How individuals are investing in solar energy for Africa

BARCELONA — Despite the influx of innovative financing models in recent years, there are still calls to find further ways to finance development efforts. Last year, a report by the European Commission high-level group on sustainable finance recommended enabling individual investors to support development opportunities as one potential solution. After Kiva helped to pioneer this type of model, new platforms have emerged with a particular focus on solar energy. According to the European Commission, which supported a project of this kind in Europe, crowdfunding platforms for renewable energy have produced particularly impressive results. Now, groups such as Energise Africa say they have the answer for frustrated investors, as well as for small Africa-focused solar businesses — but some industry observers are skeptical and warn that this type of lending comes with risks. Launched in 2017, the Energise Africa initiative is designed to allow U.K. investors to help improve off-grid energy access for families in sub-Saharan Africa — offering them the chance to make a difference, invest outside of traditional financial institutions, and see a return on their investment. According to research, 19.5 million people in the U.K. are interested in investing for positive impact but 55% don't know where to go or feel empowered to do so. The brainchild of Ethex, a U.K. based nonprofit social impact savings and investment platform, and LendaHand, a Dutch crowdfunding platform focused on impact investing in emerging markets, Energise Africa has so far garnered almost £10 million ($12.5 million) from 2,000 investors and has provided 374,000 people with solar energy in 10 African countries, including Rwanda, Mali, and Burkina Faso. Sixty-three percent of people living in Africa don’t have access to electricity yet the Sustainable Development Goals strive for universal access by 2030. In 25 countries, wood, charcoal, and waste are used for cooking by more than 90% of households — all of which can lead to health issues. Energise Africa enables individuals to invest as little as £50 — although the average investment is £1,300 — into one of 12 solar companies represented on the platform. The investment — which typically lasts two to three years with an anticipated return of up to 7% — acts as capital for the businesses, which enables them to sell solar systems via payment plans to families that otherwise couldn't afford to have them. “This ensures local people wishing to own and install their own solar equipment have access to affordable financing,” said Rachel Mountain, head of marketing and communications at Ethex, explaining that payment plans typically span two to three years and are benchmarked at the same cost as their kerosene usage or lower. It’s helping to solve one of the biggest problems in Africa around access to consumer credit or investment into solar business, she said, adding that typically the businesses haven’t been able to secure financing from domestic banks because they don’t have the amount of collateral often requested. Energise Africa takes a fee of 3-4% from the solar businesses based on the money raised through the platform. U.K.-based Azuri Technologies, a solar system provider working with local distributors in Africa, has received over £3 million via Energise Africa. “We have a variety of sources of funding, but one of the slightly more surprising ones has been the ability of the crowd to provide finance. I had a view that crowd financing is just for obscure startup companies, but we’re managing to raise several million dollars,” said Simon Bransfield-Garth, CEO of Azuri Technologies, adding that this type of financing catalyzes the market and enables companies to get a large enough customer base to secure more finance in the future. Swedish-based Trine is another investment platform working in a similar way. Like Energise Africa, it connects investors to 27 Africa-based solar projects — such as BBOX, Kingo, and Rensource — which focus on delivering solar kits to rural communities. “The majority [of our investors] are individuals who want to find a better way to [diversify] their own savings and investments, or want to leverage the climate, or they simply want their money to do something good while still delivering a return,” said Hanna Lindquist, communications officer at Trine, which launched in 2016. The platform takes a one-time fee for arranging the loan, as well as a management fee, which is calculated as a percentage of the total loan amount but on its website does not disclose how much this is. So far, the platform has raised €27 million, garnered from almost 10,000 investors, and provided 1.9 million people with electricity. It says investors can expect to receive a return on their investment within a six-month to two-year period. However, Judith Tyson, research fellow at the Overseas Development Institute, a London-based think tank, said that the amount generated by such platforms is still relatively small. While it might work for smaller projects, they so far lack the ability to scale. “The amount of funding being raised is tiny relative to that needed,” she said. She added that this type of lending can be very high-risk, and questioned the value that such companies add to credit risk management. The bonds are unsecured, meaning that if there is political instability, natural disasters, or bankruptcy in the countries where the investment has been applied, some of the money could be lost. Tyson also cited risk around foreign exchange and interest rates. “They’d be better selling to high-risk, high-return customers who better understand and can take responsibility for their risks,” she argued, adding that while there is an appetite from retail investors to do good, she remains skeptical of this type of program. “Some people will lose all of their money and you wonder what that will do in terms of reputation for these kinds of platforms,” she noted. So far Energise Africa has repaid £3.23 million but had one of its solar borrowers file for bankruptcy. Trine has paid back €4 million to its investors, with investments in one solar company resulting in a total loss of €400,000 to 1,000 investors. The U.K. Department for International Development, Virgin Unite — the philanthropic arm of Virgin — and Good Energies Foundation are helping to mitigate some of the risks by supporting Energise Africa with first loss capital and a guarantee for first-time investors. “First loss funding is basically the investor is prioritized in terms of payments and DFID would be behind those investors if there was a problem with the business making that repayment,” Mountain explained. In addition, to help reassure first-time ethical investors, the platform uses DFID money to cover the loss of capital up to £100, although Tyson noted that this figure is small, especially given that the average investment is more than £1,000. She added the risk is increased because the money isn’t pooled and invested across all loans but directed to one particular borrower or solar project. “It’s not particularly helpful because if a borrower has problems, they’re not going to pay at all,” she said, adding that it’s better to invest in a platform that has a risk pool where funding is distributed across a number of solar projects to limit the likelihood of losses, and one that offers transparency by publishing their accounts. “With that structure where you don’t have a pool of loans and you’re lending to one individual lender, either they don’t pay and you lose all of it, or they pay and it’s OK,” she said, describing this set-up as “inappropriate.” She suggested that there are organizations in the solar space that better manage risk, including BBOXX, which can be invested in directly, and M-KOPA. “Both hedge FX risk, have development finance institution guarantees, and are funded via social responsible investors who both are better able to manage risks and have pooled assets,” she said. Trine did not respond to questions about its structure. Mountain said that Energise Africa see a risk pool as the next natural progression and something it’d like to offer to investors in the future. While both companies acknowledge a return isn’t guaranteed, they try to limit risk by screening and conducting due diligence on potential borrowers. An issuer must have proven themselves as a provider of loans for small- and medium-sized enterprises, have a solid credit portfolio, and enough equity to compensate for unexpected downturns, Mountain said, adding that the loans an issuer receives via Energise Africa must be in proportion to their total balance sheet. Despite the challenges and criticisms from some quarters, Mountain believes that platforms like Energise Africa could be key in providing more funding for development efforts. “If you could scale that at a European level, if you can connect enough frustrated European investors who want to see action on climate change with a set of businesses going beyond solar to look at other climate change factors and other SDGs, you've got a significant potential to fill the investment gap,” she said.