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.

Second STEPs Network Meeting – KwaMbonambi, South Africa, 28-30 October 2014

The second STEPs network meeting was held in KwaMbonambi, South Africa from the 28^th – 30^th October 2014. The purpose of the meeting was to address the current status of the project and determine next steps, as well as take the opportunity to both meet local representatives from South African electricity and thermal off-grid concessionaires, and visit the operations of local concessionaires for fieldwork, which will be described in a later post on this blog.

The first day of the meeting saw a great deal of discussion among project partners as to the way forward for the STEPs project. Primary discussion focused around the construction of the STEPs model, focusing on five main aspects: institutional arrangements, business/enterprise models, financing, technology options, and policy/regulation. The project will look to test a number underlying assumptions for the sustainability of thermal energy service businesses, for example operating margins (in the 50-70% range), and the importance of using public sector clients as anchor consumers in a thermal energy business customer base.

Discussions were had on the most relevant technologies to target with STEPs. Key technologies are improved cookstoves, LPG for cooking/refrigeration, and household biogas installations, primarily for the successes seen in previous projects using these technologies. These include the Ghanaian experience in LPG stove dissemination via the government, and the vast scale of the Chinese domestic biomass gasifier program. However, challenges exist to the uptake of all these, including cultural contexts for cooking (meaning stove design needs to take social factors into account), as well as the difficulty in acquiring biomass feedstocks in some country contexts, for example Sub-Saharan/Southern Africa.

Discussion was also had about the most relevant financial and management models to target under the STEPs model, as well as which technologies these models applied best to. For example, outright/financed purchase models under a concession contract are most relevant for improved cookstoves, whereas fee-for-service and progressive purchase models are more relevant for LPG and biogas systems.

Binu Parthan presenting to the STEPs team – 2^nd Steps meeting network – KwaMbonambi, South Africa – 28th – 30th October 2014.

The second day saw representatives from local utility concessions in KwaZulu-Natal attend the STEPs meeting. The concessions represented were KES, with their CEO Vicky Basson attending, active in the Durban and central KwaZulu-Natal region, and Nuon-RAPS (NuRa), with MD Sifiso Dlamini, active in Northern KwaZulu-Natal up to the Mozambican border. The KES utility was founded in 1997, and currently services over 28,000 customers with solar home systems on a fee-for-service basis in and around the Durban area. Tariffs are set at 96ZAR/month for a solar home system, with six lights (2 outdoor, 4 indoor), and a 9V and 12V DC connection point. The company has provided LPG services, both in LPG bottles and integrated stove systems (notably the Shesha stoves from Totalgaz). Their concession is granted via a bidding process by the KZN state government and local municipalities on a yearly basis.

Questions were answered by the concessionaires that added context to the construction and future work of STEPs. These included revisions of assumptions for sustainable operating margins, insight into the regulatory framework in South Africa for LPG financing, and particularly the barriers to the use of mobile money in South Africa, due to transaction regulations in the financial sector and a lack of culture for mobile payments. Subsidy positioning from the government was also identified as a key barrier in South Africa to thermal energy use, with subsidies moving between thermal energy sources frequently.

Both concession representatives stated a desire to expand their thermal energy services business, and stated the criticality of tailored solutions to national and local contexts for technologies, an aspect of the thermal energy market that is core to the development of the STEPs model.

Discussion between the STEPs team and Vicky Basson (KES, far left) and Sifiso Dlamini (NuRa), middle – 2nd Steps meeting network – KwaMbonambi, South Africa – 28th – 30th October 2014.

A number of conclusions were drawn from the meeting. Given the ongoing political difficulties in Lesotho, a reorientation of project objectives was proposed to take into account the changing landscape in which the project operates. Current goals are to construct the STEPs model as a resource across all sectors, being relevant to governments and policy-makers, as well as the private sector and SMEs/entrepreneurs wishing to enter the thermal energy services market.

– Daniel Kerr, UCL Energy Institute

Side-Stepping the Energy Ladder

For decades now there has been talk of a hierarchy of energy use or ‘ladder’ which defined levels of development as well personal aspirations. Occupying the bottom of this ladder were primary fuels such as biomass, dung, etc. Moving towards the middle we had kerosene and LPG which were considered ‘modern fuels’ because of their comparative convenience as well as fairly sophisticated refining process associated with hydro-carbon fuels. And of course, at the top of the ladder was electricity, the most versatile and modern energy source of them all.

