PAYGo for faster and cleaner electrification
Carolina Inés Pan, Advisor and Contributor of Urban AI, is an economist specialized in International Development. Before becoming Director of Research at Power for All, she was a researcher at Harvard University and a consultant for the IDB, World Bank, and United Nations.
The PAYGo (which stands for “pay-as-you-go”) business model has been one of the main pillars behind the recent growth and expansion of off-grid solar in Sub-Saharan Africa. With over 500 million people with no energy access in the continent (IEA, 2019), and grid extension being unviable in the short run due to the extremely large capital expenditures and long construction times required, off-grid solar (mostly through solar home systems, pico solar systems and minigrids) has emerged as the best alternative to rapidly expand energy access. It owes to both decreasing costs over the last decade and the adoption of PAYGo systems that enabled consumers that were underserved by the traditional financial institutions to finance their purchases of solar off-grid products.
PAYGo addresses jointly the challenges of access to energy and finance, as well as affordable renewable energy. It works with mobile payment technologies, widely used in the continent, and serves Tier 1 — Tier 3 consumers. There are two main PAYGo models; one where the customer buys the entire generation capacity system (i.e. the solar home system) through small and frequent (daily, weekly or monthly) payments, and another where the customer rents the system and pays for the energy it produces. In both cases, PAYGo works in the following way. First, the energy service provider installs energy generation equipment. The customer then starts sending regular payments using mobile technologies. In case of missed payments, the provider can remotely disconnect the service (and ultimately have the generation systems removed). Finally, after the leasing period is over (usually between 1–3 years), ownership of the assets is transferred to the customer (under the lease-to-own model). Figure 1 below provides a more detailed (yet still simplified) step-by-step.
There are several advantages of PAYGo. The most obvious one is that it helps improve energy access with no need for grid extension (and the required substantial capital expenditures), just by using existing mobile payment methods. This includes all of the benefits of new electricity connections, from greater comfort to increased productivity. In addition, it promotes the use of clean energy, which is not just beneficial for the environment but also for the customer’s health (especially compared to the commonly used fossil fuel alternatives). Furthermore, PAYGo’s flexibility allows consumers to save money in energy, as off-grid solar is both more efficient and cost-effective than the alternative energy sources like kerosene, candles, and diesel fuel. Finally, PAYGo has helped solar energy providers grow through more innovative business models that can scale.
For these reasons, and thanks to the high penetration of mobile wallets, PAYGo has rapidly grown–especially in Eastern Africa, which concentrates over 90% of the PAYGo users. Kenya is currently the largest market for off-grid solar, with more than five million units sold since 2015 –40% of which were financed through PAYGo. There is great potential for this technology to keep expanding, both in the African continent but also worldwide, especially as it serves an important –and often ignored– sector of the population. Part of its attractiveness is the ease of obtaining financing. In most cases, companies using PAYGo are willing to lend to unbanked customers (unlike many microfinance institutions), and loans can be minimal and require no collateral.
By Carolina Inés Pan
References:
ESMAP. “Beyond Connections: Energy Access Redefined,” 2015.
IEA. “Africa Energy Outlook 2019,” 2019.
IRENA. “Pay-as-you-go models: innovation and landscape brief,” 2020.
Power Africa. “Off-Grid Solar Energy Market Kenya,” 2019.
Winiecki, Jacob, Michelle Hassan, and David del Ser. “Briefing Note PAYGo Solar: Lighting the Way for Flexible Financing and Services”. FIBR, Mastercard foundation, BFA, 2017
