Scaling Up Energy Access Through Enterprise-Based Approaches and Innovative Financing: Opportunities
Dear Participants,
Welcome to the second day of our online discussion on Microfinance and Energy: Scaling Up Energy Access through Enterprise-Based Approaches and Innovative Financing. Today we will be discussing Opportunities and Challenges for widening the reach of clean energy products to the market and innovative delivery mechanisms.
With an estimated 1.6 billion people without clean energy access, the opportunities for enterprise based solutions and innovative models of financing seem obvious. Other opportunities we see are the increasing number of energy stakeholders including suppliers, distributors and financial investors. Microfinance institutions (MFI) can be instrumental in creating avenues for scaling up energy access mainly because they serve more than 155 million clients worldwide, particularly the Bottom of the Pyramid (BOP). However, the challenges to realize this target are more than a few and we expect to discuss these issues throughout the day. We would be particularly interested to hear from you not only about the challenges but also the solutions that have been tried and tested.
To start off the discussion, we have two key questions – one posted below, and one in a separate discussion thread.
Question 1: What opportunities do you think Microfinance Institutions have in energy financing both for enterprise and end use financing?
We suggest that you look at the resource section of this discussion where we have put up a GVEP-I co-ordinated study in Kenya, Tanzania and Uganda. The study clearly draws our attention to the various challenges encountered by financial institutions. This might give you food for thought. We are keen to find solutions that may answer some of the gaps. Hope to have a lively and fruitful discussion!
Kind regards
Kavita and Phyllis
The reason I ask is because reading through a report on the voluntary carbon market, I find that the average price in 2008 per ton of CO2 was USD 7.34. In India, that translates into 330 rupees.
Now assuming that it must require 100 solar torches to mitigate 1 tonne of CO2 and that one torch costs on an average 500 rupees, the per torch revenue generated through carbon credit monetization amounts to just 3 rupees or less than 1% of the price of the torch. Is this enough to create incentives for MFIs (by passing this on to them) or for customers (by using this reduce the price of torch)?
Would love to hear the perspective of carbon credit aggregators on this
While Beth Rhyne has raised a very interesting idea, I would also like energy companies (if they are there on this forum) to give some perspective on why it has been so difficult to sell their product to MFIs.
Is it because the value proposition is weak?
I would believe that if the value being offered to the MFI was good, any number of MFIs would be eager to jump on to the company's bandwagon without the need for any quasi-oligopolistic market intervention
In fact, MFIs have enough opportunities for energy financing mainly due
to their own client base most of whom are in need of energy as basic to their
day to day life. Once linked to energy product, other products of MFIs do also
get better response due to complementary effect (for example time savings from
energy product can be used in some productive purpose). Energy financing, if
done properly, widens the scope for growth of outreach and portfolio to MFIs
which further help enhance opportunity for energy financing to the MFIs. Unfortunately,
most of the MFIs do not yet recognize this fact easily.
Ramesh Gautam
Has any MFI done a structured energy portfolio around biogas in Nepal or Asia? Would be great to know as we are trying to work with a Co-operative here on the same.
Krai,
Though biogas product has quite long
history in Nepal,
from microfinance perspective it is still new. As a result most of the MFIs are
following wait and see approach to enter. Thus there is not yet structured portfolio
in place but with some adjustments in product features they have introduced the
product, and depends on MFIs. Hope with experience and lessons learnt it will
give some guidance to make it more structured for scaling up.
Ramesh Gautam
Kavita ji,
There are many cases in Nepal, Sri Lanka, India, Bangladesh on energy financing. Over 100 MFIs in Nepal mostly the cooperatives are active in biogas financing. MFIs in Bangladesh are active in financing Solar Home Systems as well as Biogas Plants. Some of the cases from these countriesare documented in the this report as well.
http://www.seepnetwork.org/Resources/5877_file_Energy_Asia_FINAL.pdf
Prem
I agree with comments made by Beth. However i believe that there are many oppotunites that MFIs can tap into as they wait for favourable environment. The few MFIs particulary in Africa that have started energy portfolio do it with a specific focus on solar, however they ignore other energy technologies such as improved cookstoves, wind power, bio gas among others. In addition, you will find that at an enterprise level, ICS entreprises lack expansion captial and at a consumer level, ICS are used in many households. Is it that MFIs are not dymamic enough to start tapping these oppotunities?
