Innovative solutions to finance clean household energy

In many parts of the world, especially in rural areas, once the sun sets, everything goes pitch black. The lack of reliable access to energy is one of the greatest challenges poor countries and emerging economies face. The impacts can also affect health and livelihoods.

Poor access to energy impacts education: children attend schools without electricity and heating, some spend their days looking for firewood instead of going to school, and at night there is insufficient light to study. In Haiti’s capital Port-au-Prince, it’s common to see children reading under street lights in the wealthier neighborhoods of Petionville. In cities, without streetlights women and girls are particularly vulnerable to violence after dark.

Poor access to clean sources of energy also impacts health and the climate. Each year, more than three million people worldwide die prematurely from breathing smoke from the indoor open fires and kerosene lanterns they use for cooking, heating and lighting – that is more than malaria and HIV/AIDS combined. Residential cooking and heating with solid fuels accounts for 20 percent of global black carbon emissions. An estimated 270,000 tons of black carbon is emitted from kerosene lamps worldwide annually, this has a climate warming equivalent close to 240 million tons of CO2.

Innovative approaches are needed to address the needs of the 1.3 billion people lacking electricity, while simultaneously transitioning to a decarbonized energy system.

Decentralized energy networks are rapidly spreading, based on efficient end-use appliances and low-cost photovoltaics. For example, Bangladesh and Kenya, among others, have developed thriving self-sustaining markets for off grid lighting products. Learning from their experience and adjusting their approaches to local circumstances can help other locations to join the off-grid solar success story. With appropriate tools, it is possible to assess the progress out of energy poverty and to properly design policies and programs.

Helping people purchase clean energy options and participate in decentralized networks is key to the success of many programs. However lending for off-grid energy products is outside of the core business of traditional financial institutions for a variety of reasons among which lack of technical capacity to assess product quality.

With this in mind the Climate and Clean Air Coalition together with the European Microfinance Platform’s Microfinance & Environment Action Group organized a session in Luxembourg on the 17th of November 2016 to look at successful off-grid energy models to underserved populations and introduced a toolkit for microfinance institutions to track the progress of energy access.

Two Finance Approaches: Bangladesh and Kenya

UNEP DTU presented two business models for providing transformational off-grid solar solutions: One that taps into Bangladesh’s micro-finance network by Infrastructure Development Company Limited (IDCOL), and a pay-as-you-go business model that uses mobile money and machine to machine (M2M) communications from PAYGO in Kenya.

IDCOL is a government-owned non-bank financial institution. It provides finance for medium to large scale infrastructure and energy efficiency/renewable energy projects. ICOL’s ultimate objective is to commercialize the energy sector and it has helped established a market enabling environment. IDCOL’s Solar Home Systems (SHS) program is the world’s largest and fastest developing off-grid rural electrification program with 2.5 million systems to date.

IDCOL sets technical specifications, certifies products, and selects partner micro-finance institutions (MFIs). These partner MFIs procure solar home systems from various suppliers and sell them to households using small microcredit loans. The MFIs install the systems and, by helping pay for them in advance, can often obtain supplier credit.

Once the systems are installed, IDCOL verifies the installations and refinances a portion of the partner MFI’s credit to the households. In some instances, it may also release a subsidy to the partner organization.

Partner MFIs are the primary contact for customers during the loan repayment period (typically 2–3 years), collecting payments, providing maintenance, and training them in both operation and maintenance. Once the loan is fully repaid, the MFI offers service contracts for an annual fee. The MFI also extends a buy-back guarantee that gives customers an option to sell their system back to IDCOL at a depreciated price if the household obtains a grid connection within a year of purchase.

In comparison, in Kenya PAYGO solar lighting systems are sold for a small up-front payment (USD 10 –USD 120 depending on the system size). A solar home system usually includes 2-5 lights, phone charging, and radios or TVs in larger models, enough to seriously improve the quality of life for many families.

The customer, usually low-income earners in off-grid locations, pre-pay for lighting using mobile money. If the costumer fails to pay, the system is remotely disabled using machine-to-machine communication until another payment is made. The conditions offered under PAYGO are less expensive than traditional microfinance, because the system cuts out expensive client visits and loan recollection.

The majority of households starting to use off-grid solar energy solutions are located in Kenya, Tanzania, Uganda, and Rwanda and mobile money is the most common form of payment. Kenya is an early leader in mobile money with the majority of the population (roughly 70% as of 2013) using mobile payments on a regular basis.

Jan-Henirk Kuhlmann, a Senior Investment Manager at Triple Jump and responsible for South Asia and the Western Africa, presented the investors' point of view on the sector’s potential and the main barriers for growth.

Mr Kuhlman noted that leading companies, including M-Kopa, Off-Grid Electric, d.Light, BBOXX, Nova Lumos and Mobisol, have raised more than $360 million and serve about 700,000 customers – which is a microscopic fraction of the potential market.

According to an analysis by Lighting Global, digitally financed off-grid solar has moved from the pilot scale to a diverse and substantial sub-sector of the global off-grid energy market. Today nearly 30 companies operating in at least 32 countries provide access to consumer capital for off-grid solar using digital finance.

Progress out of Energy Poverty Index (PEPI)

The Luxemburg meeting also provided participants an overview of the recently launched Progress out of Energy Poverty Index (PEPI), a toolkit created to assist the development of green microfinance programs focused on energy. The toolkit provides information on the energy needs satisfaction of specific populations, and supports organizations track how they are providing energy access and contributing to the energy Sustainable Development Goals (SDG).

Natalia Realpe from the Berlin based Microenergy International shared her points of view and lessons learnt from the PEPI toolkit implementation in Latin America. 

Finally, Francis Vazheparambil, CEO and Managing Director of Standard Microfinance Bank (SMB) outlined the energy access challenges faced by Nigeria’s, Adamawa State and how plans to alleviate those challenges by providing financial products and services for purchasing solar equipment. 

The Climate and Clean Air Coalition and UNEP DTU will provide technical assistance to help SMB investigate the most suitable financing solutions (traditional vs. PAYGO) for its customer base. A kick-off mission is scheduled for February, 2017. In parallel the CCAC will work with UN Environment and UN Development Program and the government of Nigeria to understand the market for kerosene subsidies and recommend a move away from those subsidies.