Market Analysis

The next generation of solar fintech

April 27, 2023
Solar panels

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.

What is the global landscape for rooftop solar today?

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.

Fig 1: Estimated growth in global solar PV capacity, by region (2021-2027)

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.

How does fintech help scale rooftop solar?

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:

  • Direct ownership, made possible by solar loans to residential homeowners;
  • Net billing, in which customers consume some amount of electricity generated and sell the surplus back to the grid;
  • Lease-to-own models, in which customers can lease a system with the option to purchase it at the end of a period;
  • Lease-back models, in which customers receive a loan from a provider and then use this to lease the system.

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.

What defines a market where solar fintech will succeed?

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:

  • High electricity tariffs and taxes - The operating cost of rooftop solar is close to zero, since there is no fuel cost for turning sunlight into electricity. This means that when homeowners face high prices for electricity from the grid, the benefits of switching to solar increase. Markets - or customer segments - with high electricity tariffs will be more amenable to installing rooftop solar.
  • Established footprint of local installers - The success of a venture offering rooftop solar financing necessarily depends on the ability of customers to get the panels themselves installed. There are a number of markets which require rooftop solar to be scaled, but which do not yet have a sufficient local supply of contractors able to do this work.
  • Lack of solar-specific financing and software - In the US, before solar-specific financing was available, customers typically had to rely on home equity lines of credit in order to finance installation. These are suboptimal: They can limit a homeowner’s access to equity when other unexpected costs occur, and often are built using variable interest rates. If a solar market primarily relies on this kind of non-solar financing, there is significant opportunity for a solar fintech venture to compete with incumbents. Moreover, even when residential solar loans did emerge in the market, they were not easily available. After having their home assessed by installers, customers would have to seek financing through a bank. This process was slow and created customer churn. Innovations such as Mosaic’s installer software made instant deal closing possible.
  • High cost of capital - One of the advantages of solar fintech is that it can aggregate volume, which drives down the cost of capital. This provides an opportunity to undercut local financing options, particularly in emerging markets where borrowing is costly for consumers. One example of this is Mexico - and one reason we are excited about building Solara, a solar fintech venture that is starting its global journey in Mexico.
  • Permissible regulatory environment - Solar financing operates at the intersection of two areas which can be extremely sensitive to government regulation - energy and consumer finance. This can make it difficult for solar financing to be a compelling venture, no matter the particular business model used. China is an obvious example of a market which is difficult to enter due to regulation; however, even in the European Union there are a number of countries where the model has struggled. In the US, permitting can be a challenge in a given market; SolarAPP is an example of industry getting ahead of this to streamline the permitting process through automation.

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.

What does this mean for the next generation of solar fintech companies?

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:

  • Orka, which focuses on small businesses in the US. Growth in this market has been flat, despite customer need and an increasingly supportive regulatory environment. Orka has developed innovative lending methodology in order to make it easier for small business to access solar finance.
  • Solara, which focuses on C&I customers in Mexico. There, a combination of factors - including expensive lending rates, undercapitalization, and the lack of fintech - has limited the growth of the market. Solara is addressing these issues in order to provide financing to Mexican C&I customers.

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.