Phyllis
Beth David and Kai have all made good points – Another side of the equation is lack of financing for local entrepreneurs and/or importers of clean energy products; moreover importers of clean energy products sometimes face tremendous barriers in terms of import tariffs. My primary experience is in West Africa where for clean cookstoves we dealt with both local manufacturers (with quality controls in place) and importers. Local manufacturers had difficulties getting loans because the technology is not well understood so MFIS were not sure that the products would have a market which in turn would ensure loan reimbursement. Importers of fuel efficient stoves ran into tariff challenges – import tariffs can reach anywhere from 50% to 100% of the original value of the stoves which put them out of reach of the intended clientele which in turn could not get consumer loans.
We found that this was a multifaceted challenge which required cooperation from governments in terms of trade/tariff policies, help from the private sector, NGOs and community leaders in terms of changing attitudes and practices and focusing communities on the benefits of the new technology and participation of MFI’s in financing producers and buyers. I think that the most important key of the three named above is changes in attitudes and practice as that will spur demand which will encourage production and get MFI’s interested.
Thanks Marie-Ange for the last message. It is true that accessing SME financing along the supply chain, especially for importers or distributors of clean energy solutions is a massive hurdle and starts a vicious circle: funders want to see market demand which cannot exist until products are supplied on the market, but entrepreneurs need funding tosupply those products and create demand. A classic chicken and egg problem!
If you look at it from the mfi perspective, the opportunity is not really very attractive now, especially compared with business expansion with standard microloans.
I agree with Elizabeth on this. Standard income generating loans have devolved into a vanilla product that allows MFIs to churn them out as fast they as can (subject only to financial and operational capacity). On the other hand, energy finance loans require further investments (of time and money) by MFIs:
- In understanding the energy product and designing a suitable loan product that fits within the company's existing processes and systems
- In making the sell to their clients, most of whom (as pointed out in the Haitian example earlier) are habituated to the use of cheaper (albeit low-efficiency, high-pollution) fuels
- In servicing the needs and demands of clients over and above the efforts required for loan servicing
- In taking on the reputational and operational risks involved with energy product distribution and financing
Unless energy product companies have an answer to these aspects, MFIs will continue to skip around the unvoiced efficient energy needs of their clients.
Regards,
Sagar Shankar
Are you able to elaborate on this perspective Beth? Why, in your opinion, do MFIs find technologies other than solar less attractive?
What would change their minds?
We work with two MFIs which provide loans for cookstoves, and they have been doing so for a year or two now. I think though, that they may be more the exception than the rule.
Hugh,
If I may add my two cents. I think the reason why solar products (and more specifically lanterns) are getting traction amongst MFIs is because of the nature of the product. Solar lanterns for example are:
- Cheap, simple to use and aspirational (attractive for clients)
- Do not require any maintenance, servicing or after-sales support (attractive for the MFI)
- Loan sizes are small and the yields on them are higher than standard MF loans (attractive for the MFI)
In your perspective, how would cookstoves rank on these factors?
If I may add, we wanted to start an
improved cookstove portfolio with a semi informal group. Two barriers:
Cost
of the product which we chose (standardized, well designed, efficient,
attractive) were higher and the institution did not want to promote it as
there were cookstoves made locally that were much cheaper! We did not want
to promote a product that was not standardized or efficient.
Firewood
was still prevalent in the area, so switching from open fire to improved
stoves meant a lot of awareness programmes. Who would foot this bill was
the main question?
Hugh, to answer your question, and to ellaborate on what Kavita just wrote, lighting is much easier to address than cooking, mainly for cultural reasons:
Off-grid households who have no access to electricty mainly use kerosene (or paraffin oil) to light their homes, an expensive product that delivers a poor quality service (you can barely read!) and intoxicates families, especially young children.Competing with kerosene is easy. A solar lantern provides such an invaluable improvement that once they try it out, uptake is immediate and fast. If the product remains quite affiordable demnad is high because no behavioral changes are required. You live your life the same way, but you can see better at night
On the other hand the situation with cooking is highly different: the service provided by traditional stoves (or three stone open fires) are satisfactory for many people. And it participates in the local food and cooking culture, even if problems exists such as indoor smoke and rising cost of charcoal (or diminishing access to firewood). Most alternatives, when they are not outrageously expensive and far from within the reach of low-income households, require important behavioral changes: for example, a sun cooker requires to cook outside and at odd hours (it doesn't work at dawn or after sunset for dinner), gas cookers (LPG or biogas) change the taste of food and doesn't allow some of the traditional barbecued dishes, and even biomass fuel briquettes are perceived to change the taste and the time it taste to cook.
