The Clean Cookstoves Value Chain and Opportunities for Business

The value chain in private markets for clean cookstoves can broadly be categorised into production (either of full cookstoves or materials, such as ceramic liners), distribution and sales activities. For a prospective entrepreneur entering the clean cookstoves market, it is important to identify where business opportunities exist in the cookstoves value chain, and how to target these opportunities with specific business models.

Production of clean cookstoves is most commonly done by private market actors around the world. These companies take raw materials, such as clay or sheet metal, and form either complete cookstoves or cookstove components. Local producers, often clean cookstove product and fuel consumers themselves, feature heavily in the cookstove materials production market, with markets such as Sri Lanka relying on locally-produced clay liners for the dominant Anagi stove design in the country. Through early donor-led cookstove programs in the mid-1980s by organisations such as ITDG (Practical Action), over 200 potters and 2000 stove installers were trained, with over 400,000 stoves disseminated from 1985-1990. This led to a firm foundation for commercialisation and marketization of cookstoves technology. As of 2012, over 300,000 stoves were being produced annually, with 74 distribution companies active in the country [1] [2] [4]

anagistoveproducerMr. Thureirasa Ratnakumar, an ‘Anagi’ stove producer in Sri Lanka. Image: http://unhabitat.lk/news/promoting-energy-efficient-improved-cooking-stoves-for-better-health-in-the-north-of-sri-lanka/

Some distribution companies operate in an integrated fashion with other sectors of the market, such as being manufacturer and distributor or manufacturer and vendor. Generally cookstove products at a pre-distribution level are sold on a direct purchase basis to distributors or vendors, with little in the way of finance on a non-commercial loan basis.

Distribution companies in the cookstoves sector act as intermediaries between vendors and producers, but these activities can be integrated into a single company. Distribution of clean cookstoves is also commonly achieved with a direct purchase model, although costs can be high in distribution if operating outside of areas with suitable transport infrastructure, meaning that distributors negotiating favourable purchase terms with suppliers is not uncommon due to the high up-front costs of the business.

– Daniel Kerr, UCL Energy Institute 

[1] Amerasekera, R.M. (2006) Commercialisation of improved cookstoves in Sri Lanka: A case study. Available at: http://www.inforse.org/Case/Case-SriLanka-Stoves.php3

[2] World Food Program (2012) Sri Lanka: 50,000 Fuel Efficient Stoves Change Lives Of IDPs In The North. Available at: https://www.wfp.org/stories/50000-fuel-efficient-stoves-have-been-distributed-among-idps-north-sri-lanka

[3] BURN Cookstoves: About Us. Available at: http://www.burnstoves.com/about/

[4] [2] Rai & McDonald, GVEP International (2009) Cookstoves and markets: experiences, successes and opportunities. Available at: http://www.hedon.info/docs/GVEP_Markets_and_Cookstoves__.pdf

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Direct Dissemination (State Programs) vs Private Sector Models

This post, the second in our business models series, aims to explore the differences between state-led dissemination models and private-sector business models, both in terms of scalability, as well as affordability for consumer and the potential for developing sustainable markets and sustainable businesses.

There are a variety of business models that could be used to develop clean cookstoves businesses, which can broadly be categorised into three spheres: direct dissemination models, where the user receives a cookstove funded by an outside organisation (government, international donors etc.); vendor sales models, where consumers directly purchase a cookstove for a lump sum from a vendor, and micro-credit models, either delivered by vendors themselves or through dedicated micro-finance institutions. [2]

Vendor sales are the most common method of businesses interacting with end-users in the clean cookstoves sphere. These vendors either purchase cookstoves on a wholesale basis from producers or distributors, or are assisted by third-sector financing organisations to enable this purchase. BURN Cookstoves in Kenya, one of the largest integrated cookstoves companies in the country, uses a direct-sales model for its operations.

