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| | [[Cooking Energy Compendium|--> Back to Overview Compendium]] | | [[Cooking Energy Compendium|--> Back to Overview Compendium]] |
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| − | <span style="color: #ff0000">NEU</span> | + | <span style="color: rgb(255, 0, 0);">NEU</span> |
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| − | [[GIZ_HERA_Cooking_Energy_Compendium|--> Back to Overview Cooking Energy Compendium]]
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| | + | [[GIZ HERA Cooking Energy Compendium|--> Back to Overview Cooking Energy Compendium]]<br> |
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| | = Introduction<br> = | | = Introduction<br> = |
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| | On the demand side, the willingness and capacity to pay will strongly influence the effective demand for the product. Strategies to address demand side financing include direct subsidies as buy down grants, awareness-raising and product promotion campaigns, and micro-credits schemes.<br> | | On the demand side, the willingness and capacity to pay will strongly influence the effective demand for the product. Strategies to address demand side financing include direct subsidies as buy down grants, awareness-raising and product promotion campaigns, and micro-credits schemes.<br> |
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| − | Access to financing is a key factor in enabling target groups to purchase modern cooking energy in development countries. | + | Access to financing is a key factor in enabling target groups to purchase modern cooking energy in development countries. |
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| − | Many have come across this statement in the process of developing a programme for the promotion of improved cookstoves. Often there is a perfect stove that fits the needs of the target group perfectly, and yet they say they cannot afford it. | + | Many have come across this statement in the process of developing a programme for the promotion of improved cookstoves. Often there is a perfect stove that fits the needs of the target group perfectly, and yet they say they cannot afford it.<br>If you meet this statement, you have several options: |
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| − | <br>If you meet this statement, you have several options: | + | |
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| | *a) Analyse the statement: Perhaps ''‘I cannot afford to buy your stove’ ''is just the socially accepted way of saying ''‘I do not like your stove’ ''(maybe because it is not perceived as a good stove or maybe the access to firewood is not a ‘burning issue’ to the person in the household who is controlling the cash). | | *a) Analyse the statement: Perhaps ''‘I cannot afford to buy your stove’ ''is just the socially accepted way of saying ''‘I do not like your stove’ ''(maybe because it is not perceived as a good stove or maybe the access to firewood is not a ‘burning issue’ to the person in the household who is controlling the cash). |
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| | *c) Often this is the point at which the issue of financing comes on the agenda. Providing financial assistance to the producers or the users of the stoves may assist in removing barriers for access of the target groups to improved cook stoves. | | *c) Often this is the point at which the issue of financing comes on the agenda. Providing financial assistance to the producers or the users of the stoves may assist in removing barriers for access of the target groups to improved cook stoves. |
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| − | There is a comprehensive debate on '''subsidies''' for stove producers, as well as stove users, usually focussing on aspects such as their impact on sustainability, or the feasibility of direct targeting. | + | There is a comprehensive debate on subsidies for stove producers, as well as stove users, usually focussing on aspects such as their impact on sustainability, or the feasibility of direct targeting. |
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| | Any development programme is designed to spend money for the promotion of a change process. By definition, this money is a subsidy to the development initiative, as the beneficiaries do not pay for the services rendered to them by the programme. The subject of lively debate is therefore not the subsidy of development processes as such, but the ‘IF’ and the ‘HOW’ of direct or indirect subsidies to the producers or users of Improved Cook Stoves. | | Any development programme is designed to spend money for the promotion of a change process. By definition, this money is a subsidy to the development initiative, as the beneficiaries do not pay for the services rendered to them by the programme. The subject of lively debate is therefore not the subsidy of development processes as such, but the ‘IF’ and the ‘HOW’ of direct or indirect subsidies to the producers or users of Improved Cook Stoves. |
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| − | | + | <br> |
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| | This chapter oulines two different finanincing mechanisms for cookstove dissemination: subsidies and micro-credits. Firstly, the topic of '''subsidies '''is outlined in a systematic manner, with a listing of commonly perceived opportunities and challenges in the use of direct subsidies for consumer goods and other end products. | | This chapter oulines two different finanincing mechanisms for cookstove dissemination: subsidies and micro-credits. Firstly, the topic of '''subsidies '''is outlined in a systematic manner, with a listing of commonly perceived opportunities and challenges in the use of direct subsidies for consumer goods and other end products. |
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| − | If, as outlined above, a development programme is a sort of indirect subsidy to a specific change process, it is not following the same rationale as a commercial banking decision. A loan from a development agency is commonly perceived as a grant rather than something to be repaid. The financing of a cookstove programme will benefit from collaboration with a micro-finance institution, because this will visibly and organisationally distinguish between '''aid''' and '''business'''. | + | If, as outlined above, a development programme is a sort of indirect subsidy to a specific change process, it is not following the same rationale as a commercial banking decision. A loan from a development agency is commonly perceived as a grant rather than something to be repaid. The financing of a cookstove programme will benefit from collaboration with a micro-finance institution, because this will visibly and organisationally distinguish between aid and business. |
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| | Financial assistance for stove producers and commercial stove users (such as restaurants) adopts a similar manner to that used by micro-finance institutions. The beneficiary of the loan is earning money with stoves (production or use) and can use the profits to repay the loan. | | Financial assistance for stove producers and commercial stove users (such as restaurants) adopts a similar manner to that used by micro-finance institutions. The beneficiary of the loan is earning money with stoves (production or use) and can use the profits to repay the loan. |
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| | Much more controversial is the use of loans for households, so that they can buy improved cookstoves. It is only in a fully commercialised fuel market that the fuel savings can be used to repay the loan. It is difficult to prove that ‘time saved’ through reduced wood collection, less washing and cleaning, and faster cooking, translates directly into more cash income. This makes it more difficult to prove the case with micro-finance institutions for supplying finance for improved cookstoves for household use. | | Much more controversial is the use of loans for households, so that they can buy improved cookstoves. It is only in a fully commercialised fuel market that the fuel savings can be used to repay the loan. It is difficult to prove that ‘time saved’ through reduced wood collection, less washing and cleaning, and faster cooking, translates directly into more cash income. This makes it more difficult to prove the case with micro-finance institutions for supplying finance for improved cookstoves for household use. |
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| − | Secondly, many aspects of using '''micro- finance '''especially '''micro-credit '''for improved cookstove promotion (in collaboration with micro-finance institutions) are discussed in more detail. | + | Secondly, many aspects of using '''micro-finance '''especially '''micro-credit '''for improved cookstove promotion (in collaboration with micro-finance institutions) are discussed in more detail. |
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| − | = Subsidies = | + | = Purchasing ICS through Subsidies = |
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| − | As with many other products, the array of subsidies for stove dissemination is extensive, and their use is hotly debated among those working on cooking energy. A good example of this is the recent debate reported on the HEDON Household Energy Network. [http://www.hedon.info/CleanAirSIG:Subsidies http://www.hedon.info/CleanAirSIG:Subsidies] | + | As with many other products, the array of subsidies for stove dissemination is extensive, and their use is hotly debated among those working on cooking energy. A good example of this is the debate reported on the HEDON Household Energy Network. [http://www.hedon.info/CleanAirSIG:Subsidies http://www.hedon.info/CleanAirSIG:Subsidies] |
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| − | There is general agreement that a purely market-driven approach to dissemination of improved stoves in rural areas without established markets would be a challenge. The high risk, and consequently high financing costs, of introducing products into remote markets would lead to prohibitive stove prices. Since existing fuel markets in these locations consist mainly of woodfuel (collected at no monetary cost), and kerosene or LPG (which typically is subsidised already), there is little economic motivation for households to buy an improved stove. So the debate is not about whether to use, or not use, them at all, but rather ''how ''they should be used. | + | There is general agreement that a purely market-driven approach to dissemination of improved stoves in rural areas without established markets would be a challenge. The high risk, and consequently high financing costs, of introducing products into remote markets would lead to prohibitive stove prices. Since existing fuel markets in these locations consist mainly of woodfuel (collected at no monetary cost), and kerosene or LPG (which typically is subsidised already), there is little economic motivation for households to buy an improved stove. So the debate is not about whether to use, or not use, subsidies at all, but rather ''how ''they should be used. |
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| | There are two approaches to subsidies for stove dissemination: | | There are two approaches to subsidies for stove dissemination: |
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| − | *The use of direct subsidies to bring down the selling price of stoves (partially or totally) | + | *The use of direct subsidies to bring down the selling price of stoves (partially or totally). |
| − | *The use of indirect subsidies to help establish a market through activities such as subsidised training, product promotion, awareness creation | + | *The use of indirect subsidies to help establish a market through activities such as subsidised training, product promotion, awareness creation. |
| − | | + | |
| − | The essential question for both these approaches is how to make subsidies that are both fiscally sustainable, and that lead to a rapid increase in market uptake (with subsequent improvements in costs, performance, and supply chain reliability).
