Carbon finance
Dear participants, Some of you have started to engage in a very interesting side conversation on carbon finance and the opportunity for MFIs to access funds from the carbon markets. I suggest that, for clarity, we move this conversation in a separate thread.But I'd like to continue to hear your ideas on how to link microfinance and carbon trading. David
I love hearing about the innovation within MFIs and organizations working with them, but have concerns that some may have already struggled with and found answers to:
My worry in directing the all or most carbon revenue to the carbon revenue to the MFI is that it only incentivizes one thing: financing. Other issues that make, for example, a cook stove project successful (marketing, community buy-in, maintenance, and most importantly, a quick feedback loop as to why things are or are not working in a cook stove program) are outside the MFIs mandate and might be addressed more efficiently by local champions/ entrepreneurs.
No doubt fiance is important, but is it always the limiting factor? If not, why should MFIs be the main recipients of the carbon revenue? What happens in a community were only 25% of those who purchase a cook stove want financing? Can the MFI claim the carbon revenue for the other 75% of improved cook stove users? Or do they miss out on the benefits of carbon revenue?
Wouldn't it be more effective and likely to result in quicker scale-up if carbon revenues were directed towards local champions/entrepreneurs who could then be supported by MFIs? Would underwriting loans to entrepreneurs provide a more effective incentive to MFIs than carbon revenue? The answer likely varies on the situation, but I'd like to hear if MFIs have considered supporting local entrepreneurs instead and why direct MFI-to-user loans seem to be more preferable.
Monica
Hi all,
Thanks for this interesting workshop.
I have participated as a consultant in 4 improve cookstove programes in Kenya working on the project design and baseline development. This type of carbon reduction projects are complicate but rules are changing, making easier and faster ways to validate and register the projects into the UN, e.g. recently the UNFCCC small scale group has published new rules to demonstrate inmediately the additionality of this projects. My experience says that a good project design can make a sustainable carbon project and could be an important source of funding for MFIs.
We have performed around 500 kitchen surveys in Kenya to get the baseline fuel consumption, the questionnaire used has around 50 questions as daily time spent to collect firewood or fuel cost per day/week. This information has a great value and in the frame of my Master degree in microfinance I want to study beneficiaries daily/weekly fuel cost savings and how MFIs can adapt their loans to this savings. Does anyone know any study of this kind?
I would be grateful if you can send me any field study on how to adapt energy loans to fuel savings to ibanez.gg@gmail.com
I will be pleased to share my results.
Germán
Thanks Hugh for the clarification. this is really helpful.
You mention start-up costs: are they as high for the voluntary market? And if that is the case isn't it a misrepresentation of the situation to tell MFIs they will be able to access large pools of funding from the carbon markets (to incentivize them) although in reality they will first need to reach scale before looking at carbon finance in a cost effective way?
Hi David,
There are lots of ways an MFI can get around paying these high start up costs. For example, a lot of carbon companies are fine with paying for everything as long as they get a bigger cut of the profits from carbon (taking the upfront risk in return for a higher reward). They will offer to pay an upfront lump sum in return for the rights to a stream of emission reductions from real or planned projects over a period of time.
The answer (i believe) for MFIs, is not to handle the carbon credit creation process themselves. I don't think it is their core business, nor should it be. However, it is important that MFIs are knowledgeable enough to know which companies to deal with, what a decent deal is and what kinds of broad parameters they need to meet to be of interest to carbon finance groups. This is what I refer to when I talk about being able to access the carbon markets.
Does that answer your question?
Thanks Hugh, it does answer my question. What you are saying is basically that an MFI can't have it both ways: either you have high start-up costs and receive regular carbon revenues as you scale up, or a carbon company covers the upfront needs but leaves you with a much smaller share of the carbon revenues. Is that right? I thus have a couple of subsequent questions to you and anyone who has experience with carbon finance: can carbon markets become overtime an important source of funding for MFIs? can that be a sufficient incentive to push MFIs to offer micro-energy solutions?
Hi David,
I was happy to see several of MicroEnergy Credits' partners weighing in on this conversation. For those that don't know us well, I'd like to fill people in on MEC's solution to the dilemma you proposed: You mention "An MFI can't have it both ways: either you have high start-up costs and receive regular carbon revenues as you scale up, or a carbon company covers the upfront needs but leaves you with a much smaller share of the carbon revenues."