Micro-credit in the form of dealer credits are another common financing instrument used in vendor purchase models for clean cookstoves, allowing consumers to pay a periodic fee to progressively purchase a clean cookstove. Some vendors have clean cookstoves as their primary business, others use it as an additional income stream to a more traditional goods shop, or as another source of revenue in an energy service company business. For example, some solar home system concessions in South Africa, such as the Nuon-RAPS (NuRa) utility are using clean cookstoves to supplement their business with a smaller, secondary revenue stream, selling both cookstove equipment and fuels. NuRa uses sales of charcoal and ethanol gel cookstoves, as well as integrated fuel/hob LPG stoves, to supplement their main solar home system business.

The Kenyan clean cookstoves market is a good example of one that has transitioned from a direct dissemination model at a donor/state scale to a private-sector led distribution and sales model. Donor/development agency-led clean cookstoves programs in Kenya date back to the 1980s, and designs used in the initial deployment phase, such as the Kenya Ceramic Jiko (KCJ), have become staple designs of the market. Charcoal stoves however are still the predominant cookstove type used in Kenya, with estimates that 47% of the population use some form of charcoal stove, rising to 80% in urban areas such as Nairobi. Global Alliance for Clean Cookstoves estimates put the size of the market at 2.5-3 million households using some form of clean cookstove in 2012. As of February 2016, the GACC is continuing to work with partners such as the Clean Cooking Association of Kenya (CCAK) and other governmental and non-governmental organisations, to disseminate 5 million improved cookstoves by 2020.

kcj
Ceramic Jiko stove, often referred to as the Kenya Ceramic Jiko. Image: AFREPREN

The cookstove market is fragmented in Kenya, with the majority of cookstove production done on a small to medium scale. Distribution costs can be high because of this, and with a poor road network in some areas, it becomes more feasible for wholesale buyers to collect directly from producers. Cookstoves are sold through a combination of dedicated retailers and traditional vendors, with wholesale buyers acting as further distribution agents to demand centres. [1]

There are a number of reasons why private-sector models can have advantages over state/donor-led dissemination. The Kenyan market relies on private provision of cookstoves from manufacturers at a local level, with vendors purchasing cookstoves wholesale to be sold later. Whilst this can increase costs to end users due to multiple markups in the value chain, offering micro-finance at a vendor level allows vendors to access wider segments of the consumer market, allowing people who could otherwise not afford a cookstove outright the chance to progressively purchase one. Scalability and flexibility are also advantages to private-sector dissemination, with multiple opportunities across the value chain for businesses depending on local consumer preferences and material availabilities. [3]

The next post in this series will explore the concept of the clean cookstoves value chain further, and identify where potential business might be sited within this value chain.

– Daniel Kerr, UCL Energy Institute

[1] GVEP International (2012a) Global Alliance for Clean Cookstoves Kenya Market Assessment, Sector Mapping. Available at: http://cleancookstoves.org/resources_files/kenya-market-assessment-mapping.pdf

[2] Gaul (2009) Subsidy schemes for the dissemination of improved stoves. Experiences of GTZ HERA and Energising Development. Available at: http://fsg.afre.msu.edu/promisam_2/references/Gaul_2009_Stove_Subsidies.pdf

[3] SNV (2015) ICS Business Toolkit, Starting, Managing and Growing an Improved Cook Stoves Business in Uganda. Available at: http://snv.org/en/countries/uganda/publications/snv-uganda-integrated-cookstove-business-toolkit

Clean Cooking Technologies and Dissemination: Growing Markets

Clean cookstoves, also known as improved cookstoves (ICS) have the potential to significantly change patterns of household and institutional energy use in developing countries. However, access to clean cookstoves for consumers in developing countries remains low, despite high levels of fuel use appropriate to cookstoves being prevalent in developing countries, particularly in rural areas.

cookstovegraph1

Share of population using solid fuels with access to improved cookstoves in Developed Countries (DCs), Least Developed Countries (LDCs) and Sub-Saharan Africa (SSA) [1]

The use of clean cookstoves has the potential to improve livelihoods, particularly for women and children, in developing countries through alleviating the time burden of gathering fuel, allowing users to spend more of their time on other activities, for example income generation. Daily collection of firewood for cooking can vary in duration from 3 hours [7] to seven hours [8]. Clean cookstove technologies such as rocket stoves can achieve the same cooking results, in the same time, while using just 60% of the fuel [8]. Global Alliance for Clean Cookstoves research has shown that traditional cookstove-using households in India, Bangladesh and Nepal on average spend 660 hours/year on fuelwood collection, while improved cookstove households spend just 539 hours/year [9]. Indoor air quality improvements are another key benefit. Around 3.8 million premature deaths annually are caused by non-communicable diseases, such as heart diseases and lung cancer that can be attributed to indoor air pollution [3].