| + | |
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| − | ''' '''
| + | The essential question for both these approaches is how to make subsidies that are both fiscally sustainable, and that lead to a rapid increase in market uptake (with subsequent improvements in costs, performance, and supply chain reliability). |
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| | == What distinguishes direct from indirect subsidies? == | | == What distinguishes direct from indirect subsidies? == |
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| − | === Direct Subsidies<br> === | + | === Direct Subsidies<br> === |
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| | Direct subsidies typically involve a direct cash transfer to the stove producer or consumer. Various types of direct subsidies are described as follows: | | Direct subsidies typically involve a direct cash transfer to the stove producer or consumer. Various types of direct subsidies are described as follows: |
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| − | *'''''Buy down grant''''' to reduce the product price directly. There are different approaches to channel a buy down grant, such as paying the producer for every system sold or installed, or providing the money (or an equivalent voucher) directly to the customer. The extreme form of a buy down grant would be a 100% subsidy of the consumer price (an approach of used by the health sector). | + | *'''Buy down grant''' to reduce the product price directly. There are different approaches to channel a buy down grant, such as paying the producer for every system sold or installed, or providing the money (or an equivalent voucher) directly to the customer. The extreme form of a buy down grant would be a 100% subsidy of the consumer price (an approach often used by the health sector). |
| − | *'''''Start up grant''''' and/or '''''soft loan''''' to support the setting up of production and marketing infrastructure for a stove producer. To start up new (or to extend existing) businesses to rural areas often includes a high primary investment in infrastructure, staff and marketing, with high risks and transaction costs. Start up grants or long-term loans with low interest rates spread out the initial financial burden for stove producers. | + | *'''Start up grant''' and/or '''soft loan''' to support the setting up of production and marketing infrastructure for a stove producer. To start up new (or to extend existing) businesses to rural areas often includes a high primary investment in infrastructure, staff and marketing, with high risks and transaction costs. Start up grants or long-term loans with low interest rates spread out the initial financial burden for stove producers. |
| − | *'''''Custom reduction''''' for imported stoves (and components), and '''tax reductions''' for stove producers or fuels. A few improved stoves require imported high technology components, though this is less common than for other renewable energy technologies (e.g. solar home systems). Their added value will mostly take place in their country of origin, so there is little scope for custom exemption. During the start up period, there is a case for a reduction in income tax and value-added tax for stove producers. Tax reductions on many fossil fuels, such as LPG or kerosene, have a much greater influence. | + | *'''Custom reduction''' for imported stoves (and components), and '''tax reductions''' for stove producers or fuels. A few improved stoves require imported high technology components, though this is less common than for other renewable energy technologies (e.g. solar home systems). Their added value will mostly take place in their country of origin, so there is little scope for custom exemption. During the start up period, there is a case for a reduction in income tax and value-added tax for stove producers. Tax reductions on many fossil fuels, such as LPG or kerosene, have a much greater influence and a negative impacht on cookstove dissemination. |
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| − | === Indirect Subsidies<br> === | + | === Indirect Subsidies<br> === |
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| − | '''Indirect subsidies''' refer to subsidies that reduce the price to the consumer, but not through a direct cash transfer. The most frequent types of indirect subsidies for improved stoves are:
| + | Indirect subsidies refer to subsidies that reduce the price to the consumer, but not through a direct cash transfer. The most frequent types of indirect subsidies for improved stoves are: |
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| − | *'''''Public awareness''''' and '''''product promotion campaigns''''' increase public understanding, and thus increase the demand for improved stoves (see following chapters 2.4 and 2.6). This awareness could be about indoor air pollution alleviation and the subsequent reduction in respiratory diseases, or the cost reduction potential of efficient cooking technologies. If the cost of such promotions is not borne by the stove promoter, this is an indirect subsidy. | + | *'''Public awareness and product promotion campaigns '''increase public understanding, and thus increase the demand for improved stoves (see following chapters on [http://energypedia.info/index.php/Creation_of_Public_Awareness public awareness]). This awareness could be about indoor air pollution alleviation and the subsequent reduction in respiratory diseases, or the cost reduction potential of efficient cooking technologies. If the cost of such promotions is not borne by the stove promoter, this is an indirect subsidy. |
| − | *Introduction of '''''standards and certification systems''''' that increase the product image and give the customer a certain guarantee about quality. During set-up and introduction of such a system, external support is important. In the longer term, an established market can finance certification and quality systems without external support. | + | *Introduction of '''standards and certification systems''' that increase the product image and give the customer a certain guarantee about quality. During set-up and introduction of such a system, external support is important. In the longer term, an established market can finance certification and quality systems without external support. |
| − | *Support from '''''microfinance''''' institutions (MFI) can bridge the gap between the stove price and what people can afford by providing micro-credit to stove customers. In some cases, MFIs might not cover the total target area, or might not have sufficient resources for large numbers of new customers, they could be supported with start up grants to extend their infrastructure, or by refinancing with soft loans, to extend their portfolio. A more detailed discussion of the use of micro credits can be found in the section below. | + | *Support from '''microfinance''' institutions (MFI) can bridge the gap between the stove price and what people can afford by providing micro-credit to stove customers. In some cases, MFIs might not cover the total target area, or might not have sufficient resources for large numbers of new customers, they could be supported with start up grants to extend their infrastructure, or by refinancing with soft loans, to extend their portfolio. A more detailed discussion of the use of micro credits can be found in the section below. |
| − | *'''''Training and capacity building''''' is one of the most frequently used types of indirect subsidy. It can include business, technical and administrative training – in most cases given free of charge, and providing support to stove producers, financing institutions, NGOs, local government and certifiers. | + | *'''Training and capacity building''' is one of the most frequently used types of indirect subsidy. It can include business, technical and administrative training – in most cases given free of charge, and providing support to stove producers, financing institutions, NGOs, local government and certifiers. |
