48 Replies Latest reply: Mar 6, 2014 7:10 AM by narmacost RSS

    E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part I: Asset Finance

    1231309 C4D Extraordinaire

      DESCRIPTION


      Efforts to provide energy access on a commercial basis to rural populations in developing countries face a range of challenges, including access to finance. Off-grid customers from lower income communities currently pay a high price for purchasing kerosene for basic lighting services and switching to renewable energy based systems would not only save them fuel-costs but also improve their overall quality of life. However, the high upfront cost of the renewable energy based systems (handheld devices and stand-alone systems) restricts them from making this switch. This is identified as a major barrier by all stakeholders committed to the delivery of energy access solutions in a commercially viable manner and at scale. Over the past decade, microfinance institutions, supported by the international development community, have played an important role in providing direct consumer finance for purchase of handheld devices and single home solutions. In addition to microfinance, a number of other innovative end-user finance schemes have emerged in recent years. Building on the findings from [USAID's Renewable Energy Microfinance and Microenterprise Program (REMMP) | http://www.arcfinance.org/remmp.html, and specifically the experience of Arc Finance, this 3 weeks long e-discussion will feature and discuss a number of mechanisms for downstream end-user finance and their integration into innovative energy access business models:


      Week 1 (Feb. 18 - Feb. 25):   Asset finance

      Week 2 (Feb. 25 - Mar. 4):     Microfinance and remittances

      Week 3 (Mar. 4 - Mar. 11):     Other innovative end-user financing models

       

       

      Expert Moderators

      Nicola Armacost.JPG

      Nicola Armacost – Managing Director, Arc Finance (USA)

      Nicola Armacost is the Managing Director of Arc Finance; formed in the spring of 2008 to expand access to finance for clean energy and water. Niki has over 19 years experience in development with a focus on financing solutions for the poor; from 1993 to 2008, she worked at Women’s World Banking, a global microfinance network where she held a number of senior management roles. Niki is an advisor to a number of finance and energy organizations globally and is the Co-Chair of the SE4all Investment and Finance Working Group of the Practitioner Network. She also serves on the Board of MISFA (the donor consortium for microfinance in Afghanistan). She has provided tailored technical assistance, presented papers, given lectures and run conferences and exchanges on financing mechanisms for clean energy all over the world. Niki holds a Bachelor of Arts degree in International Relations from the University of Toronto, Canada, an LLB from Queen's University, Canada and an LLM from the Osgoode Hall Law School, Canada.

      pbaldinger.png

      Pamela Baldinger – Energy Advisor, USAID (USA)

      Pamela Baldinger currently serves as Energy Edvisor in the Energy Division of the Bureau of Economic Growth, Education and Environment at USAID. She specializes in clean energy programs, designing and managing programs in such areas as renewable energy, clean cookstoves, and cross-sectoral programs involving health, humanitarian assistance, and economic growth. She is the USAID manager of the Renewable Energy Microfinance and Microenterprise Program (REMMP) implemented by Arc Finance, and helped create two Development Credit Authority guarantees supporting small-scale renewable energy devices.

       

       

      Supporting Material

      Watch the introductory webinar:          Consumer Finance for Small Scale Off-Grid Energy Webinar - Feb. 18, 2014

      Download the webinar presentation:  N. Armacost - P. Baldinger / Webinar Presentation - Feb. 18, 2014

       

      _____________________________________________________________________


       

      PART I : ASSET FINANCE


      Expert Contributors

      Dipal Barua.jpg

      Mr. Dipal Chandra Barua – Founder and Chairman, Bright Green Energy Foundation (Bangladesh)

      Dipal Chandra Barua is Founder & Chairman of Bright Green Energy Foundation (BGEF), and a pioneer of solar energy in Bangladesh. Before this, he was President of the Bangladesh Solar & Renewable Energy Association (BSREA) and founding Managing Director, of Grameen Shakti, Bangladesh, as well as Co-founder & Deputy Managing Director at Grameen Bank until December 2009, where he designed and implemented Grameen II, heralding exponential growth and profitability for the Bank. Mr. Barua has more than 35 years of experience in finding sustainable market-based solutions for the social and economic problems faced by rural people. He has wide experience in providing advice and technical assistance to renewable energy technology programs all over the world. He was selected as a Lead Author by the IPCC on Financing & Investment and also served as a member of strategic advisory board by IRENA, the International Climate Initiative, and Solar For All, an initiative to expand solar energy to rural populations. In 2011, Mr. Barua was elected the first President of Bangladesh Solar and Renewable Energy Association (BSREA), with a vision for Bangladesh to become the first “solar nation” by 2020.
      www.greenenergybd.com

      Nazmul Haque.JPG


      Mr. Nazmul Haque – Director of Investment and Head of Advisory, Infrastructure Development Company Limited (IDCOL) (Bangladesh)

      Mr. Nazmul Haque has been the Director of Investment and Head of Advisory for the Infrastructure Development Company Limited (IDCOL), the largest energy and infrastructure financing company in Bangladesh since 2003. During his tenure with IDCOL, Mr. Haque was involved in structuring and financing many infrastructure projects in sectors including power, telecom, toll roads, ports, ICT and renewable energy. He was involved in designing IDCOL’s successful solar home system, and as of July 2013, more than 2.4 million households have been connected to solar energy through this program. Mr. Haque has contributed to developing the country’s first biomass gasification based power plant as well as a nationwide domestic biogas program and is working to promote improved cook stoves in Bangladesh. Mr. Haque is the IDCOL focal point for carbon finance related issues and serves as a resource person on CDM documentation and procedures. Mr. Haque is an expert in Project Appraisal Techniques and Financial Modeling. He has given international trainings and presented papers on renewable energy financing, advanced project finance and financial modeling, corporate valuation techniques, Public Private Partnership around the world. Mr. Nazmul Haque completed his graduation in Finance and Management Information System from North South University.

      www.idcol.org


      Paul Needham.jpg


      Mr. Paul Needham – President and Co-Founder, Simpa Networks (India)

      Paul Needham is an InfoTech entrepreneur with over 12 years of senior leadership experience. In 1999, Paul quit the Economics PhD program at Cambridge University to co-found MeMail.com, a publisher of news and entertainment content delivered to the email inboxes of subscribers. In 2001, Paul co-founded an innovative online advertising network called BidClix, which was sold to Accipiter Solutions. Paul helped negotiate the sale of Accipiter to aQuantive, which was acquired by Microsoft. Paul joined Microsoft as Director of APS Canada, with responsibility for launching Microsoft’s online advertising network business in Canada. Paul then became Director of Network Strategy with responsibility for guiding the development of overarching strategies for Microsoft’s international advertising network businesses. Paul is also on the board of directors of CAMFED USA (Campaign for Female Education), a not-for-profit organization that tackles poverty and HIV/AIDS by investing in the education of girls in Africa. Paul holds a M.Phil. in Economics and Politics of Development from Cambridge University, UK and a Bachelor of Commerce degree from the University of British Columbia, in Vancouver, Canada.