Removing poorly-combusting, high-smoke fuels such as traditional wood fuels from the household energy mix in developing countries, and reducing indoor air pollution consequently, would have huge positive consequences for public health in the developing world.

Clean cookstoves technologies tend to be demarcated on the type of fuel used, as well as the general design of the cookstove and its technological aims. These cookstoves can also be demarcated through cost, with lower-cost cookstoves made from clay or metal with a clay lining, and higher-cost stoves using factory-machined materials like metals. Differences in cost tend to lead to different target market, with low-cost cookstoves targeting rural consumers, and higher-cost cookstoves focusing on emerging middle classes and high-income employees. Costs for a household clean cookstove can range from US$10 to US$350+, and as such different business models are required to disseminate these stoves to best reach their target markets. High-cost stoves are most commonly directly sold to consumers, whereas low-cost stoves can be available through government or donor programs of dissemination, as well as through direct purchase, vendor-credit or micro-credit models. [4] [6]

stovetech-combined-wood-charcoal-ics

Stovetech combined wood/charcoal improved cookstove. Source: http://inhabitat.com/four-cooking-stove-designs-that-can-save-the-world/

Solid fuel cookstoves, for example cookstoves using traditional woodfuels, tend to aim for significantly more efficient combustion of fuels, reducing indoor air pollution in the form of smoke and particulate matter, as well as generating more heat. These efficient designs can focus on combusting fuel more effectively, through designing combustion chambers to allow for more aerobic combustion, whereas others focus on having a heavily-insulated cooking chamber to reduce heat loss, focusing on longer cooking times for the same amount of fuel. Other cookstove designs for developing countries focus on using more efficient fuels with low-cost technology. Some examples of this include efficient charcoal stoves, as well as LPG stoves designed for developing country use.

cookstove-blog-table-1

Lab efficiencies of various established cookstove designs used in the developing world. Table established by D. Kerr derived from http://catalog.cleancookstoves.org/test-results, with standards available online at: http://cleancookstoves.org/technology-and-fuels/testing/protocols.html

However, lab efficiencies do not always translate into real-world efficiencies. A recent Indian cookstoves study conducted by researchers at the University of Washington and the University of British Colombia found disparities in real-world use efficiencies in a recent CDM program of cookstove dissemination from the Indian government. Particulate matter emissions especially were higher than expected, which may have been due to the ‘stove-stacking’ phenomenon, where families continue to use traditional cookstoves after receiving an improved cookstove. Some 40% of households in this study were found to be doing this [5].

Dissemination of clean cookstoves, and growth in access to the technologies, has the potential to have a significant positive impact on the sustainability of energy use and improvement of livelihoods of consumers in developing countries. Whilst state-run programs have had some success in directly distributing clean cookstoves, market-based measures have been shown to have significant impacts over the medium-long term, and private cookstove markets have developed in a number of Sub-Saharan African countries, such as Kenya, South Africa and Uganda. Markets across the world have disseminated large numbers of cookstoves, with over 12 million disseminated in China in the 2012-2014 period, 4.5 million in Ethiopia, and nearly 3 million in Cambodia [12]. The Kenyan clean cookstoves market was sized at 2,565,954 units in 2012, with high levels of urban and peri-urban penetration (~35%), but significantly less rural coverage [10]. The Ugandan market by comparison is estimated to be around 600,000 households, with urban areas again dominating this group [11].

