Financial Inclusion and Off-Grid Solar: Three Takeaways
Off-grid solar energy solutions are taking off in the developing world. For the 1.1 billion people living without electricity, the ability to digitally pay for clean energy over time is life changing. Over 500,000 households have acquired pay-as-you-go (PAYGo) home solar systems in the last five years, with that number set to double (at least) in 2016. Not only is PAYGo solar gaining popularity, but it is also playing a role in driving financial inclusion.
How it works
PAYGo solar home systems consist of photovoltaic panels, installed upon a customer’s roof for a down payment ($10-$60, depending on system size). The customer pre-pays for energy usage through their mobile wallet. Once the pre-paid usage expires the system is automatically locked down until another payment is made. A solar home system usually includes 2-5 lights, phone charging, and radios or TVs in larger models, enough to seriously improve the quality of life for many families.
The majority of households starting to use off-grid solar energy solutions are located in Kenya, Tanzania, Uganda, and Rwanda, and mobile money is the most common form of payment.
Three critical takeaways
CGAP has spent the last two years working with a number of companies in the pay-as-you-go solar sector to see how digital finance is enabling this new energy service model to be a viable solution for millions. For us, there are three important takeaways from this work, which are explained in more detail in a brief:
1. Digital payments ARE enabling new business models.
Digital payments from mobile wallets are an important part of this story. Without mobile money, PAYGo operators would have to build an entire cash management infrastructure and customers would be forced to travel to centralized pay points whenever they wanted to reactivate their solar units. Energy poor households tend to be rural and widely distributed; in-person payments could add a recurring expense that would render PAYGo solar non-viable. By utilizing mobile money, PAYGo solar companies can accurately track customer behavior, reduce unit downtime by making payments more convenient, communicate directly with customers about their payment via SMS, remotely lock a device in the case of non-payment and leverage the existing mobile money agent network to scale rapidly.
2. But the way this occurs is surprising.
The assumption of our energy work was that digital finance systems were established platforms that could support a variety of services; MNOs had built the rails, and now service providers could use them (for a fee). But in still-developing mobile money markets, service providers that want to grow quickly must lay the tracks right in front of the train. An informal CGAP survey of three leading PAYGO providers revealed that 30-50% of new customers had never used mobile money. For the PAYGO provider, that means they need to register the customer for a mobile wallet, teach them how to use mobile money, and make sure they can easily access a mobile money agent. On one hand, this is a burden: a lack of active mobile money users and agents makes expansion more difficult for solar companies. Customers unaccustomed to using mobile money put an added strain on the company; Off-Grid Electric in Tanzania reported that 50% of their service calls are related to mobile money payment frictions. In areas without reliably liquid agents, some companies have been forced to establish their own pay points. But on the other hand, this shows that service providers can actually influence the uptake and use of mobile money. Customers are willing to register for and use mobile wallets because the promise of electrification provides a tangible value proposition that may not have existed previously. PAYGo solar providers that sign up clients for mobile wallets are driving financial inclusion at the point of sale.
3. There is a larger story here.
In the past, solar distributors were unwilling to finance sales to poorer customers due to the risk of theft or non-payment. The ability to remotely lock an asset makes financing far more secure; by connecting payment and usage, PAYGO providers have dramatically lowered the credit risk. As a result, they are able to give loans to customers once considered un-bankable.
As these clients accumulate energy payments they are establishing credit histories. At the moment those histories are being utilized by the solar companies to offer additional financed assets, with their solar unit as collateral. M-KOPA, for example, has given 40,000 follow-up asset loans, predominantly for productive assets like clean cook stoves or smartphones. Yet there is potential to offer an even wider variety of services: savings, insurance, and unsecured loans.
CGAP is working closely with energy and financial service providers to explore ways of combining their offerings. This could mean a partnership between a bank and solar company, a solar company becoming licensed to offer financial services, or a bank developing its own financed energy product.
