Difference between revisions of "Financing Mechanisms for Cookstove Dissemination"

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[[Cooking Energy Compendium|--> Back to Overview Compendium]]
 
  
<span style="color: rgb(255, 0, 0);">NEU</span>  
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[[File:GIZ HERA Cooking Energy Compendium small.png|left|831px|GIZ HERA Cooking Energy Compendium|alt=GIZ HERA Cooking Energy Compendium small.png|link=GIZ HERA Cooking Energy Compendium]]<br/><br/><!--
  
[[GIZ HERA Cooking Energy Compendium|--&gt; Back to Overview Cooking Energy Compendium]]<br>
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-->{{#ifeq: {{#show: {{PAGENAME}} |?Hera category}} | Cooking Energy System |'''[[GIZ HERA Cooking Energy Compendium#Cooking Energy Technologies and Practices|Cooking Energy System]]''' {{!}} | [[GIZ HERA Cooking Energy Compendium#Cooking Energy Technologies and Practices|Cooking Energy System]] {{!}} | }} <!--
  
= Introduction<br> =
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-->{{#ifeq: {{#show: {{PAGENAME}} |?Hera category}} | Basics |'''[[GIZ HERA Cooking Energy Compendium#Basics about Cooking Energy|Basics]]''' {{!}} | [[GIZ HERA Cooking Energy Compendium#Basics about Cooking Energy|Basics]] {{!}} | }} <!--
  
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.<br>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.
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-->{{#ifeq: {{#show: {{PAGENAME}} |?Hera category}} | Policy Advice |'''[[GIZ HERA Cooking Energy Compendium#Policy Advice on Cooking Energy|Policy Advice]]''' {{!}} | [[GIZ HERA Cooking Energy Compendium#Policy Advice on Cooking Energy|Policy Advice]] {{!}} | }} <!--
  
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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-->{{#ifeq: {{#show: {{PAGENAME}} |?Hera category}} | Planning |'''[[GIZ HERA Cooking Energy Compendium#Planning Cooking Energy Interventions|Planning]]''' {{!}} | [[GIZ HERA Cooking Energy Compendium#Planning Cooking Energy Interventions|Planning]] {{!}} | }} <!--
  
Access to financing is a key factor in enabling target groups to purchase modern cooking energy in development countries.  
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-->{{#ifeq: {{#show: {{PAGENAME}} |?Hera category}} | ICS Supply |'''[[GIZ HERA Cooking Energy Compendium#Designing and Implementing Improved Cookstoves .28ICS.29 Supply Interventions|Designing and Implementing ICS Supply]]''' {{!}} | [[GIZ HERA Cooking Energy Compendium#Designing and Implementing Improved Cookstoves .28ICS.29 Supply Interventions|Designing and Implementing ICS Supply]] {{!}} | }} <!--
  
{| style="width: 751px; height: 22px" cellspacing="1" cellpadding="1" border="1"
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-->{{#ifeq: {{#show: {{PAGENAME}} |?Hera category}} | Woodfuel Supply |'''[[GIZ HERA Cooking Energy Compendium#Designing and Implementing Woodfuel Supply Interventions|Designing and Implementing Woodfuel Supply]]''' {{!}} | [[GIZ HERA Cooking Energy Compendium#Designing and Implementing Woodfuel Supply Interventions|Designing and Implementing Woodfuel Supply]] {{!}} | }} <!--
|-
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| bgcolor="#e0e0e0" colspan="4" | ‘I like your stove – but I cannot afford to buy it. It is too expensive for me!
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-->{{#ifeq: {{#show: {{PAGENAME}} |?Hera category}} | Climate Change |'''[[GIZ HERA Cooking Energy Compendium#Climate Change Related Issues|Climate Change]]''' | [[GIZ HERA Cooking Energy Compendium#Climate Change Related Issues|Climate Change]] {{!}} | }} <!--
|}
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-->{{#ifeq: {{#show: {{PAGENAME}} |?Hera category}} | Extra |'''[[GIZ HERA Cooking Energy Compendium#Climate Change Related Issues|Extra]]''' | [[GIZ HERA Cooking Energy Compendium#Climate Change Related Issues|Extra]] }}
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<br/>
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= Overview<br/> =
  
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:
+
In the world of business, ‘financing’ is a necessary link between products and services, as both the supply side and demand side need 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.<br/>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.
  
*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).  
+
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.
*If the statement is really true, you might consider simplifying your stove design to compromise between performance and cost. Even the best stove – if used by only a few households – will not contribute to development as much as a stove with medium efficiency used by many thousands of households.
 
*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.
 
  
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.  
+
Access to financing is a key factor in enabling target groups to purchase modern cooking energy in development countries.
  
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 cookstoves.<br>
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<br/>
  
 +
{| style="width: 751px;  height: 40px" cellspacing="1" cellpadding="1" border="1"
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|-
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| style="text-align: center;  background-color: rgb(255, 255, 204)" colspan="4" | '''‘I like your stove – but I cannot afford to buy it. It is too expensive for me!’'''<br/>
 +
|}
  
 +
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/><u>If you meet this statement, you have several options:</u>
  
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. <br>Loans for households for purchasing improved cookstoves in households are ideally generating the repayment rates through fuel savings. A precondition therefore is a fully commercialised fuel market. 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.  
+
*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).
 +
*If the statement is really true, you might consider simplifying your stove design to compromise between performance and cost. Even the best stove – if used by only a few households – will not contribute to development as much as a stove with medium efficiency used by many thousands of households.
 +
*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.
  
 +
<br/>
  
 +
There is a comprehensive debate on subsidies for stove producers, as well as stove users, usually focusing on aspects such as their impact on sustainability or the feasibility of direct targeting.
  
This chapter outlines 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.  
+
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 cookstoves.<br/>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.<br/>Loans for households for purchasing improved cookstoves in households are ideally generating the repayment rates through fuel savings. A precondition therefore is a fully commercialised fuel market. 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.
  
