NextBillion - A WDI Publication

As cooling solutions become an increasingly essential element of global climate change adaptation, the world stands at the crossroads of two radically different pathways: The choice we make will have major implications for the broader fight against climate change.

Under the first pathway, which represents business-as-usual, demand for cooling will more than triple by 2050, driven by growth in global population and wealth, more extreme heat events, and growing access to often-inefficient cooling solutions among low-income households. This would almost double cooling-related greenhouse gas emissions (in comparison to 2022 levels), pushing the sector’s emissions to an estimated 7.2 billion tons of CO₂ equivalent (CO₂e).

The alternative, a sustainable cooling pathway, would consist of “passive cooling strategies, low-energy and hybrid cooling that combines fans and air conditioners, rapid adoption of high-efficiency equipment and accelerated phase-down of hydrofluorocarbon (HFC) refrigerants.” This pathway could meet the rising demand for cooling solutions, while cutting the sector’s climate impact by nearly two-thirds (in comparison to the levels expected in 2050) to around 2.6 billion tons of CO₂e — and saving up to $43 trillion in cumulative energy and grid costs.

The solutions and technologies that could achieve this second pathway largely exist. However, achieving the climate goals related to clean cooling will require much more than identifying solutions and developing new technologies. It will require markets to build the right incentive structures to deliver sustainable cooling at scale to the households that need it most.

Accomplishing this goal will be a tall order, but the clean cooling sector has the advantage of leveraging the experience gained in both the off-grid solar and clean cooking industries. Each of these sectors has had to overcome similar challenges, from ensuring product affordability and understanding consumer behavior, to enabling accessibility and developing products that fit consumer needs and infrastructure constraints — especially at the last mile.

WDI (NextBillion’s parent organization) recently published a paper that explores some key considerations that have been pivotal to the success of both the off-grid solar and clean cooking sectors. Among these factors, innovations in business models aimed at mitigating the affordability challenge have been particularly transformative for both industries, and this sort of innovation will also play a critical role in the development of the clean cooling sector. In this article, we will specifically focus on the role of Pay as You Go (PAYG) finance in accelerating scale and impact in clean cooling.

Consumer Financing and Beyond

PAYG models have become a powerful tool to increase access to energy in low- and middle-income countries. By allowing customers to pay according to their usage or in small, regular installments, these models match the cashflow constraints of low-income households, bringing products like off-grid solar and clean cooking within reach. There is every reason to believe the same will be true for clean cooling. As others have shared on NextBillion, there are many lessons to be learned about what makes PAYG work in both design and implementation. But considering PAYG as just a consumer financing tool understates what it actually does.

PAYG models shift the entire incentive structure for providers. Instead of being rewarded for selling as many appliances as possible, they earn their revenue by delivering customer outcomes such as reliable electricity, or clean and convenient cooking. In traditional sales and distribution models, the providers’ financial interest ends when they make the sale: Whether the product is used or gathers dust in a corner is largely irrelevant to them. The PAYG business model operates very differently. When revenue is dependent on sustained use, PAYG businesses have a direct commercial interest in what happens after the sale.

PAYG wasn’t the first attempt at solving this problem in the clean cooking sector. The “tool and fuel” model — which integrated the sale of stoves with the ongoing sale of specialized fuels designed for use with those stoves — was based on the same principle. But “tool and fuel” models have been difficult to scale. Carbon financing also shifts provider incentives by rewarding usage rather than acquisition, but it does so indirectly due to the involvement of third-party payers. It is primarily PAYG models that have shifted the sector’s focus toward sustained use, by creating a direct commercial relationship between the provider’s revenue and the customer’s outcome.

However, the lesson for clean cooling isn’t simply that PAYG offers a scalable consumer financing solution: The lesson comes from what happened next, after the PAYG approach was applied to clean cooking.

Having a real-time connection with customers through the Internet of Things (IoT) technologies that power PAYG models opens up opportunities for business model innovations that improve the customer experience. For example, M-Gas, a Kenyan PAYG provider of Liquid Petroleum Gas (LPG), uses mobile network-connected smart meters to charge its customers as they use the stove. The meter also alerts M-Gas when a customer’s fuel levels are running low, and technicians are dispatched to replace the cylinder before the customer is even aware. This kind of proactive customer service reduces the likelihood that customers will revert to more polluting technologies like wood or charcoal for some or all of their cooking — a behavior known as “fuel stacking.” M-Gas’ model represents one attempt to address this behavior, which has resulted in the continued use of polluting fuels among cookstove owners, and poses a significant obstacle to the clean cooking sector’s efforts to advance the transition to more efficient and climate-friendly cooking solutions.

The Clean Cooling Parallel

The emergence of fuel stacking demonstrated that one of the clean cooking sector’s key assumptions was incorrect — i.e., that households will move up the energy ladder in a linear way when provided with access to cleaner, more efficient cooking technologies. Human behavior is more complex than that, and there are a multitude of reasons why households might stack fuels.

