Navigating Off-Grid Solar Financing: Trends and Opportunities

A Conversation with Energy Finance Expert Eduardo Appleyard

We sat down virtually with Eduardo Appleyard, an energy finance expert with over a decade of experience in the energy access space, to discuss the role of financial aggregation and receivables finance in the off-grid solar sector. 

What are our chances to achieve SDG7? Where have we succeeded? Where have we failed? What has been the role of Pay-as-you-go in moving us closer to it?

Technology and innovative business models such as Pay-as-you-go (Paygo) have enabled us to make great strides towards universal energy access over the last decade. However, such progress has been uneven and the reality is that we're still running behind on SDG7.  

We need to do more to electrify whole communities, leaving no-one behind in the process, and making sure that critical services such as healthcare or education are also connected. We should also be paying more attention to clean cooking which, despite the magnitude of the challenge, offers real value for money in terms of impact – every dollar invested in the sector can translate into tangible impact from an environmental, health and economic perspective. 

Looking back, the advent of Paygo seems almost inevitable, when you consider the fact that clean energy assets with high upfront costs usually require some form of financing and the evermore widespread use of mobile money and digital financial services (which in some cases evolved hand-in-hand with Paygo). But the sector’s success has also been the result of a lot of trial and error and pioneering efforts to develop viable and scalable models across different markets, in often challenging environments – such efforts needed to be nurtured, supported, and financed.

Today, the sector seems to be at the crossroads, with sales plateauing in recent years. It may be down to the lingering effects of the pandemic, compounded by other crises, and the broader economic context. But it may also signal the need for the sector to evolve (both in terms of the services and products on offer and the customers being reached) and the need to address certain barriers to growth – the lack of financing has been and remains a critical one. 

As you mention we've reached a plateau and financing might be one critical challenge, how do you evaluate the evolution of the sector in terms of investment attractiveness and financing volumes available?

Since I’ve been involved in the sector, the lack of financing has been a recurrent theme in countless conversations with energy companies. While I believe we should celebrate the considerable influx of capital the sector has attracted over the years, both from concessional sources and more commercial ones, it is also important to acknowledge its limitations.

On the one hand, we are seeing larger and more sophisticated deals taking place. On the other hand, investments remain concentrated, with less-established players still struggling to secure equity and sufficient debt financing – more grants are also needed! 

As the sector evolves and matures, we are seeing some companies achieve an impressive level of scale and reach, others have not fared as well or faced hardships in recent years. Meaning that it is hard to paint a uniform picture of the sector in terms of the profile of the companies, their performance and profitability – ultimately that will influence who gets funded. 

What are the challenges around financing faced by both last-mile distributors and investors?

There is a mismatch around ticket sizes, but also in terms of the type of capital that's available and what's needed. Looking specifically at Paygo, it is a capital-intensive model by default, where companies are distributors, and are also providing consumer finance. Are these companies being financed in the most effective way? This brings up the whole question around the role of off-balance sheet financing and asset-backed securitization – but until recently, there were very few examples of this.

In terms of the availability of capital, if we look at most countries, it remains challenging for operators to secure local currency loans domestically at conditions that are suitable from a commercial perspective – the cost of capital matters.

For funders, you could boil it down to ‘risk and return’. Even an impact investor looking for below-market returns will need to be able to assess risks to inform investment decisions. At the same time, while some funders are now veterans of the sector with many deals under their belt, not all investors and debt providers fully understand it.

Paygo can help deliver the data needed to inform investment decisions, but this requires standardisation and common performance reporting practices to enable benchmarking – efforts have been made towards that goal. 

But assuming the demand side (investors) fully understands the sector and there is capital available to invest, there needs to be a matching supply (a sufficiently large pipeline of investment-ready companies). The concentrated nature of investments in the sector suggests there is still work to be done on that front. We need pipeline building mechanisms to increase the number (and geographic distribution) of companies capable of absorbing investments (small and large). That means better early-stage investment offerings, including technical assistance and grants, and de-risking mechanisms (e.g. guarantees).

For deals that do materialise, transaction costs tend to be relatively high, timelines remain quite long, and these require major commitments from investors and companies alike to take shape – There’s a need to streamline such processes, calling once more for standardisation.

What strategies prove most effective in attracting investment towards clean energy initiatives? 

A lot can be said about this topic, but if I had to pinpoint one key factor, it would be the need to support companies throughout their journey. If you look at the most successful players in the sector, they have one thing in common, they have been supported early-on by one or more strategic funders – be it a development agency, an impact investor, a foundation, a DFI. They received the patient capital they needed to test their models, to learn and grow. They were able to secure the appropriate type of financing at every step of their journey and this often involved concessional funders, before graduating to larger, more commercial investments. We should be doing more of this.

