Can Insurance Make Small-Scale Solar Energy More Accessible?

Small-scale solar installations have been an important innovation to bring electricity to remote areas. Despite their rather low capacity, small solar plants offer several use cases and benefits: powering lights, charging smartphones or powering appliances such as water pumps which can help farmers irrigate their fields more easily. While these systems represent a large investment for most users, financing is increasingly possible using a pay-as-you-go (PAYGo) model, which involves making regular payments to a PAYGo company that rents or sells small solar installations. Customers either lease a solar panel and make payments until they own it or they regularly pay an installment based on their usage, thus making electricity more accessible to more low-income consumers.

However, small solar installations face many risks which jeopardize their ability to provide a continuous energy supply.  Unexpected expenses or loss of income can harm a farmer’s ability to keep up with the PAYGo installments and keep the lights on. A powerful storm can damage a solar-powered water pump. A destroyed pump is not only a lost investment but may also lead to a reduced harvest income. So what insurance solutions are available as financial protection mechanisms against these risks?

Direct and indirect insurance solutions

While insurers offer coverage for larger plants, there are few solutions for smaller plants and their associated risks. Those that do exist can be divided into direct and indirect insurance solutions (see figure). Direct insurance solutions cover the solar installation itself. Indirect insurance solutions cover another step in the solar power supply chain.

Direct insurance coverage is pretty straightforward. Solar panels and solar-powered equipment such as water pumps can be damaged by vandalism, theft or weather, such as a heavy storm or hail, and should thus be insured against those risks. South African insurer, Santam, offers a solution for insuring solar installations against the risk of weather-related damages. Their regular agricultural insurance cover was expanded to include solar panels, under the rationale that solar panels are as much an agricultural input as seeds or crops.

Indirect coverage to insure against customer defaults

But damage to installations is not the only reason small-scale solar panel owners lose access to electricity. Those customers who are signed up with a PAYGo model must keep making regular payments in order to keep the lights on. Unfortunately, payment defaults or late payments are a common challenge for PAYGo companies. Standard procedure in the event of payment default is for the PAYGo company to remove the solar panel from the customer’s premises. However, in remote locations, this procedure is often too costly. In addition, PAYGo companies are often critical intermediaries for providing energy access to off-grid communities and taking that access away should be a very last resort.

Thus, there is a need for other indirect insurance solutions which can help PAYGo companies avoid taking that last resort of removing their customers’ energy access. Understanding the factors behind customer default is necessary to determine the best solutions. PAYGo companies as well as insurers have identified two main reasons leading to defaults: an unexpected illness with high hospitalization costs or crop losses and low yields.

Innovative solutions help with unexpected medical costs and crop losses

Free or affordable health insurance offered as an add-on for PAYGo customers who pay their installments on time is one solution which helps customers with unexpected medical expenses. For example, PEG Africa, a PAYGo solar provider in West Africa, partnered with insurance provider BIMA to set up an insurance product combined with a PAYGo model. The PAYGo company has found that the health insurance functions as an incentive for paying installments on time, thus improving the repayment rate.

Another solution involves using agricultural crop insurance to cover a PAYGo company’s loan portfolio, given that PAYGo companies are affected by extreme weather conditions in a similar way to farmers since most of their customers are farmers. Agricultural insuretech company Pula has recently piloted this concept in Zambia. In the event of an adverse weather event, the insurance would pay out a benefit to the PAYGo company, providing support to offset loan defaults. This type of solution could also enable investors to offer lower interest rates to PAYGo companies.

Improving access to electricity in remote areas

The COVID-19 pandemic has shown how quickly unexpected medical costs can add up and devastate people’s financial situations, especially in low-income communities. Climate change and the increasing frequency of associated extreme weather events make damage to crops and solar facilities more likely in the future. The insurance solutions described here, be they direct or indirect, can help counteract these challenges. By de-risking solar panel financing, innovative insurance products can improve access to renewable energy and help keep the lights on for remote communities.