Microfinance and Renewable Energy

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A presentation on linkages between Microfinance and Renewable Energy

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Microfinance and Renewable Energy

  1. 1. ENERGY SERVICES FOR THE BASE OF PYRAMID: THE ROLE OF MICROFINANCE INSTITUTIONS PRESENTER: ANOJ VISWANATHAN THEME: e-NVIRONMENT INSTITUTION: NATIONAL UNIVERSITY OF SINGAPORE
  2. 2. DISPARITIES IN ACCESS TO ELECTRICITY
  3. 3. 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 clien ts of MFIs have access to energy loans 1.7 billion people have no access to electricity 8 6% 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)
  4. 4. 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: $- 30/day) CONTEXT FOR ENERGY LENDING (2/2)
  5. 5. CLEAN ENERGY TECHNOLOGIES FOR RURAL APPLICATIONS Service Energy System Cost Benefits Lighting /Electricity <ul><li>Solar lanterns </li></ul><ul><li>Solar lighting systems for businesses and homes </li></ul><ul><li>Battery charging </li></ul>$ 20 – 50 $200-400 $70-100 <ul><li>Cleaner, brighter light for work, study and recreation </li></ul><ul><li>Safer - fewer burns, less breathing/vision problems </li></ul><ul><li>Reduced dependency on unreliable grid </li></ul><ul><li>Increased income opportunities </li></ul>Mechanical power <ul><li>Multifunctional platform </li></ul><ul><li>Water pump </li></ul>$100-150 $40-80 <ul><li>Women’s drudgery reduced </li></ul><ul><li>Higher quality product and higher prices </li></ul><ul><li>Job creation for operation and maintenance </li></ul><ul><li>Creates options for non-electrified villages </li></ul>Heat for cooking <ul><li>Biogas systems </li></ul><ul><li>Liquefied Petroleum Gas stoves </li></ul><ul><li>Efficient wood/ charcoal cook stoves </li></ul>$20-50 $20-50 <ul><li>Cleaner and more efficient </li></ul><ul><li>Safer - fewer burns, less breathing/vision problems </li></ul><ul><li>Job creation in manufacture, sales, and distribution </li></ul>
  6. 6. ENERGY LENDING – EXAMPLE FOR A LOAN STRATEGY * All values in Indian Rupees (INR) ** 1 USD = 50 INR LOAN FOR A SOLAR POWERED LED LANTERN
  7. 7. 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 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.
  8. 8. <ul><li>The Need </li></ul><ul><li>Build a Clean Energy Development Path: </li></ul><ul><li>Focused on Inclusion of Poor </li></ul><ul><li>Eradicates Energy Poverty </li></ul><ul><li>Combats Climate Change </li></ul><ul><li>The Methodology </li></ul><ul><li>The Model </li></ul><ul><li>Distributed energy system </li></ul><ul><li>Based on renewables </li></ul><ul><li>Seamless two-way links to the electricity grid, wherever possible </li></ul><ul><li>Massive coverage </li></ul><ul><li>Develop workable business models for : </li></ul><ul><li>Products </li></ul><ul><li>Distribution systems </li></ul><ul><li>Financing </li></ul><ul><li>Maintenance </li></ul><ul><li>As a way to help people finance the purchase of clean energy devices </li></ul><ul><li>As a distribution system </li></ul><ul><li>As a way to help finance energy entrepreneurs (microfranchising) </li></ul><ul><li>As a support system to monitor and evaluate the impact of clean energy services (carbon credits) </li></ul><ul><li>The challenge is to ensure: </li></ul><ul><li>Collective accountability </li></ul><ul><li>Scalable, embedded distribution </li></ul><ul><li>Livelihood partnerships </li></ul><ul><li>The Challenge </li></ul>How can Microfinance Help? ENERGY – MFI LINKAGE (1/2)
  9. 9. <ul><li>Scalable Business model </li></ul><ul><li>Proven Financial sustainability ( ~ 98% repayment rates) </li></ul><ul><li>Access to the capital markets, even in credit crisis ( SKS Microfinance - $75 Million (Nov 2008), Spandana - $ 25 Million ( Dec 2008) ) </li></ul><ul><li>Mainstreaming of microfinance – retail banks creating separate divisions/ funds for microfinance portfolio ( Citibank, Morgan Stanley, HDFC ) </li></ul><ul><li>Distribution channels to provide multiple </li></ul><ul><li>services. </li></ul><ul><li>Reduced transaction costs </li></ul><ul><li>Portfolio Diversification and Hedging </li></ul><ul><li>Increased customer base and customer </li></ul><ul><li>loyalty ( doorstep delivery) </li></ul><ul><li>MFI STRENGTHS </li></ul><ul><li>LEVERAGE FOR ENERGY LENDING </li></ul>ENERGY – MFI LINKAGE (2/2)
