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Sunny prospects for remote and low-income households: The next generation of PAYGo solar contracts

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Sunny prospects for remote and low-income households: The next generation of PAYGo solar contracts Innovative financial solutions like Pay as You Go contracts can bring solar energy tor rural households. | © shutterstock.com

The views expressed in the Let’s Talk Development blog are solely those of the author(s).
 

Expanding energy access involves serving increasingly remote and low-income households, which presents two significant challenges. First, the costs of serving more remote households are high, even for off-grid solutions like solar home systems. Second, households with low incomes have a limited ability to pay for energy. This blog explores whether innovative financial solutions like Pay as You Go (PAYGo) contracts can do more to overcome these barriers by making energy more financially accessible and convenient for rural households.
 

Pay as You Go: Making Energy Financially Accessible

PAYGo, contracts are designed to reduce financial barriers to adopting a solar home system. A customer makes a small down payment to have the system installed, then they “pay as they go” to use the system. These payments eventually cover the cost of the system. When consumers don’t make ongoing payments, they get temporarily locked out of their system, meaning that they cannot access the electricity being generated until they resume payments. Such remote lockout technologies dramatically lower the cost of enforcing PAYGo contracts, making it more feasible for firms to contract with low-income, rural households. Extended periods of non-payment still result in default in which solar firms will repossess the systems. Doing so is costly for both the consumer and the solar company.
 

An Even More Flexible PAYGo Contract

PAYGo contracts help consumers by lowering the upfront costs of accessing electricity and by allowing a great deal of flexibility in ongoing payments. However, they also create burdens for consumers. In my study setting in rural Rwanda, consumers typically travel to a mobile money agent to make payments, with average one-way travel times exceeding thirty minutes. In addition, consumers need to plan their purchases to ensure that they have access to electricity when they need it the most. Doing so may be difficult given the volatility of income flows for low-income households.

My study, conducted in collaboration with a PAYGo company in Rwanda, addresses the question of how to make energy contracts work better for underserved populations. To find out whether even more flexible PAYGo contracts would benefit consumers and the solar firms serving them, we offered a short-term line of credit for ongoing payments, effectively allowing customers to run a negative balance. In addition to making the timing of payments more flexible, the short-term credit reduced the need to travel to the mobile money agent because customers simply called the solar company to make their request.

 

Did It Work?

The more flexible contract was fairly popular: 20% of consumers offered the short-term credit used it, with the number of borrowers continuing to increase throughout the four months of the experiment. In fact, consumers used the line of credit just as much when they were charged a 2% fee on borrowed amounts as when they were charged a 10% fee.

Consumer responses make clear that they found the short-term credit valuable. However, the line of credit caused no significant change in demand. Instead, consumers appear to have used the line of credit to lower travel costs: the number of in-person transactions at mobile money agents dropped by 6%-8%.

The short-term credit led to no significant increase in default, likely because it still operated using remote lockout. When consumers ran out of borrowed time they would be remotely locked out until they repaid the borrowed time. Put otherwise, the incentives created by the remote lockout technology can allow for even more flexible contracts without increasing default and repossession costs for the firm.
 

Policy Lessons

Although my study is specific to PAYGo solar contracts, it has two general lessons for policymakers and for firms interested in serving remote and low-income consumers. First, low-income consumers are often time constrained, so they place a premium on convenience and flexibility. Twenty-five percent of loans in the experiment were requested after sunset, enabling consumers to avoid an evening without electricity without traveling after dark. Even low-income consumers are willing to pay for such conveniences. Second, new technologies like remote lockout have expanded the feasible contracting space with rural, low-income consumers, allowing for contracts that better suit the realities they face.
 

Conclusion

The evolution of PAYGo contracts, particularly with the introduction of short-term credit options, demonstrates the potential for innovative financial solutions to bridge the energy access gap for remote and low-income households. To ensure their positive impact, all stakeholders must continuously innovate and tailor financial products to the specific needs of different communities. This includes leveraging data analytics to better understand payment behaviors, exploring partnerships with local financial institutions to expand credit options, and investing in customer education to ensure that households can maximize the benefits of their solar home systems. By focusing on understanding and addressing the unique challenges faced by these consumers, policymakers and firms can create efficient, inclusive, and sustainable energy solutions for those who really need them. 


Megan Lang

Economist, Development Economics

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