This series of posts aims to explore the variety of models that private businesses can use to achieve scale and sustainability in their operations in the clean cookstoves sector [2]. Direct dissemination will be compared to vendor purchase, vendor credit and micro-credit models in the second blog of this series. Post three will explore the clean cookstoves value chain and identify opportunities for business growth along the value chain, and the fourth post in this series will examine the role of government in promoting clean cookstoves businesses.

– Daniel Kerr, UCL Energy Institute

[1] Bazilian et al. (2011) Partnerships for access to modern cooking fuels and technologies. Current Opinion in Environmental Sustainability, Vol. 3, pp. 254 – 259.

[2] Rai & McDonald, GVEP International (2009) Cookstoves and markets: experiences, successes and opportunities. Available at: http://www.hedon.info/docs/GVEP_Markets_and_Cookstoves__.pdf

[3] WHO Website (2016) Household air pollution and health.  Available at: http://www.who.int/mediacentre/factsheets/fs292/en/

[4] Global Alliance for Clean Cookstoves (2016) Clean Cooking Catalog.  Available at: http://catalog.cleancookstoves.org/stoves

[5] University of Washington (2016) Carbon-financed cookstove fails to deliver hoped-for benefits in the field. Available at: http://www.washington.edu/news/2016/07/27/carbon-financed-cookstove-fails-to-deliver-hoped-for-benefits-in-the-field/

[6] Global Alliance for Clean Cookstoves (2016) Business and Financing Models., Available at: http://carbonfinanceforcookstoves.org/implementation/cookstove-value-chain/business-models/

[7] FAO (2015) Running out of time: The reduction of women’s work burden in agricultural production. Available at: http://www.fao.org/3/a-i4741e.pdf

[8] GACC (2015) The Use of Behaviour Change Techniques in Clean Cooking Interventions to Achieve Health, Economic and Environmental Impact. Available at: https://cleancookstoves.org/binary-data/RESOURCE/file/000/000/369-1.pdf  

[9] GACC/Practical Action (2014) Gender and Livelihoods Impacts of Clean Cookstoves in South Asia. Available at: https://cleancookstoves.org/binary-data/RESOURCE/file/000/000/357-1.pdf

[10] GVEP/GACC (2012) Kenya Market Assessment: Sector Mapping. Available at: https://cleancookstoves.org/binary-data/RESOURCE/file/000/000/166-1.pdf

[11] GVEP/GACC (2012) Uganda Market Assessment: Sector Mapping. Available at: http://cleancookstoves.org/resources_files/uganda-market-assessment-mapping.pdf

[12] REN21 (2016) Renewables Global Status Report. Available at: http://www.ren21.net/wp-content/uploads/2016/06/GSR_2016_Full_Report_REN21.pdf

Supporting Thermal Energy Services in Afghanistan

Binu Parthan from Sustainable Energy Associates writes on the growing support for thermal energy service considerations in Afghanistan.

Afghanistan is often in the news for the wrong reasons such as large swathes of migrants on European shores, armed conflicts, loss of life etc. However it is possible that the country might actually be implementing one of the most innovative energy services projects which has just started implementation with support from the STEPs team.

Decades of political instability and conflict has resulted in low levels of infrastructure access levels in Afghanistan. Over 57% of the Afghan population does not have access to electricity and 81% of the population does not have access to non-solid fuels (World Bank/IEA, 2015). The situation is dire in rural Afghanistan where only 4% of the population have access to non-solid fuels. Many such locations in Afghanistan are located in colder regions with more than 6000 HDDs/Year.

Afghan households use a Tandoor, a traditional cylindrical clay or metal oven for cooking and baking an efficient version of which is shown in the Fig. It is reported that 90% of cooking revolves around making bread called Naan, followed by potatoes. Houses also use a Bukhari, a traditional space heater for heating the living spaces in winter. Some of the traditional houses also have a Tawa Khana which circulates the hot combustion gases from the tandoor under the floor of the living room and releases to the outside through the opposite wall.

