Can Fintech accelerate the transition to solar energy?

By Annika Mulaney and Alejandro Safdie

The urgency to act upon climate change — coupled with recent advancements in climate technology — may unlock attractive fintech investment opportunities in Latin America that focus on improving distribution, financing, and user and business experience.

Below we explore our findings on promising fintech opportunities that advance solar energy efficiency and distribution.

The Solar Energy Revolution

In 2023, wind and solar accounted for only 9% and 6% of Latin America’s total electricity generation, respectively. Hydropower dominated the space, with 43% of total power generation. With costs declining, however, wind and solar are soon expected to outpace hydropower generation. Wind and solar represent more than half of total capacity additions over the last three years and account for 95% of projected future renewables expansion in Latin America.

The chart below shows the share of electricity generated by source in six major Latin American countries. Brazil leads the renewable energy transition in Latin America, sourcing 50% of its total energy from renewables and 91% of electricity from renewables. On the other hand, Mexico and Argentina source less than half of their electricity from renewables and represent tremendous potential for growth.

Source: Ember Climate

There are two major ways to deploy solar energy: utility-scale solar photovoltaic (PV) projects — which provide electricity to a grid — and distributed solar PV systems, which are small-scale systems that generate electricity on site and use it or export it to the grid. Utility-scale solar currently accounts for 55% of global installed solar capacity, and distributed solar accounts for the other 45%.

Two benefits of solar energy differentiate it from other energy sources:

1. Affordability: Solar is now the least expensive source of electricity, according to the International Energy Agency. From 2010 to 2019, the cost of generating solar electricity declined 80% from $378 per megawatt hour (MWh) to $48/MWh. China accounts for 80% of global solar panel production and invests heavily in research and development to reduce costs. The primary cost reduction factor is improved panel efficiency, which results in a higher percentage of sunlight able to be converted into electricity. Other factors are advances in manufacturing and scale of production. Furthermore, solar power is cost-effective to produce on both small and large scales. While fossil fuels, water, and wind power benefit from large electricity-generating units in centralized power plants, rooftop solar generation leverages the existing infrastructure of a house or building without incurring long distance transmission costs.

Source: The World Economic Forum and Statista

2. Accessibility: Distributed solar generation makes it possible for households, businesses, and industrial plants to install their own panels and generate electricity regardless of weather variability. Sunlight is accessible nearly everywhere, reaching even the most isolated, remote areas without the need for complex infrastructure. The average solar panel installation needs 4 peak sun hours per day to produce enough power, in which a peak sun hour is an hour when irradiance levels reach 1,000 watts per square meter. While peak sun hours can vary by location and season, when solar systems are paired with battery storage, they are able to provide power regardless of the weather or time of day.

The Solar Fintech Startup Ecosystem

Most climate projects — including solar panel manufacturing and utility-scale solar farming — involve physical infrastructure. According to Coldwell Solar, a 1 megawatt utility-scale solar farm, which powers approximately 160 homes, requires 5–10 acres of land and 5,000 solar panels. Solar projects have steep capital requirements and long development timelines before reaching commercial viability, qualities which make them better suited for large-scale private equity investors.

As venture investors, we are naturally drawn to more capital-efficient models that can scale rapidly. So where does this fit with climate investments?

When evaluating new businesses, we look for tech-enabled solutions that drive adoption, improve decision-making, and reduce costs. Example fintech business models include trading marketplaces, lending products, and insurance products. Solar fintech solutions can be segmented into the following subsectors:

• Solar Lending: Companies that facilitate loans and leases for distributed solar panel systems to homeowners and/or businesses
• Solar Marketplace & Trading Platforms: Digital platforms that 1) connect consumers to on-grid renewable energy plants or 2) connect homeowners/businesses to off-grid solar installers and lenders
• Energy Analytics: Companies that surface consumption data to help consumers save on energy bills and businesses leverage data to optimize plant performance

Below is a mini market map of startups in the Latin American solar fintech ecosystem:

Source: Founder and investor interviews, company websites, and Pitchbook

These companies’ fintech solutions seek to improve solar energy costs and simplify sales processes for end customers. Understanding the economics of distributed solar is complex: to estimate savings, customers must compare steep installation costs to projected electricity bill costs over a 10–25 year period, and studies such as this EY survey find that customers are still unlikely to pay a premium to adopt solar energy. However, there is an opportunity to overcome the friction by smoothing upfront costs.

