Apr 7, 2022
Tesla-Backed Startup Made Cheap Power a Debt Burden for the World’s Poorest
(Bloomberg) -- As a solar panel was raised onto the roof of their mud-brick home in a Tanzanian village in sight of Mount Kilimanjaro, Akida Saidi and his wife felt giddy at the prospect of entering a new era. In a place where most residents make do with pit latrines instead of toilets and till their fields of maize and pigeon peas with hoes, suddenly having electricity would catapult them into the 21st century. With the flick of a switch they’d light their kitchen without fear of kerosene fires and charge their phones without trekking to town.
The couple’s unexpected journey to solar power began one day in 2015, when a fleet of motorbikes buzzed into the village of Gedamar, carrying salesmen from Zola Electric, which counts Tesla Inc. as one of its biggest backers. The agents offered Saidi and other residents a way to improve their life while saving money. For a small down payment, followed by a monthly fee less than the cost of fuel, they could have three lightbulbs, a phone-charging port, and a solar panel. In two years the kit would be theirs to keep, the salesmen promised, with free electricity coursing through their home in perpetuity.
“When we got the solar power equipment, we thought our lives would change and we would live a modern life, just like those in the big cities,” says Saidi’s wife, Mwasiti Waziri, who recalls that her neighbors were so dazzled by the lights that many of them signed up, too.
Since solar pay-as-you-go, or paygo, was introduced almost a decade ago, it has been hailed as the answer to the elusive challenge of bringing electricity to hundreds of millions of people currently off the grid in Africa, Asia, and Latin America. It began in the spirit of the microcredit model that Nobel Peace Prize-winning economist Muhammad Yunus popularized in the 1980s. But instead of offering small loans to poor people in the developing world, paygo solar would leverage their utility bills to give them a path to ownership and, ultimately, energy independence.
The new solar solution became a darling of development banks and socially minded investors after U.S. President Barack Obama unveiled his Power Africa initiative on a tour of the continent in 2013. He called on the public and private sectors to work together to electrify 20 million homes and small businesses. The concept was seductive from every angle: Governments embraced the idea because it shifted infrastructure costs to consumers, and charitable organizations loved it because it promised to empower the poor. At a moment when the world was waking up to the threat of climate change, everyone was eager to embrace paygo’s potential.
Soon a new generation of companies such as D.light, Mobisol, and Zola were promising to provide off-grid homes with affordable, renewable energy while also turning a profit. Humanitarian agencies and the United Nations got in on the action, along with Silicon Valley heavyweights including EBay Inc. founder Pierre Omidyar and Tesla’s Elon Musk. The clean-energy researchers at BloombergNEF tracked about $300 million invested in mostly Western-owned solar paygo startups in 2020, up from $19 million in 2013. More than 8 million paygo solar kits were sold from January 2018 through December 2021, according to Gogla, an off-grid solar industry trade group, and today about 25 million to 30 million people have access to energy via paygo solar lighting systems.
But in places such as Gedamar, the reality has fallen far short of its promise, according to interviews with more than two dozen former employees of solar paygo companies who asked for anonymity because they weren’t authorized to speak. Their comments were corroborated by customers, consumer advocates, and internal documents seen by Bloomberg Green.
The industry’s rapid growth has left it confronting challenges similar to those faced by microfinance, trying to balance the dual bottom lines of profit and social impact. Idealistic entrepreneurs are seeing their aspirations collide with the unsparing economics of trying to make money by offering credit to some of the world’s poorest communities. Because solar paygo is a low-margin, high-default business, and investors and commercial lenders often demand quick returns, companies end up on a funding treadmill. The former employees say the solar startups are pressured to grow at rates that can be achieved only through high prices, unreliable products, misleading sales pitches, and little or no due diligence. The consequence is “a social impact credit trap,” says Daniel Waldron, a solar specialist who analyzed the industry for the Consultative Group to Assist the Poor, an organization of international development agencies, and now works at impact investment company Acumen.
