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Funding the Sun: New Paradigms for Financing Off-Grid Solar Companies

Core Content

This report explores new and innovative financing paradigms for off-grid solar (OGS) companies, aiming to support the expansion of solar energy access in low- and middle-income countries. It emphasizes the need for tailored financial solutions that align with the unique business models and challenges of the OGS sector.

Main Points

• Access to Electricity: As of 2019, approximately 840 million people globally lack access to electricity, with the majority in Sub-Saharan Africa. SDG7 aims to provide affordable, reliable, sustainable, and modern energy for all by 2030, but current progress is insufficient.

• Financing Needs: To achieve SDG7, the OGS sector is estimated to require nearly $26 billion in financing by 2030. Despite generating over $4 billion in sales by 2018, existing financing channels are not sufficient to meet this demand.

• Unique Challenges of OGS Businesses: The OGS sector is characterized by:

  • Asset-heavy, service-heavy, and consumer finance-heavy business models.
  • Long cash conversion cycles (over 3 years).
  • Limited liquidity of OGS assets, making them less attractive as collateral.
  • Currency mismatches between input costs and customer repayments.
  • A triple-bottom-line nature of investment (social, environmental, and financial returns).

• Financing Instruments: The report categorizes financing options into four main types:

  • Grants: Non-repayable funds that support early-stage companies and market expansion. Examples include matching grants and results-based financing (RBF).
  • Debt: Used for working and investment capital. Includes traditional forms like term loans and lines of credit, as well as novel approaches such as accounts receivable securitization and P2P lending.
  • Equity: Involves purchasing company ownership. Includes common stock, preferred stock, and equity crowdfunding.
  • Catalytic Tools: Instruments that reduce risk and enhance investment appeal. Examples include first-loss guarantees, tax incentives, and foreign exchange hedging.

Key Information

• Pay-As-You-Go (PAYG) Model: Dominates the OGS sector, integrating product design, distribution, platform software, and consumer finance into a single business model.
• Fintech Integration: The OGS sector's data-driven and distributed nature aligns with fintech innovations, offering new financing channels and tools.
• Case Studies: Highlight real-world applications of various financing instruments, such as:
  • Grants: SolarWorks! (Mozambique), Energising Development (Tanzania), KOSAP (Kenya).
  • Debt: BBOXX (Rwanda), M-Kopa (Kenya and Uganda), SunFunder (Uganda).
  • Equity: PEG Africa (Côte d'Ivoire and Ghana), BuffaloGrid (United Kingdom).
  • Catalytic Tools: Energise Africa (Democratic Republic of Congo, Kenya, etc.), SIDA portfolio guarantee (Kenya, Rwanda, etc.), Azuri Technologies (Rwanda).
  • Blockchain and Cryptocurrencies: Powerhive and Sun Exchange (Kenya), WePower (Lithuania), PowerLedger (Australia), SOLshare (Bangladesh).

Summary of Instruments and Catalytic Tools

Conclusion

The OGS sector requires a mix of traditional and innovative financing instruments to scale effectively. The integration of fintech, blockchain, and other emerging technologies offers promising pathways to address the sector's unique challenges and unlock new financing opportunities. The report serves as a guide for practitioners, financiers, and entrepreneurs to navigate the complex financing landscape of off-grid solar.