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Securitisation: An Old Tool for Africa’s New Green Frontier?

5th July 2023

A Sun King engineer in a yellow helmet installs a solar panel on a blue roof in Kenya.

Securtisation reshaped America’s housing market. Today, a new challenge calls: helping finance Africa’s green transition. Sun King’s Anish Thakkar and Krishna Swaroop explore how the securitisation of pay-as-you-go finance for off-grid solar can bring reliable, green electricity to those without power and light.

By Anish Thakkar and Krishna Swaroop

Securitisation, a financial innovation that emerged from the crucible of post-war America, fundamentally reshaped the nation’s housing market. It began in the 1960s and 70s, when government-sponsored enterprises began buying up mortgages from banks, bundling them into pools, and selling interests in these pools as Mortgage-Backed Securities. This alchemy transformed illiquid loans into tradable assets, freeing up banks’ capital and enabling banks to issue more mortgages. The device catalysed a surge in homeownership rates.

Today, a new frontier beckons for this powerful financial tool: funding the green transition in Africa. Across the globe, 1.8 billion people live off the reliable electric grid. This number is projected to rise. Most of those living without reliable energy live in Africa. Public finance for grid extension and central power generation is sorely limited in Africa. Off-grid distributed renewable energy solutions are now the most cost-competitive choice for expanding electricity access in many unelectrified areas. Abundant and affordable solar power offers a pathway to green growth and electrification. Still, a clear plan for helping the continent’s families and businesses access energy has yet to be established.

Companies like Sun King have developed a scalable and sustainable recipe for solar success in Africa’s and Asia’s off-grid market by offering manageable pay-as-you-go payment options to customers, often unbanked or underbanked, to purchase solar equipment in regular, affordable instalments. This approach dismantles the upfront cost barriers that obstruct customers from purchasing solar equipment and successfully transitions thousands onto green energy each month.

The pay-as-you-go model relies on companies recycling funds from one customer to the next. Like America’s housing market, securitisation can accelerate pay-as-you-go adoption by consolidating payment flows into a special investment vehicle.

The impact is two-fold. One: Securitisation supercharges funding for pay-as-you-go solar in Africa by connecting investors searching for ESG-aligned opportunities in emerging markets with risk-diversified investment pathways that offer predictable returns. Two: Securitisation frees up the capital solar companies reserve for unpaid solar equipment purchased on pay-as-you-go finance, allowing these firms to redirect funds towards their core business of designing, setting up, and servicing solar systems.

In a significant development this May, Sun King and Citi embarked on an innovative securitisation transaction, marking an important step towards enhancing consumer finance for African customers, underserved by traditional energy and finance systems.

Off-Grid Solar in Africa: A Study in Sustainable Growth

Improved solar technology, the rise of innovative and inclusive payment models, and the ever-expanding presence of solar companies in Africa see more and more people adopt solar technology. Companies such as Sun King, armed with a proven track record and a robust approach to extending credit, are ready for the next phase: innovating and expanding consumer finance. This transition could be the catalyst that accelerates access to solar technology for hundreds of millions living without reliable energy in Africa.

Consider the evidence:

Firstly, Solar technology has come a long way in recent years, offering more powerful and efficient panels, batteries, and appliances. Firms like Sun King are examples of this progress, providing solar systems that can meet households’ and many small businesses’ electricity needs, and do so at a competitive price compared to available alternatives: generators, kerosene lamps, and batteries.

Secondly, the widespread presence of mobile internet and the evolution of pay-as-you-go technology has dismantled historic payment barriers. High initial costs for solar systems can now be spread across manageable instalments, made possible with a simple tap on a phone. Sun King’s 6.2 million pay-as-you-go customers are a testament to this model’s success. With the vast majority of Sun King’s pay-as-you-go customers fulfilling their device payments within a reasonable period of time, it’s clear that many underbanked and unbanked solar customers are creditworthy, affirming the viability of consumer finance within Africa’s solar industry.

Finally, the potential for off-grid solar in Africa is considerable. By 2030, it’s projected to reach 624 million people. High-level analyses suggest that off-grid solar technologies could be the most cost-effective solution for a significant portion of new household connections over this decade.

The missing ingredient needed to provide those living without energy with solar is debt. To keep up supply, the industry needs scalable finance tools. The off-grid sector in Africa is prepared for expansion. Scalable capital mechanisms can supercharge the off-grid solar industry’s tried-and-tested systems, enabling the rapid proliferation of solar across the continent.

Securitisation Deal Illuminates the Path for Future Investments

In a pioneering move designed to stimulate consumer financing, secure debt and diversify investment in Kenya’s solar energy sector, Sun King and Citi have struck a unique $130-million securitisation deal.

The transaction was supported by leading development finance institutions and commercial lenders from six countries across the globe. Through the transaction, over one million customers’ future payments for solar products bought on credit will be securitised and funded by investors. The structure connects unbanked or underbanked customers to the finance they require to purchase solar assets and provide investors with access to a steady yet underserved market that offers risk-diversified returns.

While this is undoubtedly a momentous step, let’s be frank: it’s a drop in the ocean. The colossal challenge of financing Africa’s transition from polluting kerosene and gas generators to cost-effective, sustainable solar will require funding on an entirely different scale — we’re talking billions, not millions. To truly supercharge pay-as-you-go solar, we need to replicate and build on this pioneering initiative. The transaction presents not only vital capital but a blueprint for future investments.

Learning from Past Successes and Failures

The rollercoaster journey of real estate securitisation in America reveals the duality of this mechanism. The 1970s shows the potential for economic mobilisation. The 2008 financial crisis, which finds its roots in securitisation, illustrates the risks surrounding underregulated financial innovations.

A robust regulatory framework that ensures the integrity of ESG securisation is vital. The law firm Simmons & Simmons last year spotlighted the lack of consensus on what constitutes a ESG securitisation. A recent announcement of draft standards on sustainability reporting for securitisations by European regulators, including the European Banking Authority, is a welcome stride towards addressing this void.

A prime example of this approach is the securitisation deal embarked upon by Sun King, where both the collateral pool and the funds raised from the transaction meet their ESG financing framework standards. As noted in Bloomberg recently, this contrasts with other models where non-ESG assets may be used to secure financing for green projects.

Development Finance Institutions (DFIs) have significant roles to play in creating ESG-aligned securitisation markets. By demonstrating commercial viability and pioneering new financial pathways, DFIs can build momentum for securitisation opportunities at the scale the climate crisis necessitates. At a local level, governments can provide clear regulatory and taxation guidelines to support securitisation and ensure its fair treatment relative to other financial mechanisms.

While securitisation’s potential is vast, the spectre of the 2008 financial crisis serves as a stark reminder of the importance of prudence and transparency in such structures. Lessons from the crisis emphasise the critical role of consumer protection principles. The Global Off-Grid Lighting Association’s (GOGLA) Consumer Protection Code, which Sun King subscribes to, provides a framework to ensure that consumers are adequately protected.

Securitisation holds the potential to fast-track access to solar energy at a pace commensurate with the urgency of the climate crisis. As we navigate this path, it is crucial that risks are thoughtfully considered and integrated into the design and delivery of ESG-aligned securitisation initiatives. The lessons of the past remind us that when harnessed responsibly, securitisation can be a powerful tool for change – a catalyst for a greener, brighter future.