New markets do not grow in a straight line; they move through peaks and valleys. As described by the Gartner Hype Cycle, while the early investor hype and publicity surrounding a new industry often gives way to disillusionment, it lays the groundwork for a steadier, more sustainable market. We believe this is precisely where the off-grid solar sector, particularly pay-as-you-go (PAYGo) solar, stands today: The model has passed through a period of disillusionment among investors — as promised profitability has remained elusive — but the sector nevertheless remains on the cusp of becoming a mature industry with real and sustainable impact for delivering energy access across Africa.

A visualization of the Gartner Hype Cycle: PAYGo technology is currently well on its way up the Slope of Enlightenment. Image credit: Jeremy Kemp

The impact investing sector has invested in off-grid energy for over a decade, a period in which we’ve witnessed PAYGo solar home systems evolve from a promising idea to a proven solution. These systems enable millions of households in sub-Saharan Africa to access sustainable energy through affordable payment plans. The broader decentralized renewable energy industry has also created at least 374,000 jobs across the continent (more than half of which are in the solar home system market) — a number that could grow substantially by 2030.

We are optimistic about the future of PAYGo. The sector has seen a downturn in investments, caused by macroeconomic headwinds (e.g., foreign exchange volatility, supply chain disruptions) and business model challenges. But despite this adversity, PAYGo companies remain standing at the forefront of the fight to end energy poverty, providing households with first-time access to the electricity that is essential for inclusive economic and social development.

Our optimism is grounded in three fundamental trends: resilient demand, improving financials and demonstrated returns.

Resilient demand: PAYGo solar customers are voting with their wallets

PAYGo solar systems have unlocked unprecedented levels of demand among rural and peri-urban households. The off-grid solar market rebounded from the pandemic to surpass pre-COVID sales by 2022, and stayed fairly level during 2023 despite a regional and global funding winter and severe currency slides restricting inventory. In 2023 alone, over 50 million off-grid solar products were sold, generating nearly $4 billion in revenue. And customers value these products: According to a survey of 35,000 solar customers by 60 Decibels, more than 90% reported improved quality of life.

The demand extends beyond first-time energy users buying solar home systems to light homes. Falling battery costs and technological advancements are driving interest in more advanced applications, such as solar-powered water pumps and freezers. Customers value these solutions not just for energy access but also for the economic and social opportunities they enable.

Despite inflation and currency devaluation making imported products more expensive, demand has remained robust, enabling millions to transition from darkness to light and seize new economic opportunities. This demand is limited only by supply chain constraints and working capital shortages.

Improving financials: A model that works

The PAYGo model is fundamentally sound, though not without its challenges. It’s a capital-intensive business requiring significant upfront investment to serve hard-to-reach customers, manage credit risk and navigate weak operating currencies. However, companies are increasingly overcoming these hurdles by:

• Targeting the right customers: The industry has become more strategic, focusing commercial operations on off-grid households that can afford PAYGo solutions without subsidies (the World Bank estimates these to be between 22% and 49% of all off-grid households). Companies are increasingly reaching the remainder of these customers through results-based financing programs that provide demand-side subsidies to enable affordability and strong unit economics. Studying customer engagement is also key; companies that assess customers’ ability to pay and ensure that they fully understand the terms of the product they are buying tend to see improved repayments.
• Enhancing credit management: The highest-performing companies are adopting modern lending practices, such as data-driven underwriting and standardized credit policies. While average collection rates across the sector remain low, hovering at 62%, top-performing companies achieve rates closer to 80% and single-digit default rates.
• Lowering the costs of capital: For companies operating in sub-Saharan Africa, capital is expensive, driven by shallow local capital markets and currency risks. PAYGo companies are no exception: They often see capital costs exceeding 18%. Off-balance sheet financing solutions — which allow investors to purchase the future repayments from customers without investing in companies directly — could ease this burden further, not only reducing costs but also making PAYGo businesses more capital-efficient and, therefore, attractive to equity investors. Newer facilities increasingly allow multiple smaller companies to aggregate their receivables into a single financing vehicle, thus reducing transaction costs.
• Diversifying products: Lower solar panel and battery costs have led to expanded product offerings, ranging from basic lanterns to advanced systems, enhancing companies’ financial resilience by allowing them to target diversified customer segments.
• Maintaining lean operations: A challenging investment environment has pushed companies to focus on efficient, lean operations, enabling some to achieve profitability at much smaller scale than was previously thought possible.