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.
+
This chapter outlines 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.
  
= Purchasing ICS through Subsidies  =
+
Secondly, many aspects of using '''microfinance '''especially '''microcredit '''for improved cookstove promotion (in collaboration with '''microfinance institutions (MFI)''') are discussed in more detail.
  
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.
+
<br/>
  
<br>
+
= Purchasing Improved Cookstoves Through Subsidies<br/> =
  
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]&nbsp;
+
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.
  
There is general agreement that a purely market-driven approach&nbsp;on the&nbsp;dissemination of improved cookstoves 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 cookstove. So the debate is not about whether to use, or not use, subsidies at all, but rather ''how ''they should be used.&nbsp;
+
<br/>
  
There are two approaches to subsidies for stove dissemination:  
+
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 [http://www.hedon.info/CleanAirSIG:Subsidies HEDON Household Energy Network].
  
*The use of direct subsidies to bring down the selling price of stoves (partially or totally).  
+
There is general agreement that a purely market-driven approach on the dissemination of improved cookstoves 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 cookstove. So the debate is not about whether to use, or not use, subsidies at all, but rather ''how ''they should be used.
*The use of indirect subsidies to help establish a market through activities such as&nbsp;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).&nbsp;
+
<u>There are two approaches to subsidies for stove dissemination:</u>
  
== What distinguishes direct from indirect subsidies?  ==
+
*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.
  
=== Direct Subsidies<br> ===
+
<br/>
  
Direct subsidies typically involve a direct cash transfer to the stove producer or consumer. Various types of direct subsidies are described as follows:
+
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).
  
*'''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).
+
<br/>
*'''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 and a negative impacht on cookstove dissemination.&nbsp;
 
  
=== Indirect Subsidies<br> ===
+
== What Distinguishes Direct from Indirect Subsidies?<br/> ==
  
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:
+
=== Direct Subsidies<br/> ===
  
*'''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.
+
Direct subsidies typically involve a direct cash transfer to the stove producer or consumer.
*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.
 
*'''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&nbsp;the final product price.&nbsp;
 
  
== Pros and Cons&nbsp;of direct and indirect&nbsp;subsidies ==
+
<u>Various types of direct subsidies are described as follows:</u>
  
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?&nbsp;
+
*'''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.
 +
*'''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.
  
=== Direct subsidies  ===
+
<br/>
  
'''For the following reasons direct subsidies are promoted:'''  
+
<u>'''For the following reasons direct subsidies are promoted''':</u>
  
<br>'''Market failure'''  
+
'''Market failure'''<br/>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.
  
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:  
+
<u>Using this argument, subsidies are justified where there is:</u>
  
 
*Asymmetric information: Lack of demand, as indoor air pollution and its consequences are endemic and thus people are not aware of risks
 
*Asymmetric information: Lack of demand, as indoor air pollution and its consequences are endemic and thus people are not aware of risks
 +
*Insufficient market power: 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.
 +
*External effect on the public good: 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.
 +
 +
<br/>
  
*Insufficient market power: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.
+
'''Poverty targeting'''<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.
  
*External effect on the public good: 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.
+
<br/>'''Transparency'''<br/>Direct subsidies are more transparent than indirect subsidies.
 +
 
 +
<br/>
  
<br>
+
<u>'''Direct subsidies are criticized for the following reasons:'''</u>
  
'''Poverty targeting'''  
+
'''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.
  
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">&nbsp;</span><br>
+
<br/>'''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.
  
<br>'''Transparency'''<br>
+
<br/>'''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.
  
Direct subsidies are more transparent than indirect subsidies.<br>
+
<br/>'''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 each case, assessing the specific circumstances and framework conditions.
  
 +
<br/>
  
 +
=== Indirect Subsidies<br/> ===
  
'''But direct subsidies are criticized for the following reasons:'''
+
Indirect subsidies refer to subsidies that reduce the price to the consumer, but not through a direct cash transfer.
  
<br>
+
<u>The most frequent types of indirect subsidies for improved stoves are:</u>
  
*'''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&nbsp;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.  
+
*'''Public awareness and product promotion campaigns '''increase public understanding, and thus increase the demand for improved stoves (see following chapters on [[Creation of Public Awareness for Improved Cookstoves (ICS)|Creation of Public Awareness for Improved Cookstoves]]). 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.
*'''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.  
+
*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.
*'''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.  
+
*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.
*'''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&nbsp;each case, assessing the specific circumstances and framework conditions.<br>
+
*'''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.
  
=== <span style="color: #ff0000">Indirect Subsidies</span> ===
+
<br/>
  
<span style="color: #ff0000">Pros and Cons</span>  
+
<br/>
  
=== Smart subsidies  ===
+
<br/>
  
<span lang="EN-GB" style="font-size: 10pt; font-family: 'arial','sans-serif'" /><span lang="EN-GB" style="font-size: 10pt; font-family: 'arial','sans-serif'">The term '''smart subsidy'''&nbsp;will be&nbsp;introduced to describe an appropriate subsidy, which dealt with the problems that have been described above. The term is not precisely defined, it needs to be adopted to every specific case.</span> <span style="color: #ff0000">What do we understand under smart subsidy within the compendium?</span>
+
<br/>
  
 +
<br/>
  
 +
=== Smart Subsidies<br/> ===
  
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&nbsp;can&nbsp;be&nbsp;highlighted for smart subsidies:
+
<span lang="en-gb">The term '''smart subsidy''' will be introduced to describe an appropriate subsidy, which dealt with the problems that have been described above. The term is not precisely defined, as it needs to be adopted to every specific case.</span>
  
*Support only those rural energy products and services that would not be viable without the subsidy, but for which there is verified sufficient demand.
+
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. <u>However, some important recommendations can be highlighted for smart subsidies:</u>
*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.
 
