Unlocking access to end-user finance for modern energy

Ellen Morris, Ph.D.Managing DirectorArc Finance, Ltd.

© Arc Finance

The World At Night

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

2.8

1.6

1.2 1.3

0

1

2

3

Malaria Smoke frombiomass

Tuberculosis HIV/AIDS

milli

ons

Source : World Energy Outlook 2006

Importance of Energy in Development

Increasing Access to

Energy Services

Leads to...

RReducedpressure

on forests and environment

Replace kerosene

GGreater participation in development

and trade

IIncreased productivity and income

SMEs

LLighting for schools & increased attendance

Time to study

EEmpowering women and

genderequality

IImproved child and maternal

health-vaccinesinformation

LLighting and refrigeration for

health clinics

Financial institutions serving 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

1156

21

67

02

04

06

08

0

Pe

rcen

tag

e o

f B

orr

ow

ers

by

Reg

ion

MENAEECALACSS AfricaEAPS Asia

Source: World Bank, Consultative Group to Assist the Poor

% of Total Borrowers by Region in 2004Total: 94 Million Borrowers

Borrowers are concentrated in Asia

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 500m poor entrepreneurs need access to finance; while only just over 100m have access

Less than 500k 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).

Context for energy lending

Tailoring Financial Services to the Needs of Poor Customers

What Poor Customers

Want

Asset Building, Risk Mitigating Products

• 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 H2O)

Group Individual Loans

Flexible Loans

• Small initial loan sizes• Larger loans over time• Longer terms

No Traditional Collateral

Service

• Rapid, convenient access

• Respect, connection

12

Service Energy System Benefits

Electricity • 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

Mechanical power

• 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

Heat for cooking • Biogas systems• Liquefied Petroleum

Gas stoves• Efficient wood/

charcoal cook stoves

• Cleaner and more efficient • Safer - fewer burns, less

breathing/vision problems• Job creation in manufacture, sales,

and distribution

Tailoring Energy Products to the Needs of Poor Customers

RESEARCH6 MFIs in Asia and Africa: SEWA

Bank; SEEDS, Nirdhan, Amret, Faulu Kenya, Kuscco

Desk study in Latin America/CaribbeanOn-the-ground research by 5

microfinance and energy experts

LEARNING EXCHANGE WORKSHOPHosted by SEWA BankAugust 2007

LED TO:Launch of Arc FinanceExpanded interest in energy/MF

December 2007

Microfinance =

financial services for the poor to

afford energy services

The Vision for the Research

Investigate opportunities, barriers, costs, and impacts of energy lending

Look in depth at business models, clients, and operations

Offer initial recommendations and highlight lessons learned from experience on the ground

Snapshot of the resultsProduct

• 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

ClientsDemanding loan products/energy services for business and to improve quality of life

Microfinance Institutions Experimenting with broader set of product offerings for clients

Energy companiesBeginning to develop lower cost products and services

Donors and investors Showing interest and seeing opportunities in this emerging niche

Climate change debate Growing awareness of carbon monetization from clean energy

Trends

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

Financial institutions Flexibility in lending methodologies Low-cost capital to lend for energy Business and loan officer motivated to promote

energyEnergy Enterprises Expand presence in peri-urban and rural areas Provide service and reliability Flexibility in product designsEnd-user -Energy Partnerships Communication and coordination Common vision Strong system buy-back provisionsExternal Need-based, not donor or technology driven Policy and regulatory environment – subsidies,

VAT, collateral requirements

Scale-up of energy lending

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”

•Meet growing demand of existing clients for energy loans

•Attract new customers

•New marketing channels

•Diversification of loan portfolio - cross-selling opportunities

•Carbon offset

•Access to new market segments

•Increased sales•Increased market penetration

•Decreased overhead by linking with MFI

•Carbon offset

Financial Institution

EnergyEnterprise

•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

Client

21

Arc Finance Services

Partnerships and Transactions Linking and supporting energy

companies working with microfinance institutions

Promoting appropriate technologies and financing innovation

Technical Assistance Conducting market studies,

product development Monitoring and evaluation and

due diligence Carbon finance

Tools and Knowledge Resources

Learning platform Research/mapping exercises Toolkits for practitioners

PARTNERSHIPS ANDTRANSACTIONS

TECHNICAL ASSISTANCE

TOOLS/KNOWLEDGE