Catalyzing Capital for Sustainable Growth in the Off-grid Energy Sector

SolarPanda sales staff
SolarPanda sales staff. Katito, Kenya. Photo Credit: SolarPanda

Africa’s burgeoning market for off-grid energy is helping the region contribute to achieving the United Nations’ Sustainable Development Goal 7 (SDG 7: Ensure access to affordable, reliable, sustainable, and modern energy for all). Though clean energy technology and funding opportunities continue to improve, many off-grid companies still struggle to attain profitability and grow sustainably.

The off-grid energy industry’s chief bottlenecks remain complex unit economics — especially when coupled with consumer financing — and raising the right type and amount of capital. The COVID-19 pandemic and related supply chain interruptions further limited liquidity. The sector’s recovery from the pandemic is uneven, with different markets and segments hit harder than others. For instance, some geographies face liquidity crises due to fiscal challenges and a shortage of U.S. dollars — making it difficult to obtain hard currency, import solar products, and grow — whereas conditions in other areas are more favorable for businesses expansion. Across sub-Saharan Africa, many businesses are prioritizing their established customer base, with a lower appetite to expand to rural and higher-risk markets.

Powering Growth through Technical Assistance

Since 2014, Power Africa has mobilized more than $948 million in investment for clean energy projects beyond the grid. We have helped off-grid solar companies and investors close hundreds of unique transactions ranging from equity capital at various stages to off-balance-sheet debt facilities. Our activities encompass upstream investment readiness support, exploring innovative financing, raising capital, and helping to close transactions. Our support aims to reduce the gap between companies’ financial performance and investors’ expectations, and seeks to lower transaction costs associated with structuring and raising capital in emerging markets and complex jurisdictions.

Examples of Power Africa’s access to finance support to off-grid solar companies and investors include:

  • Completed a legal review of off-grid company d.light’s trailblazing $238 million multi-currency receivables financing facility to expand its pay-as-you-go solar business in Africa.
  • Helped arrange an $8 million equity investment for Solar Panda to expand in Kenya.
  • Provided grant funding to design, structure, and finance an $11 million syndicated transaction by Mirova SunFunder for SunCulture to supply more solar irrigation units in its markets.
  • Piloted data-driven receivables financing mechanisms with First Growth Ventures and PaygOps to finance last mile solar operators.

Key Lessons from Power Africa’s Experience Supporting Growth in the Off-grid Energy Sector

1. Upstream investment readiness support is key for securing early stage capital

Off-grid solar companies generally have great insights about their products and user base, but struggle to translate this knowledge into sound financial and liquidity management practices. Unit economics are a particular challenge for many businesses: Companies often overestimate their profitability and underestimate costs and the investment needed to grow, miscalculations that limit liquidity and halt growth.

Investors want to see that a company has outstanding capacity to manage its financial risk and to grow sustainably. To help companies win investors’ confidence, Power Africa works to strengthen businesses’ financial management capacity, particularly by modeling and analyzing the company’s financial performance. In 2021, we published a financial modeling tool for pay-as-you-go energy access companies that want to do such modeling themselves. For businesses that want to improve their financial management capacity, Power Africa also offers a service to fulfill the roles of an interim chief financial officer to enhance the company’s financial practices.

Applying our suite of investment readiness services, Power Africa has helped more than 40 businesses grasp their performance metrics, model unit economics and cost structures, and manage their liquidity. Further enhancing our access to finance support are our recently launched services to help companies manage their portfolio risks, enabling them to mitigate payment delinquencies and write-offs that have increased with the COVID-19 pandemic.

2. Innovative finance is worth exploring, but should be approached rationally

Power Africa acknowledges off-grid companies’ and investors’ demand for developing innovative financial products and structures tailored to meet the funding needs of this sector. However, the transaction costs and time associated with designing, structuring, financing, and scaling new financial instruments are often underestimated. We have seen that companies looking to establish new financing structures to scale their business are best served by first securing a long-term fundraising plan and combining it with more conventional financing options. Such financial planning should ensure that the organization has enough liquidity to continue doing business while the structuring takes place.

