PAYGo is a business model that allows customers to obtain a solar home system with enough power to charge phones and lights, or even small appliances, against making an initial down payment. They then make regular payments for using that system, until they eventually own it, often after about 2 years. Customers typically make these recurring payments using mobile phones.
The model has made life-changing energy products affordable for 25-30 million people with limited savings and cash flow, and with no other ways to demonstrate their creditworthiness. It is serving the bottom of the pyramid, enabling them to access high-quality, reliable, clean energy technologies which they would not be able to afford in cash. The alternative in many cases is no energy access or solutions that typically involve high recurring costs and negative consequences for the environment, like kerosene lamps or diesel generators.
The need is massive since more than 700 million people today still live without electricity. Many live in remote areas, where efforts to expand the grid are costly and can take decades. Off-grid solar solutions such as these solar home systems have already proven to be the fastest and most cost-effective way to deliver basic electricity access to millions of homes and businesses – affordably and reliably. We believe that an integrated energy planning approach will be needed to achieve universal energy access by 2030 – but are clear that off-grid solar solutions must sit firmly, and centrally, amongst them.
Promise and challenges of the model
With PAYGo, a customer must be satisfied with the product and service, and able to pay, for the company to receive the payments. Customers generally have no formal obligation to pay and can choose not to. If they don’t pay, their system will get turned off. If the customer doesn’t pay for a long period the system may be taken back, but the customer will not be left with a debt obligation in the same way that it would should they have taken out a loan. However, ‘turning the lights off’ for customers that can’t pay, means a worrying loss of energy access for people and hurts companies’ sustainability, so the industry recognises the importance of protecting customers against these risks.
We recognize that there are instances where people have been taken advantage of by PAYGo companies, or where specific sales agents have made inappropriate sales in order to get higher commissions. GOGLA condemns such behaviour. As far as we have been able to establish through e.g. consumer research, such situations are not a widespread practice. They have however occurred more frequently in the early years of the PAYGo business model (until circa 2017), when many companies were putting growth ahead of profit, often with the intention to maximize impact. Across the industry, this has been recognized as damaging and counterproductive, and companies have adjusted their growth strategies. The large majority of PAYGo companies strive to protect consumers and achieve social impact and are constantly improving their policies and practices to achieve this.
Recent data from the PAYGo COVID Impact Monitor showed that the write-off ratio (the percentage of customers that do not complete payments) for a sample of PAYGo companies has a baseline of 7%, though this doubled to nearly 14% in late 2020 (in the midst of the pandemic’s impacts on livelihoods and incomes).
The goal for companies, and the industry at large, is to reduce the write-off ratio. However, the figure will never be 0% – this would indicate that companies are being too stringent in their credit assessments and saying “no” to many people that could have otherwise benefitted from access to the product.
The sector is still young and learning fast while adapting to major challenges like the COVID-19 pandemic. Many times PAYGo solar customers don’t have a credit profile, so their capability to pay can be hard to assess. In fact, PAYGo assets and mobile money payments can actually help to create a credit profile and spur financial inclusion, such as access to business loans, insurance, and other products – TVs, solar fridges, and solar irrigation systems.
It’s a priority to protect the consumer
Despite its many positive impacts, PAYGO is a complex business model to set up and manage. It is capital intensive, and the inclusion of financing bumps up the overall costs for the end-user. It requires companies to balance competing tensions of serving vulnerable low-income people that are costly to reach and service, whilst ensuring financial returns and a viable business. It also introduces new risks for consumers that need to be managed and minimised, since a solar home system constitutes a major investment for them.
The GOGLA Consumer Protection Code is an industry initiative to safeguard impacts and respect the rights of consumers. It helps companies understand their performance and point them at areas of improvement and blind spots. GOGLA members voted to adopt an Industry Opinion that recommends all off-grid solar companies make a Commitment to the Consumer Protection Code and strive to adhere to its principles. Initially, it launched as a self-assessment and is now piloting a Third-Party Assessment for a more thorough and independent review of a company’s performance and the development of an Action Plan to better monitor and measure progress.
How else can we protect consumers and increase energy access?
The off-grid solar industry is still evolving, and support from investors and donors to invest in capacity and skills, for example, training staff and agents on engaging with vulnerable people, or building the capacity of companies to assess consumers’ ability to pay, can accelerate improvement. Donors and investors recognise this need and are investing in tools and support programs (such as these on consumer protection and credit risk management), though much work remains to be done to build this good practice across the sector.
Governments and donors also have a role to play in helping address the systemic issues of affordability and profitability. Serving low-income people in difficult economies cannot be done with commercial international finance alone. Delivering universal energy access will require subsidy (as has been the case in the electrification story for every country on the planet). Subsidies should of course be deployed in a smart and responsible way to not distort the parts of the market that are functioning well. They should also come on top of efforts in the industry to continuously improve operational efficiency and reduce costs.
For the PAYGo market to grow and serve low-income populations with the energy access they so desperately need, while not overburdening customers with payments they can’t afford, will require a blend of public and private finance – concessional and commercial capital that works together to deliver the returns and impacts that each requires. This is essential to bring down the price of basic electricity access for low-income and vulnerable communities.
Conclusion
Off-grid solar is the fastest and most economical solution for hundreds of millions living with no or inadequate access to electricity in the world today: households, entrepreneurs, farmers. For many of them, the PAYGo business model is the only available option that gives them access to these solutions on terms that are affordable. It is an absolutely critical part of any route towards achieving our sustainable development goals. However, the model is not perfect. We have no choice but to learn from our mistakes and address our imperfections. The off-grid solar industry has already proven its ability to learn and improve in the past years, and we will continue to do this in the future too.