Powering Off-Grid Households: Energy and Microfinance
Across the developing world 1.2 billion people, or about 20 percent of the world’s population, lack access to electricity, and over 2.8 billion people don’t have access to clean cooking options. Many households in Africa power their homes with car batteries, diesel generators, or kerosene oil lamps, which are inefficient and pollute the air. To make matters worse, these “dirty” sources of energy are also expensive; Bottom of the Pyramid (BoP) individuals spend a large proportion of their income on energy. And people who are currently off-the-grid are likely to remain so over the next several decades, particularly in Africa.
Although the situation is dark for off-grid individuals, there is a real opportunity for microfinance to provide clean, affordable energy to those who lack power. For example, off-grid households that install a solar home actually wind up saving money in the long run, since a solar system can provide energy for years at low cost and low maintenance. Microfinance Institutions (MFIs) can play an important role in expanding access to energy by offering poor clients loans for energy products or by helping local energy companies penetrate new rural markets, thus creating entrepreneurial opportunities for energy suppliers and users. Access to modern energy services can create new ways to increase incomes, and it is often the first step to a better quality of life, opening the door to education and improved economic sustainability.
There are a variety of ways in which MFIs can partner with energy enterprises to provide power to off-grid and low-income individuals. The Small Enterprise and Education and Promotion Network (SEEP) released a report funded by Citi Foundation and USAID that outlines the business models for MFIs to finance energy lending. First, an MFI can enter into a partnership with an energy enterprise to offer financing for energy products along with technical assistance, which is especially important for rural communities that have little experience with modern energy and require education support for upgrading their power sources. Second, energy lending can be provided by MFIs bolstered by government subsidies for further on-lending and technical assistance. Third, MFIs may offer conventional loans to provide working capital for energy enterprises. Finally, MFIs can purchase energy products in bulk at reduced prices and sell them directly to Savings and Credit Cooperatives and their clients.
Regarding the energy products that rural consumers may purchase with mircrofinance loans, many MFIs offer credit specifically for solar charging devices to power homes, businesses, schools, social services, and mobile phones, which have become ubiquitous in the developing world. The SEEP report also profiles two Kenyan MFIs, Faulu Kenya and KUSSOCO, which offer microfinance loans for solar systems and gas stoves. Other MFIs in Asia such as SEWA Bank offer – in addition to solar home systems – a wide variety of energy products that includes solar lamps, battery chargers, and energy efficient cook stoves. It is no surprise that solar energy products are so popular among MFI energy loans due to the size of the off-grid lighting market, which is estimated to be larger than $50 billion per year.
Given the worldwide need for off-grid energy products, there are opportunities for MFIs, energy enterprises, and rural customers to take advantage of microfinance to deliver clean energy and expand power companies’ reach into rural areas. To put it bluntly, moving off-grid MFI clients to clean energy is good for business. Clients on clean energy are typically better able to take advantage of savings and credit services, and are also more likely to adopt mobile banking with solar cell phone chargers. Obvious benefits accrue to energy enterprises whose clientele are able to obtain funding for energy products. And of course, rural consumers of energy products experience new opportunities that span the entire range of development issues, from improved hygiene to the empowerment of women.
A 2011 report from the Center for Financial Inclusion stated that MFIs in Africa were interested in offering a number of energy-related products, including microenterprise energy loans for entrepreneurs to use clean energy to reduce costs, home improvement energy loans designed to upgrade homes currently fueled by kerosene, energy-linked savings accounts that underscore how much clients can save by switching to clean energy, energy retailer loans that allow clients to become last-mile distributors of clean energy, and leverage carbon credits as an additional income stream.
While opportunities abound for MFIs, energy enterprises, and rural consumers, it is important to take stock of the risks and challenges inherent to the energy and microfinance space. Energy is not a specialty of most MFIs, and many lack the technical knowledge to provide the necessary services for energy loans. Oftentimes the energy equipment costs are prohibitive for clients as it takes about $250 to purchase and install a home solar system; although some producers are exploring lower cost products. Many MFIs are reluctant to offer energy products to clients who have not proven their creditworthiness, which limits the degree to which energy loans can penetrate rural areas. And perhaps most simply, it is logistically difficult for MFIs to provide energy products to last-mile consumers.
Nonetheless, there are many examples of successful microfinance energy-lending programs, including Grameen Shakti, one of the best-known energy MFIs in Bangladesh, which has installed 350,000 end-user owned solar systems in Bangladesh to date; and Arc Finance, a U.S.-based non-profit that offers a comprehensive package of technical advisory services to MFIs that are interested in energy-lending. The for-profit social enterprise d.light has launched a number of reasonably priced solar products on the market, such as lanterns and mobile phone chargers. BioLite has similarly offered reasonably priced homestoves and cookstoves for the BoP that are clean and efficient energy./cz