There have been many articles published about the energy ladder, some supportive of its clear albeit simplistic representation of how households progress in terms of fuel use while others have been more critical altogether of its rigidity and inability to accommodate variables such as culture,  differing socio-economic and geographic contexts. How this is playing out in South Africa today is quite interesting. Looking at South Africa’s energy policy, it is highly orientated towards developing the ‘top of the ladder’ options. Policy and regulations abound when it comes to nuclear, coal, large scale renewable, LPG gas, etc. But there is little regulatory interest when it comes to wood. Perhaps its posturing (Africa’s largest and most sophisticated economy requires nuclear not biomass regulations) or perhaps that’s the reality (the energy service activities are at the top of the ladder).

Despite this there are a number of inconsistencies emerging;

• Electricity is becoming increasingly expensive (above inflation increases for over 5 years already with about the same to come) so many poorer households are having to ‘back-switch’ to LPG and paraffin.
• Many middle class households that have been electrified for decades are opting to cook on LPG gas (on stainless steel hobs for sure) and heat their houses in winter using wood (up-market fireplaces).
• Millions of households still cook with wood although they have access to electricity. The energy source is simply uneconomic to support the full range of thermal services households require.
• High oil prices (think kerosene and LPG) and increasing electricity prices are putting strain on the ability of people to use fuels which they have access to. Access and utilisation have become two different issues
• Political promises which have for decades reinforced the energy ladder now cannot be met as lower-income households cannot afford to utilise these fuels for all services required.
• Department of Rural Development and Land Affairs has put out a tender for improved cookstoves, a technology that has never appealed to the Department of Energy because of the ‘poverty’ stigma associated with wood. Or, “people did not struggle [against Apartheid] to use wood” the former Minister of Energy [Dipuo Peters] once said to this blogger [African Minister’s Meeting, Sandton Convention Centre, Johannesburg, 17th September 2011].

Without significant subsidies, the lower-income households will find ascending the so called energy ladder increasingly difficult to achieve. The progressive notion of the ladder had much to do with the assumption that it was simply a matter of time before households, given broader economic growth, would progress up the ladder. However such economic growth hasn’t quite materialised and the associated costs of using these fuels has become increasingly exorbitant. Perhaps the middle-class should be used to assist in de-stigmatising the use of biomass fuels and the like which will at least assist in addressing some of the indignity associated with being trapped at the ‘bottom of the ladder’. Third generation improved cookstoves instead of open fires should go a long way in terms of doing just that.

– Robert Aitken, Restio Energy

South Africa’s Renewable Energy Procurement Program

Robert Aitken from Restio Energy offers his thoughts on South Africa’s renewable energy procurement program to date.

South Africa has undertaken a very ambitious renewable energy programme which has the world watching with great interest. It has been said that the current programme to secure 3720MW of renewable energy is the largest in the world at this point in time. The approach used by the government is a competitive bid scheme (IPP Procurement Programme) where the private sector is invited to submit proposals against a stipulated amount of renewable energy required. Each of the identified renewable energy technologies has an associated tariff cap beneath which the bid must sit. The renewable energy technologies involved include; on-shore wind, solar PV, concentrated solar as well as a small amount of biomass, biogas and small-hydro.

It is an innovative and effective scheme which has thus far has been heavily over-subscribed in each of the three rounds assessed. It represents an important step for South Africa for a number of reasons;

• This is the first large scale utility based renewable energy project in the country.
• It will provide security of supply by diversifying the generational mix (previously predominantly coal) of electricity in the country
• It has an increasingly demanding ‘local content’ or localisation component which is intended to stimulate the local renewable energy technology industry
• It also has a strong community component aimed at ensuring local communities in and around these utilities benefit in a meaningful way.

It is these sorts of parallel requirements that will contribute towards the long-term operations and imbedding of renewable energy in the country. However, one of the service gaps this initiative will not address is access to electricity. The REIPPPP is a powerful grid security initiative which demonstrates the country’s willingness to engage with the private sector, promote renewables etc. Despite this 3.4 million households within the country remain without a grid connection and many households that are electrified cannot afford to use electricity particularly for thermal applications. While security of supply is crucial, the South African government needs to ensure a mixed approach (grid/off-grid, rural energy service delivery, small scale distributed initiatives, etc.) if access for all is to be achieved.

– Robert Aitken, Restio Energy