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Fintech is the Future

Financial technology means innovative solutions can be developed to maximize decentralized access to energy in developing countries.

by Nicolò Sartori & Nicola Bilotta
18 November 2019
13 min read
byNicolò Sartori & Nicola Bilotta
18 November 2019
13 min read

Read WE 44 "Rethinking Energy"

Universal access to energy is one of the great global challenges and one of the main factors of uncertainty for the socio-economic progress of humanity. In a context of increasing vulnerability caused by climate change, access to low-carbon and sustainable energy sources and services contributes to increasing the complexity of this issue, and at the same time makes the actions to be taken to address it even more urgent. The data speak volumes, as demonstrated by the delays in meeting the goals of the UN 2030 Agenda, in particular the SDG7 targets for Affordable and Clean Energy. Despite the progress made in recent years, it is widely and unanimously believed that, at the current levels of ambition of national and international policies, the energy targets set by the UN for 2030—universal access to modern and affordable energy services; a substantial increase in renewables in the global energy mix; and doubling the rate of energy efficiency worldwide—can definitely not be achieved.

Troubling figures for access to energy

In particular, the situation regarding access to energy remains dramatic. Today, 840 million people—more than 10 percent of the world’s population—still have no access to basic electrical services, while almost three billion people use rudimentary systems in the home (for example, for cooking or heating). It should be noted that there has been a significant increase in recent years in the annual electrification rate and the number of people without access to electricity has decreased from 1.2 billion in 2010, due in large part to the progress made in India, Bangladesh and Myanmar from 2015. In that year, the worldwide electrification rate began to accelerate significantly, and in the following two years—based on a one percent year-on-year growth rate—more than 300 million people were able to access electricity services for the first time. At least in theory, this trend could ensure the achievement of universal access by 2030, as envisaged by the UN Agenda. However, the main challenge is that of population growth trends in areas with a more limited spread of energy services. Populations are growing faster than the rates of electrification and access to clean cooking systems, canceling out in relative terms the progress made thus far.

Despite the encouraging data, the critical issues remain profound and multifaceted in some contexts. A case in point is sub-Saharan Africa, where the vast majority of the “energy poor” are currently concentrated, and where initiatives to improve rates of energy access are struggling to get off the ground. In the African subcontinent, 573 million people—more than half of the population—still have no access to electricity services. In light of the rapidly expanding demographic trends in the region, these numbers are expected to increase further to 650 million by 2030, a far cry from the goals set by the United Nations. Unsurprisingly, Burundi, Chad, Malawi, the Democratic Republic of Congo and Niger form the bottom five countries in terms of electrification rates worldwide. Even more dramatic are the data on clean cooking, an area where only four percent of the world’s population newly gained access to clean modern technologies and systems between 2010 and 2017, reaching a modest 61 percent worldwide. This increase has been driven in large part by progress in Asia (most of all in the Indian subcontinent and Southeast Asia), where access rates were around one percent over the period, almost double the global average of 0.5 percent. Under these conditions, achieving the 2030 targets—for which rates of new access to energy must reach three percent per year—seems highly unlikely. Again, sub-Saharan Africa is the region most exposed to this gap (890 million people, 80 percent of the total population, still use charcoal and traditional biomass). However, even major global economies such as India and China, with a total population with no access to clean cooking systems and technologies of around 1.3 billion (20 percent of the Chinese population plus 25 percent of the population of India), contribute to these staggering data.

The lack of progress in access to electricity services and clean cooking technologies has a devastating impact on the economic, social and political resilience of the regions concerned, but they also have serious repercussions on the international scene. Access to energy, in particular to electricity, is an essential and unavoidable factor for socio-economic development and human progress. On one hand, electricity offers many obvious advantages to the productive fabric: it provides basic services (or rather those considered as such in industrialized countries) including efficient lighting, and access to advanced information and com­mu­nication technologies. Electricity also makes it possible to use machinery and systems that can improve economic processes, in terms of both manufacturing and business. On the other hand, access to energy can transform traditional dynamics in the domestic sphere, with important social and cultural repercussions, in particular with regard to the emancipation of women and the empowerment of the younger generations. Access to safe and accessible energy sources encourages improvements at school and educational levels, meaning that teaching systems based on state-of-the-art technologies can be employed, as well as the possibility of study and training, including in the evenings. At the same time, it has a clear impact on the conditions and health of women in the home. In addition to freeing women from the burden of finding traditional biomass to ensure basic energy services, the availability of modern electrical services and technologies ensures better refrigeration capacity at home, as well as the possibility of maintaining food supplies. Availability and access to safe and clean energy sources also has a wider impact on the health of the population, limiting the negative effects of air pollution in the domestic context. It is estimated that every year, 3.8 million people, largely women and children, lose their lives due to diseases related to the use of rudimentary energy sources. Better basic health services are also making a difference, through the continuing operations of hospitals and treatment centers, and better storage of drugs and medicines.