      www.simpanetworks.com


      Willem Nolens.jpg

      Willem Nolens Founder and Managing Director, SolarNow (Uganda)

      Willem is the Founder and Managing Director of SolarNow, a company offering high-quality solar systems in combination with a credit facility, thereby making solar energy affordable for the rural masses. In 2009, Willem decided to focus on making renewable energy more affordable in Africa. As a Director at the Rural Energy Foundation (REF), he supported REF in facilitating access to electricity to more than 332,000 people, winning the 2010 EU Sustainable Energy Awards and the 2010 International Ashden Awards. In early 2011, Willem transformed REF into a for-profit social enterprise called SolarNow. Willem has over a decade of experience in establishing and managing social enterprises in Asia and Africa, in particular in the field of microfinance and renewable energy. After working for a corporate advisory, Willem successfully co-founded and managed ProCredit bank Ghana between 2001 and 2005. He subsequently co-founded and managed Catalyst Microfinance Investors (CMI), a US$125 million fund that invests in a network of highly efficient Greenfield MFIs in Africa and Asia. Willem holds a Master degree in Economics from Groningen University in the Netherlands.

      www.solarnow.org


      Kevin Kennedy.jpg

      Mr. Kevin Kennedy – Asset Finance Specialist, Arc Finance (East Africa)

      Kevin Kennedy is a consultant for Arc Finance with a focus on asset finance, and has worked with SolarNow, Simpa Networks and M-Kopa to support them in building their asset finance capabilities. Before changing his focus to asset financing in developing markets, Kevin spent fifteen years in commercial asset financing, running his own technology leasing company from 2003 to 2008. From 1992 to 2002 he was with GE Capital in a variety of roles in their leasing businesses, including extensive mergers, acquisitions and integration work in the emerging economies of Eastern Europe. As a strong advocate of the potential of asset financing to expand credit for SMEs and micro-enterprises globally, he has published in a number of areas including asset financing and microfinance; the potential of technology to expand asset financing, and the East African leasing market. Originally from Ireland, Kevin holds a BA from Trinity College, Dublin and a Master's degree from Louisiana State University — both in Zoology. He also holds a Master's in Development Economics from the University of Reading.

       

      ...

      Please click on the following link to download the briefing note on asset finance:

        • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
          C4D Connoisseur

          Hi everyone,

           

          Here are some questions to think about for the e-discussion this week:

          1. What are the most compelling reasons for an energy company to make the strategic choice to offer asset finance and set up an in-house credit facility?

          2. For an energy company focused on the small-scale clean energy sector, what are the advantages and disadvantages of setting up an in-house credit facility?

          3. If you do decide to do it, what can go wrong and how can you avoid making the typical mistakes most companies make when they opt to institute an asset finance capability?

           

          Looking forward to speaking to all of you online!

           

          Best,

           

          Niki

           

            • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
              vendeirinho C4D Explorer

              Hi there Niki, enjoyed your presentation thank you.

               

              Seems from the webinar slides when you say asset finance you are really talking about consumer asset finance. I am particularly interested in understanding more about infrastructure asset finance - typically higher capital amounts (50-300k$) for projects that provide whole communities, schools and healthcare centres with clean cooking and lighting energy as well as potable water. This translates to a project capital cost of between 1500€ - 3000€ per family amortised over project lifetime of 20 yrs.

               

              Keen to know if/what you guys are doing in this space.

               

              Regards,

              Vivian

              KUDURA Sustainable Development Solution | www.kudura.com

                • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                  C4D Connoisseur

                  Hi Vivian, I'm so glad you were able to hear!  Our focus with REMMP, is low income consumers, as a result we are not working with larger companies/projects.  That said, many of the principles of asset finance remain the same. Most importantly that adding a finance capability is complex and should not be entered into lightly!  Best, Niki

                   

                  Nicola Armacost

                  Managing Director, Arc Finance | www.arcfinance.org

                    • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                      vendeirinho C4D Explorer

                      Hi again, maybe a little context on our philosophy: SPL and SHS systems provide limited power - our experience and field work tells us that soon after having "basic" light, consumers start to develop habits that require more power - radio, TV, refrigeration and ultimately for productive energy use and income generation.

                       

                      Our model is thus to deploy mini-grid solutions that inherently allow consumers to "buy-up" their energy demand and so meet that increasing need. At the end of the day, they still pay a fair market price for clean energy so basic objective are aligned.

                       

                      Are you familiar with practitioners or companies accretive in this space? My sense is its "easy" to finance small (<40k$) and very large projects (M$+) - the space in between seems deserted...

                       

                      Keen to hear your thoughts and advise… if you prefer to take offline to keep this thread relevant to the topic, you can reply to me at vivian@rvesol.com

                       

                      cheers for now,

                      Viv

                        • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                          C4D Enthusiast

                          Hi Vivian

                           

                          I work with Niki at Arc: I agree with your assessment that consumers soon wish to graduate up to appliances like radio,TV, internet that require more than basic lighting...and we believe that micro/mini grids are an important way to address that (we're working on a couple of projects of that type). I do think, however, that low voltage appliances are evolving in leaps and bounds. Our Ugandan partner SolarNow, for example, is now offering low voltage TVs and fridges with their solar home systems, and the plan is to offer tablet PCs that will charge from the system. So I think the driver will be as much innovation in appliances and batteries as it will access to finance for minigrids...?

                           

                          Cheers,

                           

                          Sam

                          • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                            C4D Explorer

                            Hi Vivian,

                            This is Nazmul from IDCOL, Bangladesh.

                            You are right. Although SHSs can accommodate few low voltage appliances i.e led TV, mobile charger, small DC fan etc., it may be challenging to offer high end electronic appliances and other income generating equipments i.e. sewing machine, photocopier machine etc. After installing 2.7 million SHSs under our program, we have also faced similar challenges. As off-grid households in our country have got the taste of electricity, they now want more. Moreover, in some market availability of low volt DC appliances at reasonable cost is also an issue.

                            We have hence undertaken two recent initiatives. One is introduction of an optimizer unit with existing SHSs that raises the output voltage from 12V Dc to 120V DC. This ensures availability of more appliances. In parallel, we have launched a countrywide mini and micro grid program in areas where demand for such projects are present, especially in village markets and relatively high end rural areas. We have created a business model with 40% subsidy, 40% concessional loan and 20% equity, which makes the project profitable to the entrepreneur who undertakes it. Customers pay by meter. We usually conduct a comprehensive demand and willingness to pay survey in this case. We have a target to finance 50 such mini grids by 2015.      

                            • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                              C4D Connoisseur

                              Hi Viv,

                               

                              I'm sorry I didn't respond to your post sooner.  Chris from our team (who will be curating the session next week on crowd funding and PayG) is also spearheading our work on minigrids and may have insights/contacts that will be useful to you. Please feel free to reach out to him.

