29 August 2014

Africa: Access to Energy via Digital Finance: Models for Innovation

analysis

"Pay-as-you-go is really attractive when you're trying to target energy access at the base of the pyramid," says Angaza's Ellie Higham.

Globally, over 1.3 billion people lack access to electricity, and another 1 billion people have extremely unreliable connections to national electricity grids. Without access to reliable electricity, these consumers turn to costly and unhealthy energy alternatives, such as kerosene and candles for lighting, disposable lead-acid batteries for torches, and diesel to run generators. Kerosene-based lighting products pose significant health and environmental risks at the household level, including indoor air pollution, suppressed visual health, severe burns, and poisoning due to accidental ingestion of fuel. Fuel-based lighting is a significant cause of structural fires in the developing world and produces over 90 million tons of carbon dioxide emissions each year.

Energy poor consumers—people whose well-being is negatively affected by very low consumption of electricity, use of dirty and polluting fuels, and excessive time spent collecting fuel to meet basic needs—are forced to spend a significant amount of their income on costly and inefficient alternatives. Off-grid consumers in Sub-Saharan Africa spend $70–110 annually to meet their lighting needs, primarily on kerosene and disposable batteries for torches. Because of low and irregular income patterns, rural energy poor consumers often have to buy kerosene in small quantities, paying a premium of approximately 46 percent over urban consumers who are able to buy in larger quantities.

In the past decade, dozens of companies have developed high quality, solar-powered solutions targeting the needs of the energy poor. New distribution models developed by these companies are bringing these products to off-grid areas around the world. Yet, affordability remains a significant barrier to mass adoption. For most people living off-grid, lack of access to financing options—loans, leasing, payment mechanisms, and so on—is a primary barrier to adopting modern solar solutions. Those end-users can’t afford to buy most modern energy products on a cash basis, while energy product and distribution companies are often unable to finance customers directly and formal finance providers have shown limited appetite to design products that meet the financing needs of the energy poor.

A number of startup energy enterprises are now leveraging digital finance—especially mobile payments—to deliver modern energy to the poor, sold on a pay-as-you-go (PAYG) basis. PAYG pricing holds the potential to disrupt the energy sector in many of the same ways it helped to fuel the growth of mobile communication in the developing world. The energy poor earn and spend money on inefficient energy alternatives such as kerosene in a similar manner—through small, user-defined increments as and when cash is available. Designed to be flexible, PAYG services could then fit well with the existing economic realities of the energy poor consumer.

This paper provides an overview of the digitally financed energy access sector, highlighting advancements in business models and product offerings. The focus is on businesses deploying PAYG solar photovoltaic products using digitized payments and unique hardware to control the use of energy services. While there are experiences combining digital finance with a wide range of energy technologies, PAYG solar photovoltaic (PV) products have by far the most market traction in terms of total units sold, amount of time deployed, and number of countries with active sales.

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