Advantages and Disadvantages of PAYGO Approaches

Overview

Through a variety of Pay-as-you-go (PAYGO) approaches, the solar energy sector has become very dynamic in the recent years: Companies sell solar services or solar products through a pre-paid model (in small instalments) to customers that can afford these services and become potential or actual customers.

This article lists the advantages and disadvantages of PAYGO with detailed results from studies as examples.

Furthermore, it gives a short overview table to contrast the advantages and disadvantages along the following categories:

1. Impact on energy access
2. Financing possibilities
3. Affordability
4. Households’ expenses for lighting
5. Psychology: decision making
6. Financial inclusion
   
7. Policy & Commitment.

Since it is not easy to identify any comments or research about the negative experiences of PAYGO, this article tries to focus rather on the critique and the possible negative implications of PAYGO than the positive outcomes. Please feel free to add your own experiences!

Pay-as-you-go Approach

Definitions: PAYGO

Pay-as-you-go (PAYG) is a digital financing technology that allows end-users to digitally pay for solar energy in weekly instalments. (Read more here and How it Works). Find an overview of relevant companies and their approaches here. If you are interested in how the PAYGO Market developed, read this PAYGO market overview.

Advantages and Positive Experiences with PAYGO

A Impact On Energy Access

Key Driver For Energy Access

PAYGO is considered a “key driver of growth for scalable off-grid energy providers” as:

• More people can afford better energy services: “We’ve been thrilled to see how quickly our customers have migrated with d.light from solar lanterns to our larger Pay-Go systems”. d.light
  
• Systems provided through PAYGO impact also other factors of communities: improving community health, creating employment, fostering self-employment, providing education and skills.
  

PAYGO Fosters A Commercial, Demand-Driven Approach

PAYGO fosters a commercial, demand-driven approach. Therefore, it is in the companies’ own interest to meet the customers’ needs (quality, after-sales service and customer care).

Competition will stress test energy access business models and reveal successful approaches.

PAYGO allows more people to buy more devices and use the solar electricity: this expansion in terms of goods and services is a growth opportunity. However, alongside the need for clean energy within households for lighting, mobile charging, entertainment and cooling (pure consumption), exists also the need for using solar electricity for productive use (and income generation) in order to contribute to poverty alignment.

PAYGO Allows Private Sector To Step In

According to UNEP DTU Partnership (2016), PAYGO offers the possibility that the private sector can take over to supply even the poorest in the most remote areas. Since rural electrification is still more expensive than in urban areas, development cooperation should focus on improving the general economic conditions of the poorest groups in rural areas and not so much on bringing them the right technology.

PAYGO Reaches Households With Lower Incomes And In Remote Areas Than Traditional Mfi

Traditional banks and MFIs do not target classical PAYGO customers. Some are reluctant to offer credits for SHS only because the credit value is very small and seen as a non-productive asset. PAYGO companies can serve those customers (low-income), that are too risky for MFIs: Customers that have less income (using the shut off technology as collateral); customers that live in very remote areas (using mobile money to lower transaction costs); serve customers with high-end products too expensive for top-up of MFI loans. In Senegal, PAYGO is expected to reach an additional quarter of the target market (10-15% can afford to pay upfront, 15-20% can afford a top-up loan) that otherwise would have stayed untapped.

B Financing Possibilities

Private Financing Increases (For Energy Access)

Companies applying PAYGO approaches manage to raise large-scale working capital from investors to finance up-front costs. Those companies often do not have access to traditional financing institutions like banks, but due to their demand are expected to be served with less expensive loans in the long run.

PAYGO solar is becoming a commercial opportunity: Investments in PAYGO solar companies grew from 3 million USD in 2012 to 223 million USD in 2016. Largest growth in equity financing. The share of grants was largest in 2014.

In the fourth quarter of 2016, private equity firms invested over USD 60 million in Nigerian mobile PAYGO solar provider Mobisol and Lumos Global, which is selling emissions-free electricity services from solar-storage micro-grids.

Both companies sell larger systems than the original PAYGO pioneers. Both companies target relatively well-off customers, with systems up to USD 1,000, rather than the typical USD 150 - 200 for Solar Home Systems (SHS).

Since Lumos is integrated with mobile phone operator MTN, telecom operators are expected to “increasingly use their reach to distribute solar products”.

SunFunder, a US-based lender for small-scale solar companies primarily in Africa, raised USD 21 million in 2016 from OPIC, MCE Social Capital and Rockefeller Foundation, with a view to double that amount in the near future. This dramatically increases the size and range of their debt finance offerings for solar in developing countries.

In East Africa, 17 foundations, 21 impact funds, 4 venture capital funds, 2 corporate venture capital funds, and 8 large companies have invested in PAYGO companies (until 2016).

