High in the Usambara Mountains of northern Tanzania, a woman prepares to give birth in the pitch black. Her family clusters around her. With no electricity at the birthing clinic, someone shines a mobile phone above the midwife’s head.
The baby is the last to be born in near darkness at the Zahanati ya Tema clinic. The next day, a local solar company brings access to clean electricity in the form of a solar home system. The initiative was made possible by solar finance business, SunFunder, which aims to bridge the funding gap between investors and up and coming solar businesses in east Africa.
Across the world some 1.2 billion people lack access to electricity, and a further 1bn struggle with unreliable service. When the sun goes down, millions of families spend their limited household income on costly kerosene oil to light lamps, exposing their children to noxious fumes and inadvertently contributing to atmospheric warming.
Solar technology can transform this. It’s becoming more affordable, and it’s a viable investment proposition for investors. Yet solar businesses are struggling to get the cash they need to scale up and reach more off-grid communities. Why?
Dennis Tessier of ARTI Energy, the company that brought solar-powered light to the birthing clinic, explains: “Access to finance is the biggest hurdle we face as a small solar company. Grant funding from donors has helped us make some progress, but interest rates are high, and we haven’t managed to secure any loans from banks.”
Banks are often cautious about lending money to solar businesses as they lack specialist knowledge of the sector, according to SunFunder’s Lais Loma. Other types of investors would like to invest, but it’s simply not cost effective to vet each individual loan.
The trouble for companies such as ARTI is they need working capital to cover upfront costs like importing more solar lights or expanding distribution networks. Without it, they face sluggish growth, while the huge market opportunity for solar products, such as lamps, home systems and mini-grid connections, goes untapped.
“Just last year, we took over responsibility for running the SunnyMoney [a social enterprise founded by charity SolarAid] distribution network in Tanzania, but the transition required investment,” says Tessier. “We had the database and call centre all set up. But we had no lights to sell as we’d exhausted our funds. SunFunder provided us with a loan to import the first 3,000 lamps.”
Accessing the money
Founded in 2012, SunFunder has bold aims to unlock billions of dollars of investment for solar energy in Africa and beyond. It has already raised more than $30m and provided $12m of loans to 25 solar businesses, helping some 300,000 off-grid households gain access to solar electricity.
The company, based in San Francisco and Tanzania, has just won clean energy charity Ashden’s International Gold Award and Innovative Finance awards for the “game-changing” nature of its work.
“There’s a lot of capital available, but it’s hard to access,” says SunFunder’s chief executive, Ryan Levinson. “We’re getting close to the solar industry in east Africa to really understand its financing needs. We aim to minimise the risk of default and offer low risk investment opportunities with attractive returns.”
SunFunder focuses on supporting solar businesses with a proven track record that need funding to scale up. Its Tanzania-based team conducts a thorough check of their finances, sales pipeline and technical abilities with the aim of providing a clean bill of health to show investors. Monitoring continues throughout the term of the loan, and to date and the company says its loan default rate stands at 1%. Currently $3.8m has been repaid and $8.3m is outstanding.
Meanwhile, SunFunder’s finance team in San Francisco seeks out potential investors, offering them the opportunity to invest in a “solar note” – a big pot of cash that the company then divides between diverse solar businesses and countries. This helps keep the risk low for investors, who receive quarterly interest payments of up to 9% and see their original contribution returned after a pre-defined period.
The current solar note, the company’s largest to date, aims to raise $50m by the end of the year. Investors include the US government’s development finance arm, Overseas Private Investment Corporation (OPIC), which has provided $15m.
While SunFunder’s venture is commendable, it’s important for investors to enter this type of investment with their eyes open, says Philip Bazin, renewables investment expert at Triodos Bank.
“It stands to be high impact, but could also be high risk. Investors need to consider how … they will get their money back if the solar businesses are unable to repay the loans, particularly if they are waiting several years to see their original investment returned.” Bazin adds: “It’s important to look at which countries the money is going to – are they suffering from political instability or civil unrest? A lot rests on the quality of the vetting completed by SunFunder. This needs to be as transparent as possible.”
Back in Tanzania, the team tailors loans to companies’ needs – ranging from $50,000 to $2m – and loan terms span six to 36 months. With its $73,000 of SunFunder loans, ARTI has been able to increase its purchases of solar lights, freeing up cash to open a new distribution hub, hire three new employees and buy a delivery truck. In 2015, the company achieved solar lighting sales of $75,000, a 222% year-on-year increase.