Off-grid solar finance companies are expanding access to high-quality, efficient appliances in parts of rural Sub-Saharan Africa where ownership of life-changing appliances is at extremely low levels. CGAP, CLASP and others have published extensively on these companies’ use of the pay-as-you-go (PAYGo) business model to enable low-income customers to finance home solar systems and, more recently, other appliances remotely and without collateral. In some parts of Africa, off-grid companies now have made it easier for rural residents than their urban counterparts to finance a TV or refrigerator.
While PAYGo companies have increased access to financing and energy services for their customers, hundreds of millions who live in urban areas that are served by electric utilities are being left behind, unable to access financing for the appliances they need. This divide needs to be addressed. Earlier this year in "Electric Bankers: Utility-Enabled Finance in Sub-Saharan Africa," CGAP and CLASP advocated for energy utilities to play a greater role in facilitating appliance finance through strategic partnerships. One potential group of partners looms large: PAYGo solar companies. Utilities in Africa should tap the PAYGo model’s potential to expand appliance ownership through responsible consumer finance.
What could PAYGo “on the grid” look like?
At the core of the PAYGo financing model is a control unit that directs solar power from a battery to the appliances financed by the customer. Appliances are custom designed to be powered only by the proprietary control unit and can be shut off in the case of nonpayment. Linking loan repayment to use reduces the risk of financing appliances for off-grid customers. However, currently there is no PAYGo analog available to on-grid customers, who also struggle to afford high-quality appliances. As the number of grid-connected customers increases, it is no surprise that PAYGo operators are turning their eyes toward the larger appliance finance market.
If a utility were to partner with a PAYGo provider to offer its customers financing for electrical appliances, the utility could ask customers if they would be willing to share their repayment and consumption data with a third party to enable access to finance. A PAYGo company could use that data to identify and underwrite customers and then finance in-demand appliances together with a PAYGo control unit and battery storage. Customers would get access to financed, high-quality appliances. PAYGo companies would get more customers. And utilities could see higher levels of energy consumption from happier, more empowered customers.
Why this could work
Utilities have vast reach, rich consumer data and established payment channels throughout urban and peri-urban Africa. These are powerful tools for facilitating consumer finance, but many utilities are unable to offer financing because of financial, regulatory or operational constraints. They need partners who have the experience and the balance sheets to do it for them. PAYGo providers are well-suited to this task: they have financed millions of consumer appliances in Sub-Saharan Africa, have developed inventory and loan management systems and are experienced at bundling appliances with battery storage (crucial for people with unreliable grid connections). Many PAYGo companies also have experienced the financial consequences of prioritizing quantity over quality in loan origination, which has led (we hope) to a greater emphasis on robust credit risk management.
Several PAYGo companies already offer some version of an on-grid approach. Fenix International has included a utility tie-in on its products for years. Zola Electric debuted its Infinity system in 2018, built to function in weak-grid areas of Nigeria, which could help displace the 22 million small gasoline generators operating there. Other companies are contemplating expanding into mass-market appliance financing. Some utilities are beginning to recognize apparent synergies. During a CGAP webinar, Martha Kamanu Mutugi, principle marketing officer for Kenya Power, said: “With the [PAYGo] solar options there is a lot of emphasis on the value addition, and the solar companies have actually answered the need that customers have.”
Why this might not work
There are several technical issues with PAYGo appliance financing:
- It requires a set of dedicated appliances that can be used only with the PAYGo control unit. This limits the possibilities for a secondary market of used appliances, which is an important avenue for lower-income people to acquire assets.
- PAYGo energy discharges from a battery in direct current (DC), so PAYGo appliances are generally DC, whereas most appliances are alternating current (AC). While this means PAYGo appliances use less electricity, it also makes them more expensive. Used AC appliances are cheap in many African markets. How many people will be willing to pay more for a new, efficient DC version? Inverters could allow PAYGo units to power AC appliances, but would they be worth the added cost?
There also are questions around consumer experience. “PAYGo everything” may be more efficient, but having to prepay to use every appliance, on top of prepaid electricity, could be a burden for customers. This is a trade-off people may be willing to make — particularly if the alternative is no appliances — but it could be vulnerable to abuses.
From a company perspective, while mass-market PAYGo holds potential for future growth, it carries risks as well. PAYGo companies largely were created to solve barriers to energy access. This type of appliance financing could be a distraction from that mission. And for companies that have not yet managed their credit risk or reached sustainable levels of repayment, on-grid financing could be merely an opportunity to lose more money, faster.
Empowering the powered in the “informal city”
Shuaib Lwasa, a professor at Makerere University, wrote that in Sub-Saharan Africa, “the ‘informal city’ is actually the city.” Most urbanites in Africa reside in liminal, semi-formal spaces where centralized infrastructure is unreliable yet present, and a hodgepodge of private and informal services providers take up the slack. It is here that utility customers are under-powered and lack the financial tools to acquire appliances. And it is here that utilities and PAYGo companies can come together to address these issues.
PAYGo solar is not just about solar. It is not just about rural fringes or the underserved. It is a consumer finance tool that can be used everywhere. Utilities, PAYGo operators and donors ought to begin experimenting with ways of scaling responsible PAYGo financing to reach everyone.