Q&A: PayGo’s plans to unlock energy poverty areas

Nairobi-based start-up PayGo Energy has developed a proprietary smart meter for LPG cylinders — an internet-of-things (IoT) device that allows consumers to pay for their LPG by the gram using their mobile phone, while distributors monitor consumption and replace the cylinder before it runs out. The firm has also developed its "Tag and Trace" software platform that allows suppliers to better manage their cylinder distribution. The company is mainly targeting emerging LPG markets in developing countries, where the cost of a cylinder remains a significant obstacle. It reached 400 customers through a pilot in Kenya in 2018, and supplied 2,000 meters this year, with another 3,000 due for delivery in first-quarter 2021. Aidan Lea spoke with PayGo chief executive Nick Quintong about the company's plans:

How has PayGo responded to the challenges of the Covid-19 pandemic?

The first impact was to our global supply chain. Our components come from China, India and Italy. In January, delays started in China, and we felt rolling delays through the first two quarters of the year. We adjusted our operating procedures to protect our team and our partners, but we accomplished a lot with limited presence on the ground. In the fourth quarter, we added a new partner in western Kenya and landed our technology in two markets in Asia. While we experienced setbacks, the pandemic has accelerated changes like digitisation within the downstream LPG industry, which will benefit PayGo over the long term.

Is Kenya the main focus for PayGo or are you targeting other markets?

Kenya is a great launchpad for us. It is a relatively small market but there is a lot of opportunity to increase LPG consumption — around 80pc of households still cook with dirty fuels — and the government has been working hard to support the LPG industry's growth. In Africa, we are working with [utility] Bboxx, which is expanding its solar business to also provide customers with pay-as-you-go [PAYG] LPG.

We also see huge potential in Asian markets such as Bangladesh, Vietnam and the Philippines. We launched a partnership with [Japanese LPG distributor] Saisan this year. We are launching a PAYG pilot in Vietnam in January and a second pilot in Bangladesh shortly after. Bangladesh faces the same liquidity challenges as sub-Saharan Africa, while Vietnam and the Philippines are more mature markets with significantly higher LPG usage, especially in urban areas. But there is a lot of room to drive down costs through digitisation and to expand in peri-urban and rural areas.

How much will the smart meter cost and who will pay for this?

Our pricing differs by partner depending on volume and on the local operating costs of the market. The LPG companies cover the cost of our meters. We engage with partners in two ways — the outright sale of CSMs [cylinder smart meters], and hardware as a service. In the outright sale model, the partner purchases the CSMs upfront and pays a small recurring fee to cover maintenance and technical support. In the service model, PayGo provides the products in exchange for a fee on a per-CSM basis. Under the purchase model, our partners should be able to pay off the cost of the asset through marginal revenue gains within a few years. Under the service model, our partners are cash flow positive from day one.

How much LPG is used by households PayGo has reached?

Our average customer household of four people consumes around 5kg/month. We have around 90pc retention with little month-to-month fluctuation in consumption. Even through Covid-19, when customers faced heightened financial strain, fuel spend has remained consistent. More than 80pc of our customers are first-time users of LPG, who previously used dirty fuels such as charcoal and kerosine. These fuels are more expensive than LPG, and cause respiratory illness — and they have a devastating impact on the environment. Of course PAYG is not the only answer — there are supply, distribution and regulatory constraints that slow market growth. But we believe our technology can speed up development.

What is PayGo's strategy for scaling up the business?

PayGo's mission is to unlock ‘clean cooking for the next billion'. To reach this number of people we need to combine our technology with the infrastructure and institutional knowledge of multinational LPG companies. Through several strategic partnerships, we can provide LPG access to millions of homes with minimal local footprint. Over the first few years, it was an uphill battle to convince LPG distributors to not only adopt a new technology but shift their business models. We fought significant inertia, but the tide is turning, and most LPG firms now have a digitisation strategy and are making investments to gain a competitive edge.

Can PayGo gain a significant share of this emerging market?

Change is coming and it will be industry wide. Right now, there are relatively few players in this space, but we expect competition to increase. When it comes to a hardware/software platform, there is a sizable advantage for first movers. There is a large barrier to entry, especially for hardware, and positive network effects significantly benefit the team that achieves major scale first. Our strategy is to pick big markets, find strong partners and focus on their success. If we do that, and continue to listen to our customers, I think we can maintain our advantage.

Is PAYG is the best solution to enable low-income homes to use LPG?

The PAYG model overcomes the upfront cost barrier, and more importantly makes it really easy to purchase just the gas you need to cook every day. There are other solutions in the market such as smaller cylinders (3kg) or micro refilling, but we believe these analog approaches provide a clunky experience for customers. Microfinance solutions have been tested as well, but this market segment is difficult to underwrite, administrative costs are high, and repossession of assets is cost prohibitive. PAYG provides the flexibility customers need, strengthens the relationship between LPG companies and their customers, and is easier to finance.

PayGo was established in 2015 but it is still fundraising. Why is that?

It was never going to happen overnight. It took years to get a certified hardware and software platform that was ready to commercialise. Our focus over the next five years is to rapidly scale up while focusing on positive unit economics. We have demonstrated the compelling economic proposition for LPG companies. When selling gas in small amounts, our partners generate more revenue by charging a premium — around 20pc above the retail price — and the platform cuts costs by making the supply chain more efficient. Most gas companies have 3-4 cylinders per household. Our platform drops that ratio down to about 1.5.

Have you encountered any specific issues or challenges in the pilots?

We have encountered our fair share of challenges. Most of our partners manage their operations with pen and paper, and few do last-mile distribution. Our model is a significant divergence from that, so we need to make sure we bring them along for the ride. Every market and partner has different technical requirements — from cylinder valve types to digital payments provider. This is really a front-loaded, market-entry challenge that we just have to overcome. Import and regulatory requirements also vary significantly by market. We are drawing on the local expertise of our partners, which is critical.

Published in LPG World on 15 December

LPG demand 2010-19

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