The weekend read: A bump in the road for pay-as-you-go solar and self-sustainability

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From pv magazine, September 2019

On the one hand, pay-as-you-go solar (PAYG) offers an unprecedented opportunity for private companies to step in and provide tailored solutions to a wide portfolio of customers with extremely limited budgets. On the other hand, it stimulates the integration of innovative business models that are flexible enough to constantly adapt to the abilities and urgent needs of their customers, who are usually in isolated, rural areas that are otherwise unreachable. These unique characteristics are clear enablers of the attention and growth the off-grid sector has experienced in recent years. More specifically, PAYG models have attracted more than $600 million of funding so far, and growing interest from big, reputable corporate investors such as Engie, EDF, EDP and Total.

However, it is the very same dynamism and uniqueness of the PAYG system that can backfire when companies are confronted with difficult market circumstances, especially in the case of fierce competition and unsupportive legal and political frameworks, as access to finance remains a challenge. These contextual disadvantages can threaten the long-term sustainability of PAYG business models, as shown by the bankruptcy case of Mobisol, a high-profile player in the rural electrification universe that each filed for self-managed insolvency this year. Solarkiosk suffered a similar fate, demonstrating the difficulty of supporting a sustainable business in the hyper-competitive African small scale solar market. A Solarkiosk representative (see below) has pointed out the company distributed products offered by PAYG providers alongside its own solutions but never directly sold on a pay-as-you-go credit basis to its customers.

For this reason, it is extremely important that private and public agents join forces to create the business frameworks needed to turbo-charge the off-grid industry, so that it can effectively deliver on the goal of achieving universal access by 2030 for the remaining 1 billion people in the world who still lack electricity.

But what are the exact characteristics that make PAYG systems different from other business models? How can governments and development organizations take those matters into consideration when designing new policies in order to ensure positive impacts through the scaling-up of the energy-access sector?

High scalability

The PAYG system is an innovative approach that allows electricity end-users to pay for their energy consumption and solar technology in small instalments – thus avoiding the initial up-front investment. While the company provider is typically the one that finances the purchase of the necessary equipment, its ownership is fully transferred to the customer at the end of the repayment contract. Payments are usually done through a simple mobile app and allow customers to lower their risk profile by “behaving” through timely payments. As a result, a positive credit history helps them access lending at better rates on future occasions. Examples of successful and ongoing PAYG models include Angaza, Bboxx, d.Light, M-Kopa and Off-Grid Electric, as all of them have contributed to ramping up PAYG investment to $550 million over the past two years.

One of the main advantages of PAYG models is that they are highly scalable. They reduce investment barriers for customers through flexible payment schemes, lower energy costs, better technology prices and improved solutions, while also providing the necessary margins that companies need to maintain and expand their operations. Due to its flexibility and ability to adapt to different customer profiles, PAYG models are constantly improving, leading to better and more affordable services for end-users.

Moreover, these models allow customers to save money while accessing more valuable energy services for production and household use. As PAYG systems are less costly and more energy-efficient than traditional fuel-based energy production systems, customers often improve revenues from their businesses, as well as their quality of life. For instance, they achieve this through increased connectivity services and studying, recreation and income-generating activities in the evening. Productive use in turn enables the interlinking of essential sectors such as energy and agriculture or water, thus laying the foundation for long-term, local economic development.

Mobisol and Solarkiosk

As in every sector – especially relatively young and highly dynamic ones – pitfalls exist. To fully understand the how and why of the Mobisol and Solarkiosk bankruptcies one needs to first look at the wider context. The off-grid sector as a whole – and the market for solar home systems, in particular – still lacks the necessary economic and political conditions to unlock its full scalability. That means that the legislation and financial instruments the industry needs to take more action are often nonexistent, or inadequate at best. This not only complicates the development and implementation of off-grid solutions, but also makes it difficult for companies to access suitable finance, which in turn drives operational costs up in the highly competitive environments that PAYG models operate in. Only big companies like Mobisol have shown they are able to showcase positive impacts and therefore obtain the best portion of the off-grid financing pool. This grants them an ever-increasing share of the market and greater access to available resources. In other words, the off-grid sector is becoming a self-reinforcing spiral that sends an urgent signal to the PAYG market – companies must scale up at a faster pace.