It also demonstrated another key business reality: When the effective price of a product decreases, households have the choice to either consume more of it, or to use that money to consume more of something else. What they choose depends somewhat on the type of product. For example, demand for cooking is relatively fixed — decreasing the cost of cooking fuel doesn’t cause households to consume more of it beyond a certain point, because the demand is constrained by things like the cost of ingredients and the nutritional needs of the family.

The clean cooling sector has often made a similar assumption: that when a household is provided with access to a more efficient cooling solution than they’re currently using, their energy consumption, and consequently their cost of cooling, will go down. And in fact, both the business as usual and sustainable cooling pathways outlined by the UNEP assume an increase in energy efficiency due to technology improvements.

However, given a more efficient and cheaper cooling solution, it is possible, maybe even likely, that a household will choose to consume more cooling, reducing the impact of energy efficiency gains. This “rebound effect” might mean running a room air conditioner for more hours in the day, in more rooms, or at a lower temperature to increase the family’s comfort. Or it might mean that, after using a more efficient refrigerator that is cheaper to operate, a household decides to buy a bigger one to store more food, which locks in a higher baseline level of consumption. The rebound effect is often more pronounced in low-income contexts where households already consume less than their preferred levels of energy. A study from China found that acquiring an AC unit with energy efficiency labeling actually increased household energy consumption by 17.2% annually, and by almost 22% during summer months.

The PAYG Data Dividend

Managing the rebound effect, much like managing fuel stacking, requires providers to know how customers are using the appliance, and to be incentivized to act on that insight. In business models based on asset sales, there is limited incentive to understand and influence how the product is used once the sale has been made. Traditional incentives exist, such as the desire to earn repeat business and generate positive word of mouth promotion, but PAYG models that tie revenue directly to the customer’s experience are much more powerful. Building the technical, financing, and customer service networks and infrastructure to enable and incentivize this ongoing customer focus in PAYG business models in the clean cooling sector will take significant time and investment. But as the clean cooking industry is demonstrating, it’s also an investment in the sector’s long-term development.

The clean cooking providers that have gotten the most out of the PAYG paradigm are those that have recognized that real-time data on customer behavior is a strategic asset that supports better customer outcomes and improved retention. The ability to capture real-time data also lays the foundation for digital measurement, reporting and verification (dMRV), as carbon financing mechanisms mature and seek higher levels of quality and integrity. Bboxx‘s experience in Kenya, Rwanda and the Democratic Republic of the Congo shows that by combining IoT-enabled smart meters in LPG cylinders with AI-driven analytics (via the Bboxx Pulse platform), it is possible to build and scale a real-time picture of how customers cook and pay over time. That data enables Bboxx to generate credit scores for customers who have no formal financial history, which unlocks financial inclusion-related benefits that can extend well beyond clean cooking. It also allows Bboxx to adapt pricing to enhance affordability, and predict when customers are at risk of reverting to polluting fuels, which creates the opportunity to intervene.

ATEC’s Cook to Earn model, piloted in Bangladesh and Cambodia, takes things a step further. ATEC’s IoT-enabled induction cookstoves track cooking activity through mobile network connected devices, which generate carbon credits verified under Gold Standard’s dMRV methodologies. ATEC and FairClimateFund, which purchases and then trades the resulting carbon credits, share up to 70% of this carbon credit revenue directly with households using ATEC cookstoves through mobile money, effectively turning sustainable cooking into a source of household income. It is a model that demonstrates how PAYG data infrastructure, carbon financing and direct financial incentives can be brought together to deliver sustained use and verifiable emissions reductions.

Now is the time to build the right incentives

The PAYG experience in clean cooking provides practical insights for entrepreneurs and investors in the clean cooling sector. PAYG not only unlocks affordability, it eventually shifts the entire incentive structure away from one-time sales, and towards achieving outcomes that the customer values, such as convenience and reliability.

Business model innovations developed by M-Gas, Bboxx, ATEC and others demonstrate that the PAYG paradigm can move customers past the upfront affordability challenge. These approaches show how digital data can be a catalyst for improved customer experience and retention, energy efficient behavior change, financial inclusion, and verifiable outcome financing. Clean cooling will need to develop its own versions of these data and business model innovations — and it should invest in the infrastructure to do so now, in order to create the conditions to accelerate that innovation.

The need for clean cooling is clear, and the technology to deliver it largely exists. The impact opportunity is also immense. The question is whether the market system that emerges will have the right incentives to deliver clean cooling at scale, and to reach those who need it most. As seen with off-grid solar and clean cooking, this is more difficult than it appears — and as the world contemplates a future where cooling our homes may further heat our planet, it’s more important than it may first seem.

Colm Fay is an independent consultant and a Research Fellow at the William Davidson Institute (WDI); Ekta Jhaveri is a Program Manager in the Climate-Health sector at WDI; Rajat Chabba is Senior Director of Innovation and Partnerships at WDI.

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