Microfinance and energy access

The experience of clean energy and MFIs working together as close allies has not been smooth in the past

By Aruna Kumarankandath
Published: Friday 28 April 2017

A faulty solar cooker design with broken reflectors. Credit: Engineering for Change/ FlickrEnergy efficiency, combined with renewable energy, should be the ultimate goal of energy transformation for the world. The unique challenge of energy access is encouraging millions of energy-poor people to leapfrog from a scenario of no electricity and dirty fuel for cooking to a future with the most efficient appliances using electricity generated from renewable sources. Microfinance is the opportunity that helps in procuring cleaner, low-carbon options.

Microfinance and energy access seem like natural companions. Access to clean energy needs finance and Microfinance Institutions (MFIs) already have a customer base that may be deprived of clean energy sources either for lighting (still dependent on kerosene) or for cooking (using firewood, agri-waste, cow dung or other forms of biomass), especially in a country where 237 million people do not have access to electricity and around 841 million still use dirty biomass for cooking.

Another aspect that draws companies into the business of promoting products and services that enhance access to clean energy is the fact that the MFIs have already established trust and a level of engagement with the consumers.

This week, in the microfinance conclave organised by the Microfinance Institutions Network, the aspect of clean energy and MFIs working together as close allies was brought up, and it was highlighted that the experience of their collaboration has n­ot been so smooth in the past. The MFIs are sceptical about promoting renewable energy because of the low quality of products that have flooded the markets.

Renewable energy perceived as a solution for the poor

Exploiting the fact that the energy-poor segment of the population are price-sensitive, low quality products—solar lanterns, solar cookers and clean cook stoves—were sold at very low prices through these MFIs. When these products broke down the companies did not offer any after-sales services. This not only gave a bad name to the MFIs who promoted these products, but also created mistrust for renewable energy sector in general. Even today, renewable energy is perceived as a solution for the poor; rich people are given LPG cylinders to cook with and electricity through the grid. MFIs also end up losing customers because of the poor performance of these products.

Around 841 million people in India still use firewood, cow dung and other dirty biomass for cooking. Credit: Engineering for change / Flickr

While getting energy products into the hands of low-income households is very difficult, creating an ecosystem that can provide after-sales services or timely replace faulty products when required is even more difficult.

Also, the MFIs are essentially banks offering financial products. They are not in the business of promoting access products which they are neither interested in nor really have competency in. It has to be understood that access products would always be a secondary product for MFIs.

Another issue emerges from the products these companies offer. When a product is too small (like a solar lantern), its loan amount, too, is small. In such cases, the transaction costs borne by the MFIs become too high. Similarly, when solution is a solar home system, customers find it too expensive to afford and also, it is too long a term for MFIs to take a risk.

Lack of consumers or any steady financial solutions for these consumers to buy their products prevents most energy access-based enterprises from scaling up. Even if they can offer quality products, creating a distribution network is easier said than done. 

The sad reality is that because of sour experiences of the past, these energy service companies have gained a bad reputation and the MFIs have many apprehensions of joining forces with these companies.

How to make this collaboration work?

  • For an optimal solution, a MFI should collaborate with an energy service provider which has certified and tested products with an established service infrastructure.
  • The provider should add value to the business of the MFIs, instead of just depending on their customer database.
  • Microfinance should support the aspirational needs of people seeking energy access.
  • On the same lines, their partner’s energy service should be supporting the people climbing the energy ladder—starting from meeting the lighting and mobile charging needs, increasing product portfolio to include devices like fan and TV and electrifying the house for them to use in any way they deem fit.

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