Households in Afghanistan use firewood, animal dung cakes, charcoal and shrubs for heating and cooking. Traditionally firewood and charcoal were purchased in rural Afghanistan but increasingly shrubs and animal dung cakes also have to be purchased. The thermal energy use of solid fuels also have their serious health effects, the annual number of pre-mature deaths from indoor-air pollution is estimated to be 54,000/Year (WHO, 2009). In comparison the civilian casualties in 2015 from the armed conflict in Afghanistan was 11,002 (UNAMA, 2016). The use of solid fuels are also a financial strain on the Afghan households as the average rural Afghan household spends over $ 90 on fuels of which only 12% is on kerosene/lighting with 88% on thermal energy. The prices of the solid fuels also increase by 15-25% during winter months as well.

efficienttandoor

An efficient Tandoor in Afghanistan. Image: COAM/Amy Jennings

Since late 2013, since the inception of the STEPs project, till late 2015, Sustainable Energy Associates (SEA), one of the partners have been working with the Ministry for Rural Reconstruction and Development (MRRD) in Afghanistan and UNDP to develop a project to address these rural energy and thermal energy challenges. These efforts have led to development of a new programme – Afghanistan Sustainable Energy for Rural Development (ASERD) which has business model and financial innovation at the core of the programme design and was finalised by SEA in late 2015. The project agreement was signed by MRRD and UNDP in late December 2015 and will be financed by the governments of South Korea and Sweden. The project will have a financial outlay of over US$ 50 million and will be implemented over 4 years during the period 2016-2019.

The ASERD programme plans to establish sustainable rural energy services in 194 rural communities in 4 years, providing both electrical and thermal energy services. The efforts will bring sustainable energy to over 19,500 households providing health, economic and social benefits. However the major contribution the programme will make to rural energy in Afghanistan would be to establish delivery models that are technology neutral, leverage additional local and international resources, mobilise communities, engage the private sector and financiers to establish a self-sustaining delivery model. The thermal energy service model which will be used by ASERD is shown in Fig.1.

afghanbinuimage2

Thermal Energy Service Model of ASERD. Image: Sustainable Energy Associates

Past rural energy programmes in Afghanistan have mainly relied on technology driven approaches which have focused on commissioning electricity generating equipment and transferring ownership, operation and utility management responsibilities to the communities. These efforts have also largely ignored the cooking and heating needs of rural population in a country which has cold winters. The opportunities to go beyond household energy to commercial, enterprise and public service use of energy have not been exploited or capitalised effectively. Similarly private sector and financial institutions have only played a limited role in the programme so far and the aspects of policy, regulation, standards and incentive frameworks have also not received considerable attention.

Against this backdrop, the ASERD programme seeks to graduate from the current approach to establish a technology-neutral, sustainable service delivery arrangement to provide thermal and electrical energy in rural areas of Afghanistan for household, social and productive needs. The programme will also provide energy in rural areas to seek agriculture productivity gains, rural enterprise development, income generation, community social empowerment and cohesion as well as to expand public service to improve access to better health, education and security in rural areas. To deliver these services in rural areas in a sustainable manner the programme will seek to engage the national utility and the private sector in addition to community mobilisation.

The programme will also develop capacities of the government agencies, civil society and the, private sector including the financial sector. ASERD will also create frameworks for policy and regulation, testing and quality assurance as well as will also pilot seven innovative energy service delivery models which will leverage skillsets and resources from communities, private sector and financial institutions some of which are linked to global financing mechanisms for climate change and energy. These models will also result in benefits to women and the marginalised nomadic Kuchi communities.

The design of ASERD has benefited from the learnings on thermal energy services offerings, key challenges and solutions gained by the STEPs project team which will now be used to support about 20,000 families in Afghanistan. SEA will be involved during the implementation of ASERD to support MRRD and UNDP.

– Binu Parthan, SEA

References

Conservation Organisation of Afghan Mountain Areas (COAM), 2012, Shah Foladi Village energy Use Survey

International Energy Agency (IEA) and the World Bank. 2015. “Sustainable Energy for All 2015—Progress Toward Sustainable Energy” (June), World Bank, Washington, DC. Doi: 10.1596/978-1-4648 -0690-2 License: Creative Commons Attribution CC BY 3.0 IGO

United Nations Assistance Mission in Afghanistan (UNAMA), 2016, ‘Civilian Casualties Hit a New High in 2015’ available at  https://unama.unmissions.org/civilian-casualties-hit-new-high-2015

United Nations Development Programme (UNDP), 2015, Project Document: Afghanistan – Sustainable Energy for Rural Development (ASERD)

World Health Organisation, 2009, Country profile of Environmental Burden of Disease: Afghanistan

The Emerging Impacts and Evolving Development Framework for Thermal Energy Services

Binu Parthan of Sustainable Energy Associates writes on developmental frameworks and the emerging sphere of thermal energy services in them.

