It is impossible to argue against the need for reliable energy at the BoP. Energy drives every facet of society, from nourishment to communication. According to the UNDP, at least 1.2 billion people suffer from energy poverty, which has profound impact on health, education, and livelihoods.
Increasingly, people are calling for the new energy models in developing nations to be “sustainable” and drawn from “clean” and renewable sources. The accepted belief is that if we can get developing nations on a path of adopting clean technologies, they can completely leapfrog the dirty, self-perpetuating system we have created in the west. However, there are barriers to establishing renewable energy projects at the BoP, on both the supply and demand side. One recently-launched for-profit social enterprise that hopes to revolutionize financing in this field is MicroEnergy Credits Corporation (MEC), and I had the wonderful pleasure of conversing with its founders, April Allderdice and James Dailey, last week.
Allderdice and Dailey both have impressive resumes, from Peace Corps to Columbia Business School to McKinsey and Grameen; they have the research and the on-the-ground experience to move this field forward.
MEC realizes that even though clean technology pays off in the long-run compared to conventional sources, very few BoP consumers can afford to pay high up-front costs when they are concerned with day-to-day survival. According to Allderdice and Dailey, BoP consumers “cannot afford to pay extra for environmental or even social benefits, and therefore adopt traditional energy.” And let’s be honest, who are we to tell others that they should sacrifice their meager income to save a planet which we are primarily responsible for destroying? In addition to the high up-front cost, there has not traditionally been a local broker to provide financing to the poorest and the most remote clients who do want to adopt clean energy projects. That is where MEC hopes to create change.
MEC’s solution is to use existing Microfinance Institutions (MFIs) and the recent developments in the carbon credit markets on the supply side to facilitate the adoption of clean energy at the BoP. According to Allderdice and Dailey, “Putting a significant portion of the world’s population on a clean energy path could have a huge impact in the long term, and is an opportunity that should not be wasted.” Their idea has been well-received, by both the Tomberg Family Philanthropies and the judges at the Global Social Venture Competition.
To provide financing on the ground, MEC will go through the MFI network, since MFIs are embedded in the community, especially rural off-the-grid communities that need decentralized solutions. This is a very timely post, as Derek’s post last week highlighted in CGAP Senior Advisor Katharine McKee’s article on microfinance and climate change, which said that “A number of respected MFIs and networks – including ACCION, BASIX in India and Equity Bank in Kenya – are exploring products to respond to climate change.”
MFIs have expertise in structuring deals, establishing appropriate loan repayment schedules and interest rates. According to Dailey, “MFI field officers meet with millions of households every week; they are a channel to market for financial services, and financed energy services are a natural outgrowth.”
MFIs such as ACCION and Grameen have also proven to be incredibly scalable, and they can spin off renewable-energy focused businesses; the most notable example of this has been Grameen Shakti, a member of the Grameen family that provides renewable energy technologies for rural households. Allderdice recently worked for Grameen Shakti, and says that it is “currently scaling faster than Grameen Bank was at year eight.”
The other piece of the puzzle on the supply side is to provide incentives to the MFIs through the evolving world of credits for renewable energy projects. Carbon finance is a valuable source of capital, yet it is a complex and evolving field that is difficult for the traditional on-the-ground MFI to tap into. In order to reduce the transaction costs of carbon financing,
“MEC provides MFIs carbon revenues on a per unit basis for each system they finance. This gives them near term access to finance for the seed costs of starting an energy program. As their program scales up, they can pass on the subsidy to end users which enable them to achieve greater volume by reaching poorer clients.”
Allderdice and Dailey have developed two credit instruments, Microfinance-originated Carbon Credits and Millennium Development Goal (MDG) credits. With the first, MFIs can receive revenue when they lend for energy systems that create verified carbon emissions reductions, such as solar PV systems, improved cookstoves and biogas digesters. With the second, MFIs can receive MDG Credits when they lend for an intervention that enables an MDG household to meet all or part of an MDG. According to Allderdice, “There is no established market in MDG credits yet, but MEC is building the infrastructure to enable it.”
When I asked the founders about the possibility of using Kyoto-established Clean Development Mechanism credits, which I wrote about last month, they said that “MEC’s unique approach will create extremely high quality transparent, and verifiable carbon credits that will first be sold on the voluntary markets and as CDM policies evolve, MEC will be among the first to tap the CDM markets.” Well, I guess that there is my answer for the possibility for CDM credits in the short-term.
The hope for the future is clear – to put households and communities on a clean energy path that allows them to be owners of their own reliable and renewable systems. This is what Allderdice was able to see first-hand during her work with Grameen Shatki in Bangladesh:
“some villagers now use solar for electricity, light, tv and radio and biogas for cooking and heating. They are full owners of their own energy generation, without being susceptible to the price of oil, or the fallibility of the electric grid. And they enjoy the environmental benefits of clean, silent, reliable, continuously renewing energy. As their income increases they are demonstrating a preference to buy another solar panel for a fan or a color tv — rather than switch to a diesel genset, or pay a high connection fee for unreliable grid connected service. Once they are on the clean energy path, there is less incentive to get off it.”
Grace Augustine is a research associate with the William Davidson Institute, an educational institute focused on researching and supporting organizations in emerging markets. She writes for the NextBillion blog and has an interest in economic development and clean technology for the world’s poorest citizens.