  10. 10. <ul><li>Clients: Demanding loan products/energy services for business and to improve quality of life </li></ul><ul><li>Microfinance Institutions: Experimenting with broader set of product offerings for clients </li></ul><ul><li>Energy companies: Beginning to develop lower cost products and services </li></ul><ul><li>Donors and investors: Showing interest and seeing opportunities in this emerging niche </li></ul><ul><li>Climate change debate: Growing awareness of carbon monetization from clean energy </li></ul>CONVERGENCE OF STAKEHOLDERS
  11. 11. 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 $50 15% 6 months 4% flat
  12. 12. ENERGY SERVICES FOR BoP: EVALUATION FRAMEWORK (2/3) SALES MODEL ACCESS VS OWNERSHIP BoP income – low and volatile Segmentation by “who can use the product” and “who can buy it” Access model based on leasing, shared usage, rental schemes, micro-utility schemes. Success stories- Grameen Shakti’s micro-utility model and SELCO’s lantern rental model Immediate Ownership Credit based ownership Access/Lease
  13. 13. ENERGY SERVICES FOR BoP: EVALUATION FRAMEWORK (3/3) VALUE PROPOSITION CONSUMPTION SAVINGS VS. INCOME GENERATION . MFIs believe that Energy products/loans – purely consumptive in nature. Loans only for repeated, successful clients However, range of clients have proven capacity to pay for consumption loans as well as generate income as micro entrepreneurs Photovoltaic Battery Charging: A Profitable Business in India (SELCO, India) Capital Expenditure Approximately INR 5,000 (US$ 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.
  14. 14. 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
  15. 15. <ul><li>Customer Profile </li></ul><ul><ul><li>Little or no access to grid. Unreliable grid </li></ul></ul><ul><ul><li>Evaluate attractiveness </li></ul></ul><ul><li>Regulatory Framework </li></ul><ul><ul><li>Identify regulatory challenges – ability to do retail, FDI regulations etc </li></ul></ul><ul><li>Corporate Structure </li></ul><ul><ul><li>In-house service offering vs. Separate entity </li></ul></ul><ul><ul><li>Evaluate brand visibility, infrastructure sharing and financing </li></ul></ul><ul><li>Field Staff </li></ul><ul><ul><li>Utilizing existing MFI staff vs. recruiting separate staff for field operations </li></ul></ul><ul><ul><li>Evaluate cost benefits, consider training and after sales monitoring </li></ul></ul><ul><ul><li>Independent loan collection agents??? </li></ul></ul><ul><li>Loan Product </li></ul><ul><ul><li>Design to align with existing energy expenditure </li></ul></ul><ul><ul><li>Flexible repayment structure for big ticket items </li></ul></ul><ul><ul><li>Fool proof security – assets hard to relocate </li></ul></ul><ul><ul><li>Community based vs. Individual loan offering </li></ul></ul>KEY CONSIDERATIONS FOR MFIs (1/2)
  16. 16. KEY CONSIDERATIONS FOR MFIs (2/2) <ul><li>Management Information Systems </li></ul><ul><ul><li>Real time tracking of loans vs. manual recording </li></ul></ul><ul><ul><li>Handle multiple loan products </li></ul></ul><ul><li>Scalability </li></ul><ul><ul><li>Identify services with High volumes and penetration rate </li></ul></ul><ul><ul><li>“ Starbucks model” – speedy deployment </li></ul></ul><ul><li>In-house Assembly and Training </li></ul><ul><ul><li>Eliminates middlemen </li></ul></ul><ul><ul><li>Set up training centers. Risk – beyond MFIs’ current </li></ul></ul><ul><ul><li>expertise </li></ul></ul><ul><li>Timely Roll-out </li></ul><ul><ul><li>Outdated Technology </li></ul></ul><ul><ul><li>Unplanned grid extensions, delay in installations will result in high default / erosion of customer </li></ul></ul><ul><ul><li>Carbon Credit Revenues: </li></ul></ul><ul><ul><li>Monitoring and Evaluation </li></ul></ul><ul><ul><li>Evaluate cost benefits , pursue innovative models (micro-carbon credits) </li></ul></ul>
  17. 17. <ul><li>Demand creation: Membership ties, marketing & financing </li></ul><ul><li>Reach: Volume & geographic fit </li></ul><ul><li>Resources: Manpower & other SG&A costs </li></ul><ul><li>Margin: Channel profitability </li></ul><ul><li>Motivation & Professionalism: Mission fit, data collection ability, cooperation, etc. </li></ul>MFI-ENERGY COMPANY PARTNERSHIPS
  18. 18. 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

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