This article is part of the World Economic Forum on Africa 2017.
Imagine a world where, for less than US$2 a day, almost every household could have access to light, clean water, heating and air conditioning, sanitation, cleaner cooking solutions, refrigeration, communication and connectivity, entertainment services and appliances.
Today 46% of people have no access to piped water, around 40% have no access to clean cooking energy, and over a quarter of the world’s population has no access to reliable electricity. Even the most optimistic growth projections for grid connectivity in Africa currently lag behind population growth. As such, there will continue to be almost boundless demand for any solution that delivers 21st-century functionality without the need for heavy infrastructure.
The rise of pay-as-you-go (PAYG), off-grid solutions from companies such as M-KOPA, Mobisol, Nova Lumos, Off-Grid Electric, and Fenix, along with a dozen other newer entrants, could be transformative in reaching the billions of people who today lack access to basic services.
Over the past five years, PAYG, off-grid solutions have been effective in dealing with the challenges of reaching the last mile – a task that is both expensive and logistically challenging when relying on unreliable road and phone networks. PAYG solutions also play a key role in creating relationships with those at the last mile – a group that is usually notoriously difficult to reach.
PAYG penetration will continue to grow by more than 70% a year, reaching over eight million households by 2020, and matching the very rapid trend of the past few years. Around 550,000 households used PAYG solutions in 2015, rising to nearly one million by early 2017 in sub-Saharan Africa.
This growth will be driven by both new entrants and existing players expanding their geographic reach. It is expected to continue despite the growth of the grid in some markets, significant affordability constraints (both for upfront deposits and daily payments), and an underdeveloped mobile ecosystem in many African markets.
There is still scope for much more growth. Hardware costs are expected to keep falling, by between 5% and 10% a year, reflecting the combined effects of rapid technological innovation and surging demand, resulting in economies of scale and increasing affordability.
To fully meet demand, however, suppliers need more funding. While risks remain, there have been a number of deals, totaling more than $300m in 12-18 months. Recent announcements and fund launches by institutions such as the African Development Bank; and increased interest from local and international commercial lenders, suggest that this issue is being addressed, at least partially.
Beyond basic provision of solar lighting, the off-grid appliance sector is poised for strong growth, especially for those that can adapt appliances to low-energy settings and can translate their growing trove of data into insights on the emerging consumer’s next need.
Already, demand is growing for televisions in households that, via PAYG models, now have access to electricity, as well as the means to buy a product that many have long taken for granted.
Other service utility applications include PAYG water dispensing solutions, such as eWater in Gambia; PAYG clean cooking solutions like Koko Networks’ cooking ethanol “ATMs” in East Africa; and PayGo Energy’s PAYG delivery of LPG in Kenya.
Further down the road will be a wide range of productive uses for PAYG energy, as we see the emergence of systems designed for irrigation, sewing and welding, that go beyond consumption and begin to unlock new economic opportunities for households.
These could enable small- and medium-sized enterprises to access integrated packages of energy plus essential tools of the trade: such as shaving razors, irons, food processors, or multi-phone chargers; equipment for farmers, such as small scale production/harvesting, processing, and storage equipment; and even off-grid chargeable welding equipment for the light industry.
The delivery of such products should help drive significant economic growth, while improving the economics for PAYG providers, as their customers get richer.
Given their ongoing relationship with consumers, and access to payment and other behavioural data, PAYG providers could also explore data-driven business models: such as financial services, earning revenue from data with referrals to banks, microfinance institutions, or insurers; and advertising and content revenue streams, such as ACNielsen ratings boxes, or tailored advertising through PAYG-linked entertainment devices.
The future of pay-as-you-go
There are some key questions that need to addressed for the PAYG market to be transformative:
- How can the sector allow more people to access the services, enable services to work together, and avoid replication of efforts? Current activities are disjointed, difficult to scale or replicate.
- Similarly, how can the sector be more coordinated to make it easier for innovators and funders in the sector to work together on larger scale solutions? How can this ecosystem be strengthened?
- How can PAYG services scale-up on the continent beyond Kenya, Tanzania, Uganda, Rwanda, Nigeria and Ghana, where they are more commonly used? How can models working in these six countries be used to drive growth in other countries?
Such solutions would be life-changing on a continent where less than 40% of the population has access to electricity, limiting inclusive economic growth and reducing the quality of life for over 600 million people. PAYG services would finally reach their full potential of increasing quality of life, increasing incomes, creating jobs, and enhancing education and the knowledge economy.
James Irungu Mwangi is executive director of the Dalberg Group. This article was originally published by the World Economic Forum.