MicroEnergy Credits is a social enterprise that buys carbon emission reductions from Microfinance Institutions and sells them on the carbon markets, creating a revenue stream that Microfinance Institutions can use to expand their clean energy product lines through client education and marketing, aftersales customer service, internal capacity building, supporting local clean energy suppliers, and reducing interest or principal costs to the client.
At MicroEnergy Credits, we guarantee that we pass on 80% of the carbon revenue to the MFI. By most accounts this is a high share of the revenue. We reduce transaction costs through our technology that aggregates carbon monitoring data. Moreover, as MEC gains volume, we hope to pass an even greater percentage of the revenue on to MFIs.
This approach has benefits for both the MFI and the carbon purchaser. The MFI has minimal start up costs. These include monitoring the clean energy systems and undergoing an annual audit. Such costs are within the MFIs sphere of control because they can hire their own monitoring staff and fit the process in to their existing activities. Since MEC makes the payment shortly after the first audit, the timing of the revenues are also within the MFIs sphere of control--not 1-3 years as with some carbon companies.
The approach also benefits the carbon purchaser. The purchaser knows that 80% of their funding went to actual efforts on the ground to expand the clean energy program--so they aren't troubled by a common worry in the carbon markets of "where did my funding go? who did it help?" With MEC's credits carbon purchasers know who they helped and how.
For more information about microenergy credits please contact us directly at: info@microenergycredits.com
In fact, with long term perspective it would be worth if energy finance
is linked with carbon trading. However, how much of revenue to give to MFIs
depends on country to country situation. I am not sure giving too much works
better. Revenue from carbon should help motivate MFIs to finance on energy
product but not to make it too profitable to make them depend on energy product
only.
We have devised some way out to help cover loan loss risk (2-5%) for
MFIs incase energy product gets default. Also this provision to be made for the
loan term only and not beyond, otherwise MFIs might forget their usual business.
No doubt, if more can be made for client education that is worth considering otherwise
revenue should also be linked to energy companies as well for after sale
service and other developments needed rather than focusing on MFIs part only.
Ramesh
Yes, your understanding is correct.
It is worthwhile at this stage introducing another element into the mix.
What we are seeing is that some energy companies are claiming the rights to the emission reductions before the equipment has even been shipped to the end user. In return for claiming the rights to the emission reductions, energy companies lower the price of their product (or at least they should) because they are assuming the carbon revenue generated through use of the system by the end user will come back to them and they can afford to pass that benefit on to the consumer in advance. Typically, the end user is notified their emission reductions have been taken via a leaflet or simple stamp affixed to the energy system.
Now, ownership of emission reductions is the key to create carbon offsets. And although I have only seen this approach with certain types of technologies, I have also come across MFIs which are providing loans for certain energy technologies to their consumers and don't know this is happening (that is, don't know the emission reduction rights already sold).
This kind of approach certainly has its merits and its problems, but as you can see it adds another element of complexity to MFIs being able to leverage carbon offsets.
Theoretically, it is a win for consumers (if the revenue gets turned into lower costs for the product), and for the energy supplier because they sell more of their systems as they become more price competitive. The MFI may very well be left standing in the middle!
Having said that, I have also seen situations where MFIs have taken control of the process and have seen some of the dividends of carbon. So there are definitely many mutations at play.
Great to read the contributions, especially from others working on cook stove projects utilizing carbon credits.
I've been working with improved cook stove projects in Nigeria for the last three years and preparing to scale up using carbon financing. The stoves themselves are locally produced and we have been considering a micro-entrepreneur model, where each one owns a portion of the carbon revenue. Since our initial communities are in remote rural locations, we have not been able to get Nigerian MFIs involved directly. However, we are working to engage them with the local micro-entrepreneurs, then the entrepreneurs can offer payment plans in areas were it would be beneficial.
I'm very interested in learning how MicroEnergy Credits and others finance cook stove projects through MFIs. Some questions that come to mind:
1. Are there specific cook stoves the MFIs finance, or is it whatever model the customer decides to buy? When a project focuses on one stove design, I worry that technology lock-in may give it the edge over better designs or discourage better designs in the future.
2. Are the carbon payments made to the MFI annually upon the sale of the credits?
3. The website mentions you use an Internet/cell phone verification technology you provide for the MFIs. Is this used in cook stove projects or what kind of monitoring it used?
Monica
Hi Monica,
Nice to hear from you!
