Scaling Clean Energy Innovations in Sub-Saharan Africa: Perspectives from Leading Off-grid Solar Enterprises and Financiers
Laura Sundblad, Power Africa Off-grid Project
“To expand energy access and limit global warming, we urgently need to invest in pioneering enterprises that supply clean energy to the continent. To achieve the scale of funding [required], we need innovative financing vehicles that attract diverse investors and lenders with different risk appetites, return preferences, and timelines for investment. Structured finance provides one way to cater to these different preferences,” Lovemore Seveni, Off-grid Energy Specialist, Power Africa
In September 2021, Power Africa and SunFunder, a private sector partner, convened leading off-grid solar enterprises and financiers to discuss ways to accelerate climate investment in Africa, with a focus on using structured finance to scale clean energy innovations.
Below are some of the insights shared by our experienced and thoughtful panelists. To follow the full discussion, access the full recording below.
WATCH: Accelerating Climate Investment in Africa: Using Structured Finance to Scale Clean Energy Innovation
Distributed renewable energy as a climate solution
Lovemore Seveni, Power Africa’s Off-grid Energy Specialist, contextualized the discussion within the long-overdue global effort to slow down and manage the effects of climate change. According to IRENA, 85 percent of global power should be generated by renewables for humanity to avoid the worst effects of climate change.
Distributed renewable energy is not only a climate-friendly alternative to conventional thermal-powered grids, but also brings immediate socioeconomic benefits through cleaner air, improved safety, strengthened livelihoods, and better quality of life than alternatives currently being used, such as kerosene and candles.
To unlock these benefits and reach Sustainable Development Goal 7 by 2030, especially in sub-Saharan Africa, we need to develop the critical financial mechanisms that will help scale distributed solar energy.
What is structured finance?
One group of financial tools that can help to scale distributed renewable energy is broadly called “structured finance.”
As Surabhi Mathur Visser, Head of Investments at SunFunder, explained, structured finance can include tools such as collateralized debt obligations, asset-backed securities, project finance, and export finance. These tools have one thing in common: They are secured loans with some additional complexity to fulfill a particular need.
Typically, structured finance transactions are:
- Based on predictable streams of cash flows from predetermined assets;
- Backed by assets that can be isolated and that are used to help repay the facility;
- Structured in a way that allocates risks to the entities that are best placed to manage them; and
- Designed in a way that is fit for purpose and minimizes the need for continuous fundraising.
Example 1: Using a borrowing base to scale up solar water pumping
Jemimah Kwakye-Fosu, Investment Officer from SunFunder, shared insights on the $11 million syndicated debt facility that SunFunder arranged and invested in for SunCulture, a leading solar water pump provider.
This facility, which partnered with Power Africa to cover some of the additional transaction costs, was built on a “borrowing base” designed to keep growing with SunCulture and to minimize the funding bottlenecks that high-growth companies often face. In a borrowing base facility, the company can draw down larger loan amounts as its assets, and hence collateral pool, grow. In SunCulture’s case, its assets include the receivables from solar water pump customers.
SunCulture’s co-Founder and CEO, Samir Ibrahim, commented that having the borrowing base structure means that SunCulture can avoid refinancing while growing, and the syndicated structure means that several lenders gain confidence and trust in the company through participating in the facility. This is one of the more general advantages of using structured finance approaches. Such an approach can enable investment directly to projects, rather than at the corporate level, making it easier for investors to finance off-grid electrification in sub-Saharan Africa.
Example 2: Reducing the effort required for fundraising through structured finance for mini-grids
Mini-grids are another way to power productive use technology (e.g., agricultural equipment, cold storage, and power tools) and households.
PowerGen Renewable Energy is a market leader in sub-Saharan Africa that develops fully renewable-powered mini-grids across East and West Africa, including frontier markets in Sierra Leone and Somalia. Tobias Dekkers, Chief Business Development Officer at PowerGen, highlighted a project with InfraCo Africa, an early-stage investor in clean energy and part of the Private Infrastructure Development Group, a Power Africa partner.
In the PowerGen-InfraCo deal for mini-grids in Sierra Leone, a major benefit for PowerGen was working with a single funder to develop, build, and operate mini-grids, reducing complexity and the time and effort needed for fundraising. This transaction also meant that PowerGen could retain corporate equity for growth rather than regular operations.
Gilles Vaes, CEO of InfraCo Africa, emphasized the need for flexibility and time in setting up transactions for mini-grid projects, and for bringing in equity first to allow companies to build up the track record and asset base required to execute structured finance deals.
What can we do together to scale these solutions?
Although the experiences with structured finance for distributed renewable energy have been promising, sub-Saharan Africa needs a broader base of companies and funders to reach its 2030 climate and energy-access goals.
Attracting more investors to climate-related financing will require concerted effort and determination. As highlighted by Amar Inamdar, CEO at Kawisafi Ventures, off-grid entrepreneurs can make their financing journey easier by ensuring that they understand and communicate both their risks and their assets, echoing earlier comments in the discussion encouraging companies to use tools such as the PAYGo PERFORM common performance metrics and the Power Africa financial modeling tool.
Furthermore, bringing more local-currency financing into the mix is critical, as is expanding blended finance for companies and funds. With more efficient financing and better control of risk, companies will not only scale faster but will keep the price to the end customer in check.
Continuing the conversation
Much remains to be discussed about structured finance and increasing investment in the off-grid energy industry. To this end, Power Africa and SunFunder hosted a follow-up conversation in a Virtual Boardroom at the GOGLA Global Off-Grid Solar Finance Summit in December. We look forward to exploring ways to mobilize climate-related financing for distributed renewable energy while focusing on deploying funds effectively and promptly.
For more information about transaction support available from the Power Africa Off-grid Project, please reach out via a2f@powerafrica-offgrid.org.
