The pay-as-you-go (PAYGo) solar sector is crucial for expanding energy access to underserved communities, yet the financial sustainability of companies in the industry remains a significant challenge. Over the past year, CGAP along with MFR and GOGLA analyzed the extent to which different types of PAYGo firms are able to reach low-income customers. Using the PAYGo PERFORM Monitor data, we compared the performance of firms serving low-income customers against those focusing on high-value customers. By examining the differences between companies offering smaller and larger contracts, we uncovered key insights into portfolio quality, financial performance, and the ongoing effective use of subsidies. The analysis highlights the complex trade-offs faced by companies striving to serve the most vulnerable populations with affordable solar energy solutions.
This analysis (and that in the related slide deck) explores differences between country operating-level companies that serve customers with smaller contract sizes compared with companies that provide larger contracts (and, therefore, larger loan sizes). In general, the assumption is that the smaller the solar kit purchased, the smaller the customer’s disposable income. Thus, smaller contracts indicate broader outreach to poorer clients. It is worth remembering in this context that loans for Solar Home Systems (SHS) are not usually taken out for income-generating activities but rather to bring power to a household. This form of electricity is a fundamental service that reduces reliance on expensive, inefficient alternatives, but it does not tend to generate short-term income to repay a loan.
Our analysis divided companies into two groups based on average loan size: those with loans under 150 USD and those with loans over 150 USD. The groups were defined by dividing each company’s total December 2023 receivables by the number of active borrowers, with 150 USD chosen as a balanced dividing point. Analyses were run on the two groups, revealing key insights into how these segments differ.
Smaller contracts, larger reach
Our first finding was that companies financing smaller contracts tend to have slightly larger total assets despite having a similar gross loan portfolio. These companies with smaller contract sizes are more concentrated in East Africa, which is an older, more established market, and might explain the larger total asset size. Additionally, smaller loan-size companies serve a much larger client base – 110,000 on average, as opposed to 25,000 for those offering larger loans. This is where the bulk of outreach currently lies.
Balancing outreach and portfolio quality
The second area examined was portfolio quality. Here, we found that the receivables at risk of more than 30 days (which is considered equivalent to PAR 30) plus write-offs, were similar across both groups. We included write-offs so we could compare like with like – different companies may have different write-off policies. However, in terms of collection rates, the companies with smaller contracts suffer worse collection rates. The difference in the data for this metric is quite marked – a nine-percentage point variation.
Collection rates measure repayment speed – the indicator is calculated by dividing how much the company receives by how much it should have received in a given period. It’s worth noting that in this industry, clients do have practical payment flexibility. In other words, when they can pay, they pay, when they cannot pay, they don’t, and the solar kit can be switched off remotely if necessary. Although a non-payment is technically a breach of the contract terms, penalties typically aren’t charged, and sales agents tend to stress this flexibility when underscoring the affordability of the product. Poorer customers might, therefore, take longer to pay for their systems but might not be significantly more likely to become part of a portfolio in distress. From the companies’ perspective, collection rates of 80% or more would be ideal. In reality, the industry median currently sits at around 68%.
Growth in gross loan portfolio (see the bar graph above) is slightly less in companies with smaller contract sizes. When growth is slower, write-offs and collection rates worsen because newer portfolios, which usually perform better, make up a smaller share, while older portfolios, which tend to have more issues, make up a larger share So, this lower growth is potentially one of the factors resulting in slower collection rates. Neither group has particularly high median collection rates, but the companies facing the slowest repayments are the companies with smaller ticket sizes.
Performance challenges and the role of subsidies in PAYGo solar
Turning next to performance, the first bar graph below shows the earnings before taxes margin using cash flow (a measure of profitability). The difference is quite marked between groups, with companies offering smaller loan sizes struggling more in terms of covering their costs with the cash flow from customers. The second metric subtracts subsidies from cash flow. This allows stress-testing of what the margins of the companies would be if there were no subsidies. Obviously, the results are worse in both groups, but it does make the point that subsidies have been important in helping PAYGo companies both be financially sustainable and reach poorer companies at the same time.
The third graph shows solvency levels, which is an issue in the industry. In both groups, solvency is not very high, which is the first point to note, given the level of risk that these companies face. And secondly, it is companies with smaller contracts that are the ones that are in a better position. Two other general observations can also be made – the first is that subsidies in the industry are important both in terms of revenue and in terms of solvency. Second is the issue of costs. What the data shows is that companies with small contracts overall receive less subsidy as a percentage of their total cash flow. Companies with smaller contracts do seem slightly more efficient than companies with larger contracts.
Conclusion
The analysis indicates that PAYGo companies offering smaller loan sizes are essential in reaching the highest number of customers and the most remote and vulnerable. These companies face challenges, though – smaller ticket sizes tend to have lower portfolio quality, slower growth, lower profits, and the companies are more likely to receive significant income from subsidies in the provision of energy access to underserved communities. This highlights a critical trade-off between greater outreach (bringing electricity to the underserved) and profitability and the long-term viability of PAYGo firms. If left to market forces alone, PAYGo companies will – to ensure their survival, and in the absence of greater consumer subsidies – likely focus on serving more well-off customers, leaving lower income segments behind.
As the PAYGo sector continues to evolve, it is vital to focus on supporting these companies delivering smaller contract sizes, given their pivotal role in achieving broader energy access goals and their larger outreach in terms of customer numbers. Ensuring their long-term sustainability will be key to the industry’s success in delivering energy for all.
