NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

For the past four months I’ve been researching and learning about market-based solutions for access to energy for low-income communities. I’ve come across everything from energy efficient cookstoves to rural cooperatives that have the potential to replicate and serve billions of people. Most exciting for me are the models that connect slum residents to power and gas grids. Maybe I’m a city kid at heart, but I was thrilled to learn just how much there is to hope for in slum energy connections.

The picture most people know of slums is shacks, open drains, crowded lanes, and tangles of wires on teetering poles. Utilities have grown resigned to sizeable non-technical losses, and this stolen power drives up the price that formal customers pay. Slum residents live with dangerous connections, and most people receive unreliable energy at a higher price per unit than more wealthy customers.

Today more than 1b people live in slums, and this number grows by 500k every week. A solution to grid connections will provide safe, reliable energy to poor residents, and a remarkably well-tested and profitable business to those willing to take up the challenge.

We learned over the course of the investigation that enterprises in Casablanca, Buenos Aires, Khartoum, and Bogotá have connected poor residents profitably, and to the great satisfaction of their new customers. These businesses are financially viable and deliver significant social impact for their clients. They do this by:

• Leveraging the power of organized residents
• Employing pre-pay technology to reduce losses and increase
• Building complementary businesses based on payment history

LYDEC, a joint project of GDF Suez and EDF, connected 75% of slum residents in Casablanca legally to the electricity grid. This solution was designed and managed by end-users. Community representatives manage metering and payment for a block of 20 people. If one bill is late the whole block is disconnected, and currently 98% of bills are paid on time. Moreover, connected slums enjoyed 17% increase in commercial activity, at about the same price as an informal connection. Provivienda, in Buenos Aires, built a community trust fund to bring piped cooking gas to poor communities. Provivienda’s gas lines increased real income by 7%, decreased respiratory illness by 30%, and created community organization and understanding that can be used to tackle other shared problems.

Pre-pay technology is an exciting advancement in access to energy. Khartoum’s utility was $70m in debt because of non payment when it turned to Conlog’s pre-payment system. Pre-pay meters allow poor people to manage their energy budgets – paying for what they want when they want it , with no severance fees or disputed bills – and reduces losses to utilities. Customers purchase tokens at retail outlets, utility stores, or even over their cell phones. Now over 1m pre-pay meters are installed in Sudan, all new meters are pre-pay (due to requests from customers), and the utility is no longer in debt.

Codensa, the Colombian electrical utility (a subsidiary of Endesa and subject of prior posts here in NextBillion), realized that the poor could not afford to buy electrical appliances. In response Codensa built a complementary business to offer household credit so customers can purchase electrical appliances and pay back over time with amounts added to their bill. The default rate of 2% is at the banking average and the program contributes disproportionately to Codensa’s profit margin. It is a unique offering, as before Codensa, 66% of the customers had no bank relationship. Promigas, a Colombian gas utility, has replicated a similar initiative that is now providing over 200k customers from the lowest income level with credit for electronics and home improvement products.

So now social entrepreneurs have created new models, and business opportunities have opened up a few large corporations to the possibilities of serving low-income people. The question now is whether utilities will start to see low-income markets as a source of advantage and opportunity. Instead of giving lip-service or free energy to low-income populations in order to get concessions, could they compete with each other to legally, safely, affordably serve low-income people? Promigas has learned from Codensa’s experience in Colombia and its model is already profitable, having launched in 2007. I would argue this is the kind of replication at scale that we need to see to serve the 1b people in slums.

Most importantly, a commitment to slum connections requires a shift in mentality from thinking of poor people as a source of loss to thinking of them as customers. For slum residents, this means thinking of themselves as full economic citizens and taking ownership of their energy connection solutions.

Ashoka and Hystra will be publishing an extensive report on access to energy very soon, so watch out for an announcement. Until then don’t despair when you see the tangle of wires in slums, as there is a lot more reason to hope than you might think.