Unlocking access to end-user finance for modern energy

Unlocking access to end-user finance for modern energy Ellen Morris, Ph. D. Managing Director Arc Finance, Ltd.

The World At Night © Arc Finance Source: C Mayhew and R Simmon (NASA/GSFC)

Global Population Without Electricity (millions of people) Source: World Energy Outlook 2006

What Options Do People Have?

Lighting & Cooking Rural India Could you read by this lamp?

Energy Poverty: Annual Deaths from Indoor Smoke 3 2. 8 millions 2 1. 6 1. 2 1. 3 1 0 Malaria Smoke from biomass Tuberculosis HIV/AIDS Source : World Energy Outlook 2006

Importance of Energy in Development Reduced pressure on forests and environment Replace kerosene Lighting and refrigeration for health clinics Greater participation in development and trade Increased productivity and income SMEs Increasing Access to Energy Services Leads to. . . Improved child and maternal health-vaccines information Empowering women and gender equality Lighting for schools & increased attendance Time to study

Financial institutions serving the poor

80 % of Total Borrowers by Region in 2004 Total: 94 Million Borrowers 40 60 67 20 21 6 5 SS Africa LAC 1 1 EECA MENA 0 Percentage of Borrowers by Region Borrowers are concentrated in Asia S Asia EAP Source: World Bank, Consultative Group to Assist the Poor EAP: East Asia & Pacific, SS Africa: Sub-Saharan Africa, LAC: Latin America & Caribbean, EECA: Eastern Europe & Central Asia, MENA; Middle East & North Africa

Context for energy lending Many of the world’s poor do not have access to basic financial services Most of the world’s poor do not have access to modern energy Estimates vary, but about 500 m poor entrepreneurs need access to finance; while only just over 100 m have access Less than 500 k clients of MFIs have access to energy loans 1. 7 billion people have no access to electricity and 2. 4 billion people rely on traditional biomass for cooking and heating - this untapped market for clean energy is estimated to be valued at US$194 billion. 1. 3 million people die of indoor air pollution each year (smoke from biomass).

Tailoring Financial Services to the Needs of Poor Customers Service Asset Building, Risk Mitigating Products • Rapid, convenient access • Respect, connection • Voluntary savings • Health and life insurance Variety of Products • • Housing loans Education loans Life cycle products Business development services • Quality of life enhancing products (e. g. energy and H 2 O) Flexible Loans • Small initial loan sizes • Larger loans over time • Longer terms What Poor Customers Want No Traditional Collateral Group Individual Loans

Tailoring Energy Products to the Needs of Poor Customers Service Electricity Energy System Benefits • Solar lanterns • Solar lighting systems for businesses and homes • Battery charging • Cleaner, brighter light for work, study and recreation • Safer - fewer burns, less breathing/vision problems • Reduced dependency on unreliable grid • Increased income opportunities • Multifunctional platform • Water pump • Women’s drudgery reduced • Higher quality product and higher prices • Job creation for operation and maintenance • Creates options for non-electrified villages Mechanical power Heat for cooking • Biogas systems • Liquefied Petroleum • Cleaner and more efficient • Safer - fewer burns, less Gas stoves breathing/vision problems • Efficient wood/ • Job creation in manufacture, sales, charcoal cook and distribution stoves 12

RESEARCH December 2007 Ø 6 MFIs in Asia and Africa: SEWA Bank; SEEDS, Nirdhan, Amret, Faulu Kenya, Kuscco Ø Desk study in Latin America/Caribbean Ø On-the-ground research by 5 microfinance and energy experts LEARNING EXCHANGE WORKSHOP Ø Hosted by SEWA Bank Ø August 2007 LED TO: Ø Launch of Arc Finance Ø Expanded interest in energy/MF

The Vision for the Research Investigate opportunities, barriers, costs, and impacts of energy lending Microfinance = financial services for the poor to afford energy services Look in depth at business models, clients, and operations Offer initial recommendations and highlight lessons learned from experience on the ground

Snapshot of the results Product • • Solar more common in Asia and LAC (except biogas in Nepal) LPG more common in Africa Interest rates (p. a. ) • • Generally higher and greater range in Asia and LAC (10 -36%) Generally lower in Africa (10 -20%) Loan size ceiling • • Solar systems: $225 -$1430 Biogas: $250 Diesel/battery charging business in Cambodia: $5, 000 LPG: none to $150 Clients served • • • Very small number of solar and biogas loans in Africa (<300) whereas LPG in Africa has good penetration (>40, 000) Solar loans in Asia have the best penetration (>100, 000) Biogas at NUBL (Nepal) small but growing (375) Management and information systems • • Better tracking and information systems in Asia than in Africa and LAC Energy typically embedded in business loans

Trends ü Clients Demanding loan products/energy services for business and to improve quality of life ü Microfinance Institutions Experimenting with broader set of product offerings for clients ü Energy companies Beginning to develop lower cost products and services ü Donors and investors Showing interest and seeing opportunities in this emerging niche ü Climate change debate Growing awareness of carbon monetization from clean energy

Success factors § Partnerships are single most important factor § Coordination and communication between the MFIs and energy companies § Flexibility is key to deeper market development § Build capacity to sell product and educate market § Look to existing infrastructure and distribution network § Manage credit and technical risk sufficiently

Scale-up of energy lending Financial institutions ü Flexibility in lending methodologies ü Low-cost capital to lend for energy ü Business and loan officer motivated to promote energy Enterprises ü Expand presence in peri-urban and rural areas ü Provide service and reliability ü Flexibility in product designs End-user -Energy Partnerships ü Communication and coordination ü Common vision ü Strong system buy-back provisions External ü Need-based, not donor or technology driven ü Policy and regulatory environment – subsidies, VAT, collateral requirements

Arc Finance Our mission “To promote and expand access to financing for energy, water and other basic needs to build the income and assets of poor people around the world”

Financial Institution • Meet growing demand of existing clients for energy loans • Attract new customers • New marketing channels • Diversification of loan portfolio - cross-selling opportunities • Carbon offset Client • Energy needs met in an affordable and equitable way • Via energy company access to after-sales service • Via MFI - access to other financial services - savings, insurance … • Improved quality of life – health, environmental and economic benefits Energy Enterprise • Access to new market segments • Increased sales • Increased market penetration • Decreased overhead by linking with MFI • Carbon offset

Arc Finance Services Partnerships and Transactions ü Linking and supporting energy companies working with microfinance institutions ü Promoting appropriate technologies and financing innovation TOOLS/KNOWLEDGE Technical Assistance ü Conducting market studies, product development ü Monitoring and evaluation and due diligence ü Carbon finance TECHNICAL ASSISTANCE PARTNERSHIPS AND TRANSACTIONS Tools and Knowledge Resources ü Learning platform ü Research/mapping exercises ü Toolkits for practitioners 21