The case of PAYGO solar energy demonstrates how incentives are vital to the success of mobile financial services. Here we see how an apparently simple product - a solar unit sold on credit - may become the gateway to financial services for millions of off-the-grid customers, all because it offered customers something they really wanted: light.
Very interesting Daniel. Thank you for sharing. I noticed MTN Mobile Money mentioned in brief. Is it safe to assume that across Kenya, Rwanda, Tanzania and Uganda that carrier mobile money users of M-Pesa, Orange Money/Iko Pesa, TigoPesa, AirTel, Waird Pesa, m-Sente and others are involved also in facilitating payments to PAYGo providers?
Is the $10-$60 down payment toward the consumer eventually owning the solar unit? On a certain level it is interesting that customers of off-grid solar (with a generating unit that it appears the customer acquires), must pay for usage. In traditional on-grid power companies (electric, natural gas, etc.), these energy providers get paid for helping to produce and delivery the energy. Curious what annual maintenance expenses are to PAYGo providers per user-system.
Thank you for your comments John. PAYGo solar companies are working with a large group of DFS providers, although I cannot guarantee that they are integrated with every one you list.
In lease-to-own models (such as M-KOPA's), yes, the down payment goes toward ownership. In perpetual-lease models, (such as Off-Grid Electric), the payment is simply the cost of installation. In both of these models, as you hint at, the customer is not technically paying for usage. They are making loan or lease payments, which are tied to use. The difference appears semantic, but consider if the product was a consumer finance loan (or lease) tied to an automobile, which could also be turned off remotely. The customer is not paying for energy; the energy is there, generated right on their roof! Rather, they are paying to not have that energy turned off. I mention this only to illustrate the potential replicability of this model to other sectors.
As for the service component, most companies offer a warranty for the length of the loan, or offer ongoing service in the perpetual leasing model. I cannot tell you what their annual costs are, but I do know from speaking to customers that the quality and speed of PAYGo service teams is a big selling point. Most of these customers have never interacted with a call center before, so there's a lot of work to be done in building trust, but once it is earned it creates great 'stickiness' for the provider.
The penetration of Digital payment services has several benefits beyond remittances. They are playing a vital role in making several life essentials like health, energy, education, food available to all.The key to bring everybody is to spread awareness through literacy workshops and information dissemination and to strengthen distribution frameworks while maintaining low costs
Thanks for sharing. I strongly believe that mobile money and off-grid solar are a good match and the "larger story" you mention is very promising! Would be curious though to read more about the business/integration models... The article is focused on PAYGo: in the implementations you have looked at, were all models actual PAYGo - i.e. requiring quite a tight integration with the payment system? Or did you also look at some alternative options? Have you seen significant differences between online and offline solar units? Would be great to have your insight on successful/less successful models and also understand how/if the distribution network of the MNO/MFS provider is generally leveraged beyond its cash-in capabilities...
Thank you for reading! To answer your questions in reverse order:
- In some cases the MFS infrastructure is simply leveraged for cash management, as is the case in Tanzania with Off-Grid Electric. However in other cases MNOs have extended their brand or sales locations to PAYGo providers (MTN in Uganda, Safaricom in Kenya) with positive results for both firms.
- Online systems tend to be more expensive, given the cost of embedding the technology. They also generate vast amounts of data, which can be hugely valuable to a solar company if they have the analytical capability to process it. So that represents an advantage. I would say the biggest single difference we have seen is cost to the customer: offline units can be sold to most income strata, whereas online units have a somewhat higher floor. That said, there is definitely a preference among customers to scale up, so many customers that start with an offline unit may convert at some point to an online kit.
- There are two basic business models: energy as a service and energy as an asset. I don't think we've got enough data in this sector to properly assess the difference, but hopefully that will change soon. If you're interested in reading more about integration and alternative models for PAYGo companies, please check out our working paper on this, available at http://www.cgap.org/publications/access-energy-and-finance-integrated-a…