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.

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.

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]

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.

“Fuel Switching” To LPG: Substituting More Sustainable Fuels

‘Fuel switching’ has achieved some prominence in the sustainable energy for development discourse. Fuel switching is usually used to define situations where end-users transition from less-sustainable traditional fuels, such as fossil fuels like kerosene or paraffin, or traditional woodfuels, to more sustainable sources of fuel used for the same purpose. For example, kerosene for lighting may be substituted for electric lighting from a solar home system, or woodfuels used for cooking or heating may be substituted for LPG.

Fuel switching has been particularly put forward when relating to LPG uptake in developing countries, as LPG fuel has significant benefits over other modes of fuel used for similar purposes. These can include superior combustion properties, producing less indoor air pollution with the attendant co-benefits in terms of public health. Fuel switching can lead to a reduced burden on the end-user for energy resource acquisition, such as alleviating the time burden of collecting woodfuels or purchasing charcoal/kerosene.

Time spent collecting wood fuels per day by women in different African countries, 1990-2003, World Bank 2006. Source: http://ourworldindata.org/data/environmental-change/indoor-air-pollution/

Fuel switching (combined with the use of efficient cookstoves) can also lead to improved performance resulting from the use of a more energy-dense fuel, such as reduced cooking times.

A comparison of different types of clean cookstoves and their relative energy consumptions and times to boil water. Source: http://www.lowtechmagazine.com/2014/06/thermal-efficiency-cooking-stoves.html

But fuel switching is not a one-way process where energy users switch to modern fuels and never come back to traditional fuels. Energy stacking is defined as when end-users in developing countries engage in multi-modal fuel usage depending on a variety of factors (e.g. variances in household income seasonally or over time), or utilising certain fuels for specific purposes (e.g. using kerosene for lighting and woodfuels for cooking).

Creating the incentive for a household, commercial enterprise or industry to engage in fuel switching can be challenging. The barriers to increased uptake of sustainable energy sources and more-sustainable energy equipment, such as solar home systems or LPG cooking apparatus, are well-documented [1] [2]. These can include higher costs for fuels, high initial investment costs putting systems/equipment out of reach of users, and problems with fuel availability, for example in distributing LPG fuels to remote rural areas.

These issues will be addressed in the next article in this series on the STEPs Blog, “Methods of Promoting LPG Uptake in Developing Countries”.

— Xavier Lemaire & Daniel Kerr, UCL Energy Institute, February 2016

[1] Pandey & Chaubal (2011) Comprehending household cooking energy choice in rural India. Biomass & Bioenergy, Vol. 35, pp. 4724 – 4731.

[2] Rai & McDonald (2009) Cookstoves and Markets – Experiences, Successes and Opportunities. Available at: http://www.hedon.info/docs/GVEP_Markets_and_Cookstoves__.pdf#