*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 subsidizing the initial purchase price rather than the operating costs or fuel consumption
 
*Rely on existing and sustainable financial resources&nbsp;(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.&nbsp;
 
  
'''Further resources for smart subsidies'''
+
*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.
 +
*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
 +
*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.
 +
*Cover all aspects of the project including end-use investments, to encourage pro-poor income-generating end uses.<br/>
  
*Barnet, A.: Voluntary Codes of ‘Best Practice’ for Donors and NGOs for Renewable Energy &amp; Developing Countries, 2004.<span> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [http://www.hedon.info/CodeOfBestPracticeForRenewables http://www.hedon.info/CodeOfBestPracticeForRenewables]</span>
+
<br/>
*ESMAP: [http://siteresources.worldbank.org/EXTRENENERGYTK/Resources/5138246-1237906527727/5950705-1239305592740/BestPracticeManualPromoting0Dece1oint0UNDP0World0Bank.pdf Best Practice Manual: Promoting Decentralized Electrification Investment,] October 2001
 
*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>
 
*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>
 
  
== GIZ experiences  ==
+
== GIZ Experiences<br/> ==
  
{| cellspacing="1" cellpadding="1" width="100%" border="1"
+
{| style="width: 100%" cellspacing="1" cellpadding="1" border="1"
 
|-
 
|-
| Experiences with different subsidy schemes and country examples from Bolivia, Burkina Faso, Ethiopia and Mali are analysed in this study: Mirco Gaul (2009):&nbsp;[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): [[:file:Stove subsidies-gtz-2009.pdf|Subsidy schemes for the dissemination of improved stoves - Experiences of GTZ HERA and Energising Development]]<br/>
| [[Image:Stove subsidies-gtz-2009.pdf]]
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| [[File:Stove subsidies-gtz-2009.pdf|180px|RTENOTITLE]]
 
|-
 
|-
 
|  
 
|  
Line 154: Line 167:
  
 
|  
 
|  
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]  
+
Kilian Reiche/ Witold Teplitz (2009): [http://www.econbiz.de/Record/energy-subsidies-why-when-and-how-a-think-piece-reiche-kilian/10008751259 Energy Subsidies: Why, When and How? A Think Piece]
 +
 
 +
[http://www.giz.de/expertise/downloads/gtz2009-en-energy-subsidies-a-think-piece.pdf Download the file]
  
<br>
+
<br/>
  
 
|}
 
|}
  
<br>
+
<br/>
  
== Other resources for general energy subsidy issues  ==
+
<br/>
  
*Perman, R., &amp; Perman, R. (2003). Natural resource and environmental economics. Harlow, England: Pearson Addison Wesley.
+
<br/>
*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>
 
  
= Purchasing ICS through mircrofinance  =
+
<br/>
  
== <span lang="EN-GB" style="font-family: arial">Introduction to microfinance</span> ==
+
<br/>
  
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 chapter ends by discussing the potential of microfinancing, and the limits to its use in disseminating improved cooking technologies.
+
= Purchasing Improved Cookstoves Through Microfinance<br/> =
  
<br>
+
== <span style="font-family: arial" lang="EN-GB">Introduction to Microfinance</span><br/> ==
  
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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 chapter ends by discussing the potential of microfinancing, and the limits to its use in disseminating improved cooking technologies.
 +
 
 +
<br/>
 +
 
 +
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'''<span lang="EN-GB" style="font-size: 10pt; font-family: arial">Microfinance definitions</span>'''  
+
<u>'''<span style="font-size: 10pt; font-family: arial" lang="EN-GB">Microfinance Definitions:</span>'''</u>
  
'''<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 style="font-size: 10pt; font-family: arial" lang="EN-GB">[http://en.wikipedia.org/wiki/Microfinance Microfinance]</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-credit, savings, insurance and fund transfers.</span>  
+
<span style="font-size: 10pt; font-family: arial" lang="EN-GB">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-credit, savings, insurance, and fund transfers.</span>
  
'''<span lang="EN-GB" style="font-size: 10pt; font-family: arial">Microfinance Institution (MFI) </span>'''
+
'''<span style="font-size: 10pt; font-family: arial" lang="EN-GB">Microfinance Institution (MFI)</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>&nbsp; </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 style="font-size: 10pt; font-family: arial" lang="EN-GB">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">[http://en.wikipedia.org/wiki/Microcredit Micro-credit]</span>'''<span lang="EN-GB" style="font-size: 10pt; font-family: arial"> </span>
+
'''<span style="font-size: 10pt; font-family: arial" lang="EN-GB">[http://en.wikipedia.org/wiki/Microcredit Micro-credit]</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>  
+
<span style="font-size: 10pt; font-family: arial" lang="EN-GB">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">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 style="font-size: 10pt; font-family: arial" lang="EN-GB">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>
  
 
|}
 
|}
  
<br>
+
<br/>
  
<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.&nbsp;
+
The year 2005 was declared the United Nations Year of Microfinance. In 2006, Muhammed Yunus and the [http://www.grameen-info.org/ Grameen Bank] got the Nobel Peace Prize 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>
+
<br/>
  
'''Can microfinance play a role in expanding access to improved cooking stoves (ICS)?'''  
+
'''Can microfinance play a role in expanding access to improved cookingstoves (ICS)?'''
  
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.  
+
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.
  
*Credits have to be disbursed  
+
*Credits have to be disbursed
*Installments have to be collected  
+
*Installments have to be collected
 
*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
  
<br>
+
<br/>
  
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{| style="width: 100%" cellspacing="1" cellpadding="1" border="1" align="left"
 
|- bgcolor="#cccccc"
 
|- bgcolor="#cccccc"
 
| 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.
 
|}
 
|}
  
<br>
+
<br/>
  
<br>
+
<br/>
  
<span lang="EN-GB" style="font-family: arial">[[Image:Grammen Meeting.jpg|left|Grammen Meeting.jpg]]</span>  
+
<span style="font-family: arial" lang="EN-GB">[[File:Grammen Meeting.jpg|frame|left|180px|Grammen Meeting.jpg]]</span>
  
<br>
+
<br/>
  
<br>
+
Only a 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 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.
  