| − | *When support to '''''research and development''''' for improved stove technologies uses public finance, this indirect subsidy is not recouped in the final product price. | + | *When support to '''research and development''' for improved stove technologies uses public finance, this indirect subsidy is not recouped in the final product price. |
| − | | + | |
| − | ''' ''' | + | |
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| | == What type of subsidy should I use? == | | == What type of subsidy should I use? == |
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| − | While there exists a certain agreement on the positive effects of indirect subsidies for establishing a market, the use of direct subsidies is more controversial.These key questions need to be addressed by those wanting to use subsidies: ‘Should I avoid direct subsidies or use them to reduce the consumer price of fuels or technologies?; ‘Should they be: partial or full subsidies? And should they be temporary or permanent subsidies? | + | While there exists a certain agreement on the positive effects of indirect subsidies for establishing a market, the use of direct subsidies is more controversial. These key questions need to be addressed by those wanting to use subsidies: ‘Should I avoid direct subsidies or use them to reduce the consumer price of fuels or technologies?; ‘Should they be: partial or full subsidies? And should they be temporary or permanent subsidies? |
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| | === Direct subsidies are promoted for the following reasons: === | | === Direct subsidies are promoted for the following reasons: === |
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| | ==== Market failure ==== | | ==== Market failure ==== |
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| − | Economic theory demonstrates that several requirements have to be fulfilled for markets to function effectively (Perman 2003:124)<span>1. In practice, these conditions may not exist where stoves are being disseminated. </span>Using this argument, subsidies are justified where there is: | + | Economic theory demonstrates that several requirements have to be fulfilled for markets to function effectively (Perman 2003:124)<span>. In practice, these conditions may not exist where stoves are being disseminated. </span>Using this argument, subsidies are justified where there is: |
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| − | *''Asymmetric information:'' | + | *Asymmetric information: |
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| | Lack of demand, as indoor air pollution and its consequences are endemic and thus people are not aware of risks | | Lack of demand, as indoor air pollution and its consequences are endemic and thus people are not aware of risks |
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| − | *''Insufficient market power:'' | + | *Insufficient market power: |
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| | Market failure both on demand and supply side, as the existing effective demand might be insufficient to overcome the opportunity costs for a market driven supply chain. | | Market failure both on demand and supply side, as the existing effective demand might be insufficient to overcome the opportunity costs for a market driven supply chain. |
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| − | *''External effect on the public good:'' | + | *External effect on the public good: |
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| | Indoor air pollution makes respiratory diseases more likely and advancing deforestation and desertification reduce the available firewood resources. Because these external effects increase health and environmental expenditures, the state takes responsibility and interest to protect the public goods of health and environment. | | Indoor air pollution makes respiratory diseases more likely and advancing deforestation and desertification reduce the available firewood resources. Because these external effects increase health and environmental expenditures, the state takes responsibility and interest to protect the public goods of health and environment. |
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| | ==== Poverty targeting ==== | | ==== Poverty targeting ==== |
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| − | Direct subsidies can significantly increase the use of a cooking technology or fuel, particularly by the poorest strata of the rural population. For example, in Brazil, subsidised LPG reaches 98% of households, including 93% of rural households, at a cost of slightly less than US$60 per year per low-income household. It has been stated that there is a benefit to many of those living in poverty, even if direct subsidies are abused, and that these benefits at least match the costs lost by abuse.<span style="font-size: 11pt"> </span><br> | + | Direct subsidies can significantly increase the use of a cooking technology or fuel, particularly by the poorest strata of the rural population. For example, in Brazil, subsidised LPG reaches 98% of households, including 93% of rural households, at a cost of slightly less than US$60 per year per low-income household. It has been stated that there is a benefit to many of those living in poverty, even if direct subsidies are abused, and that these benefits at least match the costs lost by abuse.<span style="font-size: 11pt;"> </span><br> |
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| − | '''''Transparency:''''' Direct subsidies are more transparent that indirect subsidies
| + | ==== '''Transparency'''<br> ==== |
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| − | <br> | + | Direct subsidies are more transparent that indirect subsidies.<br> |
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| − | ==== Direct subsidies are criticized for the following reasons<span> </span> ==== | + | ==== Critique of direct subsidies<br> ==== |
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| − | '''''Inhibiting market development:'''''
| + | Direct subsidies are criticized for the following reasons<span>: </span> |
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| − | When direct direct subsidies (particularly 100% subsidies) are applied, beneficiaries expect that the product will continue to be given away in future. This undermines a sense of ownership by the customer, and devalues the economic value of the item on both supply and demand sides. This undermines commercial activities and inhibits a sustainable market. | + | *'''Inhibiting market development:'''<br>When direct subsidies (particularly 100% subsidies) are applied, beneficiaries expect that the product will continue to be given away in future. This undermines a sense of ownership by the customer, and devalues the economic value of the item on both supply and demand sides. This undermines commercial activities and inhibits a sustainable market.<br>Cooking technologies and fuels are not basic health-related goods in the same way as drugs or mosquito nets. The adoption of an improved stove depends on its quality, and on its image as a modern, useful and efficient improvement, rather than the user’s capacity to pay for it. A free widely-distributed product could well be perceived as inappropriate and be sold on for profit, or not used at all. |
| − | | + | *'''Targeting and abuse of subsidies:'''<br>In some cases, direct subsidies are abused, for example, when stoves are bought for a subsidised price, but instead of using them, they are sold in other regions for a higher price. |
| − | *Cooking technologies and fuels are not basic health-related goods in the same way as drugs or mosquito nets. The adoption of an improved stove depends on its quality, and on its image as a modern, useful and efficient improvement, rather than the user’s capacity to pay for it. A free widely-distributed product could well be perceived as inappropriate and be sold on for profit, or not used at all.
