Lower cost of accessing alternative energy to give families reprieve

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Families on tight budgets will have to further tighten their belts following an introduction of eight per cent VAT on petroleum products including kerosene, the most commonly used source of energy in low income households.

The introduction of VAT on kerosene came at a time when consumers were reeling from the adverse effects of the earlier ban on logging, which resulted in an increase in the price of charcoal and wood.

However, it is important to appreciate that the ban on logging was a step in the right direction towards reversing the rapid degradation of the environment that has caused severe and erratic weather conditions such as flooding and drought, whose results are all too common. The introduction of eight per cent VAT on kerosene was also meant to reduce adulteration of diesel, reduce over-reliance on fossil fuels for domestic use (in favour of cleaner alternatives such as solar, Liquefied Petroleum Gas (LPG) and improved biomass stoves) and raise much needed government revenues.

However, the unintended consequence of introduction of VAT on kerosene and the earlier ban on logging is an increase in the cost of energy for users, especially those at the bottom of the pyramid who use the aforementioned fuels for cooking and lighting.

The spike in energy costs can however be solved if both the public and private sector rollout financial products that can rapidly boost the use of alternative sources of energy.

Energy efficient stoves (including LPG), solar lanterns and solar home systems are substitutes for wood, charcoal and kerosene-and other biomass and fossil fuel energy sources that account for more than 70 per cent of Kenya’s energy usage. These sources, especially biomass energy, are not sustainable given the rapid population growth and the reduction of forest cover that now stands at less than five per cent of Kenya’s land area.

The uptake of cleaner energy sources has accelerated amid policy and regulatory incentives alongside greater awareness on their benefits. Promoters of alternatives are aware that the future is in solar and more efficient cookers, which explains the proliferation of PayGo solar companies.

A 2017 study by the University of Virginia’s Darden School of Business and consultancy FR LLC found that four of the region’s largest PayGo companies and renewable energy social impact investment firms had $ 200 million (Ksh 20 billion) in commitments from investors. These firms accounted for the lion’s share of funds committed to East African social impact ventures.

Despite this remarkable feat there are still challenges that make it difficult to vastly increase the number of homes using renewable and sustainable energy sources, chief of which is the cost of acquiring cookers and solar lighting systems that can cost up to Ksh 6,000. Paying a one-off payment is often above most households budgets.

Silver bullet

Luckily the ubiquity of mobile phones and mobile money has offered a reprieve for homes that want to use these technologies. PAYG energy companies and financial institutions such as banks and microfinance institutions are teaming up to offer customized facilities that can be used to acquire cleaner cooking and lighting technologies.

Mobile money is significantly accelerating uptake of clean energy solutions among off-grid consumers in developing countries, according to a 2014 study undertaken by the IFC/World Bank Lighting Global program.

Lending to the low income segment of the market can now be done at a lower cost to the borrower, with more convenience and speed as well as less risk to the lender. Banks now have a better character knowledge of borrowers due to the ability to harness the power of big data. They know the borrowing and repayment habits of users and with this knowledge they are able to offer customized loans for energy efficient stoves and solar lamps.

The risk of non-payment has been taken away from the product manufacturers and distributors by banks and other financiers, enabling distributors to sell these products on credit provided by financial institutions. Equitel’s EcoMoto loan is one such product that is enabling consumers to easily access clean energy solutions from its digital platform. Moreover, the loan application process has also been made somewhat easier as customers can follow a simple step-by step process on their mobile phone SIM menu to enjoy this loan facility.

The high upfront cost of clean energy solutions is no longer a barrier to adoption since buyers can acquire them on various credit channels and make monthly repayments or rentals that are less strenuous on household budgets. In fact, banks now have the ability to finance these solutions on daily or monthly repayments that are cheaper than the traditional alternatives of kerosene and biomass fuel.  Another interesting finding is that about 15% of customers in one PayGO model paid for their purchase in full in less than a third of the loan duration strengthening the assertion that some buyers are using PayGO to overcome product trust barriers, over and above the finance barrier. Luckily product trust especially for solar is becoming less of an issue due to the efforts by IFC Lighting Africa Program in product certification and awareness creation in the last couple of years.

By switching to clean energy, families are also able to save up to Ksh 12,000 annually, savings that can go towards other investments. Other indirect benefits include safer cooking and lighting, lower risk of getting respiratory diseases that are the result of smoke, protection of the environment, reduced greenhouse gas emissions, and improved reading especially for children through the use of brighter, cleaner lighting.

This financial model is proving sustainable and policy makers ought to consider coming up with a programmes/initiatives that can be used to increase the uptake of energy saving stoves, solar-powered lanterns and solar home system and other energy efficient technologies as a way of protecting the environment.

The writer is EGF General Manager, Energy & Environment

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