It’s the paradox of the renewable energy market’s economic revolution. Solar is now the cheapest form of new energy in much of the world, but its costs can still be prohibitive for those who need it most, leading to a cycle of exploitation. Although paygo can make a difference to middle-class homeowners and small businesses that don’t want to depend on Africa’s unreliable power grid, it hasn’t succeeded in bringing electricity to the poor on a massive scale.
The financially inexperienced are still being misled about the costs of complex solar financing contracts, according to the people interviewed by Bloomberg Green. In some places half the loans ended up unpaid, and those who continued paying struggled. During the pandemic, one study found, 43% of paygo customers had to cut back on food consumption to keep their service. Now some of Zola and D.light’s competitors are pursuing an even more vulnerable customer base: refugees in camps in Rwanda, Uganda, and elsewhere.
Two years after the lights went on in Saidi and Waziri’s home in Tanzania, a drought depleted their income. Even after cutting their budget for other household expenses, the couple couldn’t afford the monthly payment of 12,000 Tanzanian shillings ($5.17). Their solar rig was shut down remotely, something that’s happened in villages across Africa. After a few nights in the dark, they were allowed to pay in two-day installments. Seven years after signing up, they’re still paying. The ultimate cost: almost 10 times the price of the system. Zola didn’t comment about specific customers. “What kind of payments are these that never end?” Waziri asks, sheltering in her garden under a mango tree from the scorching afternoon sun. “They are taking advantage of our ignorance. When will this end?”
Zola Powers Up
Zola began in Tanzania in 2012 with boundless humanitarian intentions. Its founders set an ambitious goal of electrifying 10 million homes by 2020. “It was difficult to understand why the world’s poorest people should have to pay the most for the dirtiest energy,” says Erica Mackey, a University of Oxford business school graduate and one of the founders. “We wanted to change that.”
Operating in a country where the average annual per capita income was $868, they realized that few consumers could afford to buy a $1,000 rooftop solar system. So Zola, then known as Off-Grid Electric, retained ownership of the solar panels and charged customers a $6 installation fee. Homeowners then paid in advance by the watt via mobile phone. The average bill of $5 to $10 a month was about equal to what families in many Tanzanian villages paid to fuel their lanterns.
Mackey, who now runs an early child development startup in Montana, says the company’s slow-but-steady business plan aimed to recover its capital costs over five to 10 years. By the end of its first year, Off-Grid had 1,000 customers and deployed maintenance technicians on motorbikes known as “light riders,” who became a familiar sight in villages and towns such as Gedamar clustered around the company’s African headquarters in Arusha.
But it was expensive yachts rather than motorbikes that brought Zola serious money. Sam Morgan, a New Zealander and an early investor in Off-Grid, was at an America’s Cup race when he met a fellow Kiwi who worked for a much bigger solar company. A few weeks later, Off-Grid executives were pitching SolarCity Corp. co-founder Lyndon Rive, a cousin of Musk’s, when they discovered he had a personal interest, according to comments the company’s co-founder, Xavier Helgesen, made to a cleantech news website. While growing up in South Africa, a kerosene fire in the staff quarters behind Rive’s house killed his nanny’s infant child. In 2013, SolarCity, now owned by Tesla, became an investor in an Off-Grid funding round, and Rive joined its board. The Omidyar Network also invested.
By 2015 the company had tens of thousands of customers, but the cost of servicing all those solar units in a country four times the size of the U.K. ate up any potential profit. So Off-Grid switched to an installment plan similar to rent-to-own furniture financing and renamed itself Zola Electric. For its most basic kit, consisting of a solar panel, battery, radio, phone charger, and LED lights, customers made a down payment of about $13, then $8 a month for three years, after which the system was theirs.
The company’s sales team had been trained to prioritize growth over due diligence, Mackey says, and when Rive arrived he spurred Zola to scale up as fast as possible. If customers, many of whom had no credit history or experience with financial contracts, could cobble together a deposit, Zola would sign them up for a system that cost more than a year’s income.Around that time, SolarCity ran into its own financial problems and was bought by Tesla, which inherited the company’s stake in Zola. “Before long,” Mackey says, “we started getting pressure at the board meetings, too.”Bill Lenihan, a former Goldman Sachs Group Inc. banker who joined Zola in 2015 and is now its chief executive officer, says the company “never instituted this growth-at-any-cost approach” and that its conservative sales and credit-checking policies actually hindered growth. Helgesen says nothing changed about Zola’s business plan or methods after Rive joined the board. Rive, SolarCity, Tesla, and Omidyar Network didn’t respond to requests for comment.