Only a 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 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.
+
<br/>
  
<br>
+
== Integrating a Microfinance Specialist into an Energy Project<br/> ==
  
<br>Figure 1: Grameen Bank Meeting in Bangladesh
+
One mechanism is for the energy project to 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.
  
== Integrating a micro-finance specialist into an energy project  ==
+
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.
  
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.
+
<br/>
  
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.
+
== <span>High Value Turnover versus Business Costs </span>for Profitable Microfinance Systems<br/> ==
  
== <span>High value turnover versus business costs </span>for profitable micro-finance systems  ==
+
The main barrier in financing the customer for energy products is the price and financial requirements of an energy-financing mechanism.
  
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:  
+
<u>The development of a sustainable microfinance infrastructure is costly and time-consuming because of the following:</u>
  
*Cost of field and market research, business planning, monitoring and evaluation  
+
*Cost of field and market research, business planning, monitoring and evaluation
*Staff salaries; staff must be hired and trained  
+
*Staff salaries; staff must be hired and trained
*ICS stock has to be bought and managed  
+
*ICS stock has to be bought and managed
*Transport has to be organized  
+
*Transport has to be organized
*Logistics, maintenance and overhead costs  
+
*Logistics, maintenance and overhead costs
*Access to cash flow as technology needs to be paid up-front  
+
*Access to cash flow as technology needs to be paid up-front
 
*Interest payments from capital borrowed for up-front costs
 
*Interest payments from capital borrowed for up-front costs
  
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 Euro 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.
+
<br/>
  
<br>
+
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 Euro 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>'''  
+
<u>'''<span style="font-size: 11pt; font-family: arial" lang="EN-GB">Recommendation</span>'''</u>
  
<span lang="EN-GB" style="font-size: 11pt; font-family: arial">It is recommended that low-cost energy technologies, such as improved cookstoves, work with 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 style="font-size: 11pt; font-family: arial" lang="EN-GB">It is recommended that low-cost energy technologies, such as improved cookstoves, work with 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>
  
 
|}
 
|}
  
== Developing an ICS Project with an MFI  ==
+
<br/>
  
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.
+
== Developing an Improved Cookstove Project with an Microfinance Institution (MFI)<br/> ==
  
=== <span><span>Requirements</span></span> for cooperation  ===
+
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:
+
<br/>
  
*Quality standards, within a measurable range, must be met by producers. Any rumor that a product is likely to fail, or not save as much as promised, will be disseminated rapidly within an MFI network, and could lead to the failure of the whole project.  
+
=== <span><span>Requirements</span></span> for Cooperation<br/> ===
 +
 
 +
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.
 +
 
 +
<u>The stoves should first prove to be reliable as follows:</u>
 +
 
 +
*Quality standards, within a measurable range, must be met by producers. Any rumor that a product is likely to fail, or not save as much as promised, will be disseminated rapidly within an MFI network, and could lead to the failure of the whole project.
 
*Serious reductions in the performance of the stoves during the period of repayment will be seriously damaging. Stove efficiency will almost inevitably decrease while in use. Loans should be adopted based on a realistic fuel saving scenario. The more often that good news is disseminated within the MFI network that ‘the product almost pays itself’, the greater the number of consumers.
 
*Serious reductions in the performance of the stoves during the period of repayment will be seriously damaging. Stove efficiency will almost inevitably decrease while in use. Loans should be adopted based on a realistic fuel saving scenario. The more often that good news is disseminated within the MFI network that ‘the product almost pays itself’, the greater the number of consumers.
  
=== <span>Finding the right MFI partner</span> ===
+
<br/>
  
Depending on the type of stove that is to be disseminated, the appropriate MFI should be approached as described:
+
=== <span>Finding the Right Microfinance Institution (MFI) Partner</span><br/> ===
  
*'''MFIs that target the poorest''' – mainly people earning less than a dollar per day  
+
<u>Depending on the type of stove that is to be disseminated, the appropriate MFI should be approached as described:</u>
*'''MFIs that target the active poor&nbsp;'''– generally people who have already a small business and need capital to grow  
+
 
*MFIs that focus on urban and peri-urban areas  
+
*'''MFIs that target the poorest''' – mainly people earning less than a dollar per day
*MFIs that focus on rural areas  
+
*'''MFIs that target the active poor '''– generally people who have already a small business and need capital to grow
*MFIs with NGO status  
+
*MFIs that focus on urban and peri-urban areas
 +
*MFIs that focus on rural areas
 +
*MFIs with NGO status
 
*MFIs with banking status
 
*MFIs with banking status
  
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 <span>[[:file:Opportunities challenges in microfinancing ics-2009.pdf|background document]].</span>  
+
<br/>
  
[[Image:Ghana cookin restaurant.jpg]]  
+
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 <span>[[:file:Opportunities challenges in microfinancing ics-2009.pdf|background document]].</span>
  
Figure 2 MFI Client in Ghana, cooking in her restaurant <br>
+
[[File:Ghana cookin restaurant.jpg|frame|left|180px|MFI Client in Ghana, cooking in her restaurant]]
  
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).
+
<br/>
  
Some MFIs such as FINCA ([http://www.villagebanking.org www.villagebanking.org]) 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.  
+
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 ([http://www.villagebanking.org www.villagebanking.org]) 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 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.
  
=== Assessing an MFI ===
+
<br/>
 +
 
 +
=== Assessing an Microfinance Institution (MFI)<br/> ===
 +
 
 +
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 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:  
+
<u>The following aspects should be taken into consideration:</u>
  
 
*Organizational aspects:
 
*Organizational aspects:
  
- How is the decision-making process organized? <br>- What is the hierarchical structure? <br>- Will the board only approve a new project after market assessment and business planning has been completed?  
+
- How is the decision-making process organized?<br/>- What is the hierarchical structure?<br/>- Will the board only approve a new project after market assessment and business planning has been completed?
  