Power Africa has helped companies and investors to experiment with new funding channels and to pilot financial structures. In 2020, we published a call for proposals for our grant to subsidize innovative financing efforts in the sector. An example of such an unconventional yet well-executed transaction is the $11 million syndicated debt facility that Mirova SunFunder arranged for SunCulture. Power Africa covered part of the cost of setting up this facility, a combination of working capital and end user financing to expand SunCulture’s supply of solar irrigation products in Kenya.

Climate finance is another emerging funding source, and Power Africa is helping off-grid companies take advantage of opportunities in this field. We recently launched a service to assist companies with carbon finance, helping businesses navigate the costly and complex process of becoming certified to benefit from the market for carbon credits. We work with companies to determine how suitable they are to benefit from carbon finance and help them qualify for this type of funding.

SunCulture technician with a farmer using a SunCulture solar water pump.
SunCulture technician with a farmer using a SunCulture solar water pump. Kirinyaga County, Kenya. Photo Credit: SunCulture

3. Fundraising processes can be difficult to navigate: Keep it streamlined

Meeting the requirements of several investors is complex. Some companies engage many funding sources to diversify their bets. Although negotiating with several investors at once can be fruitful, it often burdens the company with the task of satisfying disparate demands from multiple investors. Often, a more effective strategy is to be selective. Businesses should consider building strong partnerships with key investors by approaching them with well-defined financing terms and a fundraising plan.

Companies that communicate their business assumptions clearly improve their chances of winning investors’ favor. Key to securing an investment is to present realistic assumptions that reflect a deep knowledge of the market and its opportunities and risks. Companies’ business plans should aim to anticipate changes in the market by integrating various financial scenarios the business may face.

Power Africa has provided significant end-to-end capital raise support to more than 20 companies and funds, with our assistance often spanning more than 18 months. We prioritize designing high quality investment material and models, coordinating the due diligence process, responding to investors’ requests, and negotiating term sheets — a comprehensive package of support spanning the full spectrum of capital raise.

4. Closing transactions can be a costly exercise: Comprehensive term sheets keep costs down

Drafting transaction documents often take much longer than expected, meaning that a company can wait a long time before receiving its first disbursement to improve its liquidity. To avoid harming the company’s finances, the business should keep the financing structure and terms as simple as possible during fundraising, and finalize as many clauses as possible when discussing the term sheets.

Once the term sheets are signed, companies often find themselves unequipped to handle costly, demanding, and complex legal drafting. This is particularly the case for innovative structures (such as off-balance-sheet financing) or large syndicates involving several investors.

Power Africa has assisted dozens of companies in the final stages of transactions to secure their capital.

Prospects for Off-grid Energy Finance

In the near term, we expect the off-grid energy sector to focus on controlling costs and diversifying its business models and markets. Local “champions” are emerging that demonstrate a thorough understanding of their market and meet its demands successfully. As equity investors continue to be very selective, and international debt increases in cost, we expect companies’ fundraising efforts to focus more on local currency funding, grants, and blended finance.

“We see a new wave of energy access companies emerging that are embracing the market realities of limited equity availability, increased importance of lean operations, and diversified product offerings focused on productive uses of energy. These companies are poised to accelerate energy access and well-positioned to absorb growth and risk capital when it becomes available in the needed quantum.”

– Tobias Ruckstuhl, Persistent Energy Capital (Power Africa Partner)

Going beyond meeting basic energy access needs, off-grid and decentralized energy technology is evolving to power vehicles, agriculture, and healthcare. Stakeholders from governments to financiers will need ongoing support to adapt their policies and frameworks for off-grid energy.

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A U.S. Government-led partnership that seeks to add 30,000 MW and 60 million electricity connections in sub-Saharan Africa by 2030 > https://bit.ly/2yPx3lJ