Demonstrated returns: A path to profitability in the PAYGo sector

For years, the PAYGo sector has struggled to demonstrate solid returns to investors due to high operating costs and limited exits. However, this is changing as the industry proves its potential.

The $260 million investment in Sun King in 2022 highlighted this potential to investors: All pre-Series D institutional investors exited Sun King in this transaction, delivering returns on a significant amount of capital. Far from being an outlier, this milestone is proof of concept, demonstrating that liquidity events are achievable in the sector. Elsewhere, Acumen’s 2019 Lighting the Way report outlined how ENGIE Energy Access achieved continent-wide scale by combining the PAYGo model with a manageable cost of funds.

Equity returns have the potential to significantly improve. Modeling by Persistent Energy shows that shifting debt off balance sheet can boost annualized equity returns from 8% to 28% over a 10-year period. With such structures becoming more widely available, these financial structures are expanding opportunities for equity investment.

Debt investments are showing strong performance when well-structured. For instance, Africa Frontier Capital’s first securitized receivables facility repaid senior lenders early, using only the funds generated by customers of the investee, d.light. This achievement marks the first time a large senior loan facility in PAYGo solar has been fully repaid through internally generated cash flows, without the need for refinancing. It demonstrates one of the benefits of the PAYGo model: the predictability of customer repayments for solar home systems. Even amid economic shocks, customers prioritize paying for their essential energy needs, making these businesses more attractive to debt investors.

But while the industry has made significant strides, challenges remain. Improvements in credit management and structured finance have strengthened the financial position of some companies, but stability across the sector remains uneven, with many still grappling with debt, liquidity constraints and unsustainable cost structures. High capital costs and currency volatility also continue to squeeze margins. The financial health of PAYGo companies varies significantly depending on their maturity and operational sophistication, as well as their geography: Some are able to take advantage of mature markets and established infrastructure, for example in digital payments, while others need more support to work through first mover disadvantages.

Addressing these challenges will require more than incremental improvements; it demands a sector-wide evolution. Companies must transition from dynamic but operationally stretched startups into professionalized enterprises, necessitating difficult but essential conversations about governance, leadership and organizational culture among boards, management and teams.

The future of PAYGo solar is brighter than the past

PAYGo has matured into a viable business model with proven impact in the solar sector. In the process, companies have made — and learned from — mistakes, like trying to target the lowest income customers without subsidies, and without an understanding of how to monitor and manage customer repayment effectively.

It’s also important to acknowledge that many companies are currently over-indebted because, in such a nascent sector, they had no choice but to learn while lending. We must find ways to wipe the slate clean and set companies on the path to sustainable growth with hard-earned lessons under their belt. This will require honest, timely conversations and compromise from all parties involved, including companies and their investors — but it will also help the industry move forward, more wisely, into the next stage of its development.

The hype surrounding PAYGo solar may have subsided, but its potential is brighter than ever. As a sector, we’ve learned a lot, from how to onboard and manage customers, to how to optimize corporate financial structures. We believe that due to resilient demand, improving financials and growing investor confidence, the industry is poised for a new phase of growth. By addressing their remaining challenges and building on their recent successes, PAYGo companies can scale to deliver life-changing energy access to millions of households.

As investors, we’re excited about what’s next for PAYGo solar. The lessons learned through a history of past mistakes have made the industry stronger and more sustainable. The delicate balancing act of restructuring debt while ensuring that more capital (debt and equity) will flow in the future won’t be easy. However, with the progress we’re witnessing on financing receivables off balance sheets, the continued demonstration by companies that a brutal focus on efficiency and unit economics is possible, alongside the launch of several new sector-focused equity vehicles, we remain committed to the industry.

With momentum building towards closing the energy access gap — as seen in new initiatives like the World Bank’s Mission 300, which aims to connect 300 million people to electricity in sub-Saharan Africa by 2030 — companies across the region are creating a strong foundation for the sector to deliver on these goals. By continuing to innovate and attract investment, the PAYGo solar industry can accelerate progress toward ending energy poverty, bringing clean, reliable electricity to every home in need.

Chris Emmott is the Associate Director of Investing in Energy Access at Acumen; Audrey Desiderato is Head of the inclusive transition initiative at Mirova (formerly SunFunder); and Bankole Cardoso is the Managing Director of Delta40 Venture Studio.

Photo courtesy of Diana Robinson.