 
*Available funding and capacity to access capital:
 
*Available funding and capacity to access capital:
  
- Can the funding and accessible capital be used? <br>- Is it flexible enough for the ICS project – especially if the MFIs have a banking status?  
+
- Can the funding and accessible capital be used?<br/>- Is it flexible enough for the ICS project – especially if the MFIs have a banking status?
  
 
*Human resources capacities
 
*Human resources capacities
  
- Is there enough staff for the implementation of a new project? <br>- What are the professional capacities of the staff? Can their skills meet the requirements of an ICS project? <br>- Does the MFI have training capacity? <br>- What is the capacity of the MFI regarding the integration of staff with new professional backgrounds?  
+
- Is there enough staff for the implementation of a new project?<br/>- What are the professional capacities of the staff? Can their skills meet the requirements of an ICS project?<br/>- Does the MFI have training capacity?<br/>- What is the capacity of the MFI regarding the integration of staff with new professional backgrounds?
 +
 
 +
*Finally, does the MFI have experience implementing projects?
  
*Finally, does the MFI have experience implementing projects? - especially projects that concern a field other than finance
+
- especially projects that concern a field other than finance
  
<br>  
+
<br/>
  
=== Integrating MFI: field and market surveys  ===
+
=== Integrating Microfinance Institution (MFI): Field and Market Surveys<br/> ===
  
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:
+
The goal of the field and market survey is the determination of the product requirements and the marketing strategy.
  
*The available socio-economic and cooking habits data at baseline. This may have been collected during earlier project phases.  
+
<u>The methodology to be chosen for a field- and market survey depends on following factors:</u>
 +
 
 +
*The available socio-economic and cooking habits data at baseline. This may have been collected during earlier project phases.
 
*The usual approach to market surveys for that particular MFI. The MFI should be integrated as much as possible with the project in this phase.
 
*The usual approach to market surveys for that particular MFI. The MFI should be integrated as much as possible with the project in this phase.
  
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.
+
<br/>
  
It is important to differentiate between cooking habits ''for the home'' and cooking within and away from the home ''for a business''. Data that should be assessed for both categories of cooking include:
+
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.
  
*Cooking fuel supply habits (purchasing/collecting) of all social groups represented within the MFI clients.  
+
It is important to differentiate between cooking habits ''for the home'' and cooking within and away from the home ''for a business''.
 +
 
 +
<u>Data that should be assessed for both categories of cooking include:</u>
 +
 
 +
*Cooking fuel supply habits (purchasing/collecting) of all social groups represented within the MFI clients.
 
*Microeconomics of the cooking fuel(s), including the monetary cost and time spent on collection.
 
*Microeconomics of the cooking fuel(s), including the monetary cost and time spent on collection.
  
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.
+
<br/>
  
It is necessary to determine the different roles within the supply and cooking process:
+
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.
  
*Is the respondent the typical MFI client or what is his/her relation to this client?  
+
<u>It is necessary to determine the different roles within the supply and cooking process:</u>
*Who pays for a cooking appliance?  
+
 
*Who does the cooking?  
+
*Is the respondent the typical MFI client or what is his/her relation to this client?
*Who collects the wood?  
+
*Who pays for a cooking appliance?
 +
*Who does the cooking?
 +
*Who collects the wood?
 
*Who pays for cooking fuel?
 
*Who pays for cooking fuel?
  
&nbsp;
+
<br/>
  
{| width="100%" cellspacing="1" cellpadding="4" border="1"
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{| style="width: 100%" cellspacing="1" cellpadding="4" border="1"
 
|-
 
|-
 
| bgcolor="#cccccc" |  
 
| bgcolor="#cccccc" |  
'''Case study: Cooking in Uganda'''  
+
'''Case study: Cooking in Uganda'''
  
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.&nbsp;
+
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.
  
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.
  
 
|}
 
|}
  
<br>  
+
<br/>
  
== Product Development ==
+
== Product Development ==
  
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:
+
The analysis of the results of an institutional assessment, and the field research and market research forms the initial phase of product development.
  
*What role should the MFI play within the supply chain?  
+
<u>The outcomes play a major role in determining which business model is the most appropriate:</u>
*How should the financial product be designed to be appropriate for ICS clients (accessibility, duration, interest rates, etc)?  
+
 
*Will the MFI have any say in the dissemination programme (logistics, stock level)?  
+
*What role should the MFI play within the supply chain?
 +
*How should the financial product be designed to be appropriate for ICS clients (accessibility, duration, interest rates, etc)?
 +
*Will the MFI have any say in the dissemination programme (logistics, stock level)?
 
*Should they be involved in awareness raising and marketing?
 
*Should they be involved in awareness raising and marketing?
*Should they have inputs into quality control and management?  
+
*Should they have inputs into quality control and management?
*How will the processes (communication, financial, product)&nbsp;between retailers, producers, MFI and loan clients be designed?
+
*How will the processes (communication, financial, product) between retailers, producers, MFI and loan clients be designed?
  
 +
<br/>
  
 +
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.
  
