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Tuesday, June 8, 2010

Pushing Forward Energy Microfinance: Energy in Common

By Manuel Bueno

According to our Next 4 Billion report, low-income individuals spend $433.4 billion, or 9% of their expenditures, every year on energy. Kerosene lamps, regular stoves, wood and cow dung are regularly used as fuel for cooking and lighting in poor households. As I briefly mentioned in my previous post, these energy sources are often unhealthy and unsafe. The burning of these products generates black carbon and small particulates which can ultimately cause respiratory illness and deaths and increase air pollution (Ramanathan and Carmichael, 2008). Additionally, per unit of energy used they are more expensive than electricity or liquefied natural gas. Investing in cheaper and better energy for the poor, such as clean stoves or biogas, would improve the health, safety and income of low-income households. Moreover, it would also reduce carbon dioxide emissions which, if enough people are accessed, may ultimately have a significant effect on global warming.

'Green microfinance' institutions are uniquely positioned to encourage energy-saving practices among their clients, because MFIs can tap into their existing network of clients to expand rapidly and generate economies of scale. However, the microfinance sector has yet to rise to this challenge. Around 150 million people are served by microfinance institutions (MFIs) out of which an estimated 100 million survive with less that $1 a day. The most commonly offered financial services are loans to be invested in agriculture or livestock. At most, only half a million people receive energy loans. In other words, barely 0.5% of the people borrowing from MFIs do so to invest in better energy.

Why have loans for energy not received more attention so far? There are two important reasons. First, agriculture and livestock loans have traditionally been perceived to be the main priority, while very little research has gone to examine the effects of energy poverty on development. As a result, very little funding has been made available to MFIs to invest in energy projects. Second, offering energy loans requires a particular expertise that many people working at MFIs do not have and they exhibit a different risk pattern than agricultural or livestock loans. For instance, loan officers covering a rural area in India need not necessarily know which customers would benefit more from a clean energy stove, how much money they would save from using it or in which way could it generate more income for a small business. On the other hand, they are likely to be aware of the products that should be planted in that area, when to plant them and with which other fertilizers and pesticides could they be used.

Founded in 2009, Energy in Common (EIC) is a young non-profit start-up which is currently trying to address this market gap by focusing exclusively on energy loans. EIC's business model is based on three basic pillars. First it allows individuals to lend money to poor entrepreneurs through their website by using a classic Kiva-like model that connects individual lenders and borrowers. When an individual lender finds an interesting borrower, he or she can decide how much to lend (although the current minimum is set at $25). The total loan is in average between $100 and $1000. Eventually, after several individual lenders have selected a borrower and the total amount required has been reached, the loan will be disbursed. Each and every loan is aimed to reduce emissions and alleviate poverty.

Second, EIC has partnered with MFIs that have experience in disbursing energy loans and that will provide a list of prospective borrowers out of which EIC will pick those individuals to be profiled in their website. MFIs are also in charge of disbursing the loan directly to the borrower and EIC helps MFIs partner with reliable energy suppliers. This way MFIs can focus on lending and energy suppliers can focus on providing the product while the final borrower receives a special price. All maintenance and support services to the borrower after the product is purchased are the responsibility of the MFI. To cover these expenses, the MFIs will receive all the interests charged on the customer for the loan. Currently, EIC works with four MFIs all based in Sub-Saharan Africa and it is in talks with four or five more MFIs with a view of expanding into other geographical areas.

Third, EIC is aiming to be financially sustainable within 5 years. Once a loan is repaid, money is placed into the lenders account and EIC calculates the project's emission reductions, which are then able to be used by a lender to offset their carbon emissions through a tax deductible donation to EIC. The total carbon emission offsets calculated for a given project is the difference between the carbon emissions before and after the energy loan was provided. In the case of those carbon offsets that are not purchased, EIC may in the future offer them through their website to anyone interested in using them to offset her emissions.

EIC has already disbursed 21 loans with a total value of $7,000 and 8 metric tons of carbon offsets -equivalent to a US family not using electricity for 16 months or driving a 20mpg car for 18,000 miles. EIC also offers better loan terms than MFIs alone to its borrowers. The first loans will be repaid in August. These loans were directed mostly to small or medium enterprises (SMEs) such as bakers, dress makers, restaurant and hair salon owners in Ghana - most of them women. Although EIC also offers loans to individual households, the initial set of borrowers has included mostly SMEs because of the straightforward additional revenues that a safer and more reliable energy source provides as well as the longer operation hours. Nonetheless, the energy products purchased with these loans also generate significant savings and thus EIC's client portfolio is expected to include more individual households in the future.

Currently, prospective borrowers can only opt for a loan for three types of products: solar home systems, clean burning energy stoves and LED lamps. These three products have been included in the initial set of loans because they all involve a tried and tested technology which is easy to implement and to operate by customers. Moreover, for all these products, the costs of maintenance are low, thus reducing the support costs for the MFI involved. Also, these three choices have a similar default rate - around 98% according to the experience of the four MFIs partnered with EIC. At present, EIC offers an even mix of borrowers wanting to purchase any of these three energy products in their site, although larger solar home systems are more expensive.

In terms of emission reductions, stoves tend to have better results, although this highly depends on the initial emission profile of the borrower. Furthermore, stoves tend to have greater health benefits than other options. As has been mentioned above, EIC's long-term financial success depends on the degree of emission reductions achieved by the energy loan. EIC also plans to share approximately half of the carbon revenue with the MFI who provided the project. These funds will be used to expand their energy lending and improve their training and maintenance programs. Some of the funds may also be used to pay an energy supplier to perform certain maintenance activities as well. The remaining revenue will be used to further EICs goals such as helping MFIs to offer more complex energy products such as biogas digesters and solar drip irrigation with which EIC is currently experimenting.

EIC is also mindful that, in order to be able to offer emission reductions, it is crucial to be as transparent and accountable as possible - especially considering that the voluntary carbon market is often criticized for being opaque and not offering enough information about the energy project that gave rise to the emission reduction. Currently, EIC is following the World Resources Institute GHG Protocol. EIC also collects quarterly energy usage data on each project through a set of questionnaires that are completed by the MFI and is in the process of developing additional steps that will allow it a more accurate estimation of its emission reduction calculations. One of such measures includes implementing an ambassador program similar to the Kiva Fellows, as well as hiring in-country third party auditors to verify data quality.

For the time being most of their customers live in urban areas and are relatively wealthy - according to their webpage, the average daily income of each household is nearly $5.5, which is quite high for low-income markets. As EIC moves into rural areas as well, chances are that its customers will become poorer. Instead of lending to individuals, loans could also be disbursed to groups thus increasing the social impact of the loan, because for many energy products it makes sense to share them among different households.

All in all, EIC represents an extraordinary opportunity for the green microfinance sector to access more people and expand the number of energy products that they offer. Although there are no details about the default rates of their loans, judging by the pattern of paid installments the repayment is expected to be close to 100%. EIC's approach is likely to be easily scalable and it expects to reach 15 million people in 5 years. One of the biggest constraints in the offering of energy-related financial services is the lack of expertise in energy projects at MFIs. It is likely that in the growth process EIC will end up positioning itself as an organization capable of advising and supporting MFIs wanting to make the jump to these products.

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