SunFunder is a specialist debt provider and fund manager based in Nairobi and London, financing solar energy companies and projects in Sub-Saharan Africa and Asia, where there is often limited access to reliable and affordable electricity.
As one of the few debt providers for solar financing in emerging markets, SunFunder has unlocked USD 150 million in debt financing through public and private investors and has financed over 50 solar companies and projects. Through blended debt funds–blending catalytic capital with private capital– SunFunder is working towards Sustainable Development Goal (SDG) 7–Clean and Affordable Energy, with an interest in increasing commercial investment in solar lighting, home systems, mini-grids, agri-solar, and commercial solar projects.
With plans to unlock billions for solar financing, Convergence connected with Ryan Levinson, Co-founder and CEO of SunFunder, to learn more about solar financing, debt funds and the impact of COVID-19 in advancing affordable clean energy in emerging markets.
What made you decide to address solar finance given the multitude of development challenges in emerging economies?
It was based on the dual passion Audrey Desiderato, SunFunder’s other co-Founder, and I had, regarding the world’s pervasive development challenges, specifically around energy poverty and the current and worsening climate crisis. In 2012 when SunFunder was born, we believed financing clean energy in emerging markets was an ideal way to hit on those two big issues. Therefore, our mission is very much oriented towards contributing to solutions that address both clean energy and access to affordable energy in emerging markets and underserved communities around the world.
Choosing solar finance boils down to the technological viability and affordability of this clean energy source. When I began financing solar projects at Wells Fargo in 2007, total installation costs for Solar PV Systems averaged around $6 to $7/Watt. We have seen the cost drop dramatically over the past 10 years. Now, that same system costs about $1-2/Watt – that is around an 80% drop in the cost of solar project installations. The technology has gone from being one of the most expensive sources of energy in the world to one of the cheapest. When you partner that with battery technology, which enables solar energy to be the around-the-clock solution, the combination is ideal in delivering affordable, clean energy that is scalable, especially for over 2 billion people who lack access to reliable energy.
What are some unique challenges facing solar financing in Sub-Saharan Africa and what makes a blended debt fund particularly useful?
The solar financing sector faces challenges felt by other investments in emerging economies, including foreign currency and country/political risks. In themselves these common external factors can make it difficult to secure new investors and increase investments. More specifically, in the clean energy and solar space, other challenges include how new some of these business models are, how hard it is to distribute products in remote areas, or for larger projects the lack of infrastructure more generally. On top of this, the solar sector among others increasingly face the implications of climate change events, such as hurricanes, floods and droughts, which create challenges for solar companies, their customers, and the communities they serve.
Blended debt funds are an ideal approach to advancing financing in this sector for two reasons:
1. It attracts diverse investors: Sustainable energy in emerging markets reaches diverse impact areas (e.g., from energy poverty, climate change, health, education, to food security). The projects that we finance have impacted all those different areas, attracting various investors–particularly impact investors–from donors and foundations, to private impact investors who are commercially oriented and development finance institutions (DFIs). 2. It allows for scalable financing: By taking a junior position and offering first-loss protection, public and philanthropic funders can de-risk transactions for commercially mandated investors, effectively mobilizing greater volumes of capital into solar financing.
How has COVID-19 impacted the sector, and how has SunFunder navigated these uncertain times?
Across the solar companies we support, the impact has varied based on the maturity of each business. Every company has been significantly impacted. What we have observed is that larger, more established and better capitalized players have on average performed better than we expected and managed to continue operations where possible. The smaller, early-stage companies have really struggled, either because they lack a cash buffer or wide investor base, or because they are not diversified across multiple geographies to cushion the blow from regional economic shocks. For the sector to scale long-term, it is important that earlier-stage, locally owned solar companies emerge and advance. These are the companies most at risk of survival due to COVID-19.
SunFunder has remained as active as ever in the sector throughout the pandemic. We had several sizable loans scheduled to close in late March through June 2020, and we continued to proceed using our risk tools from a couple of public institution partners to mitigate risk and navigate the uncertainty COVID-19 presents; one is a guarantee, the other is political risk insurance. With support from these risk tools, Q1 and Q2 have been our biggest and most successful in the company’s history.
Why are there so few debt providers in solar financing targeting developing countries, and what is needed to reach more solar borrowers and mobilize greater volumes of private capital?
When it comes to local banks, a lot of them are not familiar with solar finance and the structures required to finance these types of projects. On top of that, they often have very challenging collateral requirements and move at an unfavorable pace. Donors are interested in the space but are not often a sustainable source of financing over time because they tend to gravitate towards what is new rather than what is proven. DFIs have been a crucial lender in the space, but sometimes have ticket sizes that exclude smaller players who need the greatest support. DFIs can also be relatively risk-averse which leaves out many solar companies from raising directly from them. Large international commercial investors, including those with newly established impact funds, find it difficult to invest in solar in Sub-Saharan Africa for a host of reasons, some including: (i) they lack local teams and experience in those markets, (ii) ticket sizes are too small, and (iii) the risk-return profile is weak in their assessment.