Bethany Kanten, who joined Zola in Tanzania after graduating from Harvard in 2015, says the pressure from executives to hit escalating sales targets made her uncomfortable. The company’s focus on acquiring customers, combined with a poorly trained sales force working on commission, was leading to widespread abuses, she says. In some areas only half of customers completed their contracts because they’d been talked into signing up for something they couldn’t afford, Kanten says, and many stopped paying after the first month. Some salespeople would even buy the kits themselves to trigger bonus payments.
“What we would see on the customer service side is that a lot of the growth was not real,” says Kanten, at the time Zola’s group commercial manager, who became so disillusioned that she quit Zola in 2019. “It was all about getting the sale, at any cost. I used to question a lot whether the customer really understood what they were signing up for.”
To hit Zola’s targets, some sales agents would lie to customers about the cost and duration of the repayment plan, according to interviews with six former employees who had firsthand knowledge of the tactics. They would also sometimes misrepresent what appliances came free with the kits or promise they could power devices they couldn’t.
Jessica Paul, a former regional head of sales, recruitment, and training for Zola in East Africa, says nonpayment rates in some areas rose above 60% in 2018, leading the company to beef up its procedures for screening the creditworthiness of potential customers. But the sales teams bristled at the stricter controls, which reduced their commissions, she says, and after months of tension the checks became less stringent.
“We were really bad at giving out loans in the very beginning,” says Lenihan, who declined to say what the company’s delinquency rate is. “We’ve gotten a lot better since. Our credit, loan management, and underwriting [are] done completely separately from the salesperson and [are] run like a bank.”
Zola’s evolving credit policies offer little relief for residents of Gedamar who had found themselves overextended. For a while, the glow of lights along the dirt roads at night gave the impression of progress. But one after another, customers stopped paying, forfeiting their deposits. Dotted around the village of about 3,000 now are thatched roofs where solar panels once sat. Waziri’s house is among the last to have one in place. Her neighbors, who once looked up to the couple as early adopters, now laugh at them for being saddled with so much debt, Waziri says.
Gedamar was partially connected to the national grid last year, but mostly it’s still kerosene lanterns after dark. One of those without power is Mukusi Bilori, a 50-year-old farmer with nine children. When he enrolled with Zola in 2015, he says, the sales agent didn’t give him a contract. He says he paid a 24,000-shilling deposit and was told the solar panels would be his after 24 monthly payments of 12,000 Tanzanian shillings. But six years and 830,000 shillings later, he was informed that he needed to pay an additional 200,000 shillings before he owned the kit.
“That’s when I told them to come and take their equipment,” Bilori says, while tilling the soil of the banana grove behind his house. “We decided that it’s much better to suffer without electricity than to continue paying all that money to Zola.”
The Perils of Paygo
Last year, Zola raised $90 million in equity and debt from investors, including Rive and his brother, Peter, and Dutch development bank FMO, among others, bringing its total funding to more than $200 million. While the company charges on, some competitors have already succumbed to the social impact credit trap.
Mobisol, once heralded as the first solar paygo company to transition from a quasi-charitable enterprise to a commercial venture, filed for insolvency in 2019. Founded by German environmental engineer Thomas Gottschalk around 2011, its model was to install thousands of solar panels a month in Tanzania, Kenya, and Rwanda while running community outreach programs to help customers create businesses that would use and pay for their systems. But the company never had more than six months’ funding, and it scrambled to add more customers, Gottschalk said on the Redefining Energy podcast in 2019. When the region suffered devastating droughts in 2017, payments plummeted.
Mobisol, which was taken over by French utility Engie, became a cautionary tale of the perils of rapid growth and relying on private equity lenders and commercial banks that expect quick returns. A look at the company’s finances—it raised €100 million ($109 million), lent €150 million to solar customers, and collected €25 million in payments, Gottschalk said on the podcast—raises doubts about the feasibility of the entire market.
