The Path Forward: Scaling Up - a thought experiment
Welcome to day 3 of our online discussion on "Scaling up Energy Access through Enterprise-based approaches and Innovative Financing." Already we looked at some examples of things that are working, some things that aren't, as well as some new exciting opportunities. Today's topic is "The Path Forward: Scaling Up." Several participants have touched on this subject previously, but today we're going to give it our full attention. We thought it would be interesting to introduce a short thought experiment to guide the discussion:
Imagine that tomorrow Bill Gates held a press conference to announce his new passion for modern energy and an interest in dedicating $5 Billion to increasing access to energy globally through energy enterprises and MFIs, but only if we could come to him with an industry-wide strategy that sets out clear priorities, targets, and milestones. This has the potential to increase the number of people served with improved energy products/services through a largely enterprise-centered approach 100 fold over ten years. This would require a concerted effort to come together, as an industry, to structure our collective vision of a scalable "energy ecosystem", to borrow from Beth's earlier remarks.
How would we do it? What would we agree as the key sector-wide priority needs, low-hanging fruit, and areas in need of stronger cooperation? What resources are needed that do not currently exist - financial, tools, technical assistance, etc.?
We invite you to think creatively, aim high, and defend your ideas. We'll be opening new discussion sub-groups to further explore some of the ideas put forth in the comments on this page. Looking forward to hearing from you all.
Jennye Greene (E+Co) and Jacob Winiecki (Simpa Networks)
I wanted to draw everyone's attention to a great posting on the Next Billion blog in the last week looking at the potential and realistic limitations of utilizing MFIs as part of a strategy for bringing products to consumers:
http://www.nextbillion.net/blog/2010/05/07/getting-bop-products-in-consu...
This article hit home for me in that it looks at a lot of the key success factors from the viewpoint of the MFI. This points to a few larger recurring themes from our conversations in the past few days:
- Need for technical assistance - many participants pointed to the need for ground-level "hand-holding" to bridge the knowledge and experience gaps between energy enterprises and financial institutions, and a desire to do this over the long-run and not just in one-day workshops. There seems to be a lot of space for these support-enterprises to share lessons, develop industry-wide tools, and join forces.
- Innovation Funding - Several energy practitioners often suggest that the energy access sector is in serious need of funding dedicated for experimentation, in the same way that the microfinance sector benefited from decades of grant support to experiment, build, and grow successful models. In some ways, one could think of the energy access "industry" as being in the same position microfinance was in 10-15 years ago, with some businesses starting to scale and take on large-scale investment, but with most active players working on a smaller basis with major obstacles to growth that will - frankly - require grant funding to overcome.
So how do we engage the donor/investor community with these requests, both with strong social and environmental benefits, but requiring a long-term vision in the area of financial return?
Does anyone have any thoughts on how mobile banking could be used to scale up access to clean energy? For example, could products be sold on credit and customers billed via SMS? With the new person-to-person money transfer services available (M-Pesa, MTN MobileMoney and others), could customers pay their bills this way too?
I'm thinking particularly of rural areas where there is less mobility and more trust. Would this reduce transactions costs enough to permit significant scaling?
Jennye
Hi Jennye -
I am very interested in this to, specifically applying it to rural cook stove projects. Here are two interesting models I've seen:
Carbon Manna has developed programs and technology to use mobile banking to share carbon credits, but I understand they have yet to implement in Kenya as originally planned: http://www.carbonmanna.org/
A concise summary of the experience of the CEO at Musoni microfinance with mobile banking: http://www.rnw.nl/english/article/microcredit-your-mobile
- Monica
Hi Jenny,
We use corporate MPESA in Kenya and it is super super handy because there are not banks/MFIs in the very rural areas but there is MPESA everywhere. Its great because a larger percentage of Kenyans use MPESA and we have all of our community groups make payments through MPESA and we immediately know when they have paid. You can easily make cashless energy centres and see the transcations in real time. MPESA can also be used as a savings tool becuase they can deposit for free. It can handle a large amount of transactions and MPESA has built in security features to assist in theft and fraud.
Cheers,
Eliza
There seems to be a lot of opportunity to "piggyback" on both the networks of mobile operators (through their airtime vendors and branded shops) and to utilize advances in both SMS platforms and mobile money services to reduce transaction costs and enable new end-user financing models. I am curious what experience energy enterprises have had in tapping into this potential. Also, have MFIs actively pursued mobile money to accept installments? One of the big reasons why mobile phone use exploded in emerging markets was the introduction of flexible, pay-as-you-go pricing for service. What can we borrow from that model to make it easier for consumers and small businesses to invest in modern energy? Sent via BlackBerry from T-MobileFrom: "Speakers Corner 37: Microfinance and Energy: Scaling Up Energy Access Through Enterprise-Based Approaches and Innovative Financing" <microfinanceandenergy@microlinks.kdid.org>
Date: Thu, 13 May 2010 13:10:11 -0400Subject: Mobile Money Options
Hi Jeynne, I find your idea quite interesting and innovative. This could probably work out well due the economies of scale that would make most ot the challenginng areas easy to adress. For instance one big store can afford to hire an energy expert, get quantity discounts among many other areas. I think its an idea worth exploring.