When the STEPs project received the nod from EPSRC and DfID in 2012, energy access in developing countries was all about electrification and Cookstoves. The assumption was that if you provide an efficient biomass Cookstove to a household and the thermal energy access problem was solved. So lot of the focus in 2012 was on cooking and Cookstoves. Efforts then were essentially focussed on developing more efficient Cookstoves and reducing the cost of Cookstoves. In addition to Biomass Cookstoves, there were also efforts which were focussed on solar cooking focussed. So the space was divided between different technologies and limited to biomass and solar energy technologies.

When STEPs project was proposed in 2012, where we encouraged to consider thermal energy as a service for cooking, space and water heating and applications, the typical reaction was that it was a just another Cookstoves project. Often the challenge was that people – both practitioners and researchers had not heard about the concept and were often quick to dismiss it. Another challenge was when we advocated technology neutrality meaning that the thermal energy services may be delivered through renewables, LPG or electricity there was certainly a lot of discomfort as if was always been about Cookstoves and technologies. There were also suggestions that cooking technologies should be limited to renewable energy and LPG was fossil fuel based and was not an option for developing countries etc.

BP cookstove lesotho

A traditional wood stove for space heating in Lesotho. Image Credit: Sustainable Energy Associates

The STEPs project team has since made a number of efforts to increase awareness about the need to look at thermal energy as a service rather than a product. We spoke at several events that had linkages to the energy access agenda and targeting development agencies and governments. Our team reviewed and commented on the Sustainable Development Goal (SDG) drafts and objected to the emphasis on Cookstoves in the earlier drafts. We also emphasised the need for considering space heating and sanitation energy needs and the need for technology neutrality.

We also carried out a questionnaire survey during second half of 2014 to early 2015 with 2 objectives 1) to popularise the project and the idea of thermal energy services and 2) to gather data for the project outputs. The questionnaires that were sent out to 64 experts drawn from development agencies, practitioners and researchers with response collected through Survey Monkey, response forms and through phone interviews. The STEPs team also held discussions with two South African rural energy enterprises to encourage them to consider an energy service offering. We reviewed and commented on the Global Tracking Framework (GTF) and the multi-tier framework for energy access for the UN’s initiative on Sustainable Energy for All (SE4All).

We also continued to look for opportunities to pilot the STEPs model in an actual implementation context and continued our discussions with United Nations Development Programme (UNDP) and Lesotho. It was important for us that STEPs as an effort to go beyond a collection of publications and outputs to an effort which will make a tangible impact on public policy as well as thermal energy use in developing countries.

Now with the project in its third and final year we are seeing the impact of the some of our persistent efforts:

  • The current and final text and the background narrative on SDG 7 on energy talks about cooking and heating and the targets for SDG 7 is technology neutral, silent on technologies and talks about energy services. The final target reads as ‘By 2030, ensure universal access to affordable, reliable and modern energy services’. As the global development agenda on energy during 2016-2030 will be guided by the SDG framework, this will allow a level playing ground for thermal energy services and hopefully attract more resources to support thermal energy services in developing countries;

  • The SE4All GTF update in 2015 is more technology neutral and includes space heating. The multi-tier frameworks also place an emphasis on service, fuel supply etc. and a new multi-tier framework has been included for space heating. As the GTF and multi-tier framework is likely to be used by World Bank and other development agencies for energy access projects/programmes, this may support the implementation of more thermal energy access initiatives.

