ENERGY SERVICES FOR THE BASE OF PYRAMID:

THE ROLE OF MICROFINANCE INSTITUTIONS

PRESENTER: ANOJ VISWANATHAN

THEME: e-NVIRONMENT

INSTITUTION: NATIONAL UNIVERSITY OF

SINGAPORE

DISPARITIES IN ACCESS TO ELECTRICITY

Many of the world’s poor do not have access to

basic financial services

Most of the world’s poor do not have access to

energy services

Estimates vary, but about 500m poor entrepreneurs need access to finance; while only just over 100m have access.(Source: MicroCapital Monitor, Nov. 16 2007)

Less than 500k clients of MFIs have access to energy loans

1.7 billion people have no access to electricity 86% of BoP households (PCI: ~3/day) lack access to electricity only 6% of middle class segment lack access (PCI: $10-$30/day).

2.4 billion people rely on traditional biomass for cooking and heating 1.3 million people die of indoor air pollution each year (smoke from biomass).

Untapped market for clean energy estimated to be US$ 433 Billion ( ~ 10% of total BoP services)

CONTEXT FOR ENERGY LENDING (1/2)

Rural Poor have the least access to electricity

Rural areas show a larger and more persistent penalty in access to electricity across income groups.

For example, in Bangladesh 37% of urban BoP households have grid-access, compared with only 4% of their rural counterparts

The Poorest pay The Highest for Energy Services

Households in the income group of less than $1.50/day spend an average of $148 a year on energy, equivalent to around $0.40 a day

20 – 25% of household income in energy services compared to 5 – 8% of household income spent by middle class segment (~ PCI: $- 30/day)

CONTEXT FOR ENERGY LENDING (2/2)

5

ServiceEnergy System

Cost Benefits

Lighting /Electricity • Solar lanterns • Solar lighting

systems for businesses and homes

• Battery charging

$ 20 – 50

$200-400

$70-100

•Cleaner, brighter light for work, study and recreation

•Safer - fewer burns, less breathing/vision problems

•Reduced dependency on unreliable grid

•Increased income opportunities

Mechanical power

• Multifunctional platform

• Water pump

$100-150

$40-80

•Women’s drudgery reduced •Higher quality product and higher

prices•Job creation for operation and

maintenance•Creates options for non-electrified

villages

Heat for cooking • Biogas systems

• Liquefied Petroleum Gas stoves

• Efficient wood/ charcoal cook stoves

$20-50

$20-50

•Cleaner and more efficient •Safer - fewer burns, less

breathing/vision problems•Job creation in manufacture, sales,

and distribution

CLEAN ENERGY TECHNOLOGIES FOR RURAL APPLICATIONS

ENERGY LENDING – EXAMPLE FOR A LOAN STRATEGY

* All values in Indian Rupees (INR)

** 1 USD = 50 INR

LOAN FOR A SOLAR POWERED LED LANTERN

Benefits Solar Powered Lanterns

SolarPV Systems Improved Cook Stoves

Biogas Plants

Economic Avg. Kerosene savings of 5 litres/month. Payback ~ 15 months.

Avg. kerosene savings of 12 liters / mth.

Wood savings of $1.5/mth. Payback ~ 6 months.

Wood savings of $3/mth. Revenue of $160/yr from biogas and fertilizer sales.

Environmental ~ 145 kg of CO2 emission abated per lantern

~ 375kg/yr of CO2 emission abated per SHS installed. (45Watt system)

Reduction of wood consumption by 25%.

~4.6 tonnes/yr of CO2 emission abated per Biogas plant installed. (3m3 plant)

Social Increased time for work education, transit purposes.

Increased time for work and education.

Indoor air quality. Better cooking conditions for women.

Boosts agro productivity by reusing animal waste products.

Benefits enjoyed from access to clean energy services go beyond savings from kerosene and firewood

An effective way to combat climate change – Carbon Credits ??

Solar Home Systems (SHS), Biogas plants, (BGP) and Improved Cook Stoves (ICS) all deliver cash savings and also generate income.

BENEFITS BEYOND CASH SAVINGS

The Need

Build a Clean Energy Development Path:

Focused on Inclusion of Poor

Eradicates Energy Poverty

Combats Climate Change

The Methodology The Model

Distributed energy system

Based on renewables

Seamless two-way links to the electricity grid, wherever possible

Massive coverage

Develop workable business models for :

Products

Distribution systems

Financing

Maintenance

How can Microfinance Help?

As a way to help people finance the purchase of clean energy devices

As a distribution system

As a way to help finance energy entrepreneurs (microfranchising)

As a support system to monitor and evaluate the impact of clean energy services (carbon credits)

The challenge is to ensure:

Collective accountability

Scalable, embedded distribution

Livelihood partnerships

The Challenge

ENERGY – MFI LINKAGE (1/2)

• Scalable Business model

• Proven Financial sustainability ( ~ 98% repayment rates)

• Access to the capital markets, even in credit crisis ( SKS Microfinance - $75 Million (Nov 2008), Spandana - $ 25 Million ( Dec 2008) )

• Mainstreaming of microfinance – retail banks creating separate divisions/ funds for microfinance portfolio ( Citibank, Morgan Stanley, HDFC )

• Distribution channels to provide multiple

services.

