Customer Demand Solutions & Inclusive Finance Can Help Solve Cape Town’s Drought

By December 7, 2017 May 17th, 2021 No Comments

Pay-As-You-Save model offers inclusive financing for efficiency upgrades to all municipality customers including tenants

The City of Cape Town is facing a severe water crisis with dams at record low levels. To date, most of the focus has been on supply-side fixes like desalination and underground aquifers, but the city has done little to incentivize demand-side solutions that encourage customers to reduce water use. Awareness campaigns asking people to use only 87 litres a day are a start, but do little to help customers prioritize efficiency upgrades, let alone provide a financial incentive for customers to do so. The lack of sub-metering infrastructure on many large apartments and fluctuating seasonal occupancy result in meaningless targets for many customers. Likewise, publicly shaming customers for high water use and forcibly restricting water supply to these customers may raise awareness through headlines, but ultimately damages customer relationships and does little to solve the wide-scale problem. Customers should feel that the city is working with them, not against them.

Fortunately, programs piloted by other cities globally have demonstrated the effectiveness of financial incentives (e.g. tax breaks, rebates, subsidies) to install efficiency equipment. One program, called Pay-As-You-Save (PAYS), has had a high success rate by leveraging an inclusive financing approach, so customers pay nothing upfront for efficiency investments. The upgrade is financed through a 3rd party capital provider, ideally one with access to low interest Development Finance and the ability to recover costs through monthly municipal bills to the customer. Efficiency upgrades must meet minimum saving standards, so customers actually pay less after the upgrade than before as the savings exceed the tariff cost recovery charge. Since the efficiency investment is tied to the meter, PAYS doesn’t require home ownership to participate and allows renters to also benefit from the program.

Green financing is available

The City of Cape Town is already rolling-out a new “drought tariff” on customer bills, so opportunity exists to use funds from this tariff to invest in customer efficiency. Customers would likely be more receptive to the tariff if they know they’ll directly benefit from the funds.

The success of the City of Cape Town’s first green bond of ~US$ 75 million earlier this year, which was oversubscribed by investors, demonstrates that considerable funding is available for these types of programs if the city takes the initiative to help facilitate deployment.

The city should also weigh the costs/benefits to other demand-side incentive options in order to deploy efficiency products as quickly and widely as possible. A recent survey revealed that shockingly only one quarter of guesthouses in Cape Town were using low-flow showerheads, prompting local government to partner with Airbnb & Cape Nature to give away over 2,000 low-flow showerheads to guesthouses and Airbnb hosts across the city. Deploying these products is needed to help with the drought in the near-term, but giving them away for free can damage the local retail market by undercutting existing retailer prices and sales channels. A well-designed incentive program can achieve a similar goal and actually reach more customers, without hurting local retailers.

While the City of Cape Town has its hands full warding off the looming “day zero” when it runs out of water, hopefully they’ll also consider some customer focused and inclusive financing solutions like PAYS that work with customers to incentivize water savings.