| + | *'''Non-transparent costs:'''<br>The additional transaction costs of direct subsidies are substantial and often underestimated. The costs are difficult to foresee and to assess, e.g. for: development of policy and target of the subsidy, voucher systems development, identifying beneficiaries and deciding if they qualify for subsidy (when their status may be changing by the day), and monitoring the effects of subsidy. The costs may not justify the expected benefit. |
| − | | + | *'''Political abuse:'''<br>The distribution of partially or fully subsidised items to low income households is often used by political parties to rally for the election of their party. Targeting sometimes becomes distorted by political influences, as observed in Malawi with food aid, and boreholes.<br>There is no clear answer as to whether subsidies, and in particular direct subsidies, should be used or avoided. The question must be answered individually for every case, assessing the specific circumstances and framework conditions.<br> |
| − | '''''Targeting and abuse of subsidies:'''''
| + | |
| − | | + | |
| − | In some cases, direct subsidies are abused, for example, when stoves are bought for a subsidised price, but instead of using them, they are sold in other regions for a higher price. | + | |
| − | | + | |
| − | '''''Non-transparent costs:'''''
| + | |
| − | | + | |
| − | The additional transaction costs of direct subsidies are substantial and often underestimated. The costs are difficult to foresee and to assess, e.g. for: development of policy and target of the subsidy, voucher systems development, identifying beneficiaries and deciding if they qualify for subsidy (when their status may be changing by the day), and monitoring the effects of subsidy. The costs may not justify the expected benefit. | + | |
| − | | + | |
| − | '''''Political abuse:'''''
| + | |
| − | | + | |
| − | The distribution of partially or fully subsidised items to low income households is often used by political parties to rally for the election of their party. Targeting sometimes becomes distorted by political influences, as observed in Malawi with food aid, and boreholes. | + | |
| − | | + | |
| − | There is no clear answer as to whether subsidies, and in particular direct subsidies, should be used or avoided. The question must be answered individually for every case, assessing the specific circumstances and framework conditions. | + | |
| − | | + | |
| − |
| + | |
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| | ==== Smart subsidies ==== | | ==== Smart subsidies ==== |
| − | | + | <div class="draft"><span lang="EN-GB" style="font-size: 10pt; font-family: 'arial','sans-serif';">The term '''smart subsidy''' was introduced to describe an appropriate subsidy, which dealt with the problems that have been described. Currently (2008), the term is not precisely defined.</span> <span style="color: rgb(255, 0, 0);">Aktuell?</span><br> </div> |
| − | <span lang="EN-GB" style="font-size: 10pt; font-family: 'arial','sans-serif'">The term '''''smart subsidy''''' was introduced to describe an appropriate subsidy, which dealt with the problems that have been described. Currently (2008), the term is not precisely defined.</span> | + | |
| − | | + | |
| − | <br> | + | |
| − | | + | |
| | ==== How to design smart subsidies ==== | | ==== How to design smart subsidies ==== |
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| − | The central questions when designing a smart subsidy deal with the ‘how’, ‘how much’, ‘to whom’, ‘under what rules’, ‘at what cost’, and ‘what is the exit strategy’? Answering these questions leads to different strategies for particular circumstances. However, some important recommendations have been highlighted for smart subsidies: | + | The central questions when designing a smart subsidy deal with the 'why', 'when', ‘how’, ‘how much’, ‘to whom’, ‘under what rules’, ‘at what cost’, and ‘what is the exit strategy’? Answering these questions leads to different strategies for particular circumstances. However, some important recommendations have been highlighted for smart subsidies: |
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| − | *Support only those rural energy products and services that would not be viable without the subsidy, but for which there is verified sufficient demand | + | *Support only those rural energy products and services that would not be viable without the subsidy, but for which there is verified sufficient demand. |
| − | *Follow rules that are clear, transparent and predictable to all parties and do not create or reinforce a monopoly or other market distortion | + | *Follow rules that are clear, transparent and predictable to all parties and do not create or reinforce a monopoly or other market distortion. |
| − | *Focus on a clearly defined target group | + | *Focus on a clearly defined target group. |
| | *Link subsidies to optimal results. Support least-cost options that are neutral in terms of technology choice, but which are high quality and energy efficient, and encourage commercial participation | | *Link subsidies to optimal results. Support least-cost options that are neutral in terms of technology choice, but which are high quality and energy efficient, and encourage commercial participation |
| − | *Focus on increasing access by subsiding the initial purchase price rather than the operating costs or fuel consumption | + | *Focus on increasing access by subsidizing the initial purchase price rather than the operating costs or fuel consumption |
| − | *Rely on existing and sustainable financial resources (budget, cross subsidies, foreign help, carbon finance) and have a clear exit strategy | + | *Rely on existing and sustainable financial resources (budget, cross subsidies, foreign help, carbon finance) and have a clear exit strategy. |
| − | *Cover all aspects of the project including end-use investments, to encourage pro-poor income-generating end uses | + | *Cover all aspects of the project including end-use investments, to encourage pro-poor income-generating end uses. |
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| − | ''' '''
| + | ==== Further resources for smart subsidies ==== |
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| − | ==== Further resources for smart subsidies: ====
| + | *Barnet, A.: Voluntary Codes of ‘Best Practice’ for Donors and NGOs for Renewable Energy & Developing Countries, 2004.<span> [http://www.hedon.info/CodeOfBestPracticeForRenewables http://www.hedon.info/CodeOfBestPracticeForRenewables]</span> |
| − | | + | *ESMAP: Best Practice Manual: Promoting Decentralized Electrification Investment, October 2001 |
| − | Barnet, A. Voluntary Codes of ‘Best Practice’ for Donors and NGOs for Renewable Energy & Developing Countries<span> [http://www.hedon.info/CodeOfBestPracticeForRenewables http://www.hedon.info/CodeOfBestPracticeForRenewables]</span> | + | *Lindlein P., Mostert W.: Financing Instruments for Renewable Energy, Part of World Bank’s ‘Road Map for Scaling up Access to Modern Energy Services and Clean Energy’, World Bank, Washington DC, 2005, Chapter 4.4.5 on smart subsidies’ (page 75). |
| − | | + | *Smart subsidies: [http://www.lirneasia.net/wp-content/uploads/2006/02/de%20Silva%20Tuladhar%202006%20Nepal%20final.pdf Getting the conditions right - The experience of expanding rural telecoms in Nepal] (Jan 2006).<br> |
| − | ESMAP: Best Practice Manual: Promoting Decentralized Electrification Investment, October 2001 | + | *Morduch, Jonathan: [http://www.ruralfinance.org/fileadmin/templates/rflc/documents/1133368408225_Smart_subsidy_for_sustainable_microfinance.pdf Smart Subsidy for sustainable microfinance], Associate Professor of Public Policy and Economics, Wagner Graduate School, New York University, 2005.<br> |
| − | | + | *[http://www.ictregulationtoolkit.org/en/Section.3296.html ICT Regulation Toolkit''',''' section 7]<br> |
| − | Lindlein P., Mostert W.: Financing Instruments for Renewable Energy, Part of World Bank’s ‘Road Map for Scaling up Access to Modern Energy Services and Clean Energy’, World Bank, Washington DC, 2005, Chapter 4.4.5 on smart subsidies’ (page 75) | + | |
| − | | + | |
| − | ''Smart subsidies: [http://www.lirneasia.net/wp-content/uploads/2006/02/de%20Silva%20Tuladhar%202006%20Nepal%20final.pdf Getting the conditions right - The experience of expanding rural telecoms in Nepal]'' (Jan 2006)<br>
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| − | [http://www.ruralfinance.org/servlet/BinaryDownloaderServlet/29361_Document.pdf?filename=1133368408225_Smart_subsidy_for_sustainable_microfinance.pdf&refID=29361 Smart Subsidy for sustainable microfinance] BY JONATHAN MORDUCH, Associate Professor of Public Policy and Economics, Wagner Graduate School, New York University | + | |
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| − | [http://www.ictregulationtoolkit.org/en/Section.3296.html ICT Regulation Toolkit''',''' section 7] | + | |
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| − | == GTZ experiences == | + | == GIZ experiences == |
