Strange Beasts: Making Sense of PAYGo Solar Business Models

18 January 2018
[There is] a significant market opportunity in diverting existing energy spend toward PAYGo solar, but the working capital needed ... is likewise significant.
The impact of pay-as-you-go (PAYGo) solar companies is undeniable. In less than five years, they have improved the quality of life of some 8 million people—primarily in Sub-Saharan Africa—by bringing clean energy and financing to customers that traditional utilities and financial institutions have ignored. This new business model has received a great deal of attention from investors and the development community because of its potential role in addressing the energy access gap of 1.1 billion people. Despite that potential, the pathway toward a productive, resilient, and customer-centric ecosystem of PAYGo lenders remains uncertain. At the root of that uncertainty is the complexity of the business models.
Much like a platypus, PAYGo lenders defy classification. These companies combine elements of modern electric utilities that provide clean energy services, retailers that sell durable goods through diverse distribution channels, and financial institutions that provide leasing that makes valuable assets affordable for low-income customers. They straddle two value chains, with vertical integration within those operations, as illustrated below.
This setup is not unique to PAYGo. Most major car manufacturers, for example, have captive financing units. But in the emerging markets and start-up contexts where most PAYGo lenders operate, it does present a unique set of challenges:
Strategically, we may start to ask whether a vertically integrated configuration is best or if breaking up the value chain would be a more efficient means of getting these products to customers.
Operationally, it can be difficult to ensure that a company is competent in activities as diverse as hardware design and loan underwriting.
Financially, it is a challenge to assess the performance of a company when it is involved in such a wide set of activities.
That last element, the challenge of financial analysis, is the focus of “Strange Beasts.” CGAP and IFC teamed up to unpack critical issues and provide guidance to both the companies themselves and the investors that back them. One of the worst mistakes a financial analyst can make is to apply a set of analytical tools from the wrong industry, but the sheer complexity of the PAYGo business models makes it easy to make those mistakes.
Using a financial model, we explore the issues in depth and highlight areas where we see the biggest potential for analytical errors. We conclude that the cleanest solution to the financial analysis problem is to separate the financial institution from the rest of the business. At the very least, we recommend being cognizant of the spectrum of options and the trade-offs involved as PAYGo firms operate throughout value chains and across them.