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Q&A: A new path to funding African solar projects
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What if you could buy tradeable tokens that earn returns while powering rural communities? That’s the idea behind Electrify.solar, as explained by its founders, Martin, Elsa, and Mohammad, in an interview with Renewables Rising. Their blockchain model converts future electricity sales into digital tokens, opening a new path to finance solar projects.
Investors can buy these tokens to provide capital for construction. Later, they sell the tokens to local consumers, who use them to pay for their electricity. This method addresses the "bankability challenge" for small-scale projects by reducing the high legal and documentation costs associated with traditional debt financing.
“About 600 million people in Africa lack access to electricity, and while there is an abundance of capital available to solve this problem, there isn't a scalable, transparent model to efficiently deploy it. Our goal is to bridge that gap,” said Mohammad.
More details
Q: Could you explain the Electrify.solar financing model?
Martin: We are tokenising electricity sales from a project and selling these tokens to investors to raise capital for project construction. We do not develop the projects ourselves; we receive proposals from developers and screen them based on commercial viability and social impact. We then match these profiles with investors and social impact funds.
Our platform aims to enable private sector participation in small-scale projects alongside concessional capital. The main challenge we overcome is the "bankability challenge," where small projects are not viable for traditional project financing due to high documentation costs.
Instead, our system allows investors to recover their capital by directly selling the rights to electricity to consumers through our trading platform. Consumers top up their prepaid meters using the tokens, which act as a currency for electricity purchases. This method helps us avoid the prohibitively expensive documentation costs associated with conventional project financing.
Mohammad: To break it down step by step:
We identify a community solar project, which is a solar and battery-powered mini-grid where consumers use smart meters on a pay-as-you-go basis.
We predict the project's future electricity generation that will be used by consumers.
We tokenise this predicted amount. For example, if we expect five million kilowatt-hours over the project's lifetime, we create five million tokens, with each token representing one kilowatt-hour.
We sell these tokens to investors globally. The money from these sales goes to the developer to build the project.
Once the project is operational, consumers must buy the tokens from the initial investors on our platform to top up their smart meters. This creates a guaranteed marketplace for the tokens, allowing investors to easily recover their capital.
Q: What is the current size of your project portfolio, and in which countries have you deployed your model?
Martin: We are currently in the piloting phase of our model. We are looking at a portfolio of projects in Kenya, where we are also developing the software to support the repayment scheme. Our ambition is to have the pilot completed by the end of the year. Once we confirm the system is working and is scalable, we will launch it as a commercial initiative.
Mohammad: We have signed Memoranda of Understanding (MOUs) for projects in South Sudan, Zimbabwe, and Kenya with a total investment value of over $100 million in the pipeline.
Q: What criteria do you use to select projects, and how do you determine if a project is 'bankable' for your model?
Martin: We look at two main dimensions when selecting a project, both of which are based on what capital providers look for: commercial profile and social impact.
The commercial profile is about making sure a project is bankable, which means confirming there's enough demand for electricity in the project's area.
On the other hand, our social impact approach is a unique part of our model. It allows us to match backers with very specific goals to the right projects. For instance, a charity that helps children can buy tokens that are used only for a school's electricity meter, while a foundation dedicated to healthcare can provide tokens to power a health clinic. This gives social impact investors a level of transparency they've never had before, showing them exactly how their funds are making a difference.
The model is unique because it allows us to match the specific capital allocation criteria of different investor groups. We look at each project individually to see how it aligns with the goals of both commercial investors and social impact stakeholders.
Mohammad: The first step in evaluating a community solar project is confirming there is sufficient electricity demand in the community. Surveys are conducted to assess this. If demand is adequate, the next step is technical due diligence: site suitability studies such as topography, hydrology, and geotechnical surveys, along with a solar resource measurement campaign to estimate future energy production. In addition, we review the regulatory environment to ensure the project can proceed legally and sustainably, and we carry out a social impact assessment as a key criterion.
From a developer’s perspective, much of this groundwork, demand studies, technical assessments, and social studies, is already done before a project reaches us. Our role is then to prioritise among multiple proposals from different developers. For that, we are leveraging the wealth of clean energy project development experience of our founding team to build a framework for selecting the strongest projects based on both commercial viability and social impact.
Q: What types of projects and market segments do you prioritise for this financing model?
Elsa: For now, our focus is exclusively on mini-grids. We are piloting the model in these communities because they are not connected to a central power grid, and we want to give them access to electricity. We believe this technology can be expanded to larger utility-scale projects in the future once our concept is verified and its scalability is proven.
Q: Who are your target investors? How do you balance investor returns with making electricity affordable for consumers?
Elsa: We have a diverse pool of investors, and this directly impacts the types of projects we target. The social impact part is important because we are working with mini-grids in areas that are not connected to the main power grid. Our goal is to provide these communities with both access to electricity and affordable electricity to meet their unique needs.
