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In wealthy nations the green energy debate is focused on replacing carbon-belching fossil fuel power with cleaner forms of generation. But for many people in the developing world the real challenge is getting access to any kind of energy at all. This problem is particularly stark in Africa, where more than 500mn are without electricity. But a new financial structure offers one model for how international investors might help to tackle the problem.
Sun King is a business that provides small solar power kits to households that are not connected to an electric grid. The basic product consists of a solar panel, a battery, a power outlet for charging phones or other devices, and an electric light. Its retail value is $110. This is too steep for many families in the developing world. So instead, the families pay for the system in instalments, typically once a week over the course of a year.
The total cost to the customer comes to $130. So that's an effective interest rate of about 20 per cent. In Kenya, most pay through the country's ubiquitous mobile money system. In other countries, payments have to be collected in cash. So far, Sun King has reached 5mn homes in eight African countries, including 1 in 5 homes in Kenya. But that's still just a fraction of the family's lacking electricity on the continent.
Now, though, the company has got a fresh burst of funding from international investors, thanks to an innovative financial arrangement created by bankers at Citi. They created a Special Purpose Vehicle, or SPV, which will borrow $130mn from international banks and development finance institutions. The $130mn will be used to buy customer loans from Sun King. And the SPV will then repay the creditors with interest as the customer payments flow in.
Sun King, meanwhile, has a new chunk of capital, which it will use to roll out solar power to about 1mn more households. It's by no means a perfect solution. There are plenty of potential obstacles for this approach. These include the difficulty of collecting payments in cash-based communities and the so far limited interest of most international investors in this kind of scheme. But if the model proves effective, it might just offer a useful new tool for tackling one of the world's most pressing challenges.