Some quick answers to your questions
1. MEC has a simple process to add multiple clean energy technology products to our MFI purchase agreements, including multiple models of stoves. Most of our MFI partners have more than one clean energy product.
2. Payments are made semi annually.
3. MFIs may use our cell phone monitoring technology for any of the clean energy technologies, including cookstoves. They may also elect not to use it, and send the data in another one of our two other formats.
April
Hi Monica,
I'm not very familiar with MicroEnergy Credit's model but if I recall correctly:
1. They would work with any stove technology (as long as they provide energy efficiencies)
2. The payments are made annually to MFIs who collect offsets from their clients and sell them to MEC who temselves package them and sell them in bulk on the carbon market
3. Hopefully MEC's CEO April Allderdice will be on soon and able to reply to these questions
But could you tell us more details on how you are planning to use carbon finance to scale up your stove project in Nigeria?
Thanks
Sorry David, missed this the first time around: Currently, the Nigerian cook stove scale-up plans to use the carbon finance to subsidize cook stove building materials, streamline the program, develop cost-reduction technologies, and offer continuing incentives to entrepreneur to perform maintenance, collect usage data and improve up on the program.
David,
Thanks for the great follow up, these are my thoughts on your questions.
Scale: You are right in the sense that it is difficult to track each device individually, and at some point, the carbon value must be generalized based on estimated offsets. The information we collect for our aggregator initially is the average usage of traditional fuels that the device will replace (for solar lamps, this is kerosene and candles). For biodigesters, we collect information on the amount of animal waste is used as input daily. The offsets are then projected on a yearly basis, and the devices are checked quarterly, and audited yearly. This simplifies the process to (1) initial monitoring and recording task, (2) periodic checks and audit to verify devices are still in use (by aggregator). As techonology advances, these checks and audits will become more efficient (i.e. use of RFIDs to track usage with automatic queries).
Monitoring past repayment: This is a great question, and we are only able to answer for our specific case. In our case as the energy provider, we hold the rights to the carbon credits, and we will pass on the subsidies to the MFI in the form of a carbon passbook program. The subsidy would be valued at a set number of years of offsets (less than the average life of the device) and if the loan is paid off or the offsets are fulfilled, the revenue will go towards future projects. In our case, we reinvest these revenues for future clean energy projects, as agreed with MicroEnergy Credits.
But this is a crucial part of the entire clean energy / carbon credit / microfinance ecosystem. I would love to find out how other MFIs or energy suppliers are implementing carbon offset subsidies as part of their microloan programs.
Jessica
Jessica,
Thanks for your response. I am quite familiar with the role of such companies who aggregate carbon offsets and resell them on the markets (often the voluntary market I think) such as MicroEnergy Credits. The question i was trying to get to is the limit of such a system.
Can that business model be carried out to scale ?
- How to monitor the use of every single device on the market on a yearly basis? It becomes much more complicated when numbers are in the tens or hundreds of thousand
- if the monitoring is undertaken by loan officers themselves during the repayment period, how can the MFI be claiming credits once the loan term is passed ? Would those credits just be abandonned or would reporting requirements force MFIs to create a fleet of energy assessors?
David
David and Jessica,
This is an interesting chain of comments.
From a compliance carbon market perspective (CDM markets) monitoring 100,000s of projects is easier than monitoring 1000s or even 100s. That is because the rules specify randomized 'kitchen studies' and sampling of energy usage patterns within the target population - and these results are then extrapolated across all the projects. Therefore large scale projects can share the costs of these randomized studies more easily than tiny scale projects.
From a voluntary market standpoint (rules vary quite a bit) or in relation to groups like MEC, I believe the random spot checks are used on a % of the projects. The actual method is somewhat irrelevant because the point is that the randomized sampling is still at the heart of what is happening.
Most of the cost in setting up carbon programs is in the upfront or first year costs (while, for example, the client officer typically has a lot of contact with the project). After the first year, spot checks, randomized sampling etc kicks in, to minimize the absolute need for someone to go around every year because quite simply, that would drastically kill the scalability of carbon financing.
As a side point, we haven't even started talking about the upfront costs (not including monitoring) which often run into the 100,000s of dollars simply to get a project registered for carbon. Again, these costs bias the carbon markets towards large scale, and for a long time, large scale has meant big,standalone projects instead of tens of thousands of tiny ones.