Mohammad: The key advantage of our model is that it allows for straightforward blended financing. We do not target a single group of investors; we aim to combine capital from retail investors, institutional impact investors, and philanthropic organisations. The projects are commercially viable, offering attractive returns for retail and institutional investors. At the same time, they meet specific social impact criteria that appeal to philanthropic organisations.
We can also issue different types of tokens. For example, a philanthropic organisation providing concessional financing could receive tokens with a lower return rate. This benefit is then passed on to commercial investors, making the overall project more attractive. The goal is to blend capital from diverse profiles to make projects economically viable while keeping electricity affordable for the local population.
Q: How is the pricing of tokens determined, and how do you manage currency risk?
Mohammad: To determine token pricing, we first estimate the project's future energy generation, for instance, five million kilowatt-hours. We then apply an internal rate of return to discount that future production back to a present value. This gives us the number of tokens to be issued today.
The total cost of the project over its lifetime (including capital expenditure, operational costs, and fees) is divided by the number of tokens being issued to determine the price per token. When investors buy these tokens, their return is guaranteed by a set increase in the number of tokens they hold each year at the internal rate of return, which is programmed into the tokens. For example, if you buy 100 tokens with a 10% return rate and you continue to hold them, you will have 110 tokens the following year.
The price at which investors sell the tokens to consumers is different and is regulated by the local authorities in the case of many of the markets we are exploring.
Elsa: When it comes to currency risk, while our pricing with respect to token sales to consumers is in local currency, we expect the regulated price to move with the utility's pricing. For example, in Kenya, if the local currency depreciates against the US dollar, the utility rate for electricity typically increases, and our pricing would follow suit. This helps protect the investor's return.
The return programmed into the tokens themselves is not in terms of a specific currency. As long as they continue to hold the tokens, an investor's number of tokens increases yearly at the internal rate of return, regardless of currency fluctuations. In some countries, tariffs might be more open and determined by market demand, which could also help regulate the price naturally.
Q: What are the main challenges you face when implementing this new technology, particularly in new markets across Africa?
Elsa: One challenge we've faced is that in some markets, the tariffs are not flexible and are set by regulators. Ideally, the price of our tokens would move with market demand, but in many places, this is not possible. We have adapted our model to work around this by embedding an internal rate of return in the tokens, which ensures investors get a return over time. Another challenge is ensuring the project's economic viability. We need to be sure there is enough demand from the local community to sustain the project and that they are able to afford the electricity.
Mohammad: To address the uncertainty in demand, we issue fewer tokens than the total expected energy generation of the project, creating a buffer for investors. Additionally, we have spoken with philanthropic organisations that are willing to buy tokens and agree not to sell them until all other tokens have been sold. This creates an additional buffer for commercial and retail investors.
From a regulatory standpoint on the funding side, a major challenge we anticipated was potentially being classified as an issuer of securities. However, after discussing with relevant regulators, we received preliminary confirmation that our tokens will not be considered securities, which means we can avoid the typical regulatory constraints on security issuance. This is a significant advantage over other crowdfunding platforms.
Elsa: A practical challenge is consumer onboarding, as this is a new way for rural populations to buy electricity. We plan to use local agents, similar to the M-Pesa model, to help people in remote areas purchase tokens using a service like M-Pesa. We expect that having more agents will introduce competition among them to ensure fair and competitive pricing for consumers.
Q: How do you see this model shaping energy financing in emerging markets, and what are your future milestones?
Mohammad: About 600 million people in Africa lack access to electricity, and while there is an abundance of capital available to solve this problem, there isn't a scalable, transparent model to efficiently deploy it. Our goal is to bridge that gap. We want to facilitate the flow of capital from investors to developers by offering a model where investors can see exactly where their money is going, recover their capital easily, and do so with low transaction costs.
Traditional debt financing for solar projects can cost hundreds of thousands to millions of dollars in documentation and legal fees, making it unaffordable for small-scale projects. Our model eliminates the need for complex debt and equity structures by financing projects through the sale of future electricity generation. We believe this will be a key enabler for the electrification of a large portion of Africa's population.
Profiles
Martin is a finance and renewable energy expert at Mubadala, a $330 billion sovereign wealth fund. With 16 years in renewables, he's worked at Masdar, supported IRENA, and is now helping sovereign wealth funds invest in African renewables. His background includes roles at Boston Consulting Group and Danske Bank.
Elsa is a Senior Investment Manager at Sawa Energy, financing solar for small and medium commercial & industrial businesses in East Africa. Based in Nairobi, she previously worked as a portfolio manager for the Gabonese Sovereign Wealth Fund, focusing on sustainable investments. She also has a background in strategy consulting.
Mohammad is a Senior Manager at Masdar, where he develops large-scale renewable projects like solar and offshore wind. He currently manages 3 gigawatts of projects in Central Asia. Before Masdar, he worked as an analyst in commodities trading for Glencore in London.