The pay-as-you-go (PAYG) market for scaling access to solar energy is maturing quickly. Building market share through customer acquisition is no longer the top priority, being replaced by cost efficiency and portfolio management. Instead of plowing money and time into new start-ups, ever savvier funders are now embracing consolidation, thoughtful expansion or franchising. The era of the PAYG start-up is dead.
The main promise of PAYG is to provide 10s of millions of customers with basic power and financial services. But that can only happen with constant price reduction, and that requires scale: i.e. larger companies with a relentless drive for efficiency, a low cost of operations, equipment and capital, and thus minimal losses. Unlike start-ups, these companies can also hire the best managers across their entire business, including sales, finance, operations and credit. Finally, they have the capacity to generate big data, and the analysts and systems to exploit this data will not be working in a greenfield operation in Malawi, but commuting to their desks in Paris or Bangalore.
Leading PAYG companies will be formulaic: they will follow mobile money or mobile banking platforms into emerging solar markets, perhaps moving earlier than expected, while avoiding countries without mobile money. Losses will be high on the first 50,000 customers, but recouped through building last-mile distribution, brand and partnerships with mobile phone companies. Such partnerships are extremely valuable and will be available to companies with proven track records, not start-ups.
A large company can take a hit on the first 10,000 customers and dilute it against the next 200,000 yet a start-up will dream of getting to its first 5,000, a number that may convince first round investors but will not be competitive in the long run.
Product sourcing also favors larger companies. The more they source, the lower the unit cost, with orders above 100,000 units being half the unit cost of small orders. Centralized sourcing and lowest cost logistics are the most basic part of cost management for PAYG companies. Big companies will source straight from manufacturers and suppliers in China and bypass intermediaries, something beyond the reach of start-ups.
For PAYG companies to make a significant improvement in the accessibility, affordability and reliability of modern energy for underserved populations, they require large-scale consumer financing. PAYG is essentially a consumer finance business, and there is no such thing as small-scale consumer financing.
Already we are seeing the new paradigm. Engie has consolidated its position as energy transition leader in Africa and India (through acquisitions of Fenix and Simpa Networks), BBOXX has a major strategic, fully commercial investor while Ignite Power and M-KOPA already have the scale. Greenlight Planet and d.light are as much distributed energy service companies (DESCOs) as they are wholesalers and equipment designers.
As a solar company founder in Mozambique, it was clear to me in 2018 that funders had no illusions about PAYG start-ups. For them, market potential is just that – potential. A million potential customers is meaningless unless you can convince funders that when you have 100,000 customers your expense ratio and losses will support distribution and customer acquisition. If you haven’t already done this in another country, the risk is too high.
So are we now limited to the slow methodical organic growth of a few players? How can we accelerate the spread of PAYG to the rest of Africa? The fastest and safest strategy now is to move rapidly to a franchise model. Development money could be targeted at establishing a start-up that is easily acquired. Current PAYG leaders might share their model if their initial equity exposure is limited but a call option is in place if the new franchisee makes progress. Local entrepreneurs should embrace franchising where equipment and systems are aligned with the franchisor business model. Consequently, development funding and development goals will be assured, expansion will be facilitated and efficiency and ownership will be promoted. Any takers?
Mr. Kennedy is an entrepreneur and consultant in solar energy and equipment financing. After 20 years leasing in Europe he shifted to emerging markets starting two solar PAYG companies, and consulting widely with development agencies, private operators and funders.