                               

                              On the issue you raised about the habits of poor people changing as they get more energy access, I think everyone is in agreement...  There were a bunch of interesting posts from our expert contributors on how they are each trying to meet the aspirations of poor consumers to move up the "energy escalator", or "energy ladder" or "along the energy spectrum" using their existing business models. If there are other ideas out there on how people are doing this it would be great to hear from you. 

                               

                              The other point you raised about the challenge of financing slightly larger scale projects I think will resonate with everyone.  That issue is a bit tangential to this discussion which is focused on consumer finance but happy to discuss that with you offline!

                               

                              Best,

                               

                              Niki

                        • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                          C4D Explorer

                          The high cost of renewable energy materials which many individual can not buy at once. So  you make business in rural areas to have to make this arrangement.

                          The advantages is that you will have great turnover at the end of the year  the disadvantages is the risk of getting money from bad paying individuals

                          The point of dealing with individual and weak regulations. The best solution is to deal with groups and ask energy regulators to make strong regulations and fines

                          • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                            C4D Enthusiast

                            Hi Niki and other participants - and sorry for a late arrival.  I'm very much looking forward to the ideas and the discussions that will emerge here.

                             

                            The innovation I am most excited about at present is how connected devices are enabling new credit and collection approaches in companies with pay as you go models. Connected devices give us vast new data on the actual condition of the equipment, and how the client is using or abusing it (or not using it at all).  This information allows better pricing and positive interactions to encourage proper usage and manage payment flows in a positive rather than confrontational way.  The airtime model is particularly instructive.  It is inconvenient when airtime runs out, but it is not the subject of a phone call or a negative interaction with the phone company.  Connected energy devices can mimic this, saving administrative expense which can futher drive down prices.  Good data is also useful to learn who can afford and how they will likely pay, reducing losses, and therefore prices.

                             

                            Lets see how the discussions develop.  Another theme worth keeping an eye on is complexity of bringing our innovations to a large scale.  Our enthusiasm is not enough, and there is not enough professionalism in the sector ...

                            • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                              C4D Explorer

                              Thanks to the moderators for the excellent Briefing Note. I strongly encourage everyone to download and review.

                               

                              Niki, you posed some great questions. I'm going to address the first of these: What are the most compelling reasons for an energy company to make the strategic choice to offer asset finance and set up an in-house credit facility?

                               

                              The most compelling reason in favour of offering asset finance is simply consumer demand. They love it, and for good reasons. It's a highly compelling value proposition for many end-users. I met a farmer recently who put it very clearly to me:

                               

                              "If I take a loan from a bank to buy this solar product I can actually stop buying and using kerosene. I'd like that. But if the solar product breaks, and if the company doesn't service it, then I have to go back to kerosene. But I would still have to pay the bank! So then I'm paying twice, and I'm stuck again with kerosene."

                               

                              The farmer was talking about risk. There is a risk in any purchase that the product won't meet your needs or expectations. There's a risk that the company will fail to service it. There's a risk that the product will simply fail to work. For small ticket items, these risks may be bearable. But for products that are technologically complex and higher cost, the risks of purchase are really quite high. That's why even when bank loans are available, most consumers still won't purchase. That was true of residential solar in the USA, until SolarCity introduced the residential solar lease.

                               

                              That farmer of ours liked our approach better. We offered the SHS packaged with finance. There's a small down payment, then ongoing payments to use the product. At the end of the contract, the customer can buy out the system for a nominal fee. This model provides assurance to the customer that we will stick around to service the system, and do all we can to keep her happy. By financing your own products, you communicate to your customers that you trust in your products.

                               

                              I'm interested to know if this perspective resonates with others here.

                               

                              Warm regards,

                              Paul

                                • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                  C4D Enthusiast

                                  Hi Paul,


                                  Thanks for your reply.  How are you assessing and controlling the risks of non-payment from the farmer?  And how are you managing the risks of theft?  Lastly, who owns the asset and is this a 'hire-for-purchase' leasing model that you have structured.  Have you been successful in getting government subsidy for this and/or have you been able to take accelerated depreciation.  Apologies if you have already addressed these questions. 

                                   

                                  Regards,

                                  Soumitra

                                    • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                      C4D Explorer

                                      Hi Soumitra,

                                       

                                       

                                      Let me share some insights on how we do this in Uganda.

                                       

                                       

                                      Just as in any type of credit, it is important to avoid over-financing. Bigger solar systems earn the company more than small ones, so there is an obvious incentive in the wrong direction, which must be managed well.  Before selling the asset, we therefore do a credit assessment to determine the client's ability and willingness to pay the monthly installment.

                                       

                                       

                                      As for ability, we do a household visit to verify the monthly income and expenses and the asset level, which is normally a good indicator of the client's monthly surplus. Most of our clients are farmers who have irregular income. The rule is that our monthly installment should be less than 50% of their free disposable monthly surplus in a low-season month.  The good news is that most farmers have different sources of income throughout the year.

                                       

                                       

                                      The willingness to pay is verified by talking to the client, his/her spouse and a number of references, always including the village chairman. The more people you involve, the better the repayment. The good news here is that rural households, despite their relatively low education and income, normally keep their promise, unless you do not keep yours. Finally, access to decent light, television is more than convenient; it is addictive. Clients do not want to lose their system, which is inevitably what happens if they do not pay.

                                       

                                       

                                      After approval, there are three more important steps: (1) do a perfect installation, including good user training; (2) make sure the system works well and any malfunction is rectified within reasonable time; and (3) immediately follow-up late payment in order to build a disciplined portfolio and be consistent if i comes to doing repossessions when clients pay late.

                                       

                                       

                                      Our clients pay well (default < 0.3% of portfolio), and much better than the average microfinance client. In most of Africa, microfinance is limited to the (peri-)urban environment. MFIs and banks fear high transaction costs and irregular income patterns when going rural. We see that asset finance perfectly fits the gap in financial service delivery to the rural segment. The model can be replicated to include lots of other assets as well.

                                       

                                        • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                          C4D Connoisseur

                                          Thanks Willem, this is really helpful.  As per Vivian's question above, can you also tell everyone your philosophy on helping clients increase their energy access via "equipment upgrades"?

                                            • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                              C4D Explorer

                                              Niki, thanks. What Vivian mentions is true - once clients gain trust in the solar PV technology, they want to move up the energy ladder. Access to television even triggers other needs: refrigeration, tablets, internet, shavers, cookers, mixers, burglary protection, water pumping, disco systems, game stations, sewing machines, etc. etc.

                                               

                                              Once we learned this, we decided to make our product modular. A typical client starts with a 6-lights system, finishes payments after 12 months and then buy a system upgrade including a DC television. Once this is paid, people come for the DC fridge, which also again means a system upgrade. This means more income per client. And offering dc appliances starts to drive the demand for solar systems.

                                               

                                              But there is another reason to make the system upgradable: clients have an extra incentive to pay well. Because they know that when they default, they are unlikely to get a PayPlan facility on their upgrade.

