Ending the Vicious Circle in PAYGo Solar: How Companies and Investors Can Move the Sector Toward ‘PAYGo 2.0’

The Pay-As-You-Go (PAYGo) solar industry is facing significant challenges, with many companies experiencing decreases in both sales and investment capital. At the heart of the issue is that companies are selling products on credit to a meaningful segment of customers who either pay late or stop paying altogether. This creates a vicious circle: Rising default rates lead to worsened unit economics and, consequently, higher product prices to offset defaults, making these products even less accessible for the target customers at the bottom of the pyramid.

However, a more limited set of PAYGo solar companies are thriving. These businesses have implemented systems to improve customer selection, education and support, resulting in significantly higher repayment rates and profitability. Many have begun referring to this approach as PAYGo 2.0.

Since its founding 24 months ago, the PAYGo Lab has supported dozens of PAYGo solar companies and many of their financing partners, gaining valuable insights into this crucial industry. We’ve presented these insights in the following article, which analyzes some root causes of the industry’s challenges, identifies key lessons and shares best practices. Through it, we aim to provide actionable strategies for investors, companies and other industry leaders, enabling them to enhance operational efficiency, financial resilience and sustainable growth across the sector.

Understanding the root causes of PAYGo solar’s challenges

The challenges facing PAYGo solar companies stem not from flaws in the business model itself, but from poor implementation. We’ve observed that these companies fall into two interrelated traps:

• The customer over-financing trap: PAYGo solar companies operate as both sales and credit businesses. Initially, they assumed that customer down payments and system lockout modalities would ensure timely payments. However, our data shows that 36% of customers lose their solar home systems after defaulting on payments, with two-thirds of these defaults caused by over-financing. In the race to boost sales, many companies have eliminated credit screening and lowered entry barriers like down payments. Meanwhile, boards and investors continue to prioritize customer acquisition and revenue growth, assuming high sales volumes lead to profitability. However, the pressure to sell — combined with a lack of credit management expertise — results in ineffective lending decisions, fueling a cycle of unsustainable growth.
• The cash flow trap: Most PAYGo solar businesses struggle with liquidity, as working capital is tied up in slow-paying receivables. Yet they need continuous funding to buy inventory and extend more credit. With ongoing losses and over-leveraged balance sheets, profitability remains elusive. As a result, CEOs often spend more time securing funding than managing operations. The pressure to unlock concessional loans and results-based financing, often linked to sales volume, pushes companies to prioritize sales over customer repayment ability, exacerbating financial instability.

To escape these traps, PAYGo solar companies must redefine success by balancing growth with financial sustainability. A robust performance culture that integrates responsible credit management and cash flow discipline is critical for long-term viability.

The PAYGo model can be financially sustainable – if done well

We have seen several PAYGo solar companies that prove that disciplined credit management can significantly improve both the quality of new sales and the performance of existing portfolios. Five key areas underpin their success:

• Culture: “Success” is redefined not by the number of sales or revenue generated, but by the volume of quality sales — i.e., sales to customers who reliably maintain their repayment schedule. Effective credit management places customer protection at the forefront. This cultural change must be embraced throughout the organization.
• Organization: Credit management is centrally positioned within the organization to protect these decisions from being impacted by short-term, revenue-driven interests. It’s essential to establish clear ownership and accountability — among individual salespeople, credit management teams and executive-level leadership — for both overall credit performance and the outcomes of individual customers.
• Proper incentives: Effective credit management requires the use of the right metrics and a commitment to learning from past mistakes. That means companies need to stop simply incentivizing greater volume of sales, and start basing these metrics on whether customers are likely to make timely payments. In making this shift, clear accountability is crucial, with no tolerance for poor conduct or a lack of commitment to improvement.
• Customer onboarding: We know that strong customer onboarding increases the likelihood of successful outcomes. Onboarding new customers requires skilled, personalized interactions. This includes both credit screening and an effort to ensure that customers receive suitable loan terms they fully understand and genuinely commit to.
• Customer engagement: Post-sale engagement with customers is essential to ensure timely payments, and to generate follow-on sales and referrals. This approach shifts the focus from merely chasing payments to reduce arrears, to prioritizing long-term customer success.

PAYGo solar investors must be part of the solution

The PAYGo solar sector stands at a critical juncture. We believe the traditional PAYGo 1.0 model — where the business model’s loan product is secondary to the sale of a physical product — cannot achieve sustainable growth, profitability or long-term impact.