Scaling up should happen with a demand side perspective - based on need, affordability and reliability. Pure supply side attempts often bring in inappropriate technology at high costs (initially subsidised) on a programme mode - they fail to stabilise.
Mobilising people to aggregate demand for energy and finding supply solutions (group based bio-gas plants or solar cell arrays that could supply electricity for a group of households) is the key to lowering investment and maintenance costs. There is an intermediary space for enterprises that operate between households and technology/financial institutions. These enterprises would most likely engage in leasing of energy products to households and bring down their investment costs of energy access. At times the intermediary enterprises could use the BOLT (build, operate, lease and transfer) model for providing local communities with access to energy products. Wind mills and small hydel generation units are examples of such investments where communities cannot make the initial investments, but could lease in - or pay for out puts. The leasing product could work on a smaller distributed scale such as in renting out solar lanterns and solar pumps.
Microfinance institutions should make investments in understanding the nature of loan needs in energy products/investments. The loans would be typically long term, with ability to service loans coming in from avoided costs rather than from incremental incomes. The MFIs are generally not accustomed to making longer term loans bassesd on investments and the cashflows. MFIs entering energy finance should also look for alternate funding sources which are of a long term nature. Product development, loan tracking software redesign and training of staff on improved appraisal methods seem to be entry requirements for taking up access to energy as a portfolio choice for financing.
N.Srinivasan
Thanks, Srinivasan
I agree with your analysis and just wanted to zero in on this idea of BOOT or BOLT arrangements. I've seen many examples of this at an industrial level where a project developer creates a suite of project operating companies, each attached to a specific host (usually both a supplier of raw materials and energy off-taker).
These development companies have been, on the whole, a very successful and cost-effective strategy for scaling up clean energy access in the agro-industrial sector.
I have less experience, however, with seeing these sorts of dynamic companies working at the community level. Is the model applicable to dramatically scaling up energy access at the community/household level? Or do certain pre-conditions need to be met? Or does the model need to be tweaked? I'm interested in your experiences and thoughts on this.
Jennye
Jeyenne,
You are correct in that large projects use BOLT, BOOT as a mechanism especially in infrastructure. Given the nature of revenue stream and the fact that local communities do not have the funds necessary to even invest in personalised equipment for energy access ( I am talking about quite a few locations in India), third party ownership in the initial period is the option that is most feasible.
While trying to design financial products in the NRM sphere about 18 months back, I had studied the ground level situation. When electricity is not generated, there is no case for distribution and hence access is not feasible in many remote areas. Such locations require a solution that combines generation, distribution and access enablement as an integrated project. Since local communities can own the facility eventually, depending on their investment capacity projects can be structured as BOOT or BOLT. The nature of enterprises that would take up this would be typically smaller than the ones that we see in the commercial infrastructure space. Hence I had suggested that new enter[prises might enter seizing such an opportunity. As I had indicated earlier windmills, small hydels, solar cell banks are possible projects that can be owned by suer communities over a long run. These projects being in the renewable energy sector could use carbon credit financing provided sufficinet nunmber of projects could be bulked in to a tradeable quantity.
While these are capital intensive projects, others belong in microleasing. HIre-purchase of solar lanterns, solar pumps, smoke-less, fuel efficient stoves, etc could provide solutions to poor people who do not have initial funds to pay a lump sum to buy such products. While these could financed as Microfinance loans, when these come hire purchase products from the manufacturing entity or its agent, the customer comfort is higher as there is an implied warranty of good service at least till such time the hire instalments are due.
The third is pure leasing - renting out pumping systems, electricity storage units and the like on pay as per use terms.\
Some activity of the type involved in the third type - pure leasing is taking place. But the not of the first type - BOOT, BOLT or the second type. But these are distinct prospects; the first such venture will start off a cascade of projects.
N.Srinivasan
Greetings,
After very informative sessions, I can look at a few steps we can take build this whole scenario we want to see. In the end, it all points to better energy access and a paradigm shift that will ensure businesses operate optimally and Financial institutions yield more support to energy businesses. If Bill Gates was to ask, the following would be my critical programs;
1. Civil Society support to the promotion of clean energy and behavioral change communication
2. Programs for Energy business support and development: These may need to be long and possibly 5 year programs targeting value chain development accross all technology options.
3. Deliberate involvement of the financial institutions in support of Businesses and End users. Biasing them towards energy lending and capacity building them over time towards understanding the energy sector. It would not be a one day training but a process that involves various engagements until they have clearly taken on the goals.
4. Development and dissemination of regional technology standards . This is based on the assumption that regional cultures are closely related. This has to be developed across all clean energy technologies and further supported by the Seal of Approval as was discussed earlier
5. Policy and advocacy programs. These should be targeting governments at all levels rather than central governments only. Advocacy should also entail identification of areas in other sectors that may link to energy e.g. indoor air pollution and health, then have the other sectors prioritise or increase focus on energy thus each sector joining up to grow this ecosystem. Other sectors to consider are forestry, water and environment and education amongst the many
Bryan J. | Uganda
Bryan,
This is an excellent list of top priorities for creating a robust enabling environment. Just out of curiosity, does anyone have any direct experience they can share with #3 - Involving financial institutions in the support of enterprises and end users?