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.
+
<br/>
 +
 
 +
== The Potential Benefits and Possible Limitations of using Microfinance<br/> ==
 +
 
 +
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.
 +
 
 +
<br/>
  
== The potential benefits and possible limitations of using microfinance  ==
+
=== Potential Benefits for Cooperation Between MFI and ICS programmes<br/> ===
  
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.
+
*<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
  
=== &nbsp;Potential benefits for cooperation between MFI and ICS programmes  ===
+
- Advantages in competition for the MFI in case the MFI market is oversupplied
  
*<span id="1227108714485S" style="display: none;">&nbsp;</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.
+
*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 client.
 +
*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/ www.microcreditsummit.org)]
  
*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 client.
+
<br/>
*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;">&nbsp;</span></span>]
 
  
=== The limits of MFIs for energy outreach programmes  ===
+
=== The Limits of MFIs for Energy Outreach Programmes<br/> ===
  
*Only a few MFIs are aware of the ‘energy’ market without it being promoted.  
+
*Only a few MFIs are aware of the ‘energy’ market without it being promoted.
*MFIs are bureaucratic and hierarchic organizations, they need time to move.  
+
*MFIs are bureaucratic and hierarchic organizations, they need time to move.
*To promote energy in a sustainable way, MFIs need to develop expertise within their companies; this expertise should be technology-neutral so that they are able to compare different products.  
+
*To promote energy in a sustainable way, MFIs need to develop expertise within their companies; this expertise should be technology-neutral so that they are able to compare different products.
*A lot of training and communication&nbsp;at different levels of management&nbsp;are required.  
+
*A lot of training and communication at different levels of management are required.
*Only a few MFIs will target the very poor.  
+
*Only a few MFIs will target the very poor.
*If they target the very poor, they generally do not offer special credit terms.  
+
*If they target the very poor, they generally do not offer special credit terms.
*They generally work exclusively in urban centres, especially in Africa and Latin America.  
+
*They generally work exclusively in urban centres, especially in Africa and Latin America.
*MFIs work in a very standardized way.  
+
*MFIs work in a very standardized way.
*MFIs show a high staff fluctuation, especially at operational level.  
+
*MFIs show a high staff fluctuation, especially at operational level.
*Profitability depends on the number of clients per credit officer and the repayment rates.  
+
*Profitability depends on the number of clients per credit officer and the repayment rates.
*MFIs will finance only eligible clients and each MFI has its own criteria to identify them. For a larger investment, a long-term relationship (credit history) with the customer must exist or an adapted collateral is needed.  
+
*MFIs will finance only eligible clients and each MFI has its own criteria to identify them. For a larger investment, a long-term relationship (credit history) with the customer must exist or an adapted collateral is needed.
*The target group that does not pay cash for energy (for example if biomass is collected and not purchased), is normally not eligible for an energy loan.  
+
*The target group that does not pay cash for energy (for example if biomass is collected and not purchased), is normally not eligible for an energy loan.
 
*MFIs always group together their clients, and with a very decentralised supply, such as improved cookstoves, it becomes more and more expensive to do this as logistically they are harder to reach.
 
*MFIs always group together their clients, and with a very decentralised supply, such as improved cookstoves, it becomes more and more expensive to do this as logistically they are harder to reach.
  
=== The risks taken by MFIs working in energy  ===
+
<br/>
  
An energy project approaching an MFI for cooperation should be aware of the risks from the MFI’s perspective
+
=== The Risks Taken by MFIs Working in Energy<br/> ===
  
*Developing an ICS programme means that they are taking on new infrastructure-related product development services, including parts of a supply chain  
+
<u>An energy project approaching an MFI for cooperation should be aware of the risks from the MFI’s perspective:</u>
*To go into an ICS program requires new investment, and a move into unknown business field.  
+
 
*A lot of new knowledge has to be brought into the company  
+
*Developing an ICS programme means that they are taking on new infrastructure-related product development services, including parts of a supply chain
*Partnerships need to be developed and stabilized  
+
*To go into an ICS program requires new investment, and a move into unknown business field.
*A quality management system has to be introduced  
+
*A new loan product has to be designed and implemented with a high likelihood to be less profitable than common loan products
 +
*A lot of new knowledge has to be brought into the company
 +
*Partnerships need to be developed and stabilized
 +
*A quality management system has to be introduced
 
*Stocks and logistics have to be developed.
 
*Stocks and logistics have to be developed.
  
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.
 +
 
 +
<br/>
 +
 
 +
<br/>
 +
 
 +
<br/>
 +
 
 +
= Further Information<br/> =
 +
 
 +
*Ellen Morris et al.: Using Microfinance to Expand Access to Energy Services. Published by Citi Group Foundation and USAID, Washington DC 2007. [http://www.hedon.info/article1463&highlight= Further information on HEDON Homepage]&nbsp;; [http://www.arcfinance.org/pdfs/pubs/Energy_Summary_FINAL.pdf Summary]<br/>
 +
*MicroEnergy International (2008): [[:file:Opportunities challenges in microfinancing ics-2009.pdf|Opportunities and Challenges in Microfinancing Improved Cooking Stoves]]
 +
*[[A Study on Biomass Cookstove Business Models from Asia and Africa|A Study on Biomass Cookstove Business Models from Asia and Africa]],&nbsp;2015,&nbsp;GERES-StovePlus and GIZ-HERA.
 +
 
 +
<br/>
  
<br>  
+
= References<br/> =
  
== Additional resources  ==
+
This article was originally published by [http://www.giz.de/fachexpertise/html/2769.html GIZ HERA]. It is basically based on experiences, lessons learned and information gathered by GIZ cook stove projects. You can find more information about the authors and experts of the original “Cooking Energy Compendium” in the [[Imprint - GIZ HERA Cooking Energy Compendium|Imprint]].
  