C Affordability

Small Instalments Overcome Affordability Hurdle

People can afford the small instalments and pay for their solar energy needs: Impact studies showed households using solar systems by Azuri benefit from significantly more hours of light and from the ability to charge phones at home. “Households that adopted Indigo as their sole source of lighting or in combination with others had respectively 1.75 and 2.5 times more lighting time per day than the control group.”

PAYGO Lowers The Credit Risks For Households

PAYGO offers the possibility for clients to lower their risks. After completion of the payment plan, future loans might be perceived not as risky for this group by banks and MFIs as before. Furthermore, they do not have to bare the risk of the full price of the solar product: In case of not complying with the payment, the PAYGO company repossesses the product and the client loses the down payment (and all payments up until that point), however there is no risk in losing the total system price.

D Households’ Expenses For Lighting

Less Expenses For Phone Charging

People can charge their phones at home (and have therefore less expenses and more time at their hands): In Rwanda, mobile owners had to walk for half an hour (including higher theft risk) and wait there for 2-3 hours to get their mobile phone charged. “Sixty percent of the households which own Indigo products charge all their phones at home and have seen the amount paid per week for charging disappear.” Cost for charging a phone were reported to be RWF 200 (approx. USD 0.26) a week. This could be almost one third of the expenses for lighting: Mobile phone owners had almost double the weekly expenses for lighting (+charging) of non-owners: an average of RWF 680 (approx. USD 1) vs. RWF 392 (approx. USD 0.60).

Many use their phones to pay for the instalments, therefore both technologies are interconnected.

PAYGO Is Less Expensive Than Kerosene

Azuri’s research found that PAYGO systems cut customers weekly energy spending by as much as 50 percent. “Whereas residents typically spend $2 per week on kerosene, they might pay $1 per week for the basic PAYGO system. So for half the cost they get proper, clean lighting and the ability to charge mobile phones when they want right at home,” Simon Bransfield-Garth, CEO of Azuri. In Peru, families with a reading light (picoPV for USD 25) will save approximately USD 616 on energy costs in 5 years because they save the 30 Soles per month for traditional lighting. Additionally, they have 3.9 additional hours per day of lighting to work and/or complete household chores.

F Financial Inclusion

Financial Inclusion Via PAYGO

PAYGO offer the possibility to establish a track record of payed back credit. After the purchase via PAYGO of a solar product, the household not only has a good rating with financing institutions, but also a collateral to continue with the same (or similar) amount of instalments to buy other products.

Disadvantages and Negative Experiences with PAYGO

A Impact On Energy Access

Hype: PAYGO Investments Too High

• 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”.
  

No Profitability Of Remote Distribution With PAYGO

• Sensitivity to a capital-intensive venture model that is applied to rural, physical last-mile distribution: PAYGO service infrastructure is not profitable for businesses serving rural, poorer customers.
  
• Focus on specific sectors (like energy access) has proven to be arbitrary and unnecessarily limiting for Ceniarth to reach the last mile customers. The impact investor Ceniarth pulled out of the PAYGO businesses and published 5 reasons why. One of them: PAYGO is not suitable to reach the last mile customers.
  

Early Stage Technology: Companies/Projects Face Difficulties

PAYGO implementation projects have to face “various distribution challenges”, but benefit from the learning process along the way.

A report by Hystra in May 2017 identifies the following 5 challenges for PAYGO companies:

1. Maintaining both fast growth rate and high portfolio quality
   
2. Managing tension between end-user affordability and risk exposure
3. Recruiting and managing field staff at scale
   
4. Raising significant and appropriate funding
5. Replicating in more complex geographies
   

Other challenges include: payment methods, the local distributor’s limited capacity, changing tax regulations, and also (but to a lesser degree) the technical performance of the product. Furthermore, raising enough capital also leads to lower sales numbers of PAYGO products: GOGLA and Lighting Global report that several cash-sale companies reported declining sales as a result of limited inventory financing, primarily in Tanzania and Ethiopia. Such bottlenecks create opportunities for competitors, primarily generic lantern manufacturers, to capture market share.

Limited Competition: Local Vs. International Companies

Almost all successful PAYGO companies are international ones. They are foreign owned and foreign managed.

Local businesses miss out on this opportunity. Local PAYGO companies often lack the initial resources, as well as the networks and skills, to raise both early-stage capital and develop complex financial structures to raise debt capital from international markets. Local companies are also hesitant to take on foreign currency risk.

The relative lack of access to finance results in fewer companies and less competition in the PAYGO sector. More companies could emerge, as local currency debt gets more available. Increased competition among more companies will probably lower prices and increase sales.