  • We have had one South African private enterprise – AES requesting the project for business advice on offering an energy service business proposition;

  • Responses from 32 out of 64 organisations to the questionnaire survey including development agencies such as World Bank, IFC, UNIDO, UN-ESCAP, GIZ practitioners such as NuRa Energy, Practical Action, Selco, Simpa, BGF, S3IDF, ECS, ACE, practitioner networks such as GVEP, GACC, Ashden and energy research organisations such as IIASA, Imperial College, Stellenbosch University, TERI etc and the World LPG Association. Many of these organisations expressed a desire to be updated on the STEPs project details.

  • Although we faced delays in implementation with the UNDP Lesotho project where we wanted to integrate the STEPs model for thermal energy services, we have managed to integrate the STEPs thermal energy services model into a much larger project in Afghanistan. The project which began implementation in 2016, will implement the thermal energy services model in about 200 villages benefitting about 20,000 households;

During this final year in 2016, we will continue to focus on disseminating results from the research and deepening our influence and impacts with actual on the ground projects.

– Binu Parthan, SEA

What Business Model is Best for LPG Dissemination?

In the previous two posts of this series on LPG in developing countries, we have examined the concepts of fuel-switching to LPG from other, less sustainable fuels, and some ways of promoting LPG access in developing countries through government interventions. However, the development of LPG markets with private and public-private participants in developing countries has been slow, and few interventions attempted by governments and third-sector actors have had success in developing these markets.

Developing a private market for LPG in developing countries requires the existence of business models that are relevant to the technology and fuel source, as well as adaptable to changing consumer and market conditions.

Is fee for service a good model for LPG?

Fee-for-service business models, where consumers pay a monthly fee to an energy service company for their energy services, whilst the company maintains ownership of the system and maintenance/operations responsibility, have been used to great effect in other renewable technology sectors in allowing users to access energy services at a significantly reduced up-front cost, removing one of the primary barriers to business success and market development for renewable technologies.

Applying a fee-for-service business model to LPG equipment and fuels could help to promote the development of an LPG services business in developing countries. The high up-front cost of converting from other fuels to LPG can be mitigated through a monthly payments scheme, allowing the user to access the technology where otherwise they could not. This can be applied to LPG fuels as well as LPG-utilising equipment, such as water heaters or cooking equipment. However, there are disadvantages to the fee-for-service approach as a transaction model for LPG also. Equipment costs for LPG are generally low, particularly for cooking use, with the majority of the cost coming in fuels. Fuel costs are generally very high compared to other renewable thermal technologies. As such, direct purchasing of LPG equipment is within reach of a large proportion of consumers, mitigating the usefulness of a fee-for-service approach to spread out high equipment costs. Applying a fee-for-service transaction model is an approach that has been tested in rare cases: LPG fuel financing is used by some companies, for example VidaGas in Mozambique, where users can pay off cylinder purchases over a period of 2-3 months.

LPG business model table

Appropriateness of the most common thermal energy fuel types for common renewable energy business transaction models. Source: Robert Aitken, 2016. [1]

Other models for LPG dissemination

Some countries, for example Ghana, South Africa and Nigeria, have started implementing a cylinder exchange model for LPG fuels, as opposed to previous models where cylinders were bought as a unit for a much higher price. These cylinder exchange models have been used in the domestic LPG sector in Europe for many years, and involve exchanging empty cylinders at central locations for full cylinders, with the user only paying for the fuel in the new cylinder. This involves the energy service company retaining ownership of the cylinders in circulation, allowing the user to access fuel at a lower cost.

kenya lpg cylinders

A vendor inspects cooking gas cylinders at a cylinder exchange site in Kenya. Source: http://empoweredweb.blogspot.co.uk/2011/07/opportunities-in-gas-business.html

Whilst this model benefits the users greatly, from a company perspective it is challenging, requiring a large up-front investment in terms of cylinders and filling equipment for LPG, as well as bulk purchases of the fuel itself, and the need for safe and secure storage of the fuel. However, with policies to promote business development in place, for example start-up grants or low-interest credit underwritten by governments/NGOs, this model has the potential to greatly increase access to LPG in developing countries.

