How PAYGo Solar Companies Can Shine for Investors
In recent years, the pay-as-you-go (PAYGo) solar industry has attracted a lot of interest among impact investors and international development funders. Many see in PAYGo solar a fast-growing industry that has proven its ability to expand low-income people’s access to renewable energy and financial services. But investors might wonder: Can PAYGo companies deliver this impact profitably? The industry is full of companies with complex, distinctive business models and currently lacks financial reporting standards and operational metrics that would help investors and companies to assess and benchmark financial and operational performance with confidence. Standardizing the way the industry measures and conveys performance to investors will provide greater transparency, make them easier to evaluate, and help companies unlock capital on a greater scale to fuel their growth.
The PAYGo solar puzzle from an investor perspective
On a superficial level, PAYGo solar business models are easy to understand. More than 1 billion people aren’t connected to the electrical grid, and many can’t afford the upfront costs of buying an off-grid solar home system. PAYGo companies enable these customers to finance solar home systems - in effect, allowing them to earn the collateral for the solar home systems and, potentially, other future durable household goods. PAYGo companies incentivize repayment by using remote lockout technology. If a customer stops paying, his or her lights simply go off. Over time, in addition to margins on equipment sold, the PAYGo provider makes money from interest paid on the loan, and once the loan is paid off, the customer owns his or her home solar system (having generated a digital financial record in the process).
When it comes to the detailed analysis produced by funders and investors, however, things can get confusing quickly. As CGAP and the IFC explained in a joint 2018 publication, “Strange Beasts: Making Sense of PAYGo Solar Business Models,” the confusion stems largely from the fact that PAYGo solar companies combine two value chains — retail and lending — in novel ways. For instance, since PAYGo customers don’t put up collateral, their primary motivation for repaying is the ability to keep using their system. This means that the performance of the lending side of a PAYGo business heavily depends on the retail side’s ability to repair defects or replace faulty systems. Implications of the PAYGo business model, such as this one, are significant but not widely understood among investors. Compounding these difficulties is the fact that different companies measure and report their financials differently.
Now is the time to standardize financial reporting in PAYGo solar
In many ways, these difficulties are to be expected. PAYGo solar is still a young industry full of startups whose business models are evolving, which naturally presents challenges to investors. But PAYGo solar has grown quickly. Low-income customers have financed over 3 million home solar units in recent years. The industry has reached the point where to keep growing it needs to unlock capital on a greater scale than it has before. It is estimated that the projected financing needs of off-grid solar companies are around $4 billion between 2017 and 2022. To achieve this level of capital, the industry will need to mature and standardize its financial reporting.
The industry has reached the point where to keep growing it needs to unlock capital on a greater scale than it has before.
As Geoff Manley, an investment director who leads the off-grid debt finance initiative at CDC Group, put it: “To understand a company's market position, investors need to benchmark its performance against the industry. In the PAYGo space today, there is a lack of consensus on what the performance indicators should be and how to calculate them.”
The reluctance of investors to get on board with PAYGo solar is being felt by PAYGo companies.
"One of the biggest problems we witness when raising money for PAYGo, along with our local partners in various countries across Africa, is that every investor has their own set of parameters and wants the data/business model in a typical way,” explains Shagun Jain, head of strategic partnerships at Rural Spark, a company developing smart grid solutions in Africa. “Back and forth discussions to finalize the data which they can analyze also consumes a lot of precious time of the entrepreneurs. This creates a lot of hassles for companies. The lack of industry benchmarking and standard definitions of various parameters only makes the process cumbersome."
Recognizing these difficulties, CGAP, GOGLA and the IFC’s Lighting Global have initiated an open, transparent industry process to develop a reporting framework and set of key performance indicators (KPIs) for the PAYGo solar industry, building on previous work to this end by Lighting Global and GOGLA. Called PAYGo PERFORM, the effort relies on the active involvement of PAYGo companies, investors and experts in energy and financial inclusion from around the world to ensure the standards meet the needs of both investors and PAYGo companies.
“This initiative should make it easier to invest in PAYGo,” said Manley, who also serves as co-chair of one of PAYGo PERFORM’s working groups.
As a first step in achieving this goal, the initiative is working to standardize a set of KPIs to be used by the industry. Three working groups (Portfolio Quality, Unit Economics, and Overall KPIs), bringing together investors and PAYGo companies and other industry stakeholders, are currently diving into the details, agreeing on indicators and writing definitions in an open and collaborative format. Updated indicators are expected to be ready later this year and will be piloted by companies before rolling out more broadly.