SunCulture Annual Letter 2021 🌱

SunCulture Annual Letter 2021 🌱

Dear SunCulture Supporters,

In last year’s annual letter, I advocated for a more focused approach to how capital gets allocated and what it needs to be allocated to in order to scale climate resilience technology, and specifically, solar irrigation. My sense of urgency on this has continued to increase, and for good reason: the Intergovernmental Panel on Climate Change (IPCC) notes that “global warming of 1.5°C and 2°C will be exceeded during the 21st century unless deep reductions in carbon dioxide and other greenhouse gas emissions occur in the coming decades.”

Closer to where I am right now, Eastern Africa is experiencing its worst drought in decades. The landscape is barren, rotten with the stench of dead livestock and wildlife carcasses, and a humanitarian crisis is escalating. The impacts of global warming of 1.5°C and 2°C above pre-industrial levels will be devastating for everyone, including you. Chapter 3 in this special report and this entire report explain why.

Our work at SunCulture reduces and prevents greenhouse gas emissions while increasing food supply and ensuring that those most affected by climate change are more resilient.

Our recent work with 60 Decibels shows that:

  1. 94% of our customers improved their quality of life
  2. 96% improved their way of farming
  3. 90% increased crop production
  4. 98% reported the ability to cover emergency expenses, which translates to increased resilience against future shocks

We don’t have much time (less than 10 years) to make the changes necessary to protect the lives we live, and the lives of those who come after us. The same IPCC report projects that children under 12 will experience a fourfold increase in natural disasters in their lifetime.

Solar irrigation is neither a perfect solution nor the only solution, but it’s one that simultaneously supports climate adaptation and mitigation, energy access, food security, poverty alleviation, political stability, and, in many cases, responsible water resource management.

Last year, I made suggestions on how to scale solar irrigation using data from Dalberg and Mercy Corps’s work, Achieving Food Security in Kenya Through Smart Solar Irrigation. The report concluded that it would only cost USD 96 million in end-user subsidies over five years to achieve food security in Kenya. That’s not a lot of money, especially when compared to the approximately USD 2 billion that the country spends importing food each year. We can then use Kenya as a template to replicate programs to reach 100% food security in other countries around the world. We estimate that it would only cost $13 billion to end world hunger. That’s about as much money as it costs to run a World Cup.

I’m relieved to see that some of the proposals I made were actioned. Those proposals, and the ones in this letter, can be used to scale other climate assets, too. Over the course of the year, many people who are exploring how to apply donor funding to achieve the highest impact have asked me if subsidies are the only option. My response has been that while subsidies are just one tool in our toolbox, from a first principles perspective, price matters.

The potential for solar irrigation is limited by its price. While the cost of solar irrigation for plots between one and three acres has decreased by 97% in the last 10 years, most smallholder farmers still cannot afford it. The Kenya National Bureau of Statistics notes that rural households will spend, on average, 35.30% of their monthly income on non-food items. So, to calculate the total addressable market for solar irrigation in Kenya, we look at monthly household consumption data to understand what percentage of households can afford a monthly payment for solar irrigation, based on them spending 35.30% of their income to make the payment (an illustrative example assuming all non-food spending is channeled to solar irrigation payments). As a note, most solar irrigation systems sold to smallholder farmers in Sub-Saharan Africa today are sold on credit, also known as Pay-As-You-Go or Pay-As-You-Grow.

Let’s say solar irrigation costs USD 40 per month for each household. As evidenced below, only 4% of Kenyan households can afford a solar irrigation system, assuming this repayment accounts for 35.30% of monthly income. This does not meet Kenya’s national priorities of increasing irrigation, reducing food insecurity, increasing agricultural GDP, and increasing smallholder farm incomes. It also keeps this solution out of reach for a large majority of the population. As monthly payments for solar irrigation systems decrease, the addressable market increases, and sales velocity also increases, i.e., there are more sales, faster.

Here’s what percentage of Kenyan households can afford solar irrigation systems at different monthly payments:

  1. USD 40: 4%
  2. USD 36: 7%
  3. USD 31: 13%
  4. USD 20: 29%
  5. USD 16: 47%
  6. USD 11: 69%

There is a non-linear correlation between lowering the price and increasing the total addressable market. For example, decreasing the monthly price of solar irrigation by 50% increases the addressable market by over 600%. Solar irrigation companies cannot take the risk of lengthening their loan tenors (already up to 30 months) mainly due to currency risk, which means we need to lower the price in other ways.

So, no, end-user subsidies are not the only way. According to the Dalberg and Mercy Corps report, subsidies are the highest impact pathway to increasing farmer access to solar irrigation. They are also the best way to ensure savings get passed to smallholder farmers and the best way to equitably stimulate demand for all solar irrigation companies. Subsidies have worked around the world. But at the end of the day, there are other ways to lower the price of solar irrigation (and other climate assets).

Here’s an illustrative example of solar irrigation unit economics sold on credit:

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Again, from a first principles perspective, it does not matter how the price of solar irrigation is reduced, it only matters that it happens. This means that funding interventions can take place across the cost structure. Here are some examples:

  1. How to reduce Cost of Goods Sold: bulk procurement, supplier credit, supply chain optimization
  2. How to reduce Bad Debt: first loss guarantee (shoutout to AlphaMundi and FSD Kenya for the second loss guarantee facility), credit insurance
  3. How to reduce Cost of Capital: blended finance to get 3-4% debt facilities
  4. How to reduce Sales & Marketing: industry awareness campaigns (already happening via CLASP)

And there are other ways to reduce the sales price without using direct end-user subsidies, which, when used together with end-user subsidies, are the most powerful tools in the toolkit:

  1. Receivables financing (either for carbon or for credit portfolios)
  2. Remove taxes (e.g., VAT and duties)
  3. Other outcome payments (e.g., paying for nutritional, health, gender, or other impact outcomes)

All of these are viable options. The important thing here is that funders make decisions and fund quickly. As I wrote last year, “With so much information available about how devastating climate change is, and an unlimited menu of solutions, we often run into analysis or decision paralysis. Decisions are treated as over-complicated because they have too many detailed options, which results in decisions not being made because we’re looking for the ‘perfect’ solution.”

We don’t have time for decision paralysis.

***

My friends at Ezra, a climate fintech venture studio, put it well: “What we do over the next 10 years matters for the future of humanity and what kind of planet we inhabit. We must accelerate our efforts on a whole new level — a whole new way of thinking. An entire retooling of our economy is needed, and a new financial system is required to make it happen.”

The Dream Team at SunCulture is doing our part to advance this collective mission. In 2021 we raised money, were named to Fast Company’s Annual List of the World’s Most Innovative Companies for 2021, were selected to be part of the inaugural Morgan Stanley Sustainable Solutions Award and Collaborative, grew our team, and held our position as the market leader for solar water pumps and irrigation for smallholder farmers in Africa.

As always, I am deeply grateful for the family, partners, friends, mentors, and colleagues who have supported us in our journey. We still have a lot more work to do. And we’ll get it done, together.

Samir

CEO & Co-Founder, SunCulture

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