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African solar: a new safe haven asset in times of crisis?

It's time to start seeing solar as an strategic asset

Written by Jeff Siegel
Posted May 13, 2020

**Today's editorial comes from Abe Cambridge, CEO and Founder, The Sun Exchange.

Investing in African solar in this time of global financial volatility and decline can yield solid, steady and long term returns. With new solar investment innovations, it is now possible to own solar assets through vehicles that suit any investor, business or homeowner. -- Abe Cambridge, CEO and Founder, The Sun Exchange
***
The Coronavirus, the oil price war between Saudi Arabia and Russia, and fears about a global recession have caused the greatest turmoil in global markets that today’s investors have seen. March 9th heralded the start of one of the most volatile stock markets in history, with brutal market crashes around the world. At the time of writing, the Dow Jones had dropped by over 6,000 points since February.

Many investors, businesses and members of the general public are scrambling to find ways to secure their loved ones’ financial futures amidst widespread tragedy and deep concerns about their families’ and compatriots’ health. While many are likely taking the opportunity to buy up low-priced stocks in good companies, others are seeking out safe haven assets such as gold and property, and even digital assets such as Bitcoin.

There is another less obvious potential safe haven asset that could form part of a balanced and green investment portfolio - solar revenue generating assets. Solar has the potential to provide, even in times of crisis, solid long-term yields without the volatility seen in other asset classes. Businesses have to pay for power. Solar power is cheaper. Its source, the sun, never goes up in price.

The African solar market

While it is too early to know the exact impacts of this global crisis on the African solar sector, most international commentators and renewable energy leaders view it as a robust sector with solid long-term prospects. This is especially true on the commercial solar power generation side. 

The reasons for this optimism are based upon pure market economics, the price and availability of solar power, and the climate commitments made by African governments to reduce carbon emissions.

Newly-built solar plants, for some time, have been cheaper than new-built coal powered plants. It has, however, been hard for renewables to compete with existing coal-fired plants - until now. Recent data shows that over 50% of coal-powered plants that are in operation today cost more to run than large newly built renewable energy plants. In fact, by 2030, a mere nine years away, it could be cheaper to build new utility scale renewable energy plants than to run existing coal powered plants.

Even when the impending long-term economic decline and predicted recession see African and other households, businesses and governments around the globe tightening their purse strings, those without grid electricity and especially those running expensive diesel generators will continue to turn to solar as the cheapest form of power.  Businesses on expensive, aging power grids are already welcoming cheaper cleaner solar power, especially when they do not have to provide the capital for the solar assets.  

Those energy users who are connected to the grid seek to make savings wherever possible, and energy is one area where they will be able to do that, as the cost of solar power per kilowatt-hour is cheaper than grid power (in most cases), resulting in immediate or long-term savings on their energy bills, depending on how a system is financed.

On the part of African governments, most have made significant carbon emissions commitments -- South Africa, Uganda, Nigeria and others are already rolling out utility-scale and other renewable energy projects often through feed-in-tariff programs. With stimulus packages coming down the line, governments will have the incentive to stimulate their economies while achieving cheaper and cleaner energy even during an economic downturn or recession. In fact, some may even make utility scale projects part of their stimulus plans, further boosting an already robust and flourishing solar sector.

Solar as an asset

Seasoned investors, business and individuals from around the world can invest in Africa’s solar market in numerous ways.

Buying shares in renewable energy funds can be highly lucrative with significant returns, especially if funds are well managed and if investments are made in strong, well-priced companies. There are numerous African and non-African funds to choose from, and investors have their pick.

However, there is a lack of control over where one’s money is invested and over fund decisions. The greatest drawback is that any fund that is exposed on the stock market is subject to market volatility and declines we’re currently witnessing.

Another form of exposure is in the price of electricity. When in early February this year, investment trust John Laing Environmental Assets announced that it had lowered its forecast for future power prices by 7.5%, the six largest renewable energy funds, with investments of over GPB 6 billion saw Net Asset Values (NAVs) fall by over 5%

Buying solar stocks, or shares in publicly traded solar companies can provide investors a greater degree of control over where and over how much of their money is invested. The returns can vary wildly, and will depend on the solar company and ultimately how it is managed.
 