• Reduced transaction costs

• Portfolio Diversification and Hedging

• Increased customer base and customer

loyalty ( doorstep delivery)

ENERGY – MFI LINKAGE (2/2)

MFI STRENGTHS LEVERAGE FOR ENERGY

LENDING

Clients: Demanding loan products/energy services for business and to improve quality of life

Microfinance Institutions: Experimenting with broader set of product offerings for clients

Energy companies: Beginning to develop lower cost products and services

Donors and investors: Showing interest and seeing opportunities in this emerging niche

Climate change debate: Growing awareness of carbon monetization from clean energy

CONVERGENCE OF STAKEHOLDERS

ENERGY SERVICES FOR BoP: EVALUATION FRAMEWORK (1/3)

SERVICE OFFERING

STANDARDISED PRODUCT

Plain vanilla approach – single product (solar lanterns/ cook stoves)

Small ticket items (<$60) with high volume targets, repayable in 25 – 50 weeks.

Targeted at “lower poor”

Risk averse, preferred by small to medium MFIs

Low operational challenges, easy roll-out. No long term vision

Diversified approach – multiple products and services (SHS, BGPs etc)

Big ticket items ($200 – 600), repayable in 6 – 36 months

Targeted at “upper poor”

Considerable risk in operations, hedged for technology. Big MFIs are capable of pursuit (e.g. Grameen Shakti)

NEED BASED SOLUTION

PRODUCT COST/LOAN RANGE

LENDING MODEL

Down-payment

Instalment Service charge

Solar Home System (SHS)

20Wp - $217 50Wp - $400

15% 36 months 6% flat

25%. 24 months 4% flat

Domestic, Biogas

1.2m3 $220. 4.8m3 -$550

25% 24 months 8% flat

Improved Cook Stove

$12-$15 100% N.A Nil

$25 $50 15% 6 months 4% flat

ENERGY SERVICES FOR BoP: EVALUATION FRAMEWORK (2/3)

SALES MODEL

ACCESS VS OWNERSHIP

BoP income – low and volatile

Segmentation by “who can use the product” and “who can buy it”

Access model based on leasing, shared usage, rental schemes, micro-utility schemes.

Success stories- Grameen Shakti’s micro-utility model and SELCO’s lantern rental model

Immediate Ownership

Credit based ownership

Access/Lease

ENERGY SERVICES FOR BoP: EVALUATION FRAMEWORK (3/3)

Photovoltaic Battery Charging: A Profitable Business in India (SELCO, India)Capital Expenditure

Approximately INR 5,000 (US$ 110) per battery unit for each solar light that operates 6–8 hours/day, and INR 3,500 (US$ 77) for one that operates 3–4 hours/day

Clients Hawkers (fruit vendors, vegetable vendors etc)Revenue Daily rental fee for battery with 6–8 hours running capacity: INR 20-25. Savings of INR

10–15 over kerosene light.

Annual revenue for renting a 6–8 hours battery = INR 6,800.

Assuming that the loan period is 2 years at IRR 17% (diminishing). Client will pay INR 5,885 (INR 3,155+ INR 2,730). Expenses for battery transportation and maintenance is 10% of total revenue = INR 680. Year 1 income - INR 2800/battery. Year 2 - INR 3,390

When the loan is paid off, the client earns INR 6,120 per year per unit system.

VALUE PROPOSITION

CONSUMPTION SAVINGS VS. INCOME GENERATION

. MFIs believe that Energy products/loans – purely consumptive in nature. Loans only for repeated, successful clients

However, range of clients have proven capacity to pay for consumption loans as well as

generate income as micro entrepreneurs

BUSINESS MODELS FOR ENERGY LENDING

Framework based on experiences from 7 MFIs in Asia and Africa and LAC. Desk study and On-the-ground research with industry experts.

Partnership with Energy Service Companies (ESCOs): SELCO-SEWA, India

Direct Micro-lending by Energy Companies: Soluz, Latin America

Income Generation Activity Loan: Amret, Cambodia

Wholesale procurement and sale of energy products to local distribution networks: KUSCCO, Kenya

Microfranchising by MFIs/ Energy Companies: SunLabob, Laos/Vietnam

Customer Profile • Little or no access to grid. Unreliable grid • Evaluate attractiveness

Regulatory Framework • Identify regulatory challenges – ability to do retail, FDI regulations etc

Corporate Structure • In-house service offering vs. Separate entity • Evaluate brand visibility, infrastructure sharing and financing

Field Staff • Utilizing existing MFI staff vs. recruiting separate staff for field operations • Evaluate cost benefits, consider training and after sales monitoring • Independent loan collection agents???

Loan Product • Design to align with existing energy expenditure • Flexible repayment structure for big ticket items• Fool proof security – assets hard to relocate• Community based vs. Individual loan offering

KEY CONSIDERATIONS FOR MFIs (1/2)

KEY CONSIDERATIONS FOR MFIs (2/2)

Management Information Systems • Real time tracking of loans vs. manual recording• Handle multiple loan products

Scalability • Identify services with High volumes and penetration rate• “Starbucks model” – speedy deployment

In-house Assembly and Training • Eliminates middlemen • Set up training centers. Risk – beyond MFIs’ current expertise

Timely Roll-out • Outdated Technology • Unplanned grid extensions, delay in installations will result in high default / erosion of

customer

Carbon Credit Revenues:• Monitoring and Evaluation • Evaluate cost benefits , pursue innovative models (micro-carbon credits)

• Demand creation: Membership ties, marketing & financing

• Reach: Volume & geographic fit

• Resources: Manpower & other SG&A costs

• Margin: Channel profitability

• Motivation & Professionalism: Mission fit, data collection ability,

cooperation, etc.

MFI-ENERGY COMPANY PARTNERSHIPS

I shall make electricity so cheap, that only the rich shall burn candles- Thomas Alva Edison

The poor need an opportunity, not charity, to shape their future - Dr Vikram Akula

Q & A

THANK YOU

CONCLUSION