Understanding COVID-19’s Impact on PAYGo Solar: Data From a Pioneering Study Reveals Key Insights About the Sector’s Financial Sustainability
On March 11, 2020, the WHO declared that the COVID-19 outbreak had become a pandemic. Since then, it has become a global challenge that’s had an unprecedented impact on communities and the businesses that serve them, and the PAYGo solar sector is no exception. Lockdowns and other restrictions have led to supply chain disruptions and have limited the ability of energy companies to acquire and service customers. Disruptions and uncertainty in the financial sector have led to liquidity concerns that have forced some companies to scale back operations. And most importantly, the broader economic downturn has put a tremendous strain on customers. The drop in off-grid solar sales during the pandemic has led to an estimated 12 to 23 million people and 300,000 to 600,000 enterprises missing out on improved energy access.
In response to this crisis, the partners in PAYGo PERFORM – an initiative that developed a framework that offers the PAYGo solar industry a standardized and transparent set of key performance indicators (KPIs) in consultation with 600 sector stakeholders – decided to establish the PAYGo COVID Impact Monitor (PCIM). The PCIM was created to measure the financial impact of the pandemic on PAYGo solar companies’ performance, by collecting, analysing and sharing key metrics and trends on these companies’ growth, portfolio quality and liquidity. An unparalleled challenge like COVID-19 offered an opportunity to apply the industry-defined PAYGo PERFORM KPIs as a way to aggregate, compare and benchmark industry data during the crisis.
The study collected data from 13 PAYGo solar companies over a period of seven months from August 2020 until February 2021, plus baseline data from 2019. This period gives important insights into the dynamics of the sector, though the situation is continuing to evolve in these turbulent times. The study is now being extended to capture up-to-date data.
Included firms were classified as either small (with under US $10 million in Outstanding Receivables) or medium (with US $10-100 million in Outstanding Receivables). These companies represent 56% of the total sales volumes generated by GOGLA affiliates, including 66% of the volume in East Africa and 25% in West Africa. While this is a significant sample, it leaves out a substantial share of the sector, and moreover likely included a selection bias. Nevertheless, this is the first time that the industry has collaborated to publish this kind of data, representing a significant milestone in promoting transparency and developing benchmarks for the sector. Below, we’ll share some of the study’s findings, and discuss what they mean for the sector as it works to emerge from the pandemic’s ongoing disruptions.
COVID-19’s Impact on PAYGo Solar Company Growth
One of the most remarkable findings involved the pandemic’s impact on company growth, which remained positive but slowed substantially. The median growth in Outstanding Receivables – a measure of sales and portfolio size – decreased from about 130% in 2018-19 to 43% in 2019-20. The growth in 2020 was largely limited to smaller firms, with medium-sized firms achieving just 4% growth – though even smaller firms saw their median growth rate drop dramatically. In many cases, firms chose to slow growth to reduce credit exposure and risk, and to conserve cash. Small companies, however, indicated that they were mainly restricted by the availability of the financing they needed to stock inventory and make sales.
The decrease in company growth is an unsettling sign for growth-stage companies that are still chasing financial sustainability. While GOGLA’s sales data shows PAYGo sales in the first half of 2021 returning to pre-pandemic levels, ongoing supply chain constraints, increasing costs and investor pressure to achieve profitability may weaken consumer demand and limit future growth.
The Pandemic’s Impact on PAYGo Solar Portfolio Quality
The data for portfolio quality tells a mixed story, displaying some signs of resilience but also showing areas of concern. Data for KPIs like Receivables at Risk and Collection Rate was relatively stable over the course of the PCIM, though with high variation across companies. Data on write-offs was less encouraging, with a doubling in the median Write-Off Ratio – the percentage of outstanding receivables that have been written off due to non-payment during a given period – to about 14% in 2020. This suggests that the stability in other indicators was at least partly due to the increase in write-offs, driven by more stringent write-off policies as well as the obvious hit on customers’ ability and willingness to pay.
The PCIM data showed substantial variance in company performance, with some market leaders and a few small firms showing that a portfolio with high repayment rates and low write-offs is possible. Other firms still have significant progress to make in terms of good credit risk and data management. The overall portfolio health of the sector will be dependent on whether these firms will be able to implement better credit policies and practices, and better manage the challenges of servicing a large number of customers, dispersed across wide geographies and difficult terrain.
Assessing PAYGo Solar Company Liquidity
There were concerns when the crisis began that a cash crunch among the consumer base combined with a scarcity of capital would put severe financial stress on PAYGo companies. However, PCIM data on liquidity, a key indicator of financial health, showed a general increase over the course of 2020, with the median liquidity as a percentage of total cost increasing from 51% to 89% in December 2020, and 73% of firms showing an increase. This trend seems to have been driven by the fundraising cycles of companies, as well as by their efforts to decrease costs and conserve cash during the pandemic.
However, liquidity levels remain low in absolute terms. This is generally acceptable for companies and investors due to the nascent state of the market, but in the future these levels should increase if the sector’s overall financial health is to improve. This will be highly dependent on the future investment landscape and companies’ ability to control costs and move towards profitability.
Key Takeaways from the PAYGo COVID Impact Monitor
It is difficult to draw conclusions about the health of the overall PAYGo sector from this set of PCIM data alone. Some companies within the cohort showed resilience in the face of the pandemic, whereas others showed signs of distress. Liquidity, which was flagged early on as a key area of risk during the crisis, held up fairly well, but there were negative trends for growth and portfolio quality that should be monitored going forward.
Regardless of the impact of COVID-19, PAYGo solar remains an immature sector, with many companies still early in their learning curves, and broad room for improvement in areas like credit risk management and unit economics. For the sector to become financially sustainable and attract more commercial investment, more companies will need to demonstrate that they can improve their performance in these areas. Fortunately, market leaders have shown that it is possible, and tools are available to help firms achieve this.
The PCIM validated the importance of industry-wide data collection and analysis to help manage risk and improve performance. The participating companies saw benchmarks as a vital tool to highlight areas of need, and all expressed a willingness to share an even wider range of data than was collected here. Likewise, investors welcomed the insights, as they supported their efforts to assess industry risks and understand the potential for growth and return.
It is important to remember the people behind the data presented here: off-grid customers who rely on solar products for crucial services. Every dip in collection rates and every increase in write-offs represent thousands of households going without light and power – something that can get lost in any discussion of the bottom line. But better data is still important to help companies serve these customers sustainably, especially as the issues caused by the COVID pandemic are increasingly affecting the financial health of the sector. To that end, GOGLA will run a second data collection initiative over the next months to update the picture and get better visibility on the direction of these developments.
We welcome and encourage companies and investors to participate, in order to amplify the value and insights we can provide. Working together, we can attract more capital and maximise the impact of off-grid solar for the millions of households that still lack access to electricity and financial services.
Drew Corbyn is the Head of Performance and Investment at GOGLA; Bill Gallery is an Operations Officer in the Climate Finance team in IFC’s Financial Institutions Group (FIG); Roan Borst is a Technical Assistance Manager at Triple Jump.
Photo courtesy of Corrie Wingate Photography/SolarAid.
Editor’s note: This article is part of NextBillion’s “Recovery” series, which explores how businesses, development initiatives and the communities they serve in low- and middle-income countries are building greater resilience for a post-pandemic future.