Considering the volume of financial flows that need to be mobilized, can we flesh this out a little more?
Jennye
This forum makes me wish I had taken 3 days off to fully participate!
Jennye in another career I worked with an organization which disemminated clean cookstoves - one of the barriers was access to capital on both sides of the chain (manufacturers and end users) In Senegal we started negotiating with Credit Mutuel Senegalais which has branches throughout the country and one of the schemes they were open to was to have us put up a small "insurance" fund before they started lending; this because they were quite unsure about getting into the business of consumer loans. The difficulty we had with that was that we did not have a steady in-country presence to follow through nor did we know how to structure the agreement so that the MFI would only access the insurance fund if it absolutely could not collect on its loans. This is however an idea which could work in the right circumstances.
Bryan your list is excellent - I would use Gates 5 Billion to make clean cookstove technology available to all households in x countries (have not figured out how many countries and I use the word available because households do have the choice of not using a certain technology) and some of the steps we would need would be
Training – MFI’s in structuring loans for energy products this could be done on a country level or a regional level
Introducing and demonstrating the new technology – this is more of a role for NGOs and Civil Society but does require funds. New technology for the poor is sometimes experienced as a very high risk endeavour because the cost of failure is very high for them (e.g. if the cookstove does not work as it should scare food could be spoiled and unlike my kids they cannot call Dominoes pizza)
Technical support for vetted manufacturers in setting up distribution mechanisms and if necessary after purchase service.
There is more and I hope others add to this list as I rund off to another meeting
Marie-Ange
J and J – I like your thought experiment.
I don’t have a detailed answer this evening (brain dead),but I do have this thought, which might help get the thinking up where you want it.
What we are looking to build is a scenario where the renewable energy or energy device providers of today have become as big and capable as the major energy utilities companies and maybe even replaced them. Barefoot Power as the next BP – but hopefully a lot more socially and environmentally responsible. The Barefoots and SELCOs of the world need to become really large enterprises. What would that take?
Beth
Dear Beth,
All it takes for companies like Barefoot Power companies to grow is capital, constant supply and good, hard working employees. PS we are recruiting now for those hard working employees :)
Eliza
Thanks, Beth
I don't have the answer either, but can I infer from your post that large energy companies are more important for scaling up than large MFIs? (Perhaps that MFI's are already sufficiently large in many areas to cover the clients and realize the necessary economies of scale? Or that MFIs maybe aren't even that crucial - look at General Electric after all, you might think they are a widget-maker but in fact it can be argued that they are a financial institution).
As to how to promote larger energy enterprises, I'm curious if there is anyone out there that thinks there is some fundamental, underlying economic reason why the sector could not support a clean energy version of Wal-Mart? Or, is it just that it hasn't been done yet?
Jennye
Should both not be in close tandem with each other? I think MFIs can play a vital role in consumer financing to scale up. However, to do this, there needs to be quality products, and suppliers who can manage scale, funding mixture of donor/investment for soft support (marketing, awareness, trainings, absorbing risks etc) and for financing, and of course as pointed out yesterday, quality monitoring and support. In addition, this morning, Adam talked about franchisee models which I find very good. There is one in Uganda – Ultra Tech. Maybe, one might not necessarily need large enterprises. There could also be a good solid network of suppliers (if all agrees to work together!) with appropriate check and balance systems (as with biogas in Nepal) as most consumers are scattered often in rural areas.
Oh for an energy version of Wal-Mart – the sector would have arrived! At least in Kenya, I see stoves, briquettes,solar lanterns, and solar home systems on the super market shelves! Don’t know how long they survive though…
I think few would argue that there are more MFIs (and more giant ones at that) with clients than there are clean energy enterprises with customers. You bring up an interesting point though - that all actors need grow in balance with one another. My observation was only that I don't don't see a need necessarily more (or bigger) MFIs right now in order extend clean energy access, we need to just better utilize the existing MFI resources and infrastructure (although anyone is free to disagree).
On the other hand, I think the world would definitely benefit from having a half a dozen Barefoot Power-type companies on steroids, the kind of big market players that can manufacture and distribute at scale, hold down prices, and engender large sets of smaller scale wholesalers and retailers.
The franchising discussion is great too. Whether true franchises or more plain distribution outlets, it is important that the whole value chain/web/pyramid get fluffed out. Back to Beth's observation above - How do we create larger Selcos and Barefoot Powers? Is it possible that part of the answer lies in supporting the creation large numbers of independent retailers who are going to "pull" the product into the market?
In most cases, new competition in the household clean energy space has pushed some original first movers farther up the value chain (into wholesaling, large scale importing, manufacturing etc.). Of course, as this happens, someone needs to be there to meet those first movers as they grow, providing them with adequate financing and business development support at increasingly large and sophisticated scales.
Anyone else have any thoughts on the issue of balancing and sequencing growth amongst the wide array of actors?
Jennye
