Why Pay-As-You-Go Solar Companies Are Raising Big Bucks In Africa
It has been a bumper month or so for African pay-as-you-go (PAYG) solar companies, continuing a tradition established over the last couple of years of such firms raising big bucks to expand at an ever greater pace.
East African company M-KOPA Solar is amongst the best funded, and recently raised another $80 million to be used over the next three years to finance installations in one million homes, on top of the 500,000 already connected.
The West Africa-based PEG Africa is also well-backed, in October securing its latest round – $13.5 million through a combination of debt and Series B equity financing which will be used to accelerate growth in Ghana and Ivory Coast to reach 500,000 people.
Azuri Technologies and BBOXX are among the other companies in the space to secure major funding rounds. But what makes solar companies in Africa so attractive to large-scale investors.
According to Hugh Whalan, CEO of PEG Africa, it is because the continent is the perfect place for PAYG solar companies to thrive. It has large off-grid populations who pay a lot of money for polluting fuels like kerosene, candles and batteries.
“This means our customers have a willingness to pay for our products,” he said.
Pay-as-you-go solar and mobile money
Meanwhile, high mobile phone ownership in many countries means solar companies can reach customers remotely, reducing operational costs. Mobile phone ownership is also crucial for another key factor – mobile money – which Whalan says is key because cash collection is expensive and getting paid with mobile money allows easier servicing of remote populations.
“These three things in combination don’t really exist elsewhere. Mobile money is either not popular, or the crappy polluting fuels are heavily subsidised, meaning customers have much less willingness to pay.”
Simon Bransfield-Garth, CEO of Azuri Technologies, agrees that mobile money and the advent of the pay-as-you-go model have offered a huge opportunity to solar companies.
“As the PAYG model becomes more established, companies are able to improve their data and customer insights, and better predict repayment rates. All of this provides investors with the data they need to underpin the investment opportunity,” he said. “The market is seeing investment from a number of sources, from corporate and private equity to crowd finance, demonstrating the wide appeal of the sector.”
The opportunity for solar companies is clear, he says.
“There are 600 million people in sub-Saharan Africa without access to energy, and the market is only growing as the population increases. The market is also still in its infancy, providing a number of companies with room to grow,” said Bransfield-Garth.
Investors are looking for a combination of good financial returns and positive social and economic impact.
“The industry started out mainly with social impact investors, and most of the earlier funding rounds a company raises are still dominated by them. However, larger companies are raising often from commercial funds,” Whalan said.
For Bransfield-Garth, it depends on the type of investor.
“The crowd are primarily looking to make a difference and most keen to see an impact. But even the rates of interest offered are also interesting in the context of historically low interest rates elsewhere, on savings for example,” he said.
“So, individuals see it as a good use of their money. They can earn and do good at the same time. Institutional, more sophisticated investors are primarily looking for a return but also want to see their money being put to good use.”
The funding is coming in a variety of forms, with the likes of M-KOPA and PEG raising both debt and equity finance. Whalan said they both have their benefits.
“You need equity when you start, but once you are up and running and have a track record, you want as much debt as you can responsibly raise because this is what gives you the leverage to achieve good returns for your equity investors,” he said.
Bransfield-Garth agrees that equity is required in the early stages of the market when the investment case is unproven, but that companies swiftly move to debt.
“As the quantity of historical data increases, so the market is opening up to debt investment. In the longer term, it is expected that debt investment will dominate the working capital provision for the sector,” he said.
Whatever the reasons, and whatever the form in which it arrives, funding is flooding in for solar businesses.
Bransfield-Garth said the recent debt funding secured by Azuri will provide working capital to help it expand its product reach and accelerate its growth.
For Whalan at PEG Africa, the recent round will help the company cement its leading position in its two markets and build out its suite of products and services to customers.
“Importantly, this funding will allow us to reach half a million people, which we anticipate will be enough to get us to profitability,” he said.
Tom Jackson is the co-founder of tech news and research platform Disrupt Africa and a journalist covering innovation on the continent from the Cape to Cairo.