– Xavier Lemaire and Daniel Kerr, UCL, February 2016

[1] Aitken  Robert (2016), Technology and Business models for thermal energy services, STEPs toolkit, Under print.

Promoting LPG Uptake in Developing Countries

Increasing the use of LPG fuels as a means of achieving greater sustainability has been a targeted policy for a number of developing countries in recent years. However, projects to promote LPG access have met with mixed success. The barriers to increasing the use of LPG in developing countries, particularly for poorer communities or those in rural areas, are numerous, including issues of price of fuel, access considerations and the reliability of supply, and the price of LPG-using equipment, for example stoves..

A number of projects have endeavoured to mitigate these barriers and improve the state of LPG markets in their respective countries and regions. The Ghanaian LPG sector is often cited as an example of a successful government-level intervention to develop LPG markets.

The case of LPG in Ghana

The earliest government programs in the sector began in 1989, and recent government policy on energy has put access to LPG for households and institutions and security of LPG supply as high priorities in the national energy strategy. Government strategy has addressed two key themes: increasing indigenous production, storage and equipment production capacity for LPG, and removing barriers to access for both the urban and rural populations of the country. Results of these interventions have included improving the production and storage capacity of the Tema oil refinery, re-capitalising the Ghana Cylinder Manufacturing Company to indigenously produce LPG cylinders, and price-levelling the cost of LPG fuel across the country to promote rural market growth.

However, direct subsidies such as those used in Ghana for levelling the price of LPG fuel can have unintended consequences and distort markets. There has been seen in the rise of LPG conversions for taxis and minibuses in the country, taking advantage of the newly-subsidised LPG fuel for transport use. The rise in LPG use in road vehicles was also due to increased government taxes on transport fuels in 2012 and 2013, which do not include LPG in their remit. The combined effect of being able to avoid taxation on petrol or diesel, as well as take advantage of subsidised domestic LPG, has led to increased LPG use in the automotive sector. More recently, from 2013 onwards, supplementary imports to the Tema Oil Refinery’s LPG output, as well as the government’s scaling back of price controls and subsidies, have reduced automotive LPG use. [3]

Other countries, such as Indonesia and India, have also implemented direct subsidy models, such as the Indonesian kerosene conversion megaproject from 2007-2009, and the Indian LPG sector, which as of 2015 was offering direct subsidies to consumers for the purchase of LPG fuels and equipment through the government’s Direct Benefit Transfer system. Both of these projects have seen a huge shift from the use of kerosene for cooking and heating to the use of LPG, and both projects have achieved this through re-targeting government subsidies towards LPG, and away from other fuel sources. In the case of Indonesia, LPG use following the conversion project rose to over 80% of rural and 90% of peri-urban and urban households by 2013. The Indonesian program also intervened in the equipment sector, distributing 44 million LPG conversion kits to 15 provinces in the country, enabling consumers to convert to LPG fuel without the high initial investment in LPG-using equipment. [1] [2]

pertamina-graph

Increase in LPG usage before and after the kerosene-LPG conversion project in Indonesia. Source: Pertamina, 2013, http://www.pertamina.com/en/

However, experience with developing a functional private market for LPG in some developing countries is limited, particularly in Sub-Saharan Africa. The persistent issues of access to the LPG fuel and reliability of supply, as well as transport considerations for rural areas and a lack of a distribution network, can hamper the development of markets. The next post in this series will investigate business models for use in the LPG sector by private or public-private participants.

– Xavier Lemaire and Daniel Kerr, UCL Energy Institute, February 2016

[1] Budya & Arofat (2010) Providing cleaner energy access in Indonesia through the megaproject of kerosene conversion to LPG. Energy Policy, Vol. 39, pp. 7575 – 7586.

[2] Andadari et al. (2014) Energy poverty reduction by fuel switching. Impact evaluation of the LPG conversion program in Indonesia. Energy Policy, Vol. 66, pp. 436 – 449.

[3] Biscoff et al. (2012) Scenario of the emerging shift from gasoline to LPG fuelled cars in Ghana: A case study in Ho Municipality, Volta Region. Energy Policy, Vol. 44, pp 354 – 361.