                                                • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                  C4D Enthusiast

                                                  Hi Willem

                                                   

                                                  Playing Devil's Advocate for a moment here: shouldn't the appliances that accompany solar technology be income-generating in nature? A fridge can be, a tablet computer definitely can be; but a television probably cannot. Should we be encouraging the acquisition of non-productive consumer goods, or 'nudging' - as part of our asset finance philosophy' - customers towards those modular add-ons which can be useful for a business? It is the role of the energy enterprise to decide what is 'best' for the poor customer, and to provide products accordingly - or should they just match supply with demand?

                                                   

                                                  Thanks!

                                                   

                                                  Sam

                                                  Arc Finance

                                                    • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                      C4D Enthusiast

                                                      Hi,

                                                       

                                                      Regarding income generation or not ...

                                                       

                                                      The advantages of asset finance over giving out cash are numerous, including income generation.  However, if you look at income generation further, the underlying driver is not the income generation - it is the value the client places in having the equipment which they then choose to use for income generation.  Asset financing is as much about the usage of the asset - the determination of the client to own the asset, as it is about credit screening and payment mechanisms

                                                       

                                                      Televisions are one of the most desirable assets across the world.  The desire of the customers to own a television translates into a determination to keep it, and an increased likelihood that they will make the payments.  Combining a TV with the ability to remotely switch it on or off in direct relation to payment creates a very strong asset financing framework.

                                                       

                                                      If the TV is used as the 'shop window' asset, the other multiple benefits of a solar system that can support a TV are also then available - lights and mobile phone charging in particular. 

                                                       

                                                      Income generation is important, and an easy screen - but demand may be stronger for something else.  I advocate going further to drive scale and really tuning into our customer base

                                                      • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                        C4D Enthusiast

                                                        Hi,

                                                         

                                                        Its an interesting question as it takes us into the "is this charity or is this business" debate. If its charity, there is usually an element of "what the user ought to have". If its business its a case of "what the user wants / can pay for" (within the law, obviously).

                                                         

                                                        There is a strong case for saying that energy provision is addressing a market failure - the services exist, the technology exists and the customer demand is there but they are not all joined up. In that sense, it is not our job to tell a low income customer what they want but rather to provide the goods and services they require. It just so happens that these goods and services often have enormous wider benefit for not only the user but also society.

                                                         

                                                        Re the specific of TV, actually you can argue the economic benefit of entertainment, access to language, access to information about the community and the wider world is of huge value. But my point is that is not for us to judge. Rather we provide products and services and the consumer will purchase and as long as this is done in a responsible way (as in any market) then everyone wins.

                                                         

                                                        Simon

                                                        • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                          C4D Enthusiast

                                                          Vous avez raison, la plupart offre pour l'énergie rurale sont «prendre ce que je veux vous donner" et non pas ce dont vous avez besoin.

                                                          You are right, most offer for rural électrification are"take what i want to give you" and not what you need. In most case studies are too old, build with wrong data or do not exist. Real development is not only lighting, if you want rural people leave and product food for town you must help them to go to a best life. 

                                                          This may be a long discus, we can have it on a new blog if you want to.

                                                          J.P.Viaut

                                                          • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                            jeyeddu C4D Enthusiast

                                                            Hi Sam,

                                                             

                                                            You've brought up an interesting challenge. It makes me recall a local experience some few years back. I grew up in an off-grid community where one household had a TV set. The TV owner had a shed where in the evenings he would bring in the T.V and charge interested viewers some 'local coins'. We were interested in some Chinese and American movies then. Later local comedies and concerts were added.

                                                            Currently, some youth-entrepreneurs go around in off-grid communities with diesel powered T.V-video systems where movies are screened for fees. In the 1990s when I was implementing a solar for community project in an off-grid communities up north. We made room for such potential entrepreneurs and it worked. We doubled their home system units and called it 'solar video systems'. For instance, we installed a 200Wp system with a battery storage to enable them provide such T.V/movie-video services. We found out that it was the most profitable venture among the youth. For a village of about 1000 people, one would fine two such solar-powered movie centres. The movies were not only in the evenings but during day time and festivity occasions as well.

                                                            Another innovative marketing venture I have in mind is swapping traditional woodfuel cooking stoves for improved brands. Currently in Ghana we have an on-going project where users of used or 'second-hand' refrigerators can send such fridges to some designated stores/distributors for a new but high efficient refrigerators. When you bring your used or old fridge, you are given a voucher worth between $100-150 and you top it up to buy any new but efficient fridge of your choice depending on how much you can top up. It is well being patronised even though slowed for this year due to the fall in the value of the local currency. So we intend to raise the voucher value to attract more participants. It is a nation-wide activity and it is being sponsored by UNDP and the Ghana Government.

                                                            A year ago I was hired by UNEP to look at cost-effective way of implementing improved cookstoves in Liberia. Unfortunately, the project is seemingly stalled since commitment from the local partners regarding counterpart-funding was very weak or not forthcoming. One of the models I want to do is to swap equivalent (in terms of sizes) traditional inefficient cook stoves with improved versions. Participant turns in an inefficient traditional woodstoves and he or she gets a voucher where it can be redeemed and topped up for any brand of improved woodfuel cookstove of ones' choice depending upon one's financial strength; a model similar to the refrigerator-rebate programme in Ghana. Hopefully it works.

                                                    • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                      C4D Connoisseur

                                                      Hi Soumitra, Saiful has just posted a number of points that address the issue of risk mitigation in the context of microfinance in a parallel e-discussion.  Many of these points are equally relevant in the case of asset finance.  I hope you find them useful.  Best, Niki

                                                    • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                      C4D Connoisseur

                                                      Thanks Paul, I'd also love to hear your perspective on question 3 (If you do decide to do it, what can go wrong and how can you avoid making the typical mistakes most companies make when they opt to institute an asset finance capability?).  I know that making this strategic decision for Simpa involved the realization that it is not a trivial thing to introduce credit. If you can explain some of the changes you had to make in your operations and some of the pain points you experienced, I think it would be helpful for those following the discussion.


                                                      Also, Willem and Dipal, you both came from a microfinance background so you knew exactly the complexity involved in introducing credit when you founded SolarNow and Grameen Shakti respectively - it would be great if you can explain what is involved in "doing credit right".

                                                        • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                          C4D Explorer

                                                          Hi Niki,

                                                           

                                                          There certainly are challenges, but the fact is that asset finance is a very well established mode of credit, so there are many place to turn to for advice, for best practices, etc. Of course offering asset finance for solar products in rural India is entirely new, so we're breaking new ground and learning as we go.

                                                           

                                                          I think one of the biggest challenges is internal: changing the mindset of the organization. We were fortunate here, as our sales org has been growing quickly so there wasn't a lot of re-training involved, just training. 

                                                           

                                                          We find that it's very important to align the incentives of your sales organization with your business objectives. Signing up customers is the easy bit. Maintaining great customer relationships, keeping the product serviced, keeping the customer happy and paying is the magic. At Simpa we talk about picking good customers, and making great customers. The front line needs to care about both. They cannot be narrowly incentivized to just sign up customers. We've worked hard to get the incentive compensation right so as to encourage the selection of good customers, and the making of great customers. That's a big mindset shift for some sales professionals. To address this we recruit people that have experience with similar financial products and long term customer relationships.

