NDF - Financing for climate change and development projects

NCF: Clean energy promotion through microfinance in Ethiopia [NDF 62 B 1]

Photo: Kari Hämekoski
Photo: MicroEnergy International
Photo: Paula Tommila/Gaia Consulting Oy
Photo: MicroEnergy International
28.01.2015
Strengthening resilient and inclusive green growth by advancing clean energy technologies through business development in the micro finance sector in Ethiopia

Ethiopia
Clean energy promotion through microfinance in Ethiopia
Ref:  NDF 62 B 1

Nordic Partner: Gaia Consulting Oy
Local Partners: Buusaa Gonofaa Microfinance SC, Harbu Micro Finance Institution Share Company, Specialized Financial & Promotional Institution (SFPI) and Swan Management Plc
Other Partners: MicroEnergy International GmbH
Total Project Cost: EUR 535,979
NCF Financing: EUR 325,900
Agreement Signed: 5 November 2014
Project Classification: Mitigation
Duration: 42 Months

Project Objective

The objective of the project was to promote inclusive green growth by stimulating private sector business development within the renewable energy and financial sectors. The project aimed to increase access to reliable and affordable clean energy technologies (CET) for low-income households and microenterprises in Ethiopia, contribute to the reduction of GHG emissions through improved energy efficiency and introduction of sustainable energy sources, and to raise living standards.

Description 

The project initiated an innovative and replicable mechanism to finance clean energy technologies (CET) for households and small and middle size enterprises (SMEs) through a microcredit financing mechanism. During the project, a business concept was established for three Ethiopian microfinance institutions (MFIs), with a total of more than 200,000 existing clients. The business concept can be extended to other MFIs in Ethiopia as well as to other developing markets with similar needs, creating a potential customer base of tens of millions of people. The project developed the entire supply chain for high-quality, clean energy technologies for low-income markets. The actual technologies were selected during the project implementation and it was found that customers are most willing to pay for solar home systems and pico PV lamps. The project trained the microfinance institutions and clean energy technology providers in the execution of the new credit mechanism. In addition, the project studied ways to utilize innovative financing instruments to co-finance CET, facilitate scale-up of the business mechanism and contribute to achieving the targets of the country’s NAMAs and NAPAs.

Relevance for Climate Change

The project contributed to climate change mitigation by reducing GHG emissions from energy generation through replacing unsustainable energy sources by renewable options. The project will achieve direct GHG emission reductions of 3,500 tCO2 over a 20 years’ period thanks to the cleaner energy technologies deployed during the implementation period.  150,000 tCO2 more can be expected to be avoided indirectly thanks to up-scaling of the credit lines within the three MFIs during ten years after project completion.

Innovation and Knowledge Transfer

The project proposed a leapfrogging financing mechanism for enabling access to high quality CET to provide energy access without a traditional grid connection. Since the project built the business mechanism upon existing infrastructures and steadily growing outreach of the microfinance sector, it was able to utilize proved channels to reach potential clients and to provide them with access to new, yet tested CET. The lack of existing financing mechanism has been identified as the main barrier for the private sector and CET providers to expand their outreach to rural areas and low-income population.

The Ethiopian microfinance sector has limited capacity to respond  to the need by for example including green energy financing activities in their operations. The approach responded to the urgent need to facilitate a further collaboration between energy system suppliers and financial service providers to ensure that the technologies are appropriate and affordable to those living at the Bottom of the Pyramid. Energy inclusion targets can only be achieved if financial inclusion is similarly addressed, thus ensuring that those at the Bottom of the Pyramid have the means and ability to take control of their own electrification, increase income-generating activities, and ultimately break out of the poverty trap.

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