Role of Supporting Environment in Fostering Pay-as-you-go Approaches (PAYGO)

Overview

Although the market of PAYGO seems to accelerate during the past few years, the public (and financial) sector may play a role to foster PAYGO approaches and to regulate the PAYGO market in order to increase the impact for the energy access sector.

Different actors play different roles: national governments, international development cooperation and the financial sector.

Role for Governments

Overcoming barriers to market growth of PAYGO will not be easy.

• The job of Governments is to create the optimal conditions for massive investment and rapid market growth. That is likely to require sustained government commitment and policy focus, the ramping up of programmes intended to catalyse the market, and the identification and replication of best practice to help address emerging issues such as quality.
• Structuring and harmonisation of portfolio performance metrics will allow (international and local) investors to assess large-scale risks. It is expected that the scale-up will be fast: the US residential solar securitisation increased from 50 to 800 million USD in 2 years after the portfolio performance metrics were harmonised. This could also play a role for PAYGO.
• Public funding should focus on innovative business model innovations, instead of mere asset purchase. Long-term growth depends highly on high satisfaction levels of early adopters.
• Governments could futher foster commercial discipline of companies and low-risk approaches (instead of a fast scaling) by advising on key performance indictors that focus more on sustainable commercial approaches, on sales and selection practices, customer satisfaction and retention, and default management – instead of KPIs only focussing on the total number of connections.
• Example: “The World Bank and GOGLA have launched a very promising initiative – which could serve as a basis for donors and investors willing to set up benchmarks – to develop harmonized performance metrics for PAYG solar companies, and help them improve their customer targeting and risk assessment.”

Role for International Development Cooperation

• In order to minimize the negative impacts of PAYGO approaches and to address the mentioned challenges with the PAYGO systems, Development Cooperation and impact investors could implement the following recommendations:
• Offer credit-guarantee schemes for local banks
• Research the mechanisms to understand the underlying cash flow patterns of PAYGO companies
• Provide technical assistance to companies preparing loan applications and to banks seeking to understand loan applications.

Role for International Development Financing Institutions (DFIs)

• Public finance from development finance institutions (DFIs) like the African Development Bank, Green Climate Fund or KfW could play a key role in growing the PAYGO solar industry. Their involvement could include providing guarantee schemes or lines of credit to local banks, channelling investments through impact investors, or investing in PAYG companies’ marketing and distribution strategies, among other initiatives.
• With testing and supporting innovations to unlock debt and local currency loans, DFIscan help bringe the gap between commercial banks’ expactations and the reality of PAYGO firms. E. g.: creation of funding vehicles (e.g. securitization of receivables, back-to-back financing), lobbying for regulation (e.g. increased convertibility), or leverage of loan guarantees; providing guarantees on portfolios, or financing the riskiest assets.

Conclusion

The article summarises some recommendation for Governments, International Development Cooperation and Financial Institutions for them to foster the market development of PAYGO approaches.

Further information

• Financing and Funding Portal
• Fee-For-Service_or_Pay-As-You-Go_Concepts_for_Photovoltaic_Systems
• Market Development of PAYGO
  
• Advantages and Disadvantages of PAYGO Approaches
• PAYGO Approaches: Overhyped or Justified
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• Chris Aidun and Dirk Muench, Persistent Energy Capital (2016), Securitization: Unnecessary Complexit or Key to Financing the DESCO Sector? https://www.gogla.org/sites/default/files/recource_docs/securitization_-_unnecessary_complexity_or_key_to_financing_the_desco_sector.pdf
• Bloomberg New Energy Finance (2016), How can Pay-As-You Go Solar be Financed? https://data.bloomberglp.com/bnef/sites/4/2016/10/BNEF_WP_2016_10_07-Pay-as-you-go-solar.pdf
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• Winiecki, Jacob, and Kabir Kumar. ‘Access to Energy via Digital Finance: Overview of Models and Prospects for Innovation’. Consultative Group to Assist the Poor (CGAP), Washington, DC, USA, 2014. http://www.fgda.org/dati/ContentManager/files/Documenti_microfinanza/Access-to-Energy-via-Digital-Finance.pdf.