Day 3: Delivery Mechanism in scaling up

Hi all,

Disclaimer - the following rant is a set of personal views, not that of Barefoot Power. I am infamous in several circles for monstrous emails, so given it's 1am and this event will close soon, I see no reason to break a tradition. Apologies for up front for the following all-encompassing rant.

It's great to read all these posts, from familiar names and new names, and I've read every word. It looks like this area of energy and microfinance is growing, compared to 2006 when Harry and Sam from Barefoot Power went to the Global Microfinance Summit with LED lamps and panels and were asked if they'd come to the wrong conference by mistake!

I think by 2008, after Nobel Peace Prizes for Microfinance (2006) and then followed by Clean Energy (2007), the penny had dropped, and we are seeing more talk, and a bit more action. New players are entering the space, going from 10-20 to maybe 50-100, and raising more capital from a wider net of investors in the process. However, as Kavita noted, and anyone who has been in village energy for some time would probably agree, "Every one works in tiny islands created of their own". Our efforts at being open source and collaborative have too often bit us on the backside, and there is no feeling of a micro energy industry. This would not get Bill Gates to excited, and while the ecosystem Beth refers to is forming, it is not terribly visible. One has to wade through 5-10 reports to find out who are the 50-100 main organizations, and MFIs for one don't have the time or inclination to do so. www.lightingafrica.org attempts to do this, but despite a multi-million budget, lacks the elegance of www.mixmarket.org - a quick visit to the LA website and a visit to, say, the Supply side of the equation, gives 26 pages of company names, and that's it. A similar visit to MixMarket gives instant frontpage access to demand (MFIs), supply (investors) and the catalysts in between that make it all work. It would take about 1 week, or even a few days of someones' time to make a list one easily accessed page of at least all the product suppliers of the micro energy industry. There's a pretty good idea out there of the investors / supply side of the equation too - some investment preferences are easily identified - buyer/investor of carbon credits only, lender of energy funds to MFIs only, debt or equity to micro or small enterprises, any geographical preference. On the demand side, from the LA website, can I know if "zhongshan xinbao lighting factory" fits my needs? MixMarket gives quick data on each entity, and at least a star-rating system - follow the LA link, and all you get is an address, a name, and that their a supplier (of what?). Perhaps with this lack of data submitted, they should get a zero star rating, until they are participating in the industry in some real way (apologies to ZXLF if you read this, you are an unfortuante example, no offence!).

So defining the ecosystem, showing it others, I think is essential.

Then a BHAG is needed - a Big Hairy Audacious Goal, but a reasonably calculated one. Microfinance set one in the late '90s - 100 million clients served - and by jingo, they made it, on schedule, 10 years later. Once we have a list of players in this ecosystem, we could make a quick guess at households reached to date for electricity/lighting, cookstoves, and a few other key energy innovations. Let's take lighting - throw in the major players, and you'd be lucky to see outreach exceeding 1 million households per year from offgrid companies - throw in World Bank and government rural electrification statistics, and you might get 1 million more households per year (method: a stroll through the Banks' SOPE report can yield rural electrification investment data in a day or two, then divide by about $500 / household or some similar average). However, what you would see if we had even 3-4 years of data, is 100-300% annual growth or more of these non-Bank, non-Government efforts, and little growth in the traditional grid-extension projects. Microfinance grew without the World Bank playing a leading role, and micro energy will follow suit. Ask anyone who has tried to get village energy financing from the IFC or the Bank!

100-300% annual growth should be measured, and shouted from rooftops. Things are changing. The 2000 or 2002 IEA Energy Outlook reports indicated rural electrification rates do not exceed the population growth rate, so in 2030, there will still be 1.5 billion people lacking electricity. 8-10 years into this 30 year forecast, and there's no reason to doubt this conclusion, IF the annual growth rate of village electrification activities is not taken into account. 2-3% growth rate of around 250-300 million households is 5-10 million households per year. If we're now reaching 1 million households per year excluding the traditional plodders, and growing fast, then in 2-3 years, the tipping point will have been reached where we are reaching 5-10 million households per year. I have zero doubt this is going to happen. Based on 100% growth rate, how long does it take us to reach half of the 250-300 million households? Less than 10 years. Is 100% growth rate sustainable for that long - the mobile phone market studies from ITU tells us that yes, early years of market entry see 100% growth rates as normal, and these steady out to 30% growth rates after 5-10 years. Bright day ahead then, IF the investors can keep up - a majority of the poor having electricity by 2020.

Given the phenomenally good returns for cooking and heating technologies via carbon credits, they will follow, monetizing environmental benefits when the fuel costs and health benefits are difficult to monetize. As noted earlier, heat-energy innovations can make $125 of carbon income in 5 years - $25/year. A solar light can make about $1/year of carbon income. Almost too small to measure / capture. For massive aggregation of tiny emissions, the carbon investor will need most of these benefits to get out of bed and invest, and there will not be as much left for the MFI and household. It is possible, of course, but it does require, as I think David mentioned, small armies of spot-checkers to monitor every household, and sampling was NOT allowed by the CDM board for recent large scale projects (eg. dalitREDs). Much of the carbon credits generated actually pays for thousands of monitoring agents - a nice job creation scheme, though, if the investor can get a return, eliminates kerosene and its emissions, and gets a kicker social impact of making many, many jobs!