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| | | Experiences with different subsidy schemes and country examples from Bolivia, Burkina Faso, Ethiopia and Mali are analysed in this study: Mirco Gaul (2009): [http://www.energypedia.info/index.php/File:Stove_subsidies-gtz-2009.pdf Subsidy schemes for the dissemination of improved stoves - Experiences of GTZ HERA and Energising Development] | | | Experiences with different subsidy schemes and country examples from Bolivia, Burkina Faso, Ethiopia and Mali are analysed in this study: Mirco Gaul (2009): [http://www.energypedia.info/index.php/File:Stove_subsidies-gtz-2009.pdf Subsidy schemes for the dissemination of improved stoves - Experiences of GTZ HERA and Energising Development] |
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| − | This report discusses the rationale and performance of energy subsidies, proposes a new tool for subsidy evaluation and design, applies this tool to the analysis of prominent subsidy schemes, and draws conclusions for GTZ: | + | This report discusses the rationale and performance of energy subsidies, proposes a new tool for subsidy evaluation and design, applies this tool to the analysis of prominent subsidy schemes, and draws conclusions for GIZ: |
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| − | | Kilian Reiche/ Witold Teplitz (2009): [http://www.gtz.de/de/dokumente/gtz2009-en-energy-subsidies-a-think-piece.pdf Energy Subsidies: Why, When and How? A Think Piece] | + | | |
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| + | Kilian Reiche/ Witold Teplitz (2009): [http://www.gtz.de/de/dokumente/gtz2009-en-energy-subsidies-a-think-piece.pdf Energy Subsidies: Why, When and How? A Think Piece] |
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| | == Other resources for general subsidy issues == | | == Other resources for general subsidy issues == |
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| − | Perman, R., & Perman, R. (2003). Natural resource and environmental economics. Harlow, England: Pearson Addison Wesley. | + | *Perman, R., & Perman, R. (2003). Natural resource and environmental economics. Harlow, England: Pearson Addison Wesley. |
| | + | *UNEP (2008). Reforming Energy Subsidies - Opportunities to Contribute to the Climate Change Agenda, United Nations Environment Programme, Division of Technology, Industry and Economics. [http://www.unep.org/pdf/PressReleases/Reforming_Energy_Subsidies.pdf <br>][http://www.unep.org/pdf/PressReleases/Reforming_Energy_Subsidies.pdf www.unep.org/pdf/PressReleases/Reforming_Energy_Subsidies.pdf]<br> |
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| − | UNEP (2008). Reforming Energy Subsidies - Opportunities to Contribute to the Climate Change Agenda, United Nations Environment Programme, Division of Technology, Industry and Economics. [http://www.unep.org/pdf/PressReleases/Reforming_Energy_Subsidies.pdf <br>www.unep.org/pdf/PressReleases/Reforming_Energy_Subsidies.pdf]
| + | = <span lang="EN-GB" style="font-size: 14pt; font-family: arial;" /><span lang="EN-GB" style="font-size: 14pt; font-family: arial;" />Purchasing ICS throug mircrofinance = |
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| + | == <span lang="EN-GB" style="font-family: arial;">Introduction to microfinance</span> == |
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| − | = <span lang="EN-GB" style="font-size: 14pt; font-family: arial">Purchasing</span><span lang="EN-GB" style="font-size: 14pt; font-family: arial"> improved stoves through microfinance</span> = | + | |
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| − | == <span lang="EN-GB" style="font-family: arial">Introduction to microfinance</span> ==
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| | This section defines the key expressions used in microfinance, and the main concepts needed to understand how it works. Later, it describes the principal mechanisms for accessing micro-credit for improved energy access, and how to develop a project with a microfinance institution. The article ends by discussing the potential of microfinancing, and the limits to its use in disseminating improved cooking technologies. | | This section defines the key expressions used in microfinance, and the main concepts needed to understand how it works. Later, it describes the principal mechanisms for accessing micro-credit for improved energy access, and how to develop a project with a microfinance institution. The article ends by discussing the potential of microfinancing, and the limits to its use in disseminating improved cooking technologies. |
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| − | | style="border-right: windowtext 1pt solid; padding-right: 5.4pt; border-top: windowtext 1pt solid; padding-left: 5.4pt; background: rgb(224,224,224); padding-bottom: 0pt; border-left: windowtext 1pt solid; width: 464.4pt; padding-top: 0pt; border-bottom: windowtext 1pt solid; -moz-background-size: auto auto; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial" valign="top" width="619" | | + | | width="619" valign="top" style="border: 1pt solid windowtext; padding: 0pt 5.4pt; background-color: rgb(224, 224, 224); background-image: none; background-repeat: repeat; background-attachment: scroll; background-position: 0% 0%; width: 464.4pt; -moz-background-size: auto auto; -moz-background-clip: -moz-initial; -moz-background-origin: -moz-initial; -moz-background-inline-policy: -moz-initial;" | |
| − | '''<span lang="EN-GB" style="font-size: 10pt; font-family: arial">Microfinance definitions</span>''' | + | '''<span lang="EN-GB" style="font-size: 10pt; font-family: arial;">Microfinance definitions</span>''' |
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| − | '''<span lang="EN-GB" style="font-size: 10pt; font-family: arial">[http://en.wikipedia.org/wiki/Microfinance Microfinance]</span>'''<span lang="EN-GB" style="font-size: 10pt; font-family: arial"> </span> | + | '''<span lang="EN-GB" style="font-size: 10pt; font-family: arial;">[http://en.wikipedia.org/wiki/Microfinance Microfinance]</span>'''<span lang="EN-GB" style="font-size: 10pt; font-family: arial;"> </span> |
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| − | <span lang="EN-GB" style="font-size: 10pt; font-family: arial">This term describes the provision of sustainable high quality financial services to poor or low-income clients for productive purposes or for buying goods or services. It includes micro-credid, savings, insurance and fund transfers</span> | + | <span lang="EN-GB" style="font-size: 10pt; font-family: arial;">This term describes the provision of sustainable high quality financial services to poor or low-income clients for productive purposes or for buying goods or services. It includes micro-credid, savings, insurance and fund transfers</span> |
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| − | '''<span lang="EN-GB" style="font-size: 10pt; font-family: arial">Microfinance Institution (MFI) </span>''' | + | '''<span lang="EN-GB" style="font-size: 10pt; font-family: arial;">Microfinance Institution (MFI) </span>''' |
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| − | <span lang="EN-GB" style="font-size: 10pt; font-family: arial">This can be an NGO or a regulated bank that offers microfinance services like micro-credit, insurance or savings. The main roles of the MFI are to:<span> </span>assess whether the clients are credit worthy, disburse the loans, collect the installments, and follow up those who default on their repayments. A number of methodologies have been developed in the microfinance industry to support the MFIs so that they become economical sustainable entities.</span> | + | <span lang="EN-GB" style="font-size: 10pt; font-family: arial;">This can be an NGO or a regulated bank that offers microfinance services like micro-credit, insurance or savings. The main roles of the MFI are to:<span> </span>assess whether the clients are credit worthy, disburse the loans, collect the installments, and follow up those who default on their repayments. A number of methodologies have been developed in the microfinance industry to support the MFIs so that they become economical sustainable entities.</span> |
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| − | '''<span lang="EN-GB" style="font-size: 10pt; font-family: arial">[http://en.wikipedia.org/wiki/Microcredit Micro-credit]</span>'''<span lang="EN-GB" style="font-size: 10pt; font-family: arial"> </span> | + | '''<span lang="EN-GB" style="font-size: 10pt; font-family: arial;">[http://en.wikipedia.org/wiki/Microcredit Micro-credit]</span>'''<span lang="EN-GB" style="font-size: 10pt; font-family: arial;"> </span> |
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| − | <span lang="EN-GB" style="font-size: 10pt; font-family: arial">This is a microfinance instrument that facilitates very small loans to poor or low-income clients whom the banks do not consider viable as customers. In general these individuals lack collateral and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. For this reason, micro-credit is often disbursed via a group guarantee, as a '''group loan, '''where group members guarantee for each other. More wealthy clients that can offer a small collateral can also qualify for an '''individual loan'''.</span> | + | <span lang="EN-GB" style="font-size: 10pt; font-family: arial;">This is a microfinance instrument that facilitates very small loans to poor or low-income clients whom the banks do not consider viable as customers. In general these individuals lack collateral and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. For this reason, micro-credit is often disbursed via a group guarantee, as a '''group loan, '''where group members guarantee for each other. More wealthy clients that can offer a small collateral can also qualify for an '''individual loan'''.</span> |