                                                           

                                                          It was important for us to set up a specialized Credit Team, responsible for defining and implementing our credit policies. That's additional overhead, but strategically it's extremely valuable. The fact is, in an asset finance business, you'll be raising a lot of capital to scale your business. Investors will look to the health of your portfolio and the underlying credit strategy, policies and processes. You can only build a healthy portfolio on solid ground. Your business will stall if the portfolio goes sideways.

                                                           

                                                          It's important to recognize that the Credit Function adds value for the company. When done right, the Credit function helps you get more business, not less. It is not uncommon, however, for the Sales Function to perceive Credit as the people who say "no". That's obviously a misconception that can really harm the business. It's very important to build deep mutual respect for Sales and Credit and to underscore the fact that a high degree of professionalism in both functions is essential to grow sales and profits.  When done right, your Credit Function is probably saying "yes" 95% of the time, and your Sales Org is generating high quality leads that are highly likely to be approved, because the Sales Org understands and internalizes the selection criteria that are important for the company.

                                                           

                                                          Asset finance is clearly capital intensive. There are various levers to pull that can reduce the capital intensity (getting higher down payments, shorter terms, better margins, etc.) but the fact remains that you'll need to build your company's capacity for raising capital to fund your growth. It's important to invest in that capability early.

                                                           

                                                          Those are the big lessons we've learned so far.

                                                           

                                                          Paul

                                                          --

                                                          Paul Needham
                                                          President and Co-founder | Simpa Networks | www.simpanetworks.com



                                                           

                                                          • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                            C4D Explorer

                                                            Some of our lessons learnt in "doing the credit right" - btw without pretending that we do it right ;-)

                                                            1. As to reduce OpEx and increase client friendliness, our franchises combine the sales and credit hat. This works well, however franchises cannot have the authority to approve clients - this should be done by an independent HQ Credit team, who verify the information (and whose bonus is not sales dependent).

                                                            2. We have tried lots of different incentive schemes. The best schemes are simple and have a short term cash element, but also a long-term savings element to stimulate sound portfolio management. And it is not all about money - award programs also work well for us.

                                                            3. We found that most issues in the credit portfolio were the result of insufficient, unclear client communication. Most of our clients are illiterate and a contract does not mean much. Explanation needs to be clear and timely (well before the sale) and needs to be repeated frequently.

                                                            4. There is a tendency to focus on late payers. Of course this is logic and should be done at 7am on the first day of delinquency.  But it is more important to focus on good clients preventing rather than solving delinquency. Good clients generate most good referrals and will come in for system upgrades.

                                                              • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                C4D Connoisseur

                                                                Willem, this is very helpful! If you can elaborate  on what makes a "good client" on what makes for "clear communication" it would be super!  Niki

                                                                  • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part I: Asset Finance
                                                                    C4D Enthusiast

                                                                    Hello All,

                                                                     

                                                                    Is it possible for the knowledgeable experts on the e-discussion to discuss their thoughts on the exact mechanics/process of the finance to the end client.  Specific questions are -

                                                                     

                                                                    When a rural customer doesn't have access to bank or does not have a bank account, do we open his account internally or with an MFI or a local bank?

                                                                    If we create an account within our firm, is there any collateral that we take? How do we determine that the collateral is in the customer's name?

                                                                    Do we then also locate a branch of our firm near the customer?

                                                                    How do we monitor customer's use of the asset?

                                                                    How often do we talk to the customer?

                                                                    Is all the above work carried out by an intermediary and we work closely with the intermediary and monitor their portfolio?

                                                                    Do we or how do we re-possess the asset if the customer stops paying?  Do we then sell refurbished systems?

                                                                     

                                                                    Regards,

                                                                    Soumitra

                                                                      • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part I: Asset Finance
                                                                        C4D Connoisseur

                                                                        Hi Soumitra, Can you tell us a bit more about your company or the hypothetical company that is contemplating this? Is it an energy enterprise, how long has it been in operation, where is it located, what legal structure does it have … etc.?  I think that might help people respond.  Best, Niki

                                                                          • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part I: Asset Finance
                                                                            C4D Enthusiast

                                                                            Hello All,

                                                                             

                                                                            Apologies, I should have introduced us earlier.  I am at Claro Energy, a private limited firm (www.claroventures.com and www.facebook.com/ClaroEnergy) that provides solar pumps for irrigation and drinking water in remote rural regions of India.  We are a solar energy company with a focus on solar, have been in operation for 3 years in India now with operations in 7 states (mostly in north India), and have about 30+ employees.  We have installed over 300 off-grid solar pump systems ranging from 1 kW to 10 kW through various government programs.  Since government programs end up in benefitting few, connected and informed people, the bulk of the really needy population lose out.  So we have decided to directly sell the systems to farmers and size it according to their individual (or shared) needs.  We have gotten strong interest and also sold a few initial systems.  However, asset financing is really the key to scaling.  Economics are there – cost of irrigation through diesel > solar irrigation and the payback without subsidies is less than 5 years with about 10 to 15 years of useful life still remaining.  A recent Bloomberg report (http://washpost.bloomberg.com/Story?docId=1376-MZCAB56TTDSJ01-44QCHU8EL5H73SAB55RJDE4VPA) outlines the market potential of solar pumps in India. 

                                                                             

                                                                            We are essentially a system integrator and focus on customer acquisition, installation, and post-sales.  We are technology and product agnostic and look to partner with firms and act as a channel for them.  We try to understand the customer requirements very well so that we can assemble the best combination available in the market.  Often we make incremental innovations (product) only to open up a large market but do not invest in in-house product development.  We also look at financing partners who could provide debt or equity to us or to projects.  Most social impact funds in India know about us and have had a discussion with us at one point or another.

                                                                             

                                                                             

                                                                            We operate in rural domain only and have also started business development for 1kW systems and some solar based applications such as solar powered air-water cooler and small air conditioning units among others but we are in initial stages.

                                                                             

                                                                             

                                                                            Sorry for the longish email but if you want me to expand on any point I’ll be happy to. 

                                                                             

                                                                            Soumitra

                                                                          • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part I: Asset Finance
                                                                            C4D Enthusiast

                                                                            Hi,

                                                                             

                                                                            Your questions are very similar to what I would encounter consulting with an organisation that wants to get into the space for the first time. Often the strategic interest is strong, and now the board or senior management wants to hear the solution or approach described immediately with some precision.

