Cycle” | NextBillion’, 17 March 2017. https://nextbillion.net/an-impact-investor-urges-caution-on-the-energy-access-hype-cycle/

Why the hype is justified

Investment is needed!

Blog by GOGLA on: “Dear Critics: Here’s Why the Off-grid Energy Industry Needs Impact Investment”

GOGLAs response to the blog post of Ceniarth reveals the following:

1. GOGLA thinks that Impact Investment is needed for the Off-grid Energy Industry.
2. Access to distributed clean energy has been historically underfunded by public finance institutions (Energy Scorecard_06_web.pdf see Sierra Club’s analysis on this topic) and therefore, 200 million USD in 2016 is not a problem.
3. With a commercial, demand-driven approach, it is in the companies’ own interest to meet the customers’ needs (quality, after-sales service and customer care).
4. In their view, expansion in terms of goods and services is a growth opportunity, not something to be dismayed about. However, the need for solar products for productive use (and income generation) exists alongside the need for clean energy within households for lighting, mobile charging, entertainment and cooling (consumption).
5. There are many potential customers: Even outside of the rural, remote last-mile customers, there are many more in peri-urban and highly densified areas that need access to energy services. Everybody is free to choose whom to serve.

Read more at: GOGLA: Keane, John, and Laura Sundblad. ‘Dear Critics: Here’s Why the Off-Grid Energy Industry Needs Impact Investment | NextBillion’, 6 April 2017. https://nextbillion.net/dear-critics-heres-why-the-off-grid-energy-industry-needs-impact-investment/.

 

Why we need the hype

Blog by The Persistent Energy Capital LLC on: “Hype in the Energy Access Sector (Finally!)”

The Persistent Energy Capital LLC(PEC) strongly disagrees with Ceniarth’s analysis, too. According to them:

1. There is no investor hype: it took several billion dollars per year for a decade to enable the mobile phone industry to reach 75 percent of sub-Saharan Africa. USD 200 million in 2016 will maybe reach 1 million households, equal to 1% of market potential!
2. In order to protect customers, regulation will follow the revelations of abuse, normal procedure in new industries.
3. Competition will stress test energy access business models and reveal successful approaches.
4. There are profitable businesses targeting even the lowest-income consumers.
5. Investing in a still young market is always difficult and requires persistence, we should however not miss out on providing adequate risk capital by investors who want to figure out how to ensure growth.

Read more at: Persistent Energy Capital LLC: Aidun, Chris, Dirk Muench, and Rodrigo Weiss. ‘Hype in the Energy Access Sector (Finally!) | NextBillion’, 6 April 2017. https://nextbillion.net/hype-in-the-energy-access-sector-finally/.

 

Overview Table

The following table summarises the critique on the PAYGO hype by the blog post of Ceniarth and the two reactions by GOGLA and Persistent Energy Capital (PEC) who both thinks what Ceniarth calls a PAYGO “hype” is a justified and necessary development in order to reach energy access via PAYGO. The table follows 5 categories of arguments: financing, regulation, profitability, consumption vs. productive uses, and target markets. For details and resources, see sections above.

Category	Critique on Hype by Ceniarth	Reactions on the critique (by GOGLA and PEC)
Financing PAYGO increased exponentially during the past years. (to 200 million USD in 2016)	Ceniarth thinks that PAYGO investments grow too fast	GOGLA states that those large investment is not a problem since the sector has been historically underfunded anyway. PEC explains that “there is no investor hype”. Even the mobile phone industry needed several billion dollars per year to reach 75 percent of sub-Saharan Africa. Every industry needs impact investments and PAYGO is in its very early market stages. In 2017, PAYGO will maybe have reached 1% of market potential!
Regulations for customer protection do not yet exist	Ceniarth fears that this hype will have negative effects on the PAYGO customers, while many companies are “operating in a grey area of regulation”.	PEC assumes that the PAYGO sector will follow the same steps as all new industries: In order to protect customers, regulation will follow the revelations of abuse.
Profitability of remote distribution	Ceniarth argues that the service infrastructure is not profitable in rural, poorer areas: Applying a capital-intensive venture model to rural, physical last-mile distribution does not work in their opinion.	PEC counters that competition will stress test energy access business models and reveal successful approaches. There are profitable businesses targeting even the lowest-income consumers. GOGLA argues that with a commercial, demand-driven approach, it is in the companies’ own interest to meet the customers’ needs (quality, after-sales service and customer care).
Productive vs. consumption of energy	Ceniarth fears that without an (increasing) income, customers might increase their consumption (and/or their level of credit lines) leaving them more vulnerable than before. Giving them access to more goods and products increases this vulnerability.	GOGLA observes that more goods and services is a growth opportunity, not something to be dismayed about! They admit there is a need for both uses: productive use (to generate income) and consumption by households.
Target markets of PAYGO products and services	In the opinion of Ceniarth, PAYGO is not suitable to reach the last mile customers.	GOGLA responds that the target market is more diverse: all relevant consumers (poor or rich) should get access to relevant supply. PEC argues that the target market of PAYGO is still a young market: investing is always difficult and requires persistence, investors should not miss out on providing adequate risk capital to PAYGO companies.

 

Conclusion

It is true, the PAYGO market got a lot of attention during the past years and exponentially more money is lending to push the market. Whether or not we can call this a “hype”, depends on the perspective. Some call it overhyped, others feel the attention is justified.

Traditional impact investors like Ceniarth might feel that PAYGO is not quite the right approach to reach the last mile customers for achieving universal access to energy. They feel that the hype around the PAYGO approaches might even endanger the path towards that goal. Others (GOGLA and PEC) rather see the fast development of the PAYGO approaches as a “normal” development of new markets. This path will maybe not only focus on the most vulnerable customers, but offers the possibility to reach many more people than other approaches. According to them, like other young markets, the PAYGO market receives the attention that is needed to grow substantially.

 

Further Information

• Financing and Funding Portal
• PAYGO: Definition and How It Works
• Fee-For-Service or PAYGO for PV systems
• Market Development of PAYGO
• Advantages and Disadvantages of PAYGO Approaches

 

References