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| − | <span lang="EN-GB" style="font-size: 10pt; font-family: arial">The majority of '''MFI clients''' are women. In most cultural contexts, men do not accept the group lending principle, so they have to qualify for an individual loan. Experience has shown that they are less reliable in repaying the debt.</span><span lang="EN-GB" style="font-size: 11pt; font-family: arial"> </span> | + | <span lang="EN-GB" style="font-size: 10pt; font-family: arial;">The majority of '''MFI clients''' are women. In most cultural contexts, men do not accept the group lending principle, so they have to qualify for an individual loan. Experience has shown that they are less reliable in repaying the debt.</span><span lang="EN-GB" style="font-size: 11pt; font-family: arial;"> </span> |
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| | <br>The year 2005 was declared the United Nations Year of Microfinance. In 2006, Muhammed Yunus and the [http://www.grameen-info.org/ <font color="#002bb8">Grameen Bank</font>] got the Nobel Price of Peace in 2006. Since that time, microfinance has become a well known, successful tool to reach those living in poverty in regions with weak infrastructure and low incomes. | | <br>The year 2005 was declared the United Nations Year of Microfinance. In 2006, Muhammed Yunus and the [http://www.grameen-info.org/ <font color="#002bb8">Grameen Bank</font>] got the Nobel Price of Peace in 2006. Since that time, microfinance has become a well known, successful tool to reach those living in poverty in regions with weak infrastructure and low incomes. |
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| | *Failures have to be followed up and, in this case, guarantees have to be recovered | | *Failures have to be followed up and, in this case, guarantees have to be recovered |
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| | | Note: ‘Microcredit’ needs an institution in the background. It is not a tool by itself. | | | Note: ‘Microcredit’ needs an institution in the background. It is not a tool by itself. |
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| − | <span lang="EN-GB" style="font-family: arial">[[Image:Grammen Meeting.jpg|left|Grammen Meeting.jpg]]</span> | + | <span lang="EN-GB" style="font-family: arial;">[[Image:Grammen Meeting.jpg|left|Grammen Meeting.jpg]]</span> |
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| | Currently (2008), only a very few projects that combine energy and microcredit have been implemented successfully. The main reason is the lack of communication between the different stakeholders in the finance and energy sectors. The following sections seek to create a mutual understanding between both these sectors. They are specifically targeted at practitioners who are implementing ICS programs. These sections will support them to understand more clearly the perspective of those working in microfinance. | | Currently (2008), only a very few projects that combine energy and microcredit have been implemented successfully. The main reason is the lack of communication between the different stakeholders in the finance and energy sectors. The following sections seek to create a mutual understanding between both these sectors. They are specifically targeted at practitioners who are implementing ICS programs. These sections will support them to understand more clearly the perspective of those working in microfinance. |
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| | <br>'''Figure 1: Grameen Bank Meeting in Bangladesh''' | | <br>'''Figure 1: Grameen Bank Meeting in Bangladesh''' |
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| | All these issues represent business costs, and are part of the service charge that the customer has to pay ''in addition'' to the price of the energy system itself. It needs a large number of clients to keep the running costs down and to reach break even, so most microfinance energy projects start with a high value technology to ensure that the turnover has a high value, and business costs do not exceed 30% of the total price charged for the item. The problem of financing a lower price technology in the initial phase, such as an affordable improved stove, is that the business costs do not depend on the system cost. The implementation of financing a ten Euro10 stove is not much cheaper than a 500 Euro solar system, since the dissemination infrastructure and networks that need to be developed, are the same. | | All these issues represent business costs, and are part of the service charge that the customer has to pay ''in addition'' to the price of the energy system itself. It needs a large number of clients to keep the running costs down and to reach break even, so most microfinance energy projects start with a high value technology to ensure that the turnover has a high value, and business costs do not exceed 30% of the total price charged for the item. The problem of financing a lower price technology in the initial phase, such as an affordable improved stove, is that the business costs do not depend on the system cost. The implementation of financing a ten Euro10 stove is not much cheaper than a 500 Euro solar system, since the dissemination infrastructure and networks that need to be developed, are the same. |
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| − | '''<span lang="EN-GB" style="font-size: 11pt; font-family: arial">Recommendation</span>''' | + | '''<span lang="EN-GB" style="font-size: 11pt; font-family: arial;">Recommendation</span>''' |
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| − | <span lang="EN-GB" style="font-size: 11pt; font-family: arial">It is recommended that low-cost energy technologies, such as improved cookstoves, work through microfinance institutions that are already in existence. In this case, additional costs are only generated for organizing the supply and, in part, for any technical services that may be required (if they are part of the business plan).</span> | + | <span lang="EN-GB" style="font-size: 11pt; font-family: arial;">It is recommended that low-cost energy technologies, such as improved cookstoves, work through microfinance institutions that are already in existence. In this case, additional costs are only generated for organizing the supply and, in part, for any technical services that may be required (if they are part of the business plan).</span> |
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| | [[Image:Ghana cookin restaurant.jpg]] | | [[Image:Ghana cookin restaurant.jpg]] |
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| − | '''Figure 2 MFI Client in Ghana, cooking in her restaurant''' <br> | + | '''Figure 2 MFI Client in Ghana, cooking in her restaurant''' <br> |
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| | Almost all MFIs have available data regarding the categories of businesses they finance. A first evaluation of those categories will give an insight into the relevance of cooking-fuel dependent businesses (for example: Restaurants, canteens, food processing and bakeries). | | Almost all MFIs have available data regarding the categories of businesses they finance. A first evaluation of those categories will give an insight into the relevance of cooking-fuel dependent businesses (for example: Restaurants, canteens, food processing and bakeries). |
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| | *Finally, does the MFI have experience implementing projects? - especially projects that concern a field other than finance | | *Finally, does the MFI have experience implementing projects? - especially projects that concern a field other than finance |
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| | === Field and market surveys === | | === Field and market surveys === |
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| | Experience has shown that many MFI clients in Uganda delegate cooking and collecting fuel to maids or daughters. The willingness to spend money for a stove in such cases is rather low, and the time for collecting fuelwood does not have any relevance. However, in restaurants many MFI clients cook for themselves and buy their own fuel. Thus, the economics of time/ fuel saving is highly relevant. | | Experience has shown that many MFI clients in Uganda delegate cooking and collecting fuel to maids or daughters. The willingness to spend money for a stove in such cases is rather low, and the time for collecting fuelwood does not have any relevance. However, in restaurants many MFI clients cook for themselves and buy their own fuel. Thus, the economics of time/ fuel saving is highly relevant. |