The role of Fintech

In this critical context, it seems urgent to start a process of transformation in the provision of basic energy services in the areas of greatest criticality. Financial technology (Fintech) enables the development of innovative solutions that can maximize the potential of decentralized energy access arrangements for poor households in developing countries. Historically, one of the most important barriers to buying new energy technologies is the high upfront cost that must be borne by consumers with very little economic means and no savings. For example, the cost of an LPG kit is around 85-100 dollars, while the price of a solar kit is almost 600 dollars. At the same time, manufacturers and distributors are not always able to offer incremental or installment payment solutions to financially excluded customers with no credit history. The growing popularity of smartphones, which can easily provide access to cheaper financial instruments than can traditional banking channels, encourages payment and mobile money solutions, thus offering an alternative to cash by mitigating their transition, safety and transport costs. Interaction between end consumers and energy service providers is made cheaper and easier through the medium of the smartphone. In Southeast Asia, it is estimated that, by 2025, 82% of the population will own a smartphone with mobile internet access. In Africa, this figure will double from 36% in 2018 to 66% in 2025. Between 2018 and 2025, these two macro-regions will increase their mobile user base by over 524 million. According to Global Findex data, published by the World Bank, the spread of mobile money accounts is also being consolidated in the poorest sections of developing countries. The availability and coverage of mobile telecommunications infrastructure is different from country to country, thereby influencing the penetration of smartphones and mobile money at both macro and individual levels. But the trends of substantial increases in users connected to mobile networks makes the potential of these payment solutions increasingly relevant. In Uganda, for example, the number of consumers paying their electricity bill with mobile money increased from 2.9% of total users in 2012 to 52.5% in 2017. 

More and more start-ups are leveraging the option of mobile payment solutions and mobile micro-loans to facilitate the purchase of modern energy kits by developing affordable products and services. Based on this synergy, the pay-as-you-go (PAYG) payment method is rapidly being consolidated as a means of energy inclusion. End consumers are able to purchase a decentralized energy solution by paying a small initial percentage or providing a security deposit (between 10 and 30% of the total cost), then paying for their energy use in installments or on credit, offering a flexibility and ease of transactions that had previously been unimaginable. 

At the same time, companies can manage customer solvency with mobile payments and SMS payment codes, reducing the costs and risks of a door-to-door agent-based system. Through a machine-to-machine connection between home devices and central servers, managers can remotely monitor, communicate and administer device operations. For example, in the event of non-payment, manufacturers can block the delivery of the service remotely, reactivating it only when the customer tops up their account.

There are two main business models for these solutions. The first, lease-to-own, allows the end consumer to make a long-standing purchase of the technology they are using.

The second, energy-as-a-service, where the asset remains owned by the company throughout the cycle of use, whereby the consumer usually pays a one-time fee for installation and a small monthly sum for use. For example, Shenzhen JCN New Energy Technology offers the option of buying a solar kit with a deposit of about 10% of the total value of the kit—about 80 U.S. dollars—to be supplemented by customers with small monthly payments to pay off the total cost of the device. Via remote control of the kit, customers will receive a code on their mobile phone to activate the device once the payment has been made. M-Kopa, on the other hand, offers solar kits with a deposit of 35 dollars, topped up by a daily fee of 43 cents, paid via the M-Kopa mobile money app. KopaGas is using an alternative PAYG system to provide LPG kits in a pilot project in Tanzania, where 48% of their customers live on less than 3.10 dollars per day. The GSMA Association has estimated that about 1.6 million PAYG transactions per month are made for solar kits. PAYG systems integrated with LPG kits are however still rare. According to the Lighting Global report, in 2022, 20 million solar kit units supported by PAYG payment systems are expected to be sold, an increase of 80-90 percent, highly concentrated in Africa (98%) with the remaining 2% in Asia. Between 2011 and 2017, the number of solar kits supported by PAYG was more than 1.3 million in East Africa, 176,000 in West Africa but only 48,000 in Southeast Asia.

Future prospects?

The opportunities developed by the Fintech sector are an important enabler for the process of transformation (or, in some cases, construction) of the energy sector in the poorest areas of the world. The rapid expansion of individual and personalized financial services, and their application to credit-related sectors (i.e., telephony, the internet) offers new options and new vehicles to encourage investment and achieve the target in access to energy services by 2030.

However, the characteristics and complexity of the energy and electricity sector in the first place (i.e., infrastructure, the need for balancing) require more than a “one-solution-fits-all” approach, and require ad hoc systems and applications to be identified and developed by the stakeholders.

In this sense, the establishment of strategic partnerships and joint initiatives between the most cutting-edge stakeholders in both sectors—and the promotion of public policies to support them—could be one of the cornerstones of freeing up the potential economic and social aspects of a section of world society that still remains too considerable.

Read WE 44 "Rethinking Energy"

The author: Nicolò Sartori

Nicolò Sartori is Senior Fellow and Head of the Energy Program of the IAI (Institute for International Affairs), where he coordinates projects on the issues of energy security, with a focus on the external dimension of Italian and European energy policy.



The author: Nicola Bilotta

Nicola Bilotta is a researcher at the IAI, where he works on projects of international political economy, digital economy and “geofinance”.