                                                                             

                                                                            We can all offer you specific answers to each question ... but as Niki has indicated, without background these specific answers may not be right for you

                                                                             

                                                                            i) go with the MFI or bank that has similar strategic goals to you and brings something to the partnership

                                                                            ii) don't make it difficult to engage with a customer.  Regarding collateral, the best is the asset you are funding.  If the client really benefits from it they will not want to let it go

                                                                            iii) what is important is how you and your customer solve the practical issues of interaction.  There are more alternatives than physical branches

                                                                            iv) stay close to your customer by phone, through your distribution, face to face meetings.  However, whatever you do you have to be able to afford it through the margins you charge

                                                                            v) talk with the customer as often as you can afford

                                                                            vi) work with an intermediary only if they are better at the relevant task than you are, and are doing it for complimentary reasons.  The selection process for partners should reveal this

                                                                            vii) If you are not able to repossess, you are not in asset financing.  Repossession underpins your whole process by making it clear that you are serious.  Good plannng and execution keeps repossession to an absolute minimum.  Repossessed equipment should be used for spares/parts unless it is economic to refurbish and sell, which is a great

                                                                             

                                                                            This is the point at which the need to develop a thoughtful integrated asset financing plan becomes clearer. Before designing the product features, higher level questions need to be answered.  Which asset works for our customers?  How will it be delivered and maintained through a term?  what is its value over its useful life? What is the technology cycle? How will we underwrite it?  How will we sell it? What is the legal context for ownership and financing?  What is the in-house capacity to do credit, credit sales, customer support and funding?  Where do we need to seek partnership?  How good are our systems? 

                                                                             

                                                                            By working through this level of questions, by the time we design the actual product features, we will be doing so knowing we can deliver.

                                                                             

                                                                            KK

                                                                             

                                                                    • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                      C4D Enthusiast

                                                                      hello

                                                                      Mini-grid, Micro-grid and individual systems are all good. There is only different use for each type, but for environemental Mini-grid as we build is better for many reason : maintain is only on one point (low cost), battery are on battery box (safe for people and childs), thermal effects are controled easyly, best life for battery and inverter (big battery vith good termal regulation is twice life time than individual battery). The initial cost ant maintain cost are lower and so each kW is cheaper.

                                                                      For artisanal use it's the best way, they can directly wired their tools on the local grid. Just one thing : they agree to use big power tools only during sunny hours (no impact for battery). Our Mini-grid 40kW can deliver 80kW for 1 mn and 60kW for 5 mn (3 phases+neutral system). We work a lot for build a system as African villages ask us, now it's do, but we have to ear each comment to get better for long time.

                                                                      we can start and stop a generator directly for peak power,

                                                                      we can olso wire grid when it arrive or for renfort power without change, in this case solar power excess will be send to grid.

                                                                      waiting your comments

                                                                      J.P.Viaut

                                                                       

                                                                      • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                        jeyeddu C4D Enthusiast

                                                                        Great guys. Let me however welcome myself for the come back. It has been a long time.  I am contributing from Ghana in West Africa. In my country's 2000 census, over 80% of rural households used kerosene for lighting; electricity for lighting was about 16%. Solar lamps and dry-cell (battery) lamps were virtually non-existent. In 2010 census however, lighting by electricity had jumped to 39% and this is due to on-going national universal electrification programme. Kerosene for lighting has dropped to about 30%, solar lamp penetration is still less than 1%. However, drycell lamps had come from almost nowhere to almost 30%. We observed that it has displaced most of the kerosene lamps due to its superior lighting quality and also relatively very cheap dry cells  and this was due to no deliberate government policy but just by surfacing of this lamp technology largely from China,  So the rural folks are going for the drycell lamps themselves because they find them far less expensive than the solar lamps, an example of appliance shift due to technology change.. The durable solar lamps cost between $20-40 equivalent per unit and now we have very durable ones on the market. For instance, those I am using are now over three years old. I wish not to mention the brands not to create the impression of marketing a commercial product. The drycell lamps cost between $5-10 equivalent but not as robust as the solar lamps.

                                                                        So what are we doing with the few kerosene lamps in my country? There used to be a subsidy on kerosene price with the excuse that rural folks are largely using it for lighting. We however discovered that the some fuel dealers were diverting the product to illegally blend with diesel which was priced higher (i.e. a more expensive product). So we (Energy Commission) advised the government to remove the subsidies and rather use that money to buy solar lamps and sell them at reduced rates to rural folks. When the government adhered to our advice, the smuggling and the illegal blending of kerosene with other products have virtually stopped. The government in turn has started to distribute solar lamps in deprived off-grid rural areas. The solar lamps with units for charging cellphones has also become an attractive feature. In my own small way, in my village two years ago, my approach has been very different.  I observed that rural households were spending between $10-50 equivalent on kerosene every month for lighting and other sources. So I experimented with 10 households; I asked interested rural users to surrender their kerosene lanterns in exchange for solar lamps; one kerosene lamp per household for one solar lamp.  Every week, I collected from the beneficiaries, between $2-5 equivalent for the next three to five months. I decided to sell the kerosene lamps to a scrap dealer between $2-5 equivalent per lantern depending upon how old the lamp looked.  I am now documenting this lamp swap model for the government. I see this as an example of rural community approach to asset finance. Anyway, the rural folks even those who could not get my solar lamp are saving towards purchasing dry cell (battery) lamps.

                                                                        • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                          C4D Explorer

                                                                          Hi Paul,

                                                                          You have raised one very important issue related to dissemination of solar products in rural areas that is customer confidence on the product. We gave a lot of though about this issue and structured out program in the following manner:

                                                                           

                                                                          First of all, we introduced the concept of an independent 'Technical Standards Committee' which had to approve every solar equipment and supplier before the same could be used in our program and hence, we could significantly reduce the promotion of low quality products. This worked because we did not refinance the systems at concessionary rate if systems did not meet our quality criteria.

                                                                           

                                                                          Second, as part of the approval process, all the suppliers were required to provide certain warranty i.e. 20 year for PV, 5 year for battery and 3 year for the rest.

                                                                           

                                                                          Third, we introduced a credit scheme for the household who had to pay the price of the system in monthly installments over 3~5 years. This helped because if the systems do not work during this period, households won't pay.

                                                                           

                                                                          Finally, IDCOL ensured proper supervision though physical visit of the systems and a dedicated call center that proper after sales services are given to the end user.

                                                                           

                                                                          Nazmul

                                                                          IDCOL, Bangladesh

                                                                        • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                          C4D Enthusiast

                                                                          Hi,

                                                                           

                                                                          I've held off a little in responding to Niki's question "... what can go wrong and how can you avoid making the typical mistakes most companies make when they opt to institute an asset finance capability" and do so here so we revisit it.

                                                                           

                                                                          As a consultant I have now been able to see different approaches in Africa and India to building an in house asset finance capability, and my list of pitfalls would be

                                                                           

                                                                          1) the complexity of the changes to your existing business model.  Credit is complicated, but it is also more than underwriting - it is documentation, portfolio management, collections.  It has critical interfaces with sales, finance, systems and product development

                                                                           

                                                                          2) the impact on your sales process because selling with credit is a different skill set, or distribution model than selling without.  Your existing team are unlikely to have the right skill set

                                                                           

                                                                          3) An in-house credit capability requires the systems to support it.  These systems will need to capture the credit process, its scoring or assessment, the documentation, and the handoffs from inventory, sales, installation.  Data on payment will need to be real time to ensure prompt intervention.

