NB Financial Health
NextThought Monday – An Alternative to Alternative Energy: Will microfinance embrace biogas for the BoP?
Solar was once the wild west of alternative energy. Today, microfinance banks see it as a solid investment, even for poor clients, and bio-gas may follow its footsteps.
Hussein Farag lives in Cairo’s Darb el Ahmar district where people earn around $3 a day. Poor families, like his, cook with butane gas because government subsidies make it cheap. Knowing the subsidies might not last and interested in trying an alternative, Farag got in touch with the nonprofit Solar CITIES, which gives grants for home bio-gas converters. Instead of dumping his kitchen waste into the sewer outside his apartment building, causing health hazards, he now puts it into the unit and converts it into usable methane gas.
Farag’s device can produce about two hours of gas a day in the summer, according to IPS News. His family saves about LE 20 (USD $3) each month by not buying butane gas. Bio-gas units allow cash-strapped families like Farag’s to save money for other needed items like food. Families also protect themselves from the dangers of bottled butane gas, like poorly maintained bottles that can cause fire. As traditional fuel costs rise and political instability in Egypt means an uncertain future for government subsidies, bio-gas units insulate families from potentially crippling cost increases.
However, like other alternative energy sources such as solar or clean cookstoves, bio-gas technology is still too expensive for the poor despite its long-term benefits.
The upfront installation cost associated with bio-gas puts it out of reach for most families unless financial assistance is available, but microfinance institutions don’t yet see it as a viable investment. Here are some of the reasons why:
Microfinance institutions usually give loans to boost income-generating activities. Bio-gas units save families gas money, but don’t inherently generate income. Though some people sell the byproduct waste as fertilizer, that may not be enough to pay back the loan
Implementing untested lending programs would take too many additional resources for microfinance institutions. Starting a lending program for bio-gas would take extra market studies, business plans, and trained human resources that many institutions do not have
Microfinance institutions feel pressure from their funders to support lending that results in short-term growth, whereas energy is seen as a medium- to long-term investment and less urgent
The bio-gas sector is fairly new with few known companies putting out tested products. The risk of helping a family invest in a poor product with no warranty doesn’t sound intriguing to most banks, and performing due diligence on new companies can be an undertaking too large for small microfinance groups
Other alternative energy sectors, like solar, may offer a roadmap for microfinance involvement in bio-gas. Here are some positive incentives for bio-gas investment:
Offering credit for bio-gas units could provide a new source of clients for microfinance institutions
Larger bio-gas units may serve an entire community and become a source of income for the unit’s owner, which would reduce the risk to the microfinance institution
Microfinance institutions can use similar funding structures that have already been successfully implemented for solar energy. These structures offer limited credit risk because bio-gas units offer predictable financial savings over time
Microfinance institutions can strengthen their reputations with environmentally conscious investors and donors
Making urban bio-gas a viable investment for microfinance institutions would likely require a combination of these incentives, but scale may be the most important aspect. For example, communities that pool together would likely secure financing for a bio-gas unit more easily. Large-scale rural bio-gas projects used for the agriculture sector have demonstrated that multi-user systems generate a shorter payback period. The Rural Support Programmes Network, a Pakistani non-profit, found that agricultural bio-gas converters can pay back the initial investment after 15-30 months. By engaging on the community rather than the individual level, microfinance organizations can find attractive investments in bio-gas like they have found with solar. Another example might be a lease model that could create cash flows from bio-gas energy savings. The NGO Arc Finance operates a solar energy lease program that charges a weekly fee to groups of rural Kenyans for access to money-saving solar energy.
Solar provides the roadmap microfinance institutions need to see bio-gas as a viable alternative energy investment. And when they do, families like Farag’s in volatile political environments will have more control over their energy expenses.
Editor’s note: This article originally appeared on Global Envision, a blog focusing on market-based solutions to poverty that is managed by Mercy Corps.