Do MFIs play a big role in what I'd suggest is an inevitable explosion of village energy success? In our experience, not really. As Eliza mentioned, once payback periods drop to 2-6 months for the end consumer, cash sales are possible (ie. the discount rate of the consume is 200-300%). Barefoot Power's BHAG set 5 years ago was set at 1 million people (or 200,000 households), bringing forth much laughter at our former site of employment and wondrous insights from highly qualified managers, such as "Hmm, that's a lot of lights!". Such genius regrettably was left behind as we started our journey! Our BHAG was rationally calibrated to mobile phone industry growth rates and Deloitte Fast 50 revenue growth rates for the world's best startups, and despite obstacles too numerous to mention in even this long rant (email me at stewartc@barefootpower.com for a detailed list of misery), we will hit out BHAG. And largely without MFIs - almost 100% of our products sell for cash.

Hence, end consumer finance is not really necessary, and when kerosene expenditure is $20-50 per year while MFI loans average $126 in South Asia and $305 (ref: MixMarket.org again), and MFIs won't loan for more than 1 year, there is a simple gap here. True, it can be filled by group loans, but Barefoot Powers' experience was that by the time you brought the product to market, it sold - 4 years of supply gaps due to excess demand and insufficient investment capital, and 300% growth rates, are evidence enough. In Asia, small groups exist and are quite strong (SHGs), but in Africa and the Pacific, cash is king, when consumer discount rates are 200-300%. Barefoot Power, with help from Oikocredit and a host of other investors who are growing in confidence, have built up micro supplier credit for the full supply chain as a solution, delivering businesses, not cash, to entrepreneurs in Africa. Traditional microfinance delivers cash that buys a business from the local market - our Trade Finance Fund allows local entrepreneurs to tap into innovative new micro businesses, and by taking our margin from distribution, we have even offered entrepreneurs 0% 30-60 day "loans" of product, to then sell for cash. Efficient bundling of finance and businesses can result in substantial new models that, like traditional microfinance, deliver micro enterprises to the poor and stop the destruction of wealth by burning money in kerosene lamps.

How much money is being burned that could be mobilized? $10-30 billion / year, 10 times more than the World Bank and government invest in rural electrification, and far, far more than MFIs will lend for energy any day soon. MFI loans focused on retailers who sell 1 lamp per day requires no new loan product - their existing enterprise loan is designed for any widget seller. I am yet to see a Sewing Machine loan, or a Chicken Raising loan - keeping things simple for MFIs will break down their resistance by avoiding the perceived and much talked about need to create Energy Loans. The less that needs to be changed, the lower the fruit hangs. If the governments continues to do nothing, that will probably help too, instead of distorting markets with massive and unsustainable subsidies, though there are very positive roles they can play without strangling innovation.

Microfinance does not mean only MFIs. If 90% of households are reached by 2020 via cash sales and retailers selling 1 lamp per day, 350,000 micro energy entrepreneurs are required. That's about 0.3% of all clients reached by microfinance globally. In Africa, 175,000 energy entrepreneurs would be 2.5% of the current 7 million MFI clients. Retailer loans, not end customer loans, will be MFIs contribution. But our experience indicates that the supply chain, large corporate employers, government departments and NGOs can all offer forms of microfinance via micro supplier credit, payroll deduction and even grants and donations raised. Funding 350,000 entrepreneurs with $100 each to buy a micro energy business is only a $35 million issue to solve in the next 8 years. Mr Gates may get very excited by the impact that investment could have on over 100 million households. It is true that larger energy systems will need 1-year loans to consumers, and later 2-5 year loans may required for minigrids, but these are not the starting points of revolution, they are the next phase of billions of investment - we need to get the first $100 million invested first to get Barefoot Power and others even a step towards becoming pro-poor BP's.

On the investment side, our experience is that Exit is Exciting. The return doesn't really matter that much - when we found it hard to raise more equity (which has a long, long period to exit), loans filled the gap well. In 6 months, via cash sales, Barefoot Power offers investors double digit interest and the ability to make, ship and sell a container of 10,000 desklamps benefiting 50,000 people, and get those dollars safely home and tucked in bed. In a way, the investor has the same payback period preference to the villager buying the lamp - ironic that discount rates are so similar when one is in poverty and the other is just nervous. Some enlightened villagers will go for larger systems as they see longer term benefits - similarly, a small number of important investors allow us 3 year loans to work with, providing much needed stability. But so far, these are the exception, not the rule, and investment guarantees from donors will do wonders to catalyze millions, perhaps tens of millions, in new investment for village energy. It's all about risk - the perception of it, not the real risk, and taking that perception away.

If we can describe our small universe to ourselves, show that the islands are impressive as a whole, set ourselves achieveable goals and challenge investors to match our determination, I have zero doubt that the next 10 years will see a micro energy revolution that can grow the microfinance industry from 1% portfolio share to 10% or more, and that will be enough to make serious inroads into energy poverty, and I give thanks to all those that work with me and invest in our vision of a cleaner, safer, richer world.

If you made it this far, I apologize again for the length of the rant!

Best regards,

Stewart Craine, Barefoot Power

Hello All,

Interesting discussions that I am following over past few days.

Can someone provide a list of MFIs in different countries and how they operate under different environment?  What would also be interesting to know from our experienced members is the way they differentiate energy financing either by energy related products or by energy sector. Possibly the scaling aspect can be better understood that way. 

Quaid J. Surti carbonlessenergy@gmail.com