Mobisol’s failure didn’t stop paygo solar from being touted at Davos in January 2020. Greta Thunberg and Al Gore were there to push for more drastic measures to combat climate change. So was Ned Tozun, CEO and co-founder of D.light. He started the company in India and China in 2007, along with Stanford classmate Sam Goldman, and he chose Davos to announce reaching a once-unimaginable goal: 100 million people now benefited from D.light’s solar products.
Just five years earlier, the company was running out of money. It had sold tens of millions of solar torches for as little as $10 apiece in Africa, India, and beyond, but marketing low-cost items to poor people also meant low returns, and by 2015 the company decided to alter its strategy and provide credit. “If we wanted to survive and not be a dinosaur—extinct—we had to move into paygo,” says Tozun. “We had to become a financing business as well as doing the distribution.”
The numbers explain why. Company executives say the gross margin on solar products bought on finance was 45% to 65%, twice what D.light generated on cash sales. Even with the higher servicing and administrative costs of running a paygo system, it could make the difference between profitability and potential insolvency.
Those margins made more sense to investors, too. Tozun , who had spent years scrounging for charity grants, could now get an audience with deep-pocketed investors. In 2016, D.light raised $22.5 million from private equity lenders, development banks, venture capital funds, and impact investors. Two years later it got $41 million in equity from a consortium including the Dutch, Norwegian, and Swedish development agencies and $50 million in debt from the European Investment Bank, impact investor ResponsAbility, and others.
But its growth was fueled in part by scams and deceptions, according to internal documents and emails seen by Bloomberg Green and interviews with seven former employees who asked for anonymity because they still worked in related industries. Sales agents would lie about solar kit costs and the length of the contracts, people with direct knowledge of the practices say.
Tozun acknowledges that in some cases credit screenings were too lax and says the company’s goal is to keep its nonpayment rates below 10%. “We talk about it being like a twin-engine plane, where one is quality of sales and the other is portfolio growth,” he says. “You have to have both engines running or you don’t have something that’s viable.”
To keep its sales staff in check, D.light delayed paying part of the commissions until after customers made follow-up payments. Some salespeople say they routinely sidestepped this policy by making small payments on behalf of delinquent clients to trigger further payouts. In some places, as many as half of those who stayed on after the first month didn’t complete their contracts, the D.light employees say. In Uganda, at the end of 2019, about one-third of new customers made no payments at all after putting down an initial deposit, according to internal emails. Tozun says he can’t confirm that figure, but notes that the company has rectified its sales issues in Uganda and that currently less than 1% of customers fail to make payments after their initial deposit. Tozun says agents who don’t meet the company’s standards can be retrained and that some who misled customers have been fired.
Last year, D.light secured a new structured financing mechanism that will allow it to raise money by selling portions of its future collections and announced a goal of reaching 1 billion people by 2030. The new line of credit, underwritten in part by the taxpayer-funded U.S. International Development Finance Corp., Norway’s Norfund, and other development banks, will allow the company the kind of flexible financing it needs to grow sustainably, Tozun says, noting, “It’s been an evolution for us.”
As the paygo market has evolved, the industry has taken steps to address the credit and funding problems. Gogla released a set of consumer protection principles that call for pricing transparency and responsible sales tactics. Because publicly funded agencies guarantee many of the loans to paygo companies, commercial investors who lend to them face less risk that they won’t reap their expected returns. Still, to help investors differentiate between companies seeking sustainable growth and those sprinting for the next round of funding, Gogla in 2020 hired a forensic accounting firm, which found such a morass of financial reporting practices that, depending on the company, an identical transaction could be recorded to show anywhere from $80 to $250 in revenue. Companies, development agencies, and aid groups have also tried to devise standards for gauging the creditworthiness of poor customers.
