In our latest sector deep-dive, we look at the global distributed solar landscape - and lay out our thinking on where the next generation of solar fintech companies could be. You can see our earlier perspectives on building decarbonization, the Inflation Reduction Act, and the climate finance landscape on Ezra Insights.
Solar photovoltaic (PV) generation needs to grow by 25% annually between 2022 and 2030 in order to meet the IEA’s net zero target, from 1 TWh to 7.4 TWh by the end of the decade. Today, utility-scale solar projects make up ~55% of installed capacity, followed by three different kinds of distributed solar: Commercial (27%), residential (16%), and off-grid (~1%). The balance between utility-scale and distributed solar will remain roughly the same over that period. We focus on distributed solar in this article because of its relevance for fintech.
PV must be scaled significantly in all regions. The bulk of growth is in China, which - despite starting with the highest installed capacity in 2021 - will also have the highest growth rate, increasing 350% by 2027 (Fig 1). However, even smaller regions such as Asia Pacific (excluding China) and Latin America must more-than-double their installed capacity in a short period. This creates significant opportunities for distributed solar ventures across a number of markets.
Fortunately, the technology has proven it can quickly scale. Annual global installed rooftop capacity grew ~9x between 2010 and 2021, from 8.5 GW to 75 GW. This was driven largely by the 80% drop in the cost of rooftop solar equipment and installation over the past decade. Most of this growth was in the US, the European Union, and China.
Innovative business models are critical to scaling distributed solar at pace. We have seen the impact of business model innovation on the speed of deployment in the US over the past decade - as Wood Mackenzie notes, “Residential solar market growth in the US is strongly linked to the availability of a wide range of financing options,” such as solar loans and third-party ownership (i.e., leasing).
This is in large part because of the mismatch in solar’s value over different time horizons. Despite the fall in component and installation costs, solar PV systems can still have high upfront costs for homeowners and businesses. This can deter potential customers, despite the long-run benefits from lower electricity bills. Financing has been a critical success factor for scaling distributed solar in the US because it rectified this mismatch - something Ezra witnessed firsthand at Mosaic.There are a variety of financing innovations that have been created to address this mismatch in value. Examples include:
We believe that these innovations are ready to be replicated in new markets. Many of the markets that require a disproportionate scaling of rooftop solar have not yet seen these models in the market. Indeed, financing and business model innovations are the first challenges that the IEA lists in a 2022 report on the state of rooftop solar:
“Upfront costs remain a significant obstacle to lower- and middle-income households, and new business models have not yet adapted to these potential consumers. Financing also remains an issue in developing countries due to higher perceived risks.”
Of course, this cannot be a simple copy-paste of the solutions that have worked in markets like the US. For example, in many emerging markets another major barrier to entry is the sub-metering problem, where the electricity usage and production of individual units in a multifamily building must be tracked and charged accordingly. Solar fintech ventures entering these markets will need to tailor their approach to the needs of the local market.
We believe there are (at least) 5 necessary conditions for rooftop solar fintech to be competitive in a market. We have developed these based on our experience launching Mosaic, Solara, and Orka across their own unique markets. Note that markets can mean new geographies or new customer segments that are underserved in areas with existing options for other customers.The conditions are:
One market that has moved towards this set of conditions in recent years is the United Kingdom, a country not typically associated with solar. The UK government introduced feed-in tariffs in 2010, which lasted for almost a decade and had the effect of building a domestic installation industry. Since then, the country’s solar panel installation industry has grown by 18% annually since 2018. The effect of the war in Ukraine on UK energy prices was significant, making the market more amenable to low-cost alternatives. As a result, we are seeing a new generation of solar fintech companies such as Sunsave now entering the market.
Company-builders should focus on finding geographies or customer segments where these conditions are in place. We have co-founded two companies using this approach:
There are multitudes of new geographies and customer segments undergoing similar transformations. New solar fintech companies will be critical in providing the financing solutions that allow rooftop solar to finally scale in these markets.