Local Commercial Lending for Commercial and Industrial Solar PV in Rwanda

This blog is the second of a three-part series. The first blog focused on solar photovoltaic (PV) systems for households beyond the power grid. This blog addresses solar PV systems for commercial and industrial (C&I) users and providers. The third blog will discuss how C&I solar power development can have broader impacts on job creation, small- and medium- enterprises (SMEs), and local currency lending for clean energy.

Raouf Saidi, a Clean Energy Finance Expert with Crown Agents USA, contributed to this blog.

How can programs encourage and enable local commercial banks to lend to companies supplying solar home systems for off-grid customers? Power Africa supported the USAID-funded Climate Economic Analysis for Development, Investment, and Resilience (CEADIR) Activity’s training and technical assistance on this topic. In the process, CEADIR identified opportunities to expand to promote local bank lending for photovoltaic (PV) systems for commercial and industrial (C&I) customers.

Some of the participating local banks had a specific objective of increasing lending to small- and mid-size enterprise (SME) customers. They recognized that loan products to help SMEs reduce the costs and improve the reliability of electricity could be profitable and make SMEs better clients. Power Africa supported CEADIR’s expanded focus on developing the capacity of local banks to provide direct loans to SMEs for rooftop solar PV installations.

To validate the approach, CEADIR developed a model to calculate the return on rooftop solar investments for various SME market segments with different electricity costs. Rwanda did not have a net-metering regulation that would allow grid-connected utility customers to sell surplus self-generated electricity back to the grid. As a result, the model assumed that all of the solar PV power generated would be consumed during the day to offset the amount of grid-supplied electricity needed.

One of the participating local banks was eager to test this market and held a workshop to present the loan model and introduce a new solar loan product it designed for business and institutional clients. Ten SMEs attended the workshop. They learned that rooftop solar PV systems could reduce electric bills by $200,000-$550,000 over 10 years. The bank proposed a six-year loan that would allow clients to keep repayment costs at or below their current monthly electricity bills. This new loan product also offered better terms and conditions than typical business loans because the electricity cost savings would reduce repayment risks. The local bank also had a USAID Development Credit Authority (DCA) partial loan guarantee to reduce half of the principal repayment risks.

Following Power Africa’s recommendation, CEADIR issued a request for information that identified reputable solar PV providers. CEADIR developed a shortlist of companies with 1) a proven track record of high-quality, C&I rooftop solar installations in Rwanda; 2) a remote monitoring system to proactively identify system performance problems; 3) a potential client pipeline based on minimum electricity consumption criteria; and 4) audited financial statements that could support loan applications.

The SMEs that attended the workshop were interested in the potential cost savings, but some were uncertain about the ability of solar PV energy to meet their electricity consumption. Many had only ever seen solar PV systems used in back-up or remote off-grid installations and did not know how they worked. CEADIR introduced potential clients to the shortlisted solar PV providers so they could obtain specific, detailed information on potential applications.

CEADIR followed up to find out whether the assisted SMEs had actually applied for a loan. It found that there were still obstacles in convincing potential commercial and institutional customers in Rwanda to take out a loan for a solar PV system. It concluded that local banks have to take a more proactive, supply-side role in developing this market because SMEs often have more confidence in investment recommendations from local banks, rather than development assistance partners.

The transactional approach used in this activity could have had more impact on commercial and institutional investments in grid-connected rooftop solar with stronger involvement of bank marketing and sales teams from the start. The incentives for grid-connected PV investments could also be improved if Rwanda adopted a net metering regulation. There are also interesting questions about whether demonstration effects from the adoption of solar PV systems by grid power customers might contribute to the original goal of accelerating access to electricity in off-grid and small-scale systems.