More than half a billion people. A decade and a half into the off-grid solar revolution, the impact is increasingly visible. Nearly one in five energy consumers in the Global South have tapped off-grid solar to support or start a business, according to 60 Decibels. Roughly 80% of those users saw an increase in income.
Investors are responding. The off-grid solar sector saw a record $1.2 billion in investment in 2022 and 2023, driven by debt financing. Among the up-and-coming subsectors: Productive use appliances, like solar water pumps, that help users generate immediate income.
“When you can earn extra dollars, extra naira or shillings on top of that [lighting and charging] it’s much more systemic in terms of development impact,” Guilhem Dupuy of Gaia Impact told ImpactAlpha. “In this space of technical innovation, at the crossroads of utilities and distributed renewable energy, you are seeing way more opportunities for innovative local entrepreneurs.”
Though electrification rates are growing, growth remains uneven, particularly in Africa. At the Global Off-Grid Solar Forum in Nairobi last week, investors talked risk mitigation, blended finance and opportunities for growth.
Risk reduction
Commercial investors, historically reluctant to invest in off-grid solar startups, are warming to the sector. The reason: Reductions in real and perceived risk by pooling assets.
“As a sector, we need to prove to [commercial investors] that they can make a viable investment,” Wim Jonker Klunne of Household Solar Funders Group, a group of 65 household solar financiers, tells ImpactAlpha. Securitization funds now “work with basic providers and they’ve reached an investment grade so that’s a safe investment and they can predict their returns.”
Klunne notes that many banks are still more comfortable investing in larger and established projects at the commercial and industrial levels. As with the case with decentralized mini-grids or solar home systems providers, they mostly provide balance sheet financing instead of asset financing.
“What we will see is that a donor will come in to provide results-based financing or some kind of grant related to the provision of energy,” he says. “That can be seen by the investor as a guaranteed revenue stream.
Blended finance
Even with record investment in the sector, an estimated sixfold increase to $21 billion is needed to electrify 398 million people. Off-grid solar solutions represent a large opportunity to connect them efficiently.
“We need to leverage as many pockets of capital as we can,” says Dupuy. Gaia cuts equity checks to African startups in renewable energy. Dupuy says blended finance mechanisms are vital in helping providers reduce their financial risks and enhance their capital efficiency due to “capex intensive strategies” or projects that require significant investments in the energy sector.
“What you are doing is putting solar panels and productive use appliances in the ground, fridges, water pumps, electric motorcycles,” he says. “That assumes that somebody at some point invests in the assets and this kind of strategy is difficult to handle in Africa because you have to import a lot of your activity.”
Productive use appliances
To achieve long-term impact with off-grid solar solutions, providers must reach commercial viability. Reliance on debt funding, however, has investors questioning the sustainability of off-grid, especially those offering consumer financing models like pay-as-go repayment schemes.
Dupuy notes that many companies offering PAY-GO solar have taken on massive debt which puts in financial strain in an already tough market.
Debt financing “is very important to fuel the continent’s growth trajectory,” he says. “We need to think of new models and this is where blended finance comes in.”
Blended finance, he says, could be used to adopt other sustainable models like energy-as-as-service models where local companies could still own and offer their solar products, but charge maintenance and distribution fees to generate stable cash flows.
Providers can focus on service delivery with much more predictable cash flows rather than grappling with high-debt levels. They can grow sustainably and can create more local jobs, especially in rural areas.
“Local companies will have a way better chance of accessing a decent chunk of the markets because they wouldn’t have to bear the financial risk themselves,” he says.
Gaia itself is looking to invest in the new wave of companies offering so-called ‘productive use appliances,’ like solar water pumping, cold chain storage and electric mobility that offer consumers extra revenue streams and significant resource savings from the get-go.