Mobisol was a clear victim of this vicious circle. In order to keep up with ever-decreasing prices, fast product development and the expansion of its competitors the company had to rely heavily on impact investments and public funds, as commercial financing methods for PAYG start-ups are fairly expensive. For Solarkiosk, this would have seemed like a sensible way – at least in principle – to reduce financial risks, as it built trust among private investors. However, the business models and full-speed commercial activities of both companies proved to be unsustainable in the end.

Even with established first movers such as Mobisol and Solarkiosk, the pressure to scale up can have a pernicious effect that can eventually lead a company to bankruptcy. This is due to the strategic advantages of second movers, which can benefit from passing realized lower technology costs in the meantime on to their customers. Consequently, in markets with short product cycles, second movers are often able to increase their market share in the short term while incumbents remain tied to older technology purchase contracts, which makes it difficult to hold and attract new customers by lowering prices.

For first movers, this could mean two things: They either incur losses by reducing the price of their services – while financing a more costly technology – or they maintain the same prices. However, the latter option sets the stage for second movers to grab market share from them. This situation, along with Mobisol and Solarkiosk’s increasing operational and technology costs amid their race to scale up, created a financial gap that public funding and impact financing alone could not fill.

Key lessons

From these experiences two important lessons can be learned. First, it is clear that the main objective of PAYG models is to become self-sustainable in terms of commercial and financial viability over the long term. Companies should also prioritize quality – that is, looking first at the stability offered by suitable finance and reliable customer portfolios – over rapid growth. As highlighted above, there are a number of successful PAYG business models in operation and in the process of scaling up. However, it is overambitious to expect full commercial viability over the short term as the sector targets hard-to-reach customers with a low ability to pay. Companies also face markets that have been distorted by hefty fossil-fuel subsidies and therefore they need continued support to develop properly.

This is why, as a second point, in order to achieve full PAYG scalability over the long term, public financing needs to support the rural electrification transition to bring confidence to mainstream financial markets, so longer-term capital can become accessible to the key players of the PAYG sector. But as far as market size and the products offered are concerned, it is important to remember that the sector provides opportunities for all companies to scale up. Second movers can benefit from falling input costs while experienced first movers are ideally positioned to improve and develop their business model to the next level.

The cases of Mobisol and Solarkiosk can teach us key lessons about the PAYG and small scale, off-grid sector in terms of scaling electrification, the commercial benefits on offer and the remaining challenges. They also send a clear message: The strategic behavior of companies in highly dynamic, innovative markets offer a natural way for any sector to mature. Public and private investors should therefore adopt holistic approaches to supporting PAYG companies, so they can play a leading role in charting the path to sustainable electrification.

Marcus Wiemann and David Lecoque

This article was amended on 23/10/19 to reflect the fact Solarkiosk retails PAYG products offered by rival companies but never sold its own solutions on such a basis.

About the authors

Marcus Wiemann: The executive director of the Alliance for Rural Electrification (ARE) is responsible for the operation and future direction of ARE as well as the management of relationships with institutional partners and governments. He also managed the ARE-OFID CfP, under which three clean energy mini-grids were installed, in Bangladesh, India and Mali.

David Lecoque: Heads ARE’s policy and business development department and coordinates activities globally, with a specific focus on Africa. He works closely on policy and business issues with energy companies, key donors and institutions, as well as financiers and NGOs that are involved in energy access. In particular he focuses on consultancy, advocacy, partnerships and project management. He also oversees ARE’s research activities and runs the organization’s contact database, which includes 33,000-plus stakeholders.