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| − | If the assessment is compiled with the usual monitoring and evaluation tools of the MFI, a lot of inter-sectoral correlations are possible. These will be very helpful for the development of the marketing and awareness-raising programme. | + | If the assessment is compiled with the usual monitoring and evaluation tools of the MFI, a lot of inter-sectoral correlations are possible. These will be very helpful for the development of the marketing and awareness-raising programme. |
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| | == Product Development == | | == Product Development == |
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| | === Potential benefits for cooperation between MFI and ICS programmes === | | === Potential benefits for cooperation between MFI and ICS programmes === |
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| − | *<span id="1227108714485S" style="display: none"> </span>Market aspects<br>- Overcoming the financial barrier for investments in energy efficiency<br>- Bringing together demand, and offering access to new markets | + | *<span style="display: none;" id="1227108714485S"> </span>Market aspects<br>- Overcoming the financial barrier for investments in energy efficiency<br>- Bringing together demand, and offering access to new markets |
| | *Social aspects<br>- MFIs are necessarily interested in enhancing income generation<br>- MFIs focus on empowering women by enabling female entrepreneurship | | *Social aspects<br>- MFIs are necessarily interested in enhancing income generation<br>- MFIs focus on empowering women by enabling female entrepreneurship |
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| | *Quality aspects<br>- The long-term relationship with the customer that makes it possible to offer additional services may be needed for a sustainable implementation of ICS<br>- The MFI can become a central stakeholder in consumer protection as quality is a key aspect in the relationship with their clients | | *Quality aspects<br>- The long-term relationship with the customer that makes it possible to offer additional services may be needed for a sustainable implementation of ICS<br>- The MFI can become a central stakeholder in consumer protection as quality is a key aspect in the relationship with their clients |
| − | *Monitoring and evaluation<br>- The performance of the MFIs clearly indicates the quality of their services<br>- MFIs have to monitor and evaluate their projects regularly through third parties to get access to finance.<br>- The monitoring methodologies of MFIs offer an opportunity to evaluate the impact of energy on social aspects<br>- MFIs have an expanding market, reaching actually more than 133 Million borrowers worldwide ([http://www.microcreditsummit.org/ <span>www.microcreditsummit.org</span><span>)<span id="1227108714680E" style="display: none"> </span></span>] | + | *Monitoring and evaluation<br>- The performance of the MFIs clearly indicates the quality of their services<br>- MFIs have to monitor and evaluate their projects regularly through third parties to get access to finance.<br>- The monitoring methodologies of MFIs offer an opportunity to evaluate the impact of energy on social aspects<br>- MFIs have an expanding market, reaching actually more than 133 Million borrowers worldwide ([http://www.microcreditsummit.org/ <span>www.microcreditsummit.org</span><span>)<span style="display: none;" id="1227108714680E"> </span></span>] |
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| | === The limits of MFIs for energy outreach programmes === | | === The limits of MFIs for energy outreach programmes === |
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| | All these risks need to be addressed by the energy project as early as possible to encourage the involvement of the MFI. | | All these risks need to be addressed by the energy project as early as possible to encourage the involvement of the MFI. |
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| | == Additional resources: == | | == Additional resources: == |
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| | [[Category:Cooking]] | | [[Category:Cooking]] |
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| | + | <br> |
In the world of business, ‘financing’ is a necessary link between products and services, as both the supply side and demand side need to the required capital to either invest in business infrastructure or buy goods. Financing is needed for monetary cash flows, support activities that enhance the quality and reduce the cost of products and services, increasing customer awareness, and building market share.
For the product supply, availability and the cost of financing determines whether it is feasible to start up a business, and the price demanded for the offered products and services. Strategies to address supply side financing include direct subsidies as start up grants, soft loans, and measures to reduce production costs. Production costs include material costs, and the design and efficient production process and technology.
On the demand side, the willingness and capacity to pay will strongly influence the effective demand for the product. Strategies to address demand side financing include direct subsidies as buy down grants, awareness-raising and product promotion campaigns, and micro-credits schemes.
Access to financing is a key factor in enabling target groups to purchase modern cooking energy in development countries.
Many have come across this statement in the process of developing a programme for the promotion of improved cookstoves. Often there is a perfect stove that fits the needs of the target group perfectly, and yet they say they cannot afford it.
If you meet this statement, you have several options:
There is a comprehensive debate on subsidies for stove producers, as well as stove users, usually focussing on aspects such as their impact on sustainability, or the feasibility of direct targeting.
Any development programme is designed to spend money for the promotion of a change process. By definition, this money is a subsidy to the development initiative, as the beneficiaries do not pay for the services rendered to them by the programme. The subject of lively debate is therefore not the subsidy of development processes as such, but the ‘IF’ and the ‘HOW’ of direct or indirect subsidies to the producers or users of Improved Cook Stoves.
This chapter oulines two different finanincing mechanisms for cookstove dissemination: subsidies and micro-credits. Firstly, the topic of subsidies is outlined in a systematic manner, with a listing of commonly perceived opportunities and challenges in the use of direct subsidies for consumer goods and other end products.
If, as outlined above, a development programme is a sort of indirect subsidy to a specific change process, it is not following the same rationale as a commercial banking decision. A loan from a development agency is commonly perceived as a grant rather than something to be repaid. The financing of a cookstove programme will benefit from collaboration with a micro-finance institution, because this will visibly and organisationally distinguish between aid and business.
Financial assistance for stove producers and commercial stove users (such as restaurants) adopts a similar manner to that used by micro-finance institutions. The beneficiary of the loan is earning money with stoves (production or use) and can use the profits to repay the loan.
Much more controversial is the use of loans for households, so that they can buy improved cookstoves. It is only in a fully commercialised fuel market that the fuel savings can be used to repay the loan. It is difficult to prove that ‘time saved’ through reduced wood collection, less washing and cleaning, and faster cooking, translates directly into more cash income. This makes it more difficult to prove the case with micro-finance institutions for supplying finance for improved cookstoves for household use.
As with many other products, the array of subsidies for stove dissemination is extensive, and their use is hotly debated among those working on cooking energy. A good example of this is the debate reported on the HEDON Household Energy Network. http://www.hedon.info/CleanAirSIG:Subsidies
There is general agreement that a purely market-driven approach to dissemination of improved stoves in rural areas without established markets would be a challenge. The high risk, and consequently high financing costs, of introducing products into remote markets would lead to prohibitive stove prices. Since existing fuel markets in these locations consist mainly of woodfuel (collected at no monetary cost), and kerosene or LPG (which typically is subsidised already), there is little economic motivation for households to buy an improved stove. So the debate is not about whether to use, or not use, subsidies at all, but rather how they should be used.
The essential question for both these approaches is how to make subsidies that are both fiscally sustainable, and that lead to a rapid increase in market uptake (with subsequent improvements in costs, performance, and supply chain reliability).
