Monday
October 19
2009

Phil Larocco

Utilities as Decentralized Energy Delivery Platforms

(Apologies for the silence, which some may prefer anyway: I have been in a medical fog these past weeks. I owe another installment on Francisco’s and Manuel’s entries on platforms — one on micro-finance — and some comments and questions from previous posts. Fortunately, NextBillion has been really rich as I slept, so I also need to catch up on fifty or so entries).

In a prior post I commented on the potential of traditional utilities to serve as a platform for expansion into a non-traditional area: decentralized energy. It was suggested (by Paul Rigterink) that it would be helpful to provide more cost information and he kindly suggested some resources. While such resources may be helpful for “back-of-envelope” calculations, it is more relevant and frankly more important that you reverse-engineer the product search a bit by looking at what is currently available within a region you may wish to serve or study.

Product Pricing presumes Product Access, which is not always the case. It makes little sense to determine that a particular solar lantern might be available for $25 in market X if your interest is in market Y half a continent away. If there is a logical way to move the product between points (Uganda to Tanzania for example), then costs in one market may serve as a useful placeholder for another until you get a firm price quote. Such regional prices will result in better business planning than catalog estimates. There is a second caveat: most imported goods (solar panels, for example) are very volume sensitive, so general or catalog unit prices may only serve as the roughest of approximations.

A few other comments bashed me on the head for too many digressions and for seeming to advocate for a specific solution without supplying specifics. Guilty as charged on the first item but on the second, I was definitely not saying that utilities could do this or that type of decentralized energy program or project. All I was saying was that utilities offer a seemingly ideal platform (rate base, long-term financing) to take up the business of de-centralized energy. But I believe I went on in the blog to lament the lack of concrete examples to offer. In other words, while utilities seem ideally well positioned to become players in off-the-grid energy in emerging markets, it has not happened in any way that I can report, and I was looking for either examples that might have been overlooked or reasons (like “this de-centralized stuff is really hard.”) to explain why utilities have not taken up the cause.

The Microfinance-Energy Platform

While the utility platform may seem to be well positioned despite little evidence of engagement, this is not the case with another platform suggested by Francisco and Manuel: micro-finance.

Micro-finance institutions and energy enterprises represent two vibrant trends that have much to offer each other. Energy enterprises can develop far deeper markets if their customers have access to credit, especially in the 18 month to three-year range. Micro-finance institutions can increase their loans to existing customers by offering energy loans and can attract new customers in areas where it has built outreach capability if reliable energy products and services can be introduced. Either entity could bundle whatever carbon value or volume discounts might be out there for an aggregated market (although this easier said than done). There is an apparent logical connection. And here there is an experience base being built around a couple of “models”.

The first could be called the “two-handed model” where the energy enterprise delivers the product-service and the microfinance institution provides credit to the customer. The energy enterprise does what it knows best as does the MFI. If you look at the Selco-SEWA experience in Gujarat – as well as many others — these illustrate a side-by-side but complementary approach that has much to offer the energy entrepreneur, the microfinance institution and, most important, the BOP customer. Investors and donors will also tend to admire that the separation of functions lets experts do what they are expert at.

Then there is the “one-handed” approach in which either a micro-finance organization creates an energy product-service unit or an energy enterprise takes on the role of being a credit provider. Grameen Shakti in Bangladesh stands out as a prominent example of the merging of energy product-service and finance. I confess to a worry about the one-handed model, especially for new entrants in the space. It requires mastering two very different things: delivering energy products and services – which has managed to make many young entrepreneurs old before their time – and the difficult chore of credit provision, collection and portfolio management. This is not to say these cannot be successfully integrated and that this isn’t a very attractive business concept: it is just tempting the Fates to master so many innovations under one roof.

There is probably a “no-handed” or broker model out there also, in which a third party brings the energy enterprise and the micro-finance platform to the customer. But I must confess to not having a sizeable example to suggest for further study.

Regardless of the model chosen, there are significant similarities and differences between the business of energy and the business of microfinance that need to be reconciled. Standardization is a key driver in finance. In energy it is only sometimes a driver. Finance professionals can tie themselves up in knots if they are forced to choose energy products. BOP energy firms often need to adapt products to their local markets, especially to different income groups within a market. This calls for choice, which may be conflict – or at least cause problems — with standardization. There needs to be careful alignment of incentives so that good products are going to good borrowers rather than bad products to good borrowers or vice versa. A container-load of one particular product may seem a bargain but may sit on shelves after initial enthusiasm, whereas a more expensive but more marketable set of four different products may have moved well and satisfied a greater cross-section of customers. This is the One Size Definitely Does or Does Not Fit All debate.

But the attraction of these two fields to each other is very strong and the maturity of the microfinance platform quite alluring as a way to bring modern energy to the un-served. Overcoming these “sector differences” between energy products-services delivery and microfinancing can be well worth the effort. For those wishing to dive into the possibilities of microfinance serving as a platform for energy access I recommend a visit to the publications housed at www.arc.finance.org/learning-publications, where a series of studies will be found under the heading of “Using Microfinance to Expand Access to Energy Services.”

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