Recommendations and opportunities for catalytic financing to scale PUE

This article is part of a series by GET.transform and Sun-Connect News about the changing nature of the Productive Use of Energy (PUE) landscape. We hope to inspire a new dialogue on Energy for Rural Industrialisation, inviting practitioners to discuss opportunities and shape the sector to capitalise on emerging trends. Join the conversation through the hashtag #E4RI on LinkedIn or Twitter.
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A study published by GET.invest assesses what it takes to (a) enhance the uptake of PUE finance by potential customers (e.g. hardware and service providers, individual entrepreneurs, farmers and coops), (b) accelerate the market for PUE technology and solutions, and (c) scale up the impact from deployment of PUE solutions.

Here are the key recommendations for financing to scale PUE

A. Financing project-level investments


  • Promote and capitalize instruments that lower up-front cost for users

Increasingly, developers and some financiers are identifying leasing as a key opportunity in this space as an alternative to long-term loans. Leasing has two notable advantages. First, it allows a client to secure the renewable generation and productive use assets for use without requiring full payment upfront; rather, the lease terms ensure that the supplier (who may even be the financier) is repaid for the asset over time. Secondly, in some jurisdictions, developers have noted that structuring an asset leasing approach allows them to sidestep regulatory requirements that would otherwise require them to secure a generating license, thereby saving on permit costs.

However, the ability for a company to provide leasing depends on the availability of suitable financing to bolster its own ability to provide credit directly to its partners or in partnership with a financial institution. Overall, it is critical to make capital available to operators, producers and distributors of PUE so that they can offer more supplier/seller finance to end users, bringing down upfront costs and rather spreading costs out against operating revenue for end users.


  • Deepen available capital through concessional debt and investment grants

The most critically needed financial tool, as stated clearly through the interviews, is investment grants and subsidies to the PUE sector. It is a nascent segment based on the marriage of a relatively new technology with adapted processing technology or tools. Grants would also create further innovation and localization of existing technology. Complementing other impact-oriented funding, such as impact investors and crowdfunding platforms, grants could be a key area worth exploring. Overall, the cost of capital is too high for the narrow margins of PUE which arise from serving primarily rural, low-income client bases.


  • Provide hedging or access to local currency finance to mitigate currency risks

Increasing availability of local currency finance or providing affordable tools to manage FX exposure borne by companies is key to PUE sector growth. Mobilising local currency finance will take substantial technical and capacity investments in local banks, so FX guarantees may be the next best alternative. Currently, the best-known currency hedging solutions for renewables come from MFX and TCX.

However, scale, structure and pricing are all constraints with these two funds, as the primary modality for deployment offsets FX risk for lenders in structured finance projects for larger scale infrastructure. A more tailored approach for PUE operators is needed. The revenue sharing asset finance approach provided by Untapped Global is one example of a better tailored approach for PUE, where the financier provides up-front asset finance in hard currency and accepts revenue sharing in local currency. However, this is only available with certain currencies and for qualified companies now, and probably requires a blanket grant facility to underpin FX risk mitigation to grow in scale.


  • Bolster scale by providing finance direct to hardware suppliers focused on bespoke PUE

The hardware suppliers’ model puts the distributor (or installer) of PUE equipment at the centre. The supplier establishes a direct relation with the end-user as client. The supplier may sell PUE equipment (on a credit or rent-to-own basis) or may offer a rental and/or fee-for-service scheme to the client. The distributor will need both asset finance and working capital which needs to be provided by a thirdparty lender.


B. Financing product-level investments


  • First-loss portfolio guarantees to PUE-oriented lenders

While different financial structures and deployment models exist, it is clear that there is a need for mitigating the financial and operational risk associated with the different mechanisms. This is particularly critical in achieving scale, as market feedback so far indicates that much of the capital supporting initial prototypes of the models above has been largely grant funded. As (micro) financial institutions are brought in with more risk mitigation capacity from third parties, there will likely still be need for grant resources to subsidize the underlying cost of that risk transfer, among other things.


  • Securitized receivables financing to achieve scale

Receivables financing may be considered for PUE equipment / solution providers who technically are able to scale (i.e. market potential identified) but face credit/liquidity challenges. Receivables financing is already in use by some leading SHS companies (e.g. SolarNow in Uganda) allowing them to scale up operations. In the PUE sector its use is still limited – SunCulture, on project-level PUE, being a positive exception to this. As other operators mature, they may also be sufficiently sophisticated to take a similar approach.


  • Bolster end-user credit availability through direct risk sharing with developers and manufacturers

More innovative forms of direct risk transfer, particularly structures that cover or reduce the end-user credit risk for a mini-grid or SHS operator to extend credit to existing clients for appliance purchase, might be better aligned with growth. While supporting the development of PUE-friendly local debt through first loss guarantees to financial institutions is key (see above), sharing risk directly with developers, distributors, operators and manufacturers of PUE is equally important. Using risk mitigants like borrower-side credit guarantees or price hedging instruments to address the risk of expansion into appliance sales for any “last mile” ESCO would likely spur high-impact growth.


  • Foster a more explicit strategy to support product-level PUE access through crowdfunding

As indicated before, availability of RBF does not cease the need for up-front capital required to implement an investment around PUE. With the increased availability of RBF for appliance delivery, working capital requirements could potentially be fulfilled by non-traditional financiers like crowdfunding agencies. Pursuing this route would require more exploration, however, on the priorities, terms and conditions put forward by crowdlending companies. This is of special importance in co-financing situations where due diligence and supervision of loan products need to be coordinated between different financiers.


  • Expand the role for MFIs in direct consumer finance to access PUE products

The MFI consumer financing model entails an active cooperation between the (M)FI and the distributor. Whereas the distributor remains responsible for delivery of equipment, installation and providing after-sales services, the MFI branch – availing of an existing client network – engages with potential customers in terms of promotion and order placement of the PUE equipment. The MFI also provides credit to these customers, who most likely will have a credit history with the MFI.

The head office of the MFI (or alternatively, a separate financial institution which will establish a working relation with the MFI) will enter into a cooperation agreement with the distributor. This cooperation agreement will, apart from the credit terms and conditions, include topics around buying back of equipment, warrantee claims, etc. The FI or MFI Head Office extending loans to the MFI may be backed up by a credit risk mitigation tool (e.g. an FLPG).

Excerpt of: Financing and Scaling Productive Use of Energy: Challenges and opportunities for catalytic growth (GET.invest 2023)

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