Ellen Morris et al.: Using Microfinance to Expand Access to Energy Services. Published by Citi Group Foundation and USAID, Washington DC 2007. Further information: [http://www.hedon.info/article1463&highlight= http://www.hedon.info/article1463&amp;highlight=]&nbsp;; Download summary:&nbsp;[http://communities.seepnetwork.org/node/267 http://communities.seepnetwork.org/node/267]
+
<references />
  
MicroEnergy International (2008): [http://www.energypedia.info/index.php/File:Opportunities_challenges_in_microfinancing_ics-2009.pdf Opportunities and Challenges in Microfinancing Improved Cooking Stoves]  
+
<br/>[[#Overview|Top of the page]]
  
<br>
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[[GIZ HERA Cooking Energy Compendium|--> Back to Overview GIZ HERA Cooking Energy Compendium]]
  
ACP-EU Energy Facility, Thematic Fiche no. 3: [[File:Thematic fiche no. 3|"Microcredit - a tool to improve access to modern energy"]]  
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[[Portal:Financing and Funding|--> Back to Financing and Funding Portal]]
  
<br>
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{{#set: Hera category=ICS Supply}}
  
[[Category:Cooking]] [[Category:Cooking_Energy_Compendium]]
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[[Category:Cooking_Energy_Compendium_(GIZ_HERA)]]
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[[Category:Financing_and_Funding]]
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[[Category:Cookstoves]]
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[[Category:Cooking_Energy]]

Latest revision as of 07:45, 26 August 2021

GIZ HERA Cooking Energy Compendium small.png



Cooking Energy System | Basics | Policy Advice | Planning | Designing and Implementing ICS Supply | Designing and Implementing Woodfuel Supply | Climate Change | Extra


Overview

In the world of business, ‘financing’ is a necessary link between products and services, as both the supply side and demand side need 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.


‘I like your stove – but I cannot afford to buy it. It is too expensive for me!’

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:

  • 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).
  • If the statement is really true, you might consider simplifying your stove design to compromise between performance and cost. Even the best stove – if used by only a few households – will not contribute to development as much as a stove with medium efficiency used by many thousands of households.
  • 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.


There is a comprehensive debate on subsidies for stove producers, as well as stove users, usually focusing 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 cookstoves.
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.
Loans for households for purchasing improved cookstoves in households are ideally generating the repayment rates through fuel savings. A precondition therefore is a fully commercialised fuel market. 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 chapter outlines 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.

Secondly, many aspects of using microfinance especially microcredit for improved cookstove promotion (in collaboration with microfinance institutions (MFI)) are discussed in more detail.


Purchasing Improved Cookstoves Through Subsidies

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.


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.

There is general agreement that a purely market-driven approach on the dissemination of improved cookstoves 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 cookstove. So the debate is not about whether to use, or not use, subsidies at all, but rather how they should be used.

There are two approaches to subsidies for stove dissemination:

  • 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 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).


What Distinguishes Direct from Indirect Subsidies?

Direct Subsidies

Direct subsidies typically involve a direct cash transfer to the stove producer or consumer.

Various types of direct subsidies are described as follows:

  • 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.
  • 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.


For the following reasons direct subsidies are promoted:

Market failure
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:

  • Asymmetric information: Lack of demand, as indoor air pollution and its consequences are endemic and thus people are not aware of risks
  • Insufficient market power: 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.
  • External effect on the public good: 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.


Poverty targeting
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.


Transparency
Direct subsidies are more transparent than indirect subsidies.


Direct subsidies are criticized for the following reasons:

Inhibiting market development
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.
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
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 each case, assessing the specific circumstances and framework conditions.


Indirect Subsidies

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:

  • Public awareness and product promotion campaigns increase public understanding, and thus increase the demand for improved stoves (see following chapters on Creation of Public Awareness for Improved Cookstoves). 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.
  • 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.
  • When support to research and development for improved stove technologies uses public finance, this indirect subsidy is not recouped in the final product price.






Smart Subsidies

The term smart subsidy will be introduced to describe an appropriate subsidy, which dealt with the problems that have been described above. The term is not precisely defined, as it needs to be adopted to every specific case.

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 can be highlighted for smart subsidies:

  • 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.
  • 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
  • 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.
  • Cover all aspects of the project including end-use investments, to encourage pro-poor income-generating end uses.


GIZ Experiences

Experiences with different subsidy schemes and country examples from Bolivia, Burkina Faso, Ethiopia and Mali are analysed in this study: Mirco Gaul (2009): Subsidy schemes for the dissemination of improved stoves - Experiences of GTZ HERA and Energising Development
RTENOTITLE

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:

Kilian Reiche/ Witold Teplitz (2009): Energy Subsidies: Why, When and How? A Think Piece

Download the file







Purchasing Improved Cookstoves Through Microfinance

Introduction to Microfinance

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 chapter ends by discussing the potential of microfinancing, and the limits to its use in disseminating improved cooking technologies.


Microfinance Definitions:

Microfinance

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-credit, savings, insurance, and fund transfers.

Microfinance Institution (MFI)

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: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.

Micro-credit

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.

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.


The year 2005 was declared the United Nations Year of Microfinance. In 2006, Muhammed Yunus and the Grameen Bank got the Nobel Peace Prize 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.


Can microfinance play a role in expanding access to improved cookingstoves (ICS)?

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.

  • Credits have to be disbursed
  • Installments have to be collected
  • Failures have to be followed up and, in this case, guarantees have to be recovered


Note: ‘Microcredit’ needs an institution in the background. It is not a tool by itself.



Grammen Meeting.jpg


Only a 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 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.


Integrating a Microfinance Specialist into an Energy Project

One mechanism is for the energy project to 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.


High Value Turnover versus Business Costs for Profitable Microfinance Systems

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:

  • Cost of field and market research, business planning, monitoring and evaluation
  • Staff salaries; staff must be hired and trained
  • ICS stock has to be bought and managed
  • Transport has to be organized
  • Logistics, maintenance and overhead costs
  • Access to cash flow as technology needs to be paid up-front
  • Interest payments from capital borrowed for up-front costs


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 Euro 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.


Recommendation

It is recommended that low-cost energy technologies, such as improved cookstoves, work with 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).


Developing an Improved Cookstove Project with an Microfinance Institution (MFI)

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.


Requirements for Cooperation

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:

  • Quality standards, within a measurable range, must be met by producers. Any rumor that a product is likely to fail, or not save as much as promised, will be disseminated rapidly within an MFI network, and could lead to the failure of the whole project.
  • Serious reductions in the performance of the stoves during the period of repayment will be seriously damaging. Stove efficiency will almost inevitably decrease while in use. Loans should be adopted based on a realistic fuel saving scenario. The more often that good news is disseminated within the MFI network that ‘the product almost pays itself’, the greater the number of consumers.