                                                                           

                                                                          4) the change in mindset of senior functional leaders to interact constructively and ultimately successfully with the new credit capability

                                                                           

                                                                          5) the change of mindset within the whole business to shift from a 'We've sold, we've won" to a "We've booked, and now must cultivate payment for XX months" to emerge successful"  Asset financing is a long cycle business

                                                                           

                                                                          6) avoid the simplistic view that a small pilot managed by a few motivated clever people and tracked on a spreadsheet over 12 months is easily scaled to a new, long term business capability

                                                                           

                                                                          These challenges can be met.  My short summary of how is to get the funding in place for at least a full cycle of the portfolio, and invest wisely in systems upgrade, and key individuals in credit, sales, technology and finance.

                                                                           

                                                                          KK

                                                                            • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                              C4D Connoisseur

                                                                              Hi Kevin,This is very helpful. In my experience, the lessons learned from what went wrong can sometime be more informative than the success stories! Your points about changing the mind set among top management, key line managers and the staff as a whole are absolutely key and are arguably more difficult to solve than other challenges.  If you have any insights on how to actually do this I think everyone would find it really useful. Best, Niki

                                                                              • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy / Part I: Asset Finance
                                                                                C4D Enthusiast

                                                                                Hi Kevin,

                                                                                 

                                                                                Great suggestions on building an in house asset finance.  I have read all the posts with great interest and it seems that there are a decent number of cases where the asset finance is working for a 'less than $200' asset.  We have to combine and select appropriate models to fit different markets. 

                                                                                 

                                                                                I am interested to learn how would you approach the problem if the asset had a much higher dollar value, say $2000 to $5000?  The typical applications are 1 kW rooftop systems, solar pumps and a few other similar things.  Are there any good examples to follow or learn from?  Would we still want to have an in-house asset finance?  Any insights will be very helpful.

                                                                                 

                                                                                Thanks,

                                                                                Soumitra

                                                                            • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                              C4D Connoisseur

                                                                              Dear everyone,

                                                                               

                                                                              I hope you've all had a chance to read the Briefing Note we prepared on Asset Finance - we welcome comments, questions and other examples that people would like to share. Also, if the Expert Contributors want to provide more details about their own business models we very much encourage that!

                                                                               

                                                                              Best,

                                                                               

                                                                              Niki

                                                                               

                                                                              Nicola Armacost

                                                                              Managing Director, Arc Finance | www.arcfinance.org

                                                                               

                                                                                • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                                  C4D Explorer

                                                                                  Hi Niki,

                                                                                  Sorry for late arrival. Let me share how my company IDCOL promotes SHS in Bangladesh.

                                                                                   

                                                                                  IDCOL’s has been providing asset finance for more than ten years now. Since 2003, over 2.7 million Solar Home Systems (SHS) have been installed in off-grid rural areas of Bangladesh under the program, and the organization hopes to finance 6 million SHS by 2016, with an estimated generation of 300 MW of electricity.

                                                                                   

                                                                                   

                                                                                   

                                                                                  IDCOL has developed a unique asset finance model for SHS. It works through NGO/MFI/private entities (partner organizations, or “POs”), which interact directly with customers. IDCOL provides the necessary technical and financial support to the POs for implementation of the program.  The salient features of the model are as follows:

                                                                                   

                                                                                   

                                                                                   

                                                                                  Ownership of SHS

                                                                                   

                                                                                   

                                                                                  After making full installment payments or a one-time payment, beneficiaries become owners of the SHS. For this reason, customers use and maintain the SHS properly, which has been one of the key success factors of the program. The capacity of the SHS has been limited, to make it affordable for customers. It has been designed to supply electricity for 4 to 5 hours during the night to run small appliances like a few lamps, one black and white TV, one mobile-charger etc, or one DC fan. As customers will face trouble with the system if they over-utilize its capacity, customer support was necessary for smooth implementation of the program. The ownership concept has been instrumental in facing this challenge and the idea of the end user becoming an owner after full installment payments has also facilitated payment to the POs.

                                                                                   

                                                                                   

                                                                                   

                                                                                   

                                                                                   

                                                                                  Ensuring financial contribution of all parties

                                                                                   

                                                                                   

                                                                                  IDCOL ensures the financial contribution of customers as well as POs in installing SHS. To procure an SHS, a customer has to pay a minimum of 10% of the system cost as down payment to the PO, on receipt of which the PO installs the system. The remaining cost is a loan from PO to the customer, which is repaid by the latter in installments. IDCOL pays 70-80% of this loan amount as refinancing to the PO. Therefore, the PO’s own contribution is approximately 18% of the SHS cost. As a result, efforts from both customer and PO in implementation of the program have been ensured.

                                                                                   

                                                                                   

                                                                                  The POs have to manage funds for their contribution for further installation of SHS, and they also have to ensure return on their equity contribution. Therefore, they are dedicated to collecting installments from the customers, which has facilitated proper after-sales service. The investment by the customers in terms of down-payment has made customer and PO alike conscious about proper maintenance and installment payments.

                                                                                   

                                                                                   

                                                                                   

                                                                                   

                                                                                   

                                                                                  Price determination by the market

                                                                                   

                                                                                   

                                                                                  In implementation of the program, IDCOL allowed market forces to determine the price. It always has an eye on the price of the SHS at the customer end, as well as the component prices, and has ensured that there are reasonable grounds for changes of SHS prices, without ever interfering in the determination of theprice. Rather, IDCOL has tried to ensure competition among the POs and equipment suppliers from the very beginning. Now, each of the SHS components has multiple suppliers for POs to acquire equipments at competitive prices. Similarly, every corner of the country has a number of POs selling SHS to the customers. As a result, customers have the choice to buy SHS on the basis of price and quality of service.

                                                                                   

                                                                                   

                                                                                   

                                                                                   

                                                                                   

                                                                                  Independent selection of POs and suppliers

                                                                                   

                                                                                   

                                                                                  IDCOL has kept the PO and supplier selection processes independent. There are two different committees for the selection of POs and suppliers under the program. The committees are comprised of reputable persons working in relevant sectors and have absolute authority to take decisions that are binding on IDCOL, and to which IDCOL only provides secretarial support. As a result, qualified POs and suppliers are selected/enlisted under the program.

                                                                                   

                                                                                   

                                                                                   

                                                                                   

                                                                                   

                                                                                  Indirect subsidy for the customers

                                                                                   

                                                                                   

                                                                                  IDCOL is providing a small portion of the SHS cost as a subsidy to the POs for the sale of each SHS. The subsidy is fixed for SHS up to 30Wp and is, at present, 12% of the SHS cost by weighted average. Thus, poorer customers buying smaller systems benefit more from the grant support. The subsidy is meant to be passed on to the customers to reduce cost at the customer end.

