Everyone loves a “win-win”. They are often spoken of, less often found. The North Kivu province of the Democratic Republic of Congo is home to exceptionally rare wildlife, most famously the mountain gorillas of the Virunga National Park. Now a team of researchers has recently uncovered evidence that it is also home to a genuine “win-win”.
BII investee Virunga Energies, which operates three “run of the river” hydroelectric power stations in North Kivu, is capable of producing more electricity than it can presently sell. Most people who live in the region, including the two million residents of the provincial capital Goma, use charcoal to cook. That charcoal predominantly originates from local deforestation, with an estimated two-thirds from illegal deforestation within the Virunga National Park. The charcoal industry is also often controlled by local armed militias. Using charcoal for cooking is very damaging to families’ health, with evidence that it increases cardio-respiratory and neurological diseases, and cancer. Somebody had the terrific idea of giving free electric cookers to households, which generates demand for electricity (and revenue for Virunga Energies), saves households money compared to how much they were spending on charcoal, is good for their health, and reduces deforestation. Everyone is happy![1]
The researchers teamed up with Virunga Energies to randomly distribute 1,000 free electronic pressure cookers to households in Goma. The cookers were popular, on average they were used to prepare 22 per cent of all meals, reduced charcoal consumption by 31kg per month (or 34 per cent) and increased monthly electricity purchases by 11kWh ($2.75). They also reduced cooking times by 35 minutes per day. The researchers estimate that 31kg of charcoal equates to 117 square meters of forest.
A typical household in Goma has been estimated to spend roughly $30 per month on charcoal, representing around 20 per cent of household expenses.[2] Assuming a 10% discount rate, the estimated monthly net saving of $5.75 amounts to $288 over 5 years. The total intervention cost around $94 per targeted household, suggesting that households would quickly make their money back if they had been required to pay for the cookers. If the social benefits of avoided CO2 emissions and the (partial) biodiversity gain from reduced deforestation is added to that $288, the estimated social return on the $94 cost is over 800%.
The fact that buying a stove would pay for itself by saving on charcoal does not imply there is a viable business selling them here, however. In Kenya, researchers found that households were only willing to pay $12 for a stove that would save them $237 on charcoal over two years (and the offer of credit only increased that to $25). That’s because however good value a product is, people living on very low incomes have other immediate and pressing demands on their money.
There is also a question of whether Virunga could profit by subsidising the stoves and making its money back from electricity revenues. Hydropower generation is a zero marginal cost business and when Virunga has spare capacity (it is close to commissioning a fourth power station that will supply Goma), additional revenue is close to pure profit. Based on $2.75 additional monthly revenue it would take about three years to earn back $94, but that is without earning the extra would be needed to cover the cost of borrowing money to buy the stoves. Virunga and donors are still determining the best way to distribute more cookstove. They could be wholly grant-funded (which could limit the quantity made available), partly subsidised, or offered on a pay-as-you-go contract (or some a combination).
Although electric stoves save people money that would otherwise be spent on charcoal, the electricity that Virunga Energies supplies is still expensive relative to local incomes, particularly the initial connection charge to install a meter and equipment (an estimated 74 per cent of Congolese people live on less than $2.15 per day)[3]That limits potential customers to relatively well-off households. Virunga is currently exploring the idea, with partners, of defraying connection charges and rolling them into tariffs, which could make power more affordable and bring the benefits of grid electricity and clean cooking to a larger population.
Once households have access to power, creating financial solutions to help the early adoption of electrical appliances is an appealing idea because otherwise it tends to take very long time for households to be in a position to purchase them. Research in South Africa found that after rural households first receive a grid connection, it takes about eight years before most of them begin to use electricity as their primary cooking method, and about 12 years before 90 per cent of households have a refrigerator and a television. Without those appliances, electricity suppliers will not sell much power, and the households won’t benefit enough from a grid connection to justify its cost.
Our investment in Virunga illustrates both the potential and the limitations of development finance in frontier markets. Virunga Energies exists because of the Virunga Foundation, which has received tens of millions in grants from the EU, and other donors. That money funds its conservation work, including park rangers that protect animals from poachers, but it also funded the initial construction of the hydroelectric power stations and transmission lines, various initiatives to revitalise local agriculture and industry, and – when the security situation permits – eco-tourism. Some of those activities could generate revenue, so could have potential as investments. But although DFIs offer patient and risk-bearing capital, even at the more concessional end of the spectrum their finance is still on close to commercial terms (i.e. expects some positive return).[4] The instruments DFIs use – equity and debt- also require the ability to enforce various rights, which in turn requires the rule of law. BII needs well-structured formal firms or intermediaries to invest in, capable of complying with our policy on responsible investing.
The Virunga Foundation needed grant financing. Even its potentially revenue-generating activities would not have met DFIs’ investment criteria. DFIs do invest in hydropower in frontier markets (another BII investment is developing a hydro project in the nearby Great Lakes region), but Virunga Energies would not have got off the ground without everything else that the Virunga Foundation has done in that community. However, once the power business was established, it was then able to consider expansion by making new investments in generation, transmission and distribution that stood a good chance of making enough of a return to repay a suitably structured loan from a DFI who is prepared to take risks. It is going to be a while before commercial finance goes to North Kivu – not least because of the recent return of armed conflict – but support from BII is helping Virunga Energies move towards operating on a financially sustainable basis. That exemplifies the role of DFIs in frontier markets.
Footnotes
[1] With the exception of the charcoal vendors, probably.
[2] See page 16 here
[3] In another context, researchers found that rural household were only willing to pay a fraction of the cost of a grid connection. Kenya Power had estimated the cost of a single connection in a grid-covered area to be $1435. At the time, the connection price imposed by regulators was $398. The researchers argue there are economies of scale and estimate that an average cost per connection, if every house was connected, would be $739. Their experiments suggested that even at a highly subsidized price of $171, only 24% of rural households would want a grid connection. There are various explanations but chief amongst them is that households tend not to own electrical appliances that need grid power.
[4] BII has recently created more concessional facilities that can offer grants (or finance in expectation of negative returns) under some circumstances.