What role can financial aggregation play moving forward? How can it be used to address some of the previously mentioned challenges?

I believe there is a need for a variety of approaches to solve the energy access financing gap, what may work in one context may not work as well in a different one – The Paygo sector is relatively young and there is still room for testing new approaches.

But a good way to gauge the potential of a given approach is to look at other markets to see what has worked before. From that perspective, if we look at the rise of solar asset-backed securitization (ABS) in the US over the last decade and more recently in Europe, it is not surprising to see the recent developments in the African Paygo market. 

There have been several major announcements in the last 12 months that exemplify how aggregation and ABS can unlock large amounts of capital for the sector. Could this approach be replicated and made available in a responsible manner to more operators who are facing the same realities and operating under similar business models? I think it’s still too early to draw conclusions, but there is some initial evidence that the model can be successfully applied. 

Going back to the challenges highlighted in the previous questions, aggregation’s primary role is to create scale, by combining smaller size investment opportunities into a portfolio – thereby helping to address the ticket size mismatch. What’s more, through off-balance sheet financing, companies can free up cash that would normally be tied up in their receivables. 

If applied responsibly, with the right consumer protection and credit risk management practices and safeguards in place, aggregation could bring about a variety of other benefits such as unlocking new sources of capital, lowering the cost of capital and transaction costs, risk separation (e.g. when securitized assets are held in an SPV) and risk diversification, etc. But again, we’re still in the early days, there’s a need for a sector-wide conversation about these mechanisms.

How can third parties help lift some of the barriers you mentioned and, therefore, bring larger volumes of investment to the sector? 

Today, most Paygo businesses have access to a plethora of third-party data tools and services that allow them to run quite sophisticated operations – Something that early players had to build from scratch, often on their own. While such tools are not a panacea, they allow even small companies operating in niche markets to apply advanced analytics on their portfolios to better manage credit risk and make informed decisions to build more solid and profitable businesses. These data capabilities, combined with standardisation, could also be leveraged to enable innovative financial models such as aggregation. 

In that sense, third-party technologies and platforms can play an important role in removing barriers for new market entrants and allowing a broader base of energy companies across different geographies to access new sources of capital – and investors to access new opportunities. 

A third-party platform approach also brings the added benefit of aggregating data from different operators and portfolios in a standardised manner, which can allow for a better benchmarking of performance. This can also enable tranching of portfolios and subordination, tailoring the risk/return profile for different investors.  It can also be combined with carbon finance or results-based financing to make products and services more affordable for end-users.

How can Bridgin help address both the challenges and the opportunities that we just discussed? 

Given Solaris Offgrid’s experience working with a wide range of distributors across different markets, doing leasing with a variety of products, you have an opportunity to develop a platform (Bridgin) that is truly tailored to the users’ needs, building on deep sector insights, and understanding. Working with both distributors and investors, you can help bridge the knowledge gap and provide the data that is needed to inform investments. This could potentially enable a much broader base of companies, including smaller ones, to access financing for their receivables.

As we’ve seen through the work you’ve undertaken under the UNDP Climate Aggregation Platform (CAP) Financial Innovation Challenge (FIC) there are still barriers that need to be addressed – How do you apply this approach across different jurisdictions? How do you manage the legal costs involved? From that point of view, taking a progressive approach, testing the model in a few initial markets and expanding from there, makes sense. I look forward to seeing how Bridgin evolves.

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Eduardo Appleyard is an energy finance expert with over 15 years of experience at the nexus of sustainable energy, climate change mitigation and finance. Most recently, he championed the Climate Aggregation Platform, a flagship global initiative of UNDP, spearheading innovative financial mechanisms to unlock new sources of capital and climate finance for clean energy deployment in emerging markets. Prior to that he worked with UNCDF, which provides performance-based grants, loans and guarantees to energy companies, financial institutions and other providers of wholesale or retail financing for clean energy in the Least Developed Countries. He’s been involved in the Paygo sector since its early days, piloting new business models with SolarAid in Kenya, back in 2012.

About Bridgin

Bridgin is Solaris Offgrid's Receivable Financing Solution. Conceived as an online trading platform for accounts receivables, it allows distributors of essential services to unlock liquidity over assets through the sale of their outstanding invoices to investors, offering investors a unique chance to tap into a previously untapped asset class at a lower risk.