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Funding the sun

New Paradigms for Financing Off-Grid Solar Companies

Davinia Cogan, Jonathan Coony, Alex Hazoury, Dana Rysankova, Malcolm Cosgrove-Davies, Michel Rauchs, the late Tibor Kludovacz, Tania Ziegler, Bryan Zhang, Robert Wardrop, Kieran Garvey, Raghavendra Rau, Martino Recanatini, François Rostand

This report is a collaboration between the Cambridge Centre for Alternative Finance and the World Bank, examining the new paradigms for financing off-grid solar companies. It explores the potential interplay of innovative financing channels and instruments with more established methods and provides a roadmap for practitioners, financiers, and entrepreneurs navigating capital raises for companies active in the sector.

Highlights from the report

  • Substantial new financing sources need to be identified, sourced and advanced – despite the sector generating almost $4 billion in sales as of 2018, it is estimated that to achieve Sustainable Development Goal 7, a further $26 billion in financing is required.
  • Established financing channels are not acting quickly enough – there is mismatch between the structure of traditional financial instruments available and the underlying business models of companies in the OGS sector. Whilst some established financing channels, such as bank finance, remain important, they fail to address the nuanced needs of OGS companies across the business lifecycle.
  • The OGS sector and its value chain bring unusual financing challenges – the dominant OGS business model (vertically integrated PAYG) has added consumer finance to OGS company functions. This introduces unique financing requirements, as companies must source capital for product development, manufacturing and operations, while juggling working capital and accounts receivable financing needs.
  • Limited liquidity of OGS assets adds complexity to financiers – the OGS sector, in deploying a PAYG model, has a long cash conversion cycle, creating a mismatch between credit terms and capital needs. Transaction costs create further currency mismatches, as customer repayments are usually fixed in local currency, whereas working capital and accounts receivable are often in hard currency.
  • New financing opportunities are emerging – OGS markets are built on the characteristics of being distributed, data driven and based on novel technology. This aligns with new developments in the finance sector, often termed fintech.
  • A one-size-fits-all approach to financing will not succeed – because of the diversity of OGS companies, in terms of stage of maturation, company capacity, enabling environment, customer needs and purchasing power, there is a need for financiers, companies, governments and development partners to assess the suitability of the financing instruments in the context in which they are working.
  • Many promising financing options exist in the OGS sector – nearly all would benefit from ongoing support that is patient and charged with a drive for innovation; it must cover regulatory environments, capacity building and piloting to demonstrate proof points.