                                                                                   

                                                                                   

                                                                                  The sale price of the SHS is similar to the total cost of a larger sized SHS or less for smaller sized SHS. The total cost includes procurement cost of SHS components, transportation and installation costs, and POs are deducting the subsidy from their profit. This happens due to the fact that strong competition has been created by IDCOL among customers, and a similar amount would be charged as a mark-up in the absence of the subsidy.

                                                                                   

                                                                                   

                                                                                   

                                                                                  A direct subsidy to the consumer would be extremely complicated; so in practice, this makes the process simpler for IDCOL as well as the POs.

                                                                                   

                                                                                  Nazmul, IDCOL

                                                                                   

                                                                                • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                                  C4D Enthusiast

                                                                                  Regarding the energy ladder, I have an alternative view of how best to achieve movement, while at the same time as expanding the number of clients we bring into energy access for the first time

                                                                                   

                                                                                  There are a number of aspects that come together.  First we have a first adopter of our new financed solar products. Secondly we have solar equipment that has a useful life much longer than the financing term.  Thirdly we have distribution that allows us to collect equipment as efficiently as we deliver it.  Fourthly we have equipment that with minimal refurbishment can be financed with a second customer.  Fifthly we have social funding to help us move refurbished equipment to first time energy customers at a subsidised rate

                                                                                   

                                                                                  The model would be to go to rental with our core customers, offering them solar equipment for 12 months at a more favorable rate than a hire purchase structure

                                                                                  After 12 months we offer them the upgrade that technology advancement makes available - brighter lights, longer battery, better design either as a straight swap, or an upgrade

                                                                                  We take the 12 month old equipment and refurbish it. 

                                                                                  The refurbished equipment is offered to the market as a rent to buy over 12 months. The rental should be lower because i) cost recovery and profit in the first client rental and ii) with subsidy from social capital that want to fund deeper penetration of solar and credit into rural populations

                                                                                   

                                                                                  To achieve this model we need to start with a mature portfolio (12 months or longer) and to control the supply and distribution chain in one organisation.  I believe this model would be more efficient and increase our penetration at multiple levels of the rural population.

                                                                                   

                                                                                  What do you think?

                                                                                    • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                                      C4D Enthusiast

                                                                                      Hi Kevin,

                                                                                       

                                                                                      We have been operating a model similar to this at Azuri as part of our "Energy Escalator" for the last 18 months or so and it certainly works. It does have quite a high setup and management overhead, particularly for the reverse logistics and refurbishment of units so these need to be put in place with care. It can easily be that the cost of recovering and redeploying the unit is a significant part of the residual value and once that is taken into account, the customer does not make much of a saving on renting a new system (it will depend a lot on the size of the system here).

                                                                                       

                                                                                      One slightly surprising outcome was that many customers instead of upgrading, preferred to buy out their initial systems and then purchase an upgraded one from scratch, using the savings from kerosene/phone charging. Generally the existing systems are then given to a relative or used to light a less used room such as an outside toilet.

                                                                                       

                                                                                      So, it definitely has merit but probably as part of a portfolio offer where the customer can choose which way they want to go.

                                                                                       

                                                                                      Simon

                                                                                      Simon Bransfield-Garth

                                                                                      CEO, Azuri

                                                                                        • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                                          C4D Enthusiast

                                                                                          Hi Simon

                                                                                           

                                                                                          Perhaps you could expand a bit on this for everyone, not just the concept of the escalator, but the way payments are spread for the customer over the 18 month period, and why this is preferable in some cases to partnering with an MFI for the finance...

                                                                                          And perhaps you could also discuss the scratchcard model v m-money (like M-KOPA, for instance), and how that fits within customers' willingness to upgrade versus buy out: are small weekly payments more conducive to this than for example a monthly installment credit facility, like SolarNow's?

                                                                                           

                                                                                          Thanks

                                                                                           

                                                                                          Sam Mendelson

                                                                                          Arc Finance

                                                                                            • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                                              C4D Enthusiast

                                                                                              There are lots of different models here so I will attempt to generalise while keeping enough detail to be useful ....

                                                                                               

                                                                                              The paygo model is generally one where the equipment is cryptographically tied to a payment mechanism. The customer makes a payment in some way (there are various options from scratchcards, to tokens, to mobile payments) and this causes the equipment to deliver either a given quantity of power or simply to operate for a given period of time such as a week. The equipment normally belongs to the vendor until such time as the customer has made a given number of payments, at which point title transfers. The main differences to MFI are:

                                                                                               

                                                                                              Usually the customer is not in debt as such. Rather they have a rent-to-own model of business. Also, most models allow for some flexibility in repayment to align for example with crop cycles. If customers stop paying altogether, the equipment is usually removed. This means customers are less concerned about taking on a liability as they cannot be chased for the outstanding payments. Of course, one of the key items for a vendor is choosing customers who will continue to pay throughout the cycle. Many paygo systems price their usage fees at less than the cost of the kerosene and mobile phone charging they replace so from the customer perspective the equipment is "net free".

                                                                                               

                                                                                              In principle, paygo systems are lower overhead and faster to deploy than MFI. You don't need funding circles, weekly meetings or people going around collecting money. So fewer people are required on the ground and they have the potential to scale more effectively. Whether they do so or not depends on the implementation. In many parts of Africa, the distinction is academic as the customer has not access to MFI finance.

                                                                                               

                                                                                              There are various payment mechanisms and each has its advantages and disadvantages but fundamentally almost all of them rely on the mobile network in some way to do asset tracking and payment. One of the main learnings of the industry is that the technology is only a small part of the challenge and the complexity in the business is the distribution channel, customer management and asset management. So, while the technologies differ, arguably the differences are less important than the processes that go around them and this is much to do with the distribution channel that has been selected (e.g mobile operator channel, local entrepreneurs, cooperatives etc). It's one of those businesses that is easy to do at a pilot level but much more complicated to do at scale (actually that's probably true of a lot of BoP activities). Having said that, for those that invest in the infrastructure to deliver scale, the benefit is the resulting statistical data upon which aggregated business decisions can be made.

                                                                                               

                                                                                              Hope that helps.

                                                                                            • Re: E-Discussion #6 - Innovative Consumer Finance Mechanisms for Small Scale Off-Grid Energy
                                                                                              vdeodhar C4D Enthusiast

                                                                                              Dear all,

                                                                                              It is very interesting to know your experiences with innovation in RE consumer durable financing. I have questions regarding the type of RET devices you have come across, remoteness/accessibility of the area catered by you and experience with the existing banking system in the country. I am currently exploring innovative financial instruments for RETs in a Least Developed Country. The RETs I am working include Improved Cook Stoves (ICS) besides small solar PV home systems. The households are extremely poor and fuels like kerosene or LPG have all to be imported, hence not affordable. There are government subsidies (40-50% of capital cost), but the people find it difficult to raise their share of cost. We have identified leasing or hire-purchase as one of the financing modalities, but it is not prevalent in the country and people perceive it to be expensive. Does anyone have any experience with financing for devices such as ICS? Also, I would like to know if any of you have experience on the Result-Based Funding (RBF) modalities.

                                                                                              Vinay Deodhar