The market for pay-as-you-go (PAYG) solar solutions is growing fast, according to a Bloomberg report from February 2016, titled ‘Off-grid Solar Market Trends’. PAYG companies have different business models and offer a variety of products. But their commonality is that consumers pay in affordable instalments. And if they can’t pay, a mechanism disables the system.
RI talks to Jan-Henrik Kuhlmann, Senior Investment Manager, and Jirin van Santen, Business Development Manager of Triple Jump, the investment fund manager. Kuhlmann will participate in a panel during European Microfinance Week in Luxembourg on 16-18 November where the financing of PAYG solar models will be discussed. Responsible Investor is a media partner for the event.
RI: According to the Bloomberg study, investments in PAYG solar companies have accelerated rapidly from $19m in 2013 to $120m in 2016. What is the opportunity of the PAYG business model?
Jirin van Santen: PAYG is one of the models that uses new technology in order to provide people access to electricity. It certainly has risen strongly in the last couple of years. I think investments totalled $360m in the last 3-4 years. We definitely see it as an opportunity. But while the PAYG model is becoming more professional and proven with every year, there are also companies that still haven’t figured out the business model yet, despite having received tens of millions of investments. The relative growth of PAYG is impressive, but it needs to be put into context of starting from a low base within a large scale mature energy industry of hundreds of billion USD.
RI: Why has it risen so fast?
Jan-Henrik Kuhlmann: The advantage is that distribution, operation, maintenance and payment collection are integrated in the mobile technology. Without this technology, it becomes very expensive from a financial perspective as money amounts in the range of five dollars have then to be collected physically in rural areas. If the system breaks down frequently, you would usually need hours or a day to fix it. Mobile technology makes this a very efficient system. And efficiency is key as each business employs very few people.
Overall, renewables have reached grid parity in the last two to three years, even for mid-sized or larger projects. There is also a very strong technology push and price erosion for solar panels, inverters, and building kits and systems, which has allowed the rise of this model. It’s a double technology push in this way.RI: Is this how you explain the growth of this business model?
Jan-Henrik Kuhlmann: Yes. Another dimension is that there has been a strong willingness to support related companies by various investor foundations. While we are not sure whether all companies are profitable, a couple have become quite professional, well run and fast growing. So besides the technology push, it’s also important that there is a large mission to achieve this.
RI: What are the advantages of the PAYG business model?
Jirin van Santen: PAYG is one of a number of existing models. It’s based on a pre-paid system, and it’s not necessarily better than other systems that also use mobile technology. But, compared to other systems it allows the most flexibility, because people can send text messages and decide, for example, to buy five dollars’ worth of electricity now, and you can become the owner of the system within 12 or 36 months; whereas other models are more fixed.
RI: The demand for debt financing to fund these PAYG businesses will continue to outstrip supply, according to the Bloomberg study. Is this the biggest barrier for this model to scale?
Jan-Henrik Kuhlmann: It’s one of them. But what we generally see is that it is still a nascent industry, and the business model seems to evolve and change and adapt quite quickly. There is a lot of integration. The transaction costs between different players are too high, and this is why the services are integrated under one roof. The industry is too young to say what the aspiring business models and end game will be.
RI: Has the PAYG business model the potential to be a solution for successful impact investing?
Jan-Henrik Kuhlmann: There is clearly potential, yes. The question is what kind of risk appetite you have as an investor. Risk adjusted returns might be limited for this model at the moment. A couple of companies are more advanced, stable and closer to profitability than others. So it depends on the professionalism of the company and whether the model fits the specific local situation such as the country, the density of people / villages, existing power infrastructure etc. But, there is clearly an opportunity, and it has a good chance to develop further.