Direct subsidies typically involve a direct cash transfer to the stove producer or consumer. Various types of direct subsidies are described as follows:
Indirect subsidies refer to subsidies that reduce the price to the consumer, but not through a direct cash transfer. The most frequent types of indirect subsidies for improved stoves are:
While there exists a certain agreement on the positive effects of indirect subsidies for establishing a market, the use of direct subsidies is more controversial. These key questions need to be addressed by those wanting to use subsidies: ‘Should I avoid direct subsidies or use them to reduce the consumer price of fuels or technologies?; ‘Should they be: partial or full subsidies? And should they be temporary or permanent subsidies?
Economic theory demonstrates that several requirements have to be fulfilled for markets to function effectively (Perman 2003:124). In practice, these conditions may not exist where stoves are being disseminated. Using this argument, subsidies are justified where there is:
Lack of demand, as indoor air pollution and its consequences are endemic and thus people are not aware of risks
Market failure both on demand and supply side, as the existing effective demand might be insufficient to overcome the opportunity costs for a market driven supply chain.
Indoor air pollution makes respiratory diseases more likely and advancing deforestation and desertification reduce the available firewood resources. Because these external effects increase health and environmental expenditures, the state takes responsibility and interest to protect the public goods of health and environment.
Direct subsidies can significantly increase the use of a cooking technology or fuel, particularly by the poorest strata of the rural population. For example, in Brazil, subsidised LPG reaches 98% of households, including 93% of rural households, at a cost of slightly less than US$60 per year per low-income household. It has been stated that there is a benefit to many of those living in poverty, even if direct subsidies are abused, and that these benefits at least match the costs lost by abuse.
Direct subsidies are more transparent that indirect subsidies.
The central questions when designing a smart subsidy deal with the 'why', 'when', ‘how’, ‘how much’, ‘to whom’, ‘under what rules’, ‘at what cost’, and ‘what is the exit strategy’? Answering these questions leads to different strategies for particular circumstances. However, some important recommendations have been highlighted for smart subsidies:
This section defines the key expressions used in microfinance, and the main concepts needed to understand how it works. Later, it describes the principal mechanisms for accessing micro-credit for improved energy access, and how to develop a project with a microfinance institution. The article ends by discussing the potential of microfinancing, and the limits to its use in disseminating improved cooking technologies.
Microfinance splits high investment costs into affordable monthly rates, offered through Microfinance Institutions (MFI). MFIs develop a whole network of close relationships with their customers.
Currently (2008), only a very few projects that combine energy and microcredit have been implemented successfully. The main reason is the lack of communication between the different stakeholders in the finance and energy sectors. The following sections seek to create a mutual understanding between both these sectors. They are specifically targeted at practitioners who are implementing ICS programs. These sections will support them to understand more clearly the perspective of those working in microfinance.
One mechanism is that the energy project may hire a microfinance specialist, and together they will develop an adapted mechanism specifically for the project. In this case it is important to integrate the microfinance specialist into the preliminary market research, because the criteria to identify potential clients or ICS producers will not only include ability and willingness to pay, but also their eligibility for credit (measured by their known levels of repayment or default). Failure to integrate the specialist at an early enough stage is a common problem, as the project manager may search for a financial mechanism, only to discover too late (when the client assessment is undertaken), that only a few of those identified as end users in the market survey are creditworthy for an energy loan. Exactly the same can happen with a potential ICS producer. They may fulfil important criteria in terms of skills and technical know-how, but not the requirements of an MFI to get a loan.
A microfinance system for improved household energy access requires a solid infrastructure in the background, as offered by MFIs. In small, time-constrained energy projects, it is often difficult to organize such a system and to reach long-term sustainability. The following section discusses the use of microfinance as an end user financing tool.
The main barrier in financing the customer for energy products is the price and financial requirements of an energy-financing mechanism. The development of a sustainable microfinance infrastructure is costly and time-consuming because of the following:
All these issues represent business costs, and are part of the service charge that the customer has to pay in addition to the price of the energy system itself. It needs a large number of clients to keep the running costs down and to reach break even, so most microfinance energy projects start with a high value technology to ensure that the turnover has a high value, and business costs do not exceed 30% of the total price charged for the item. The problem of financing a lower price technology in the initial phase, such as an affordable improved stove, is that the business costs do not depend on the system cost. The implementation of financing a ten Euro10 stove is not much cheaper than a 500 Euro solar system, since the dissemination infrastructure and networks that need to be developed, are the same.
This section provides an overview of project development requirements, and steps that need to be taken when developing a partnership with a micro-financing institution.
MFIs need a high level of technological standardization to be effective and economically sustainable. This is the reason why a few successful microfinance ICS programs are disseminating LPG. The technology they are using comprises standardized bottles and a high quality management system.MFIs have a long credit relationship with their customers, focusing on their businesses (and not their households). The mutual trust, which is an important part of the relationship, makes MFIs a powerful partner for awareness creation and marketing. On the other hand, the MFIs demand reliable products and producers. Where this relationship breaks down, it will adversely affect the stove image and its dissemination. Since the client networks of MFIs are highly organized, this kind of bad news could spread rapidly. It is thus recommended that improved stoves are not disseminated through MFIs until the stove is well tested and quality control instruments are implemented. The stoves should first prove to be reliable as follows:
Depending on the type of stove that is to be disseminated, the appropriate MFI should be approached as described:
These categories are not exclusive. For an energy project, it is important to identify the focus of each MFI, identify the right one, and decide how it can be approached for a given product. More details regarding the categories can be found in the background document.
Almost all MFIs have available data regarding the categories of businesses they finance. A first evaluation of those categories will give an insight into the relevance of cooking-fuel dependent businesses (for example: Restaurants, canteens, food processing and bakeries).
Some MFIs such as FINCA already monitor the cooking fuel expenses of their clients. Depending on the project relevance and assessment, MFIs will decide whether or not to go for an ICS project.
The assessment should include an investigation of which MFI clients might become part of the ICS supply chain through production and retailing services and the like. If the MFI data is not precise enough, these aspects should be included in the market assessment.
The goal of this type of institutional assessment is to identify the capacity of the MFI to develop, implement and evaluate an ICS project, and to determine the required institutional support required in terms of capital, facilities and training. The following aspects should be taken into consideration:
The goal of the field and market survey is the determination of the product requirements and the marketing strategy. The methodology to be chosen for a field- and market survey depends on following factors:
It is advisable to start the market research with a qualitative approach as: it helps to inform the research questions needed by the MFI in a later quantitative study; and it can introduce and train MFI staff about improved cookstoves. In some cases, the monitoring and evaluation tools of the MFI are already so mature and highly developed that just a few questions need to be added.
The business case needs an analysis of the competitive situation: In some business cases, it may not help to save money on fuel with an ICS if the technology slows down the entrepreneur to a rate below that of his/her competitors.
It is necessary to determine the different roles within the supply and cooking process:
The analysis of the results of an institutional assessment, and the field research and market research forms the initial phase of product development. The outcomes play a major role in determining which business model is the most appropriate:
Depending on the results of this process, the project plan has to be developed to consider marketing tools, location of initial commercial enterprise, strategies for scaling up, methodologies for monitoring and evaluation.
Cooperation between ICS programmes and MFIs has great potential mainly because it is engaged with a shared target group, women, who otherwise have little access to capital.
An energy project approaching an MFI for cooperation should be aware of the risks from the MFI’s perspective
All these risks need to be addressed by the energy project as early as possible to encourage the involvement of the MFI.
