Unlocking access to end-user finance for modern energy

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

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

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

4. What Options Do People Have?

5. Lighting & Cooking Rural IndiaCould you read by this lamp?

6. 3 2.8 2 1.6 millions 1.3 1.2 1 0 Malaria Smoke from Tuberculosis HIV/AIDS biomass Energy Poverty: Annual Deaths from Indoor Smoke Source : World Energy Outlook 2006

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

8. Financial institutions serving the poor

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

10. Context for energy lending Many of the world’s poor do not have access to basic financial services Estimates vary, but about 500m poor entrepreneurs need access to finance; while only just over 100m have access Less than 500k clients of MFIs have access to energy loans Most of the world’s poor do not have access to modern energy 1.7 billion people have no access to electricity and 2.4 billion people rely on traditional biomass for cooking and heating - this untapped market for clean energy is estimated to be valued at US$194 billion. 1.3 million people die of indoor air pollution each year (smoke from biomass).

11. Asset Building, Risk Mitigating Products • Voluntary savings • Health and life insurance Tailoring Financial Services to the Needs of Poor Customers Service • Rapid, convenient access • Respect, connection Flexible Loans • Small initial loan sizes • Larger loans over time • Longer terms What Poor Customers Want Variety of Products Group Individual Loans • Housing loans • Education loans • Life cycle products • Business development services • Quality of life enhancing products (e.g. energy and H2O) No Traditional Collateral

12. Tailoring Energy Products to the Needs of Poor Customers 12

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

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

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

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

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

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

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

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

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