Richa Goyal

Spotlight: Does PAYGO unlock energy access and financial inclusion?

innovation
Energy
Uganda
Sub-Saharan Africa

PAYGO does not pay for itself, but its role in expanding system affordability and energy access is crucial.

Authors: Richa Goyal, Arne Jacobson, Robin Gravesteijn

Solar home systems can be costly, especially for low income households. As a result, a majority of low income people have been unable to access clean energy technology to meet their energy needs. The introduction of innovative financing models like pay-as-you-go (PAYGO) provide a new window of opportunity.

UNCDF’s CleanStart Programme, in partnership with SolarAid/Acumen and the Schatz Energy Research Center (SERC), is conducting research on energy adoption patterns in Uganda. The research seeks to investigate the validity of the ‘solar energy ladder’ hypothesis and determine the patterns in which users adopt higher levels of solar based energy access. The study will also investigate if flexible consumer financing options can help enable higher levels of energy access and if PAYGO options have the ability to expand access and use of mobile banking.

This blog series reveals some of the early outcomes of the study. Our first blog showed that dissatisfaction and high cost associated with traditional energy sources and the utility grid generates significant market demand for solar off-grid energy. The second blog demonstrated the importance of direct marketing and delivery channels in driving the solar product purchase decisions of customers.

In our third and final blog before launching our report, we look at the role of pay-as-you-go financing in enabling adoption of mini-solar home systems. In particular, we examine how PAYGO options impact energy access, affordability and general financial inclusion. Here are some initial findings.

There is substantial reduction in use of traditional fuels with adoption of solar products

After adopting solar products, 55% respondents across all levels of solar energy access reported that they did not use existing energy sources such as kerosene, candles, dry cell batteries, and paid mobile phone charging services. This is indicative of a perfect substitution of these ‘status quo’ energy options with solar among these households. The study examined the solar off-grid product adoption behavior of three respondent groups:

  • users of small solar portable lanterns (SPLs)
  • users of mini-solar home systems (SHS)
  • users of large solar home systems

The level of perfect substitution of traditional fuels with solar technologies is higher for large SHS owners at 82%, compared to mini-SHS users at 51% and SPL owners at 40%. It is not surprising that large system owners substitute greater levels of their lighting and mobile charging demand with solar systems, and, hence, have a lower reliance on traditional fuels.

PAYGO financing allowed low-income households to buy larger solar systems

Reported income of buyers of PAYGO systems was almost identical to the reported incomes of buyers of SPLs. Despite the similarity in incomes, 98% of PAYGO system owners bought the PAYGO product as their first system. This demonstrates that PAYGO offers low-income households flexible financing options allowing them to immediately purchase the larger home systems.

PAYGO and other flexible financing options do not help system cost pay for itself

A net present value (NPV) analysis shows that while SPL owners experienced rapid economic payback within the first year of product purchase, mini and large SHS owners did not recover their investment in solar products within the system warranty period. In fact, these users experience large net cash outflow in the first two years of product use – $130 to $740 depending on system size.

At the same time, mini and large SHS owners derived higher energy service levels from their solar systems when compared with SPL owners. The median daily energy service derived from mini- and large SHS ranged from 40 to 130 Wh/day [Watt-hour per day] while that of SPL systems is ~1Wh/day. We conclude that mini and large SHS adopters make their purchases to achieve quality of life improvements rather than near-term economic return on investment.

PAYGO customers valued mobile money as a savings tool as much as non-PAYGO customers

A significant majority of rural Ugandans save money. Mobile money is the most preferred savings option and outruns other savings options significantly. A total of 83% respondents across all levels save money using their mobile money account. We note that the data for this study were collected before MTN launched MoKash savings option. It is likely that MoKash has prompted more Ugandans to save using mobile money since. Furthermore, PAYGO customers value mobile money as a savings tool as much as non-PAYGO customers. Making solar payments is not a primary motivation for adopting mobile money. We do not yet witness increased digital financial inclusion as a result of PAYGO system adoption within the respondent pool. This will be an interesting area to explore for further research.

Conclusion

There is a high degree of income parity between SPL owners and mini SHS users. This indicates that the PAYGO financing model played a key role in enabling adoption of larger systems in the mini SHS group. While we did not see ancillary benefits of PAYGO systems such as increased digital financial inclusion, the large increase in daily energy service levels and increased affordability via flexible financing bring significant improvement in quality of life.

This blog was originally posted here.

Read our second blog: How does marketing unlock solar energy growth?

Red our first blog: Off-Grid Energy Systems in Uganda: Exploring the Unmet Demand for Reliable Electricity

The Energy Ladder Research – an initiative launched by UNCDF’s CleanStart Programme in partnership with SolarAid/Acumen aims to address these and several other questions. Researchers at the Schatz Energy Research Center (SERC) are conducting the research through a mix of quantitative and qualitative research methods, including 600 phone interviews and 114 face-to-face interviews with users of solar energy products in two regions of rural Uganda. This year-long study explores customer adoption and financing behavior of off-grid energy solutions.

Kat Harrison, Acumen Associate Director of Impact and Lean Data and Michael Nique, GSMA M4D Utilities’ Director of Research and Insights have been active thought partners in steering this research forward.

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