Mature solar lending companies in the US offer some valuable takeaways. With the emergence of new financing options from GoodLeap, Sunlight Financial, and Mosaic, loans in the US residential solar market grew 40% year-over-year in 2021 and financed 70% of residential solar installations. In the distributed solar space, where upfront costs are a barrier to adoption, innovative financing models are critical.

Key Takeaways

When we recently held a series of conversations about fintech’s ability to drive solar adoption with investors and founders operating in the space, three key takeaways emerged.

1. Transitioning to solar energy should be a seamless and cost-saving customer experience.

High upfront costs and lack of customer-centricity in the sales process still prevent mass adoption of solar energy. Solar lending models — including solar-as-service, solar lease, and solar power purchase agreements — are well-positioned for growth. Furthermore, marketplace offerings that serve as a single touchpoint for sales, lending, engineering, maintenance, and tracking can provide the most seamless customer experiences.

2. Truly scalable, capital-efficient players suited for venture funding are still uncommon in the space.

As mentioned earlier, most traditional solar energy companies are capital-intensive and have long timelines to reach profitability, which makes them less attractive for venture investment. For example, SolarCity became the top residential solar installer in the US in 2013, but accumulated $3 billion in debt by the time of its acquisition by Tesla in 2016 . The value add of pure-play software solutions in the solar space is nascent, but we are witnessing the rise of marketplace solutions that manage a third-party network of OEMs, installers, and finance partners instead of absorbing the costs themselves. In addition to solutions acting as integrators, we believe it is important to ensure they offer value-add services (such as data analytics and automated workflows) to maintain differentiation from competitors.

3. As with fintech more generally, policies and regulations are fundamental to determining which business models will thrive.

Brazil’s last decade of solar energy growth demonstrates that regulations have a significant effect on demand. Brazil, the world’s third-largest solar market in 2023, accounts for 80% of Latin America’s investment in small-scale solar. Over the years, the Brazilian government has implemented several tax incentives and favorable regulations to promote clean energy generation. However, a January 2022 law establishing a grid access charge with a 12-month sunset clause caused a surge in demand until the end of the year and a decline from 2023 onward, when the law took effect. This data demonstrates that regulations have a significant effect on solar energy demand in both directions. Brazil serves as an example for other Latin American markets, where we will look for regulatory tailwinds that promote renewable energy development. We believe that Mexico, Colombia, and Chile are three countries to watch, given that Mexico’s recent election may shift policy toward support for renewable energy, Colombia has increased tax incentives in the last five years, and Chile created programs to co-finance renewable energy in small-sized enterprises in 2023.

In summary, we observe that there are three main types of solar fintech solutions today — solar lending, solar marketplace/trading, and energy analytics platforms — that seek to reduce costs, improve customer experience, and ultimately drive solar adoption. We expect newer fintech technologies and business models that enable the hypergrowth of the sector will appear.

Given all that we have learned about Latin America’s vast potential for renewable energy generation, rising government support, and growing markets, we have conviction in the opportunity for solar energy fintech. The future of the solar sector will undoubtedly depend on market-specific regulations and macroeconomic conditions, both of which are difficult to predict. However, we expect energy consumers to rapidly adopt solar energy because of its increasing affordability and accessibility. There is a stronger than ever global urgency to transition to a cleaner energy matrix and we will follow the markets where we observe regulatory tailwinds promoting renewable energy development. As these governments push toward renewable energies with limited spending budgets, the private sector will be instrumental in carrying forward the transformation.

Thank you to the 20+ investors and founders who made invaluable contributions to this piece. If you think we’ve missed an important point or you’re building in this space and would like to talk to us, please reach out!