Buying shares is easy to do and there are solid tax incentives, but picking the winners is hard --  a number of large solar companies (such as US-based veteran and solar pioneer company, RSG Energy) that have had significant market share have gone bankrupt in recent years. 

The drawback with this type of investment into solar, is that investors essentially lack control over their investments and business decisions made by the leadership of a company. In addition, holding shares in publicly traded companies means that investments will also be subject to the vagaries of the markets and market volatility, and as mentioned earlier, the price of electricity. 

There are other ways to invest which yield stable, yet attractive returns while protecting investors from fluctuating or falling markets.

The first way, for those with commercial or industrial business interests in Africa, is for the business to install their own solar system. 

According to African solar installers, those who pay upfront for their solar systems are seeing very solid returns on investment, payback periods of four to six years, and IRRs of 15% - 25%, especially when combined with the tax advantages such as South Africa’s Section 12B Tax Allowance. When a system previously ran on expensive diesel generation, the returns on investment can be even higher and more lucrative, even if the solar system includes batteries which are notoriously pricey. 

African markets have also seen exponential growth in the availability of power purchase agreements (PPAs). PPAs allow homeowners and businesses the opportunity to go solar without putting any money down. They pay only for the energy they are consuming for the 20-25 year lifespan of the solar system. If a homeowner or business can secure a PPA they will (in most cases) realise immediate savings on their electricity bills.

The downside for those without capital to invest upfront, is that favourable PPAs, or affordable bank finance is not that easy to come by yet. If home or business owners proceed to invest by using expensive bank finance, their solar system might not yield the returns they were aiming to achieve.

Finally, a major practical consideration would be that you’re going to be remaining in the property you are solar powering for the duration of the pay-back period to ensure that you recover the full cost of the solar power plant before/if you move premises. Tenants of the building would also need to ensure that they have full landlord consent, and that the building has had a full structural assessment, the cost of which is not always covered by the solar installation company or the landlord. 

The second and newest, and probably most innovative way to invest in solar assets, is by owning and earning rental income from remotely-located solar cells or panels. 

Through micro-leasing vehicles, anyone from across the world can purchase solar cells, and earn a steady and predictable income from the power they generate.

There are numerous benefits to going this route. In addition to having the flexibility of incremental purchasing, not having to own or even occupy the building being solar powered, the buyer has control over where solar assets are installed and which individual projects they solar power. 

Investors can even amplify their environmental impact by choosing to solar power schools, retirement homes, farms or clinics in the world’s sunniest regions. Under such arrangements, you should ensure that your chosen service provider fully insures your remote solar cells for fire, theft and third party liability to ensure sustainability and reduce risk. 

The returns are solid and stable, with those owning solar cells receiving inflation-adjusted monthly rental income payments equivalent to an internal rate of return (IRR) of 12-15% for the duration of the micro-lease (usually 20 years). As this is a direct asset purchase, in  some tax jurisdictions there are accelerated depreciation allowances available, increasing the effective IRR even further. South Africa’s Section 12B Tax Allowance allows a tax deduction equal to 100% of the cost of any solar cells one purchases in the year they were first brought into use.

With these asset purchases, which operate similar to annuities, liquidity can be an issue in some cases for those who need ready access to cash. It is highly likely that future trading platforms for solar cells will allow owners to sell their assets to the highest bidder. 

To conclude - it is unclear what sort of world and markets we will wake up to once the Coronavirus and oil crises have been resolved. It is likely to be a radically changed one. However, what is certain is that the world, the African continent and its people will continue to need energy to build and rebuild. This is ultimately what makes solar a robust safe haven asset - and the fact that as long as the sun shines, solar will be the cheapest and cleanest form of energy around.
 
 
Sun Exchange is the world’s first peer-to-peer solar cell leasing marketplace. Through the Sun Exchange online platform, anyone, anywhere in the world, can buy remotely-located solar cells and lease them to power businesses and organisations in sunny emerging markets. Solar cell owners earn income from the electricity that’s generated, while schools, businesses, clinics and other organisations secure access to affordable clean energy, reducing electricity costs and carbon emissions. 

 

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