Is the PAYGO Solar Industry Ready for Deverticalization?
Insights from Unlocking Solar Capital - October 2017, Abidjan
By Tom Schumacher
In late October, USAID’s Scaling Off-Grid Energy team spent two days at the Unlocking Solar Capital: Africa conference in Abidjan, Cote D’Ivoire. The conference was abuzz with several large funding announcements and the news of a major acquisition, which all point to the continued growth of the household solar industry that provides electricity to customers in Sub-Saharan Africa that live off the grid.
Major announcements around the $80 million M-Kopa financing facility and the ENGIE/Fenix acquisition are good news and represent small, yet significant steps towards the maturity of an industry that was just starting to formalize five years ago. Recent estimates now put the “pay-as-you-go” (PAYGO) household solar industry in Sub-Saharan Africa above the million-customers-served milestone, with the number of companies operating in the sector now in the dozens, and global estimates show that over 130 million people have benefitted from high-quality solar products in off-grid areas to date. While these figures represent impressive growth for the industry, it pales in comparison to the need for affordable energy access for an estimated 600 million households across the continent. Despite the progress made to date, a key question remains as to whether the industry’s current makeup position it to achieve the universal energy access goal of Sustainable Development Goal (SDG) 7.
In answering this question, we see two topics that are particularly relevant: the value of more specialized firms in scaling energy access, and the immense remaining capital needs of off-grid companies.
A Path to Scale
To date, much of the industry's foundational and early growth has been established by a handful of innovative businesses operating mostly in East Africa: M-Kopa, Off-Grid Electric, Fenix and Mobisol, to name a few. As pioneers of a new industry working in challenging business and operational environments, these companies are the embodiment of the startup ethos: “if it doesn’t exist, build it.” These businesses have had to stand up an entire value chain from whole cloth, including design, production, distribution, service, and data/financial management. In addition, these companies helped develop the pay-as-you-go (PAYGO) business model, which allows customers to pay in small increments for access to energy, and add more time as needed, by day, week or month. PAYGO allows consumer financing to widen and deepen the customer base for solar home systems. As such, they have by necessity become complex and vertically integrated entities, with corporate structures described as a “design company on top of a data science company on top of a last mile distributor on top of a banking institution.” By all standards, their a Typically, as de-verticalization begins in a given industry, supply chain partners focus on particular parts of the value chain chievements in driving down costs, increasing product quality and reaching new consumers have been impressive. Nevertheless, the energy sector as a whole has made modest progress towards to goal of universal access in Africa.
As more companies join the market, we expect to see more decide to specialize or “de-verticalize” as a means of competing with more seasoned firms and to broaden customer reach. Typically, as de-verticalization begins in a given industry, supply chain partners focus on particular parts of the value chain. In the PAYGO industry that means new models exploring the separation of design, distribution, service and consumer financing. While de-verticalization is inherently destabilizing and may lead to some model failures, we believe that it is both inevitable and positive from an access perspective. We believe we are beginning to see this take root in several companies across West Africa such as PEG, Baobab+, Oolu, and Azimuth that do not build hardware or software but concentrate on customer acquisition, servicing, and distribution. Mobisol is another example: their new SolarHub software platform will be available to new and existing PAYGO providers across the sector as an off-the-shelf operations, payments, and logistics solution.
Still, the emergence of new entrants, new business models and new attempts to capture pieces of the value chain is not keeping pace with the enormous need ahead. While some may look at recent industry headlines and no longer see a need to support early-stage experimentation, we see a deep need to support growing innovators, especially around financing needs.
Profitability vs. Scale
Sam Parker, of the Shell Foundation, tackled this subject of the finance needed for off-grid companies. Previewing a forthcoming report, Sam shared some sobering numbers for the industry as it seeks to achieve SDG7 across Africa by 2030. In summary, the report estimates that the market for innovative energy solutions, such as PAYGO companies, numbers 126 million households across Sub-Saharan Africa, even if assuming maximum grid coverage. To reach those households the sector needs to draw in over $24 billion in investment and create dozens of new companies to create a competitive, thriving marketplace.
To provide energy access to a staggering number of tens of millions of households, we likely need to see business models evolving in a different but complementary direction than the industry leaders. It’s unlikely the current handful of larger incumbents can solely tackle this enormous opportunity on their own or that new entrants will quickly and ever-more cheaply replicate the “best-in class” processes and systems that the incumbents have already refined. Furthermore, many of these companies are evolving their business models around consumer finance which are meant to deepen their customer relationships and offset the relatively high cost of acquisition and their vertically integrated structures with greater lifetime customer values (LTVs). Increasing customer LTVs is a strategic move to help these companies reach profitability sooner, draw more investment into the sector and build more efficient operations. However, these evolutions, understandably driven by the priorities of the businesses, are not sufficient on their own to meet the SDG7 goal of achieving the scale necessary to increase energy access by an order of magnitude or two over the next decade.
We need to continue to experiment, to innovate, and to take big risks. The industry is paving the way for this to be possible and cannot continue to scale without it.
As we do this work and mobilize others to this task, we must not forget who the beneficiaries are of our efforts: tens of millions of people all across Sub-Saharan Africa.