Off-grid energy systems and products have connected over 560 million people to clean and more reliable sources of power. One of the key drivers of that access is credit, which about 40% of off-grid solar adopters rely on to finance their products. So-called pay-as-you-go financing has been a game changer in addressing energy poverty since many products are too expensive for low-income consumers to purchase outright.
Defaults on off-grid solar systems have been on the rise in recent years, as low-income households grapple with inflation for daily needs and face greater income variability amid economic instability. At least 30% of loans were written off or considered at high risk of default in 2023 – a sharp increase from 18% in 2021.
In a new study of defaults in the pay-as-you-go solar sector, 60 Decibels finds that 90% of defaults are happening with first-time solar users. Part of the problem is income irregularity, which drives about 40% of loan payment lapses, according to “Falling behind: Defaulted customers.”
Another key issue is unfamiliarity with how such financing works. Of the 1,400 customers 60 Decibels interviewed from 11 solar providers, 31% say they didn’t fully understand their payment terms. Half of those were unaware that their solar units could be repossessed.
“There is some accountability and responsibility companies have to take on to make sure fully explain what this kind of financing means,” says 60 Decibels’ Kat Harrison. “And explaining what their responsibilities to the customer are – making sure that customers are not over invested.”
Borrower education
The 60 Decibels report illuminates the challenges solar providers face as unwitting financial services firms for individuals and households who haven’t taken on formal credit before. The majority of solar adopters still buy their units upfront with cash. Pay-as-you-go evolved to drive wider adoption among off-grid, low-income households.
“There’s a recognition that having pay-go consumer financing models and being able to pay in installments makes these products services accessible in a way it just wouldn’t be for a whole heap of the population,” says Harrison.
Many companies take borrower education seriously. Nearly 70% of customers who had defaulted on their credit obligations reported that their solar provider checked to make sure they understood the terms of their contract. 60 Decibels’ Audrey Chebet says one of the information gaps is what happens after the contract is signed.
“There were companies either doing the comprehension check during the sales process only, or others will do it after the sales process, but in between, we really don’t know what is happening,” she says.
It’s likely that first-time users are simply more likely to default because of their unfamiliarity with installment-based payments. Over half of defaulters were unaware that they could potentially restructure the amount and length of their payment plans, for example.
One customer had her unit repossessed with just a few months of payments left to make.
“The company didn’t call me to inform me that they would come to take the product,” she said. “I would have finished paying.”
Demographic trends
Customers living below the poverty line are less likely to default than slightly wealthier households.
“This may be because people living in poverty are having to make harder financial decisions to sign up for consumer financing and are more committed to making it work,” the report finds.
In rural areas, pay-as-you-go solar customers were more likely to report not understanding their contracts or having information about payment restructuring than their urban counterparts.
To reduce the risk of default, solar providers should find ways to more regularly interact with customers after sales are completed, 60 Decibels recommends. Other considerations: Simplifying the language in contracts to minimize legal and financial jargon. Increasing communication with customers at risk of repossession, to make them aware of the consequences or any payment restructuring possibilities. And customizing payment schedules to align with the seasonal incomes of rural farming communities.
“From a user experience and design perspective,” says Chebet, “it’s really important to figure out how to personalize a customer’s journey.”