A few PAYGo 2.0-oriented companies have integrated a robust credit function, prioritizing both customer success and revenue realization. But though these businesses are beginning to show paths toward profitability, even they need strengthening. Many finance their receivables portfolios with debt, while those portfolios’ true value may fall short of covering all their loan obligations. When these companies struggle, their financing partners often face a Catch-22, with lenders awaiting shareholder capital injections, while shareholders hesitate, wanting any new capital to support company growth rather than repay debt. We’ve seen these types of stalemates increase the risk of failure, demotivate management and encourage short-term fixes rather than structural solutions. To break this reactive cycle, here are five proactive measures funders can take to help the PAYGo solar sector achieve financial sustainability:

1. Redefining success to restore customer-centricity: Investors must redefine what success means. A sale that ends in customer default is a failure for both the company and the customer. GOGLA’s Consumer Protection activities are an important contributor to this industry evolution. For their part, investors can foster this shift by:

• Prioritizing high-quality sales (e.g., expected repayment rates above 90%) over low-quality ones (e.g., expected repayment rates below 67%).
• Revising incentives (e.g., grants, loan covenants, disbursement triggers) away from the volume of sales to the quality of sales.
• Using reliable key performance indicators (KPIs) like Paid-versus-Plan ratios of customer cohorts (i.e., the percentage of payments made relative to payments due) to assess sales quality, rather than traditional measures like Portfolio at Risk or collection rates, which can mask deeper issues.

2. Injecting expertise to elevate credit as a priority: Though it is widely accepted that sales quality — not just sales volume — is critical to profitability, many PAYGo solar companies lack professionals with end-user finance experience, and the importance of this expertise is still under-recognized in the industry as a whole. Investors should insist that companies:

• Hire a Chief Credit Officer reporting directly to the CEO.
• Appoint board members with backgrounds in micro or rural lending, perhaps forming a dedicated credit subcommittee involving both the CEO and Chief Credit Officer.

3. Supporting a performance culture: Investors can significantly impact the development of a performance-driven culture by:

• Promoting accountability and discouraging the externalization of issues — e.g., blaming customers for being unable to pay: PAYGo solar companies, like microfinance institutions, have a duty to protect customers from over-financing.
• Simplifying KPI tracking to focus on two to three primary indicators: Current credit metrics can be “gamed” to reflect the desired outcome. GOGLA’s ongoing PAYGo PERFORM 3.0 initiative will bring much-needed revisions and rigor to the industry’s core credit metrics.
• Targeting solutions to address root causes (e.g., over-financing) rather than treating their symptoms (e.g., chasing collections).
• Implementing PAYGo 2.0, which separates the sale of a physical product from the loan product. This approach could go as far as establishing separate profit centers for sales and credit, or even a full unbundling of the loan product into a separate entity.

4. Improving planning for greater accountability: PAYGo solar company planning cycles are often too short and optimistic, designed more for fundraising than creating accountability. Investors should:

• Insist that companies operate with fully funded plans, with realistic cash flow forecasts and improved loss provisioning, reducing liquidity challenges.
• Support new funding opportunities once a stable, achievable plan is in place, enabling growth without sacrificing accountability or sustainability.

5. Addressing structural financial problems: As mentioned above, many PAYGo solar companies are burdened by loans they can no longer fully service. Even if loan terms are suspended or new loan quality improves, companies remain at risk unless their existing loan book is restructured. To avoid this, lenders should take proactive steps to restructure debt, while shareholders should act decisively — either supporting the company or divesting. Timely decisions can preserve value, ensure customer service continuity and help avert distressed sales or bankruptcy, benefiting all stakeholders.

The way forward

While the PAYGo solar sector currently faces significant challenges, the success stories of companies that have implemented the PAYGo 2.0 model show that the industry can be impactful and sustainable. These examples underscore the importance of coordinated action and alignment among all stakeholders.

For PAYGo solar companies to achieve financial sustainability, funders must actively participate in driving change. This can be accomplished by redefining success, bringing in credit expertise, fostering a performance culture and solving structural barriers.

With a collaborative approach, the PAYGo solar sector can evolve into a robust, customer-centric model that prioritizes responsible credit management. The result? A wave of financially sustainable PAYGo solar companies that not only achieve profitability but also provide life-changing access to energy for millions living without it.

Dan Murphy is the founder and Managing Director of Catalyst Energy Advisors, and a co-founder and Director at PAYGo Lab, and Willem Nolens is the Managing Director of PAYGo Lab.

Photo credit: Shubhomoy Ball