Sustainability of Growth of pay-as-you-go (PAYG) solar

Ghana has one the highest rate of acccess to electicity in West Africa. However, five million people, specifically in rural areas, continue to have limited or no access to reliable energy. Power projects require upfront capital investments. They must, therefore, be profitable to maintain a high quality of services. In Ghana, electricity providers face challenges in the collection of electricity bills and receivables. In March 2023, the Electricity Company of Ghana (ECG) had to carry out a nationwide disconnection campaign to recover overdue bills. State institutions had accumulated debt owed to the ECG of $478.7 million (GHC5.7 billion). Disconnection is devastating for households, making solar a viable alternative, especially in rural areas. But even here, bills collections can be a challenge. The pay-as-you-go (PAYG) pricing model strikes a balance between affordability and financial sustainability. This is particularly relevant for solar energy to off-grid customers.

Pay-as-you-go (PAYG) in Ghana

The model allows customers to pay for solar products in small increments, removing the need for upfront investment. This makes PAYG solar is a viable option for poor households in urban and rural areas, where the national grid is absent. In Ghana, mobile phone penetration facilitates mobile money for payment services.

The Bank of Ghana (BoG) sees the PAYG model as an integral part of the national drive towards a digital payment system. The banking regulator also says that PAYG is a driver of financial inclusion with its adoption spreading to all the economic sectors and industries, including retail, utilities, pensions, health insurance, and agriculture. PAYG is also the dominant model in the communication sector. Its salient feature is that users pay based on how much they consume.

With solar energy, an energy service provider rents out or sells solar PV systems on the condition that the user makes regular advance payments through mobile payment systems. In cases of non-payment, the service provider has the power to disconnect the service. PAYG improves energy access in off-grid areas, while enabling other innovative business models, such as peer-to-peer trading or community ownership of mini-grids.

Data from PAYG customers suggest that the model can achieve financial sustainability. In a study of six countries, of which Kenya and Tanzania, researchers found that 95 percent of consumers paid off their loan and ultimately, owned the solar kit permanently. The research even found that weekly (as opposed to monthly) repayment frequency led to higher repayment rates¹. Another research shows that PAYG companies with an adequate recovery strategy and credit risk management can tolerate an acceptable level of default rate².

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Since 2012, Azuri has delivered affordable solar home systems, on a commercial basis, to customers in 12 countries in sub-Saharan Africa. The company has sold at least 150,000 systems, bringing electricity to over 750,000 households. Azuri is present in Kenya, Uganda, and Tanzania. The company is also well-established in Ethiopia, Rwanda, and South Sudan. In West Africa, Azuri has activities in Sierra Leone, Ghana and also Togo. In Southern Africa, it is present in South Africa and Zimbabwe.

In 2016, the company announced plans to accelerate expansion in existing sub-Saharan Africa markets. The same year, it rolled out AzuriTV. With this new services, it became the first PAYG company to integrate solar TV with satellite entertainment in one affordable package for households without access to grid electricity. Between 2015 and 2018, together with Ghana’s ministry of energy and Oasis African Resources, Azuri Technology, provided 100,000 off-grid homes in Ghana with pay-as-you-go solar power.

Advantages and disadvantages

In a PAYG model, customers have a lower barrier to entry and no debt. Customers also pay for what they use and there is a minimal waste of energy. From the provider’s perspective, PAYG has the potential to improve cash flow and help business reduce risk. However, the model is not risk free. In fact, GOGLA (the Global Off-Grid Lighting Association) has identified some operational risks. The association notes that PAYG companies face hidden and unpredicatable risk because they primarlily serve ‟vulnerable low-income people that are costly to reach and service”. The industry association also explains that ‟PAYG is a complex business model to set up and manage” and remains ‟capital intensive”³.

In Ghana, pre-paid public utilities used PAYG smart meter cards. Pre-paid services is also a preferred model for mobile phone companies. Their services cease when the credit on the phone runs out. However, customers retain the option to resume the use of service after adding credit to their accounts. In 2022, pre-paid subscriptions represented 99.18 percent of the total mobile data subscriptions, according to the Ghana National Communications Authority (NCA)⁴. However, industry analysts say that, unlike utilities and mobile sectors, PAYG solar suffers from a lack of standardization and transparency.

Another major sources of risks stem from receivable collection, in a environment where receivable assets can unlock financing for scaling up. However, technologies and fund management companies are offering innovative solutions to tackle this problem. A new initiative called the ‟multi-country, multi-distributor platform”⁵, enables the sales of pools of receivables. With this approach, the PAYG cash flow model becomes attractive to debt providers or equity funds⁶. Similar initiatives inclue the ‟Climate Aggregation Platform (CAP)”, which promotes the scale-up of financial aggregation for small-scale, low-carbon energy assets in developing countries. The goal of the CAP is to increase access to and lower the cost of financing for the clean energy sector.

Prospect

Between 2019 and 2023, the Ghanaian solar energy grew at a rate of 20 percent (Compound annual growth rate-CAGR). The market recovered from COVID-19 meltdown of 2020. It is now hovering towards a pre-pandemic level. By 2030, Ghana plans to increase the proportion of renewable energy in the national energy generation mix from 42.5 MW in 2015 to 1363.63 MW (with grid-connected systems totaling 1094.63 MW).

Authorities says that Ghana’s Renewable Energy Masterplan (REMP) will create new opportunities for the solar energy market. In this plan, the government wants to promote the manufacturing and assembling of solar components and equipment in Ghana. The new scheme offers incentives to investors who venture in this field. They will receive substantial tax reduction and exemption.

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