Finding the Right Microfinance Institution (MFI) Partner

Depending on the type of stove that is to be disseminated, the appropriate MFI should be approached as described:

  • MFIs that target the poorest – mainly people earning less than a dollar per day
  • MFIs that target the active poor – generally people who have already a small business and need capital to grow
  • MFIs that focus on urban and peri-urban areas
  • MFIs that focus on rural areas
  • MFIs with NGO status
  • MFIs with banking status


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.

MFI Client in Ghana, cooking in her restaurant


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 (www.villagebanking.org) 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.


Assessing an Microfinance Institution (MFI)

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:

  • Organizational aspects:

- How is the decision-making process organized?
- What is the hierarchical structure?
- Will the board only approve a new project after market assessment and business planning has been completed?

  • Available funding and capacity to access capital:

- Can the funding and accessible capital be used?
- Is it flexible enough for the ICS project – especially if the MFIs have a banking status?

  • Human resources capacities

- Is there enough staff for the implementation of a new project?
- What are the professional capacities of the staff? Can their skills meet the requirements of an ICS project?
- Does the MFI have training capacity?
- What is the capacity of the MFI regarding the integration of staff with new professional backgrounds?

  • Finally, does the MFI have experience implementing projects?

- especially projects that concern a field other than finance


Integrating Microfinance Institution (MFI): Field and Market Surveys

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:

  • The available socio-economic and cooking habits data at baseline. This may have been collected during earlier project phases.
  • The usual approach to market surveys for that particular MFI. The MFI should be integrated as much as possible with the project in this phase.


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.

It is important to differentiate between cooking habits for the home and cooking within and away from the home for a business.

Data that should be assessed for both categories of cooking include:

  • Cooking fuel supply habits (purchasing/collecting) of all social groups represented within the MFI clients.
  • Microeconomics of the cooking fuel(s), including the monetary cost and time spent on collection.


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:

  • Is the respondent the typical MFI client or what is his/her relation to this client?
  • Who pays for a cooking appliance?
  • Who does the cooking?
  • Who collects the wood?
  • Who pays for cooking fuel?


Case study: Cooking in Uganda

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.

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.


Product Development

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:

  • What role should the MFI play within the supply chain?
  • How should the financial product be designed to be appropriate for ICS clients (accessibility, duration, interest rates, etc)?
  • Will the MFI have any say in the dissemination programme (logistics, stock level)?
  • Should they be involved in awareness raising and marketing?
  • Should they have inputs into quality control and management?
  • How will the processes (communication, financial, product) between retailers, producers, MFI and loan clients be designed?


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.


The Potential Benefits and Possible Limitations of using Microfinance

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.


Potential Benefits for Cooperation Between MFI and ICS programmes

  • Market aspects
    - Overcoming the financial barrier for investments in energy efficiency
    - Bringing together demand, and offering access to new markets

- Advantages in competition for the MFI in case the MFI market is oversupplied

  • Social aspects
    - MFIs are necessarily interested in enhancing income generation.
    - MFIs focus on empowering women by enabling female entrepreneurship.
  • Quality aspects
    - The long-term relationship with the customer that makes it possible to offer additional services may be needed for a sustainable implementation of ICS.
    - The MFI can become a central stakeholder in consumer protection as quality is a key aspect in the relationship with their client.
  • Monitoring and evaluation
    - The performance of the MFIs clearly indicates the quality of their services.
    - MFIs have to monitor and evaluate their projects regularly through third parties to get access to finance.
    - The monitoring methodologies of MFIs offer an opportunity to evaluate the impact of energy on social aspects.
    - MFIs have an expanding market, reaching actually more than 133 Million borrowers worldwide. (www.microcreditsummit.org)


The Limits of MFIs for Energy Outreach Programmes

  • Only a few MFIs are aware of the ‘energy’ market without it being promoted.
  • MFIs are bureaucratic and hierarchic organizations, they need time to move.
  • To promote energy in a sustainable way, MFIs need to develop expertise within their companies; this expertise should be technology-neutral so that they are able to compare different products.
  • A lot of training and communication at different levels of management are required.
  • Only a few MFIs will target the very poor.
  • If they target the very poor, they generally do not offer special credit terms.
  • They generally work exclusively in urban centres, especially in Africa and Latin America.
  • MFIs work in a very standardized way.
  • MFIs show a high staff fluctuation, especially at operational level.
  • Profitability depends on the number of clients per credit officer and the repayment rates.
  • MFIs will finance only eligible clients and each MFI has its own criteria to identify them. For a larger investment, a long-term relationship (credit history) with the customer must exist or an adapted collateral is needed.
  • The target group that does not pay cash for energy (for example if biomass is collected and not purchased), is normally not eligible for an energy loan.
  • MFIs always group together their clients, and with a very decentralised supply, such as improved cookstoves, it becomes more and more expensive to do this as logistically they are harder to reach.


The Risks Taken by MFIs Working in Energy

An energy project approaching an MFI for cooperation should be aware of the risks from the MFI’s perspective:

  • Developing an ICS programme means that they are taking on new infrastructure-related product development services, including parts of a supply chain
  • To go into an ICS program requires new investment, and a move into unknown business field.
  • A new loan product has to be designed and implemented with a high likelihood to be less profitable than common loan products
  • A lot of new knowledge has to be brought into the company
  • Partnerships need to be developed and stabilized
  • A quality management system has to be introduced
  • Stocks and logistics have to be developed.

All these risks need to be addressed by the energy project as early as possible to encourage the involvement of the MFI.




Further Information


References

This article was originally published by GIZ HERA. It is basically based on experiences, lessons learned and information gathered by GIZ cook stove projects. You can find more information about the authors and experts of the original “Cooking Energy Compendium” in the Imprint.



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