Therefore, intermediaries play a vital role in the space. SunFunder was one of the first, but we are not the only one. We are thrilled to see financial intermediaries emerge in the solar financing space that bring with them experience in the microfinance sector and have developed strong co-lending relationships with some of them including Convergence member, responsAbility, and Oikocredit and Global Partnerships. Together, we are scaling finance in the space. We are aggregating smaller loans with various risk mitigating tools and approaches like first-loss capital and guarantees to present private investors with transactions that meet their scale requirements for their ticket size and return, while offering them local expertise they lack in-house.
It is not always easy to attribute impact to blended finance. How does SunFunder make this connection?
At SunFunder, we focus on the two major areas: energy poverty and climate change. We measure the number of people that have improved access to energy through the loans that we make and the number of tonnes of greenhouse gas (CO2) emissions avoided because of our loans. We do this on a project-by-project basis and aggregate that data. To date, SunFunder has helped 7 million people gain improved access to solar energy and prevent 700,000+ tons of CO2 emissions from entering the atmosphere annually. Everything we have done has been a result of a blended capital structure. It is clear to us that had we not adopted a blended finance approach, we would not have been able to raise funds or unlock the USD 150 million to advance solar financing. The impact we have had on climate and energy access as an organization through the loans we have made is a result of blended finance.
Can you provide any insights on how SunFunder integrates gender in its work?
Our thinking about gender equality starts with our team and the way we operate. In addition to that, we look at our pipeline companies and how they work and approach hiring. Often, in emerging economies, women come across white-collar employment opportunities for the first time through solar companies like the ones we lend to. We know solar companies are playing a critical role to empower women in developing countries. The broader impact of improved energy access and solar systems also disproportionately benefit women when we see change at the household level (e.g., replacing kerosine-based systems with solar systems, helping reduce indoor air pollution and better safety). There are some interesting studies that get into some of these benefits, including this report from 60decibels and these case studies from our borrower PEG Africa.
The truth is the data is more challenging, and this is a gap SunFunder is committed to address. We have begun to ask and answer “How do we measure gender equality impact of the loans that we have made, and how do we report on that like we do on the number of people who have access to energy?” We are still early on in this process.
The U.S. International Development Finance Corporation (DFC) invested in our most recent fund, the Solar Energy Transformation (SET) Fund, through the 2X Challenge, in an effort to catalyze additional private sector investment to advance women's economic empowerment. We know they, and other key investors in the fund such as Calvert Impact Capital, also a Convergence member, apply a gender lens in everything they do and have a rigorous process for evaluating investments that address gender equality.
SunFunder works with investors including DFIs, impact investors, family offices, foundations, high net worth individuals and institutional investors. What are some trends across these various capital providers in accelerating solar financing and blended finance?
It is hard to generalize since there is distinct activity unique to each group.
Some investors require seniority with subordinate or “first-loss” capital from others to de-risk their senior investment, and others are more interested in playing a catalytic role and taking a first loss or subordinate position. When DFIs only opt to participate in a senior tranche, that presents a challenge for us and others using similar structures who are interested in scaling because there are very few scalable options available for the subordinate tranches. One trend we are seeing across DFIs is greater willingness to come in as a junior lender and truly play that catalytic role to mobilize additional private capital. This is an important trend that has helped us overcome a heavy roadblock in raising blended capital funds. We saw this with our most recent fund, the SET Fund, which is SunFunder’s third debt fund – a 9-year blended finance vehicle for distributed solar and storage investments in Africa and Asia. Through the SET Fund, we saw both private capital investors and DFIs take on junior debt exposure. Both DFC and Swedfund (Sweden’s DFI) invested in both the senior and junior tranches of the fund, which marked a huge step forward from our vantage point. Had they not done so our fund would have not been viable.
One of the challenges we face in general is matching investors’ risk-return requirements. Donors and governments being willing to take concessional interest rates and/or a subordinate position has helped us provide commercially viable returns to commercial investors. The SET Fund currently has USD 10 million of senior debt available to reach its USD 70 million target size. We can now offer a high single-digit fixed returns to commercial investors in the fund’s senior tranche.
Foundations are a mixed bag. Foundations can take more risk, and often are willing to take on subordinate capital exposure. However, one challenge is that once some foundations do something once, often their investment policy limits them being a repeat investor in the same sector or structure as they often prefer innovation over scaling. But when it comes to financing solar, it takes a lot of innovation early on to figure out the right business models and financing structures, and once that is figured out, the aim is to scale by replicating what is proven. This has made it hard to work with foundations in our SET fundraising, with notable exceptions; IKEA Foundation has been a great scalable partner for us.
What else would you like to share about SunFunder, its activities to date, and what is ahead to increase solar financing?
Our mission is to pioneer and scale financing for solar energy and storage in emerging markets and underserved communities around the world. Looking ahead, we aim to design scalable funds that really touch on those two specific aspects of our mission – pioneer and scale. Because they can conflict with one another when it comes to risk-return profile, SunFunder is creating distinct funds that speak to both imperatives, respectively. On the scale side, we are working to develop a large fund that will grow into hundreds of millions, and then billions, to address energy access and the climate crisis. At the same time, we are working with the donor community to design a catalytic pioneer fund to support early-stage locally owned and led businesses to cultivate long-term investible pipeline for the sector.
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