Developing Sustainable Financing and Delivery Models For Green Energy Products
Microfinanza developed an innovative methodology called Reduction Expense Energy Product Delivery Model (REEP-DEMO) to support MFIs and TPs in strengthening their finance and delivery models for green products.
Other working tools are under development in the framework of another green microfinance initiative aiming at reduce risks of microfinance institutions by integrating natural resource managment, climate change impacts and climate risks into day to day operations.
With nearly 3 billion people on Earth relying on wood, charcoal or animal waste to cook their meals and light their homes, improving access to sustainable energy services and reducing carbon footprint and deforestation is a key challenge in developing countries.
Green technologies as solar lanterns, improved cook stoves or bio digesters can contribute to improve the living conditions of people at the Base of the Pyramid (BoP), while at the same time protecting the environment. But to reach significant impact, these technologies need to be distributed in the millions, which is a challenge since most of the potential clients are located in remote, rural areas.
To address this challenge, Microfinanza initiated the “New Financial Products for a Sustainable Development” project, which aims at linking microfinance institutions (MFIs) with green technology providers (TPs) to increase the distribution of clean energy products to people at the BoP in Kenya, Tanzania, Uganda and Ghana.
The project developed an innovative methodology called Reduction Expense Energy Product Delivery Model (REEP-DEMO) to support MFIs and TPs in strengthening their finance and delivery models for green products.
Thanks to these project results, Microfinanza is now implementing a new project in Ghana "Introduction and up-scale of microloans for the distribution of biochar stoves" that aims at developing, pilot-testing and fine-tuning an innovative and sustainable business model for the provision of "Elsa" biochar cookstoves to at least 4,000 low income customers; and implemented the project in collaboration with SNV "Facilitating Access to Finance by Identifying Financial Institutions, Building thier Capacities and Awareness on Renewable Enrgy Technologies (RET)" in Uganda.
Photos by MICROFINANZA, Umberto Trivella
The financial product should not be considered as a standard loan product, but as a Reduction Expense Energy Product (REEP). By acquiring such a product, a household will save money.
In other words: Savings on monthly energy expenses generated at the household level thanks to a green technology product will finance its distribution costs.
Example: Amina spends 1 Ghanaian Cedi (GHS) per day to purchase charcoal to prepare food for her family. This represents a 30 GHS monthly expense. With the improved cook stove provided by a Technology Provider, her daily expenses would decrease to 0.5 GHS per day, or 15 GHS per month, equal to a 50% saving. The price of the cook stove is 25 GHS.
The purpose of the additional monthly repayments (green color) will help build the needed sustainable incentive for the MFI to cover its distribution costs. For Amina (the End User), the MFI incentive increases the cost of the product but decreases her monthly energy expenses from 30 GHS to 20 GHS from day one. Therefore, this is an incentive for her too to purchase the product.
The number of additional monthly repayments should be reasonable and negotiated between the MFI and the TP. The strong social mission of the MFI should prevent any abuse in this area.
Based on this assumption, the REEP-DEMO approach aims to:
The REEP-DEMO provides a set of tools to address all issues involved in the setting up of a sound delivery model, such as governance, marketing, pricing the product and establishing operational (sales) and financial (P&L) projections against which to track effective performance over time.
By helping the MFI and TP to address all issues involved, the REEP-DEMO promotes a “learning by doing” approach where the partners, month after month, can adjust and fine-tune its activities accordingly. The support of an external consultant can be helpful and will be considered on case-by-case basis.
Finally, in order to boost sales and have a significant impact, it is necessary to involve a social investor to provide the needed working capital. The operational and financial projections will support the MFI and TP to establish an effective track record that should help the social investor to assess such an investment.
Microfinanza Srl – January 2014