In other words, solar for basic lighting needs is the low-hanging fruit and, as i see it, behavioral change is the biggest challenge to cookstove adoption, even before price. With reason, MFIs are thus very reluctant to try it out and very few have in my knowledge undertaken cookstove promotion. The risks (financial and reputational) are high but they have no ways to evaluate these risks.
And that leads us to the biggest barrier for MFIs to join the energy space, a barrier briefly touched upon by Ramesh, but fundamental in my oppinion because it's the first one that needs to be adressed: MFIs, their staff, management and board are not energy-litterate and they don't have the resources to be. They don't understand the needs or the products; they can't choose between products and technologies; they are not educated or aware of what is out there and what can be done. But moreover because of the financial pressure that they bear, MFIs cannot commit time or resources to decrypt the energy landscape. Some risk it, and a number fail but most MFIs stick to their core business. Thus they need the support of another organization who can guide them through the energy maze and identify what type of energy needs they want to serve, and how they can do that. That is what we do with the Energy Links project at the Center for Fianncial Inclusion, by bridging the gap between the microfinance industry and the energy world.
David,
So if we follow your line of thought a bit further - I am curious as to whether you feel it makes sense for an MFI to start with one technology (say an LED lamp), and then progress to different technologies, as well as more complicated ones as their capacity and understanding of energy lending increases? Or do you not see it as a linear progression, but rather more of an all or nothing equation.
My interest comes from what I have seen (and what we are funding) in West Africa - where an MOU or partnership between an MFI and an energy supplier typically covers a range of technologies (say LED lamp to Solar home systems), but starts with the simplest, and slowly builds in number of different technologies and in complexity of technology being offered through loans.
Hugh
Hugh,
I completely agree with you that it makes total sense for an MFIs to start small and simple with a technology they understand, that does not require much maintenance, at a price point low enough to ensure a wide market demand. And then gradually diversify to a wider range of products and technologies as capacity expands.
Such an approach allows to limit the risks by avoiding dispersion in a sector that no one fully grasps at the management level and it also builds up strength and confidence in the responsiveness of the market as well as in the internal capacity to deliver and manage energy loans. And I think building confidence in the product (and supplier), the market and the MFI is an essential step to grow such an activity to scale and to diversify it. Progressive diversification allows for small and frequent course correction in delivery without having to question the whole rationale for energy loans.
David
I believe that scale requires the building of an energy ecosystem,and that requires cooperation among players. Right now there are multiple energy providers and devices all competing for the attention of a variety of MFIs. No wonder most projects stay small. Each partnership between an MFI and an energy company has to invent too many parts of the ecosystem.
My premise is that scale will be more achievable if at least some parties are working on building the industry environment through a joint effort, because:
Easier to get the attention of MFIs to participate if they are assisted to choose from among multiple suppliers.
Advocacy with government works better with joint efforts. Many important tasks can be done jointly, such as market research, product testing and quality control, development of marketing materials, training of clients as distributors and/or servicers. Significant scale of financing easier to arrange, including grant funding for project, bridge financing for import or manufacturing, and carbon credits.
Beth Rhyne
Hello Beth,
I like the term "energy ecosystem". I think that you are right that we, as a commuinity, need to look at the issue of linking energy with end-user finance more holistically and taking on some of the support tasks together. It is important to help MFIs find solid energy enterprises that give them what they need in terms of products and services. I agree that it is overwhelming and time consuming for MFIs to have to choose a energy supplier, a product, etc. because it is not in their core business to be able to know how to select or do the necessary due diligence on their energy partner. This problem highlights the needs for reputable and objective intermediaries, but it is difficult to find a way to pay for those services. Everyone recognizes that you need the bridge between the two sectors but it is difficult to make the case that someone has to.
Ellen Morris