Richenda Van Leeuwen, a former executive director of the UN Foundation’s Energy Access for All, says that while the development world has made progress providing clean energy to the poor in some areas, she regrets that the emphasis on paygo solar has eclipsed more equitable approaches. “It is a learning process for the companies and the development world, figuring out the very small segment of the market where paygo actually works,” says Van Leeuwen, now executive director at the Aspen Network of Development Entrepreneurs. “But they shouldn’t be learning their lessons at the expense of the poor.”
Selling to Refugees
When the sun goes down, many of the roughly 76,000 people in Uganda’s Kiryandongo Refugee Settlement don’t leave their homes. The camp, which sprawls across about 24 square miles, was set up in 1990 to provide displaced people from neighboring South Sudan with land they could farm. Today, most people rely on boreholes for water, roads largely remain unpaved, and crime is high. About 80% of the residents are women and children, according to the UN, which runs the camp. Only 15% have jobs, and research conducted last year on behalf of relief agency GiveDirectly found that one quarter said they had recently been victims of muggings or burglaries.
In 2019, the U.S. Agency for International Development subsidized three paygo companies to sell solar home systems to camp residents. Although some refugee settlements in Africa and elsewhere already relied on centralized solar grids run by cooperatives, the pilot program in Kiryandongo was part of an effort to enlist paygo companies in the electrification of individual homes.
Previous attempts to introduce paygo in refugee camps, most involving heavy subsidies, had had some moderate success. But paygo industry groups have said that charity dampens refugees’ willingness to pay for energy—and even publicly criticized a policy, carried out by aid groups and the UN High Commissioner for Refugees, of providing free solar lanterns to new arrivals at camps. So at Kiryandongo, customers were charged market rates. In 2019, BrightLife, Fenix International, and SolarNow had sales agents pitching paygo in Kiryandongo and another Ugandan camp.
Despite efforts to check refugees’ creditworthiness, the challenges were more extreme than Peter Mugwanya had encountered working for another paygo company elsewhere in Uganda. In addition to having low and often erratic incomes, many refugees had no experience with financing, says Mugwanya, who helped run the pilot program for BrightLife. They also lived itinerant lifestyles, often moving before completing their payment plans. Then there were the rats. “There was a rodent problem at the camp,” Mugwanya says. “So rats would chew through the wires.”
Nyakong Yuot purchased one of the solar home systems sold during the pilot program. Yuot, 24, whose husband was killed in South Sudan’s civil war, welcomed the chance to bring solar lighting to the two-room home where she lives with her four children and 10 other people. She enrolled with Fenix in 2020, paying for two bulbs and a phone charger. Yuot says she didn’t sign a contract and the sales agents, who didn’t speak the same dialect as her, seemed more focused on getting her 30,000 Ugandan-shilling ($8.44) deposit than explaining the total costs.
The solar kit was transformative. Her children could study at night, she could charge her phone without walking across the camp, and the light deterred thieves. But the 16,000 Ugandan-shilling monthly cost, which consumed more than three-quarters of her stipend from UNHCR, soon became unmanageable. Eventually, Fenix switched off the power. Fenix, now called Engie Energy Access, said it couldn’t find a client named Nyakong Yuot in its database. The firm said it was a “top priority” to sell only to customers who could afford its products, adding that it had hired local agents fluent in the most widely spoken dialects in the camp.
Two years ago, only about half the refugees who purchased paygo kits from BrightLife completed their payments, according to a USAID report. BrightLife, which ended up repossessing 190 of the 1,095 solar systems it had installed in and around the camps, decided to switch to cash-only sales. Fenix says it has stopped selling at the camps, citing the high default rate and the impact of the pandemic. A USAID spokesperson said the agency is proud of the results of the pilot program, which produced 4,000 new electrical connections and 285 jobs despite the financial hardships caused by Covid, and offers insight to guide future efforts to bring power to refugee camps.
As for Yuot, she says her children can no longer study in the evening and she had to resort to shouting when burglars attacked her home. “I do all that’s required earlier in the day, and we go to bed before it’s dark,” she says. “In case there’s a need for light, I use my phone torch.”
With assistance from Fumbuka Ng'wanakilala, Fred Ojambo, and David Malingha
©2022 Bloomberg L.P.