RWANDA – Rwanda’s energy ambition received a boost following an endorsement of a financial instrument by the Global Innovation Lab for Climate Finance that will accelerate the deployment of solar home systems.
According to the Global Innovation Lab for Climate Finance, the first issuance will be at US$ 9 million and will enable the deployment of solar home systems for 175,000 households.
According to New Times Rwanda, the institution approved the piloting of solar securitisation in Rwanda, which seeks to improve the financial capacities of developers to enable them to expand and meet the demands in the local market.
Rwanda targets to connect 300,000 households annually to off-grid energy solutions if it is to meet the 2024 access target. It is anticipated that by 2024, off-grid solutions will contribute up to 48 per cent of national electrification.
Among the hurdles include the fact that considering that systems are financed by customers, sales have been relying on the solar developers’ ability to leverage their own balance sheets which are often constrained.
The firms have often been constrained due to substantial collateral required by few commercial and concessional funding sources available. However, this is set to change with the financial instrument, solar securitisation.
By pooling solar home system loans into tradable asset-backed security and providing solar developers access to more liquid capital markets, the intervention aims at increasing the developers’ ability to leverage and allow for a rapid expansion of the solar market.
Eligible loans from the solar home companies will be pooled into a special purpose vehicle (SPV), overseen by the trustee.
Loans will then be underwritten, priced, and divided into tranches. The instrument will be split into two tranches, with tranche 1 being sold to investors, and tranche 2 serving as a subordinated, first loss facility to provide downside protection to the senior tranche.
While development finance institutions (DFIs) will be needed to provide funding for design-stage capital and the first loss credit enhancement (subordinate tranche), commercial and retail investors will most likely be the buyers of the senior tranche.
The Trustee will oversee the flow of funds from the sale of the security to the solar developers, as well as the funds from repayment of the solar loans to the investors.
“At scale, the instrument can reach US$ 100 million in size in Rwanda alone, targeting 2 million households, and later be expanded to other East African countries with similar energy access and economic/institutional conditions,” the institution said in a statement.
Rwanda was selected as the first market based on the considerable market, institutional influence, high economic growth rate, and a positive regulatory and political environment, the statement said.