Increase in costs of OGS products

Serving customers in hard-to-reach places and in FCV contexts increases the costs and complexities for OGS products. Different factors and pricing inputs impact the cost of these products.

Photo credit: Lagazel

Cost implications of serving remote and FCV populations

Tier 1 access comes at a much higher price for those who live in remote locations and in conflict-affected settings owing to higher operational costs. About 82% of the population lacking access—roughly 562 million people—reside in hard-to-reach areas, where off-grid solar companies face higher expenses for delivery, maintenance, and payment collection. Around 31% of people lacking access (~211 million people) live in active conflict zones, where the cost of doing business is high and potential revenues are limited. Distributing OGS products to remote or FCV areas tends to be significantly more expensive, a challenge faced by both suppliers and consumers.

Cost increase for a Tier 1 PAYG OGS product to serve remote populations (USD)

Distributing and selling OGS products in remote or FCV areas is significantly more costly than in densely populated regions near major infrastructure. As a result, OGS companies often have to implement differentiated pricing within the same country, leading to price increases of up to 57% in harder-to-reach areas. This can raise the total costs of Tier 1 OGS system financed via PAYG to approximately USD 199—verses an average price of USD 127. Several factors contribute to these higher costs:

Higher operating expenses: In remote areas, economies of scale for sales, distribution, and collection are often unachievable due to low population densities. Consequently, these higher operating costs are reflected in increased product prices for consumers.
Challenges with local distribution: The lack of strong local distributors and the high costs associated with maintaining a direct sales force in low-density areas further drive up prices. These additional costs are ultimately passed on to consumers.
Higher financing costs: For OGS companies operating in remote areas, particularly those that are conflict-affected, the cost of capital is typically higher. This is largely due to the uncertainty stemming from heightened security and political risks, which reduces investor confidence and, in turn, raises interest rates. As a result, customers are adversely affected, as a 2–3% increase in the cost of capital can translate into a 5% price hike for end-users.

Even when consumers are reached, they often have limited savings, unstable incomes, and poor creditworthiness. This increases the credit risk associated with PAYG OGS products, leading to potential payment delays and defaults. Income variability and sensitivity to economic fluctuations can affect affordability, even for customers who might otherwise be able to pay. These factors also contribute to higher bad debt costs for OGS suppliers.

Affordability sensitivity of OGS products

The affordability of off-grid solar products under PAYG is primarily influenced by the tenure and interest rate. Interest rates are often hiked by suppliers to recover the costs of serving hard-to-reach customers and operating in difficult contexts. While this is necessary for suppliers to maintain operational profitability, it can potentially push low-income customers (who form the majority of the unelectrified) into long-term debt. Alternatively, suppliers can reduce payback tenure to minimize the risk of defaults, especially from low-credit worthy customers. These customers also live in regions where fluctuating economic conditions can cause incomes to fall rapidly, prompting suppliers to collect payments over a shorter tenure to minimize any such risk.

Affordability sensitivity of PAYG Tier 1, Tier 2, Tier 3 products

Longer tenures have a greater positive impact on affordability than lower interest rates – however, OGS suppliers do not have much flexibility with either factor. Increasing the tenure from 1 year to 2 years for a Tier 1 product can increase affordability by 1.5-2x depending on the interest rate. However, suppliers work with thin margins due to the high cost of production, distribution, and after-sales service in remote areas. This limits their ability to adjust interest rates or extend loan tenures without eroding core operational profitability. Offering lower interest rates would require access to cheaper capital, which is not always available in the markets where these products are sold. Extending the loan tenure, while making the product more affordable in the short term, increases the risk of default and adds to administrative costs (related to collection), further tightening margins. As a result, while adjusting interest rates and tenure could improve affordability, in reality, suppliers have limited flexibility to change financing parameters without compromising their own financial viability.