A new way for investors to help light up Africa

Welcome back. One thing to start: over the past couple of years, we’ve been covering the twists and turns around the UN-backed Race to Zero initiative, which has signed up more than 11,000 companies and other non-state bodies to net zero emissions pledges.

Lacking the clout of a fully fledged UN body, Race to Zero hit resistance from some corporate members around new membership rules such as a ban on new coal financing. And it faced uncertainty over how it would secure the funds to build a team who could hold members accountable for their climate promises.

This week Race to Zero announced that it was dropping plans for a review of progress made by its partner initiatives — including the financial alliances in the Gfanz grouping — just two weeks before that process was due to start. Instead, it will support UN officials who are developing a new “recognition and accountability framework” under the leadership of the UN climate secretariat.

Provided that framework is designed and implemented well, this sounds sensible. Race to Zero has done sterling work in signing companies up to climate commitments; to hold them accountable, a formal UN body will be better placed.

Meanwhile, the International Energy Agency yesterday issued a report predicting another year of monster growth in renewable energy. Yet far too little of that expansion is happening in low-income nations, particularly in Africa. In today’s newsletter, we look at a promising new financing approach that could prove part of the solution. Thanks for reading. (Simon Mundy)

Sun King looks to global investors to power up African solar

For years, Nigerian cities have thrummed with the noise of diesel generators, used by households and businesses faced with a chronically unreliable electric grid. And they are the lucky ones: nearly half the country’s 213mn people are without electricity altogether.

But that picture has now changed for a million Nigerian households — and counting — who are customers of Sun King, a company that has rolled out low-cost home solar power systems to 5mn homes in eight African countries. For the vast majority of them, it provides finance enabling them to pay for the systems — typically worth about $110 — in instalments.

Now, Sun King has managed to get international investors to fund that credit — in a transaction that offers a striking new model, amid the intensifying debate over how green growth in developing nations can be financed.

In the securitisation deal announced this week, seven commercial lenders and development finance institutions have committed to buy $130mn in loan notes issued by a special-purpose vehicle that will in turn buy customer loans from Sun King — giving the company a new injection of funds for expansion.

The investors include Citi, the Kenyan units of South Africa’s Absa and Standard Bank, the Eastern and Southern African Trade and Development Bank, British International Investment, Norway’s Norfund and the Netherlands’ FMO.

Anish Thakkar, Sun King’s co-founder, told me that consumer finance was crucial to bring power to millions of African households. The falling cost of solar panels and batteries has made green power cheaper, over the medium to long term, for low-income families than the smoky energy sources on which many rely. But most of these households are unable to meet the upfront cost of making the switch — and lacking bank accounts or credit histories, they typically have no means of borrowing.

Sun King’s extension of credit to its customers, through a network of 20,000 full-time field agents, has made it the world’s biggest provider of power systems to off-grid households. In Kenya, where it launched in 2016, Sun King systems are now found in one in five homes, the company says.

Clients typically pay weekly instalments over the course of a year, with an effective annual interest rate of roughly 20 per cent. Most in Kenya pay through the country’s mobile money systems; in other countries Sun King has had to rely on its agents to collect cash.

Sun King markets its offering as a “pay as you go” service, similar to those provided by mobile phone networks. If customers run into financial trouble, they can “pause” their repayments, with their power system deactivated remotely until payments resume.

The default rate is low, Thakkar said, although he was not able to give details. (In the new securitisation, Sun King will cover all credit losses up to a specified level, which has not been made public.)

“I think that the value proposition for customers — if you’re using kerosene, or diesel, or candles — is so clear,” he said. “Solar has become cheap enough that if you can break up the payments over the course of a year, or 18 months, it’s less expensive. It’s safer, it boosts productivity, people feel more secure.”

The securitisation deal came ahead of next month’s Summit for a New Global Financing Pact in Paris, which will focus on mobilising capital to support development in low-income countries, with a particular focus on clean energy. Only 2 per cent of global investment in renewable energy over the past two decades was in Africa (which is home to about a sixth of the world’s population), the International Renewable Energy Agency reported last year.

Thakkar reckons this debate needs a greater focus on home solar power, which in many communities can “replace the idea of a centralised, expensive and often very carbon-intensive electric grid”.

“There’s a billion people who live without power,” he added. “It’s very unlikely that for a majority of these homes, the grid is going to show up and deliver reliable power.”

Bankers at Citi, which arranged this securitisation, think it could provide a blueprint for future transactions at a larger scale. Manolo Falco, the bank’s global co-head of investment banking, told me such deals looked like an attractive proposition for institutional investors who are increasingly seeking evidence of social and environmental impact alongside financial gain.

“This is a way for those investors to demonstrate that they are putting their capital where their mouth is around social responsibility,” Falco said.

Investors in the securitisation can expect to earn “a commercial return”, said Jorge Rubio, Citi’s global head of social finance, though he declined to give further details.

Thakkar said the repayment record of Sun King’s 5mn household customers to date showed that “a securitisation like this offers investors pretty good, predictable returns . . . And every dollar going into a facility like this is really going to deploy purchase financing for solar equipment”.

The $130mn committed is enough to finance credit for another 1mn Sun King customers. But with more than 500mn African people lacking electricity — and the continent’s population set to nearly double by 2050 — there will need to be an awful lot more where that came from. (Simon Mundy)

Smart reads

• FT Lex has slammed ESG funds for remaining hugely underweight in defence stocks even after the invasion of Ukraine. “A movement aiming for ethical superiority risks becoming detached from reality.”

• Tesla’s decision to open its charging network to rival carmakers has sent shockwaves through the electric vehicle charging industry, writes Claire Bushey in Chicago.

• EU regulators have pointed to “clear evidence” of widespread greenwashing by European banks and other financial institutions, report Kenza Bryan and Alice Hancock.