It is possible to combine clean and distributed energy development (a significant component of sustainable development) and provide access to electricity for the poor. The success of E+Co’s investments in Tecnosol, in Nicaragua, with the local entrepreneur as the driving force in the market, demonstrate that locally based nongrid energy systems can work.

Globally, approximately 1.8 billion people lack access to electricity, and 2.4 billion people use wood fuels for cooking. The poor spend roughly $20 billion per year for ad-hoc solutions, such as kerosene lamps, candles, charcoal, firewood, dung fires, and batteries, just to meet basic energy needs.^[1] Lack of modern forms of energy, particularly electricity, keeps people from escaping poverty and becoming more productive, and these substandard substitutes are often more expensive and more damaging than modern alternatives. For these reasons, electricity access has been a top priority for world governments, multilateral development organizations, and nongovernmental organizations for more than 50 years. However, the number of people without access to modern forms of energy has remained approximately the same despite these efforts.

In 1994, E+Co, a rural energy finance company, was formed to pioneer a different approach to the global energy problem. Focusing on local entrepreneurs, E+Co combines the traditional training and support services of a nongovernmental organization with the capital investment strategies of private equity and banking firms. The result could lead to a dramatic rethinking about how to reach and provide access to energy to the world’s poor.

Over 10 years, E+Co invested in 90 energy enterprises, reaching more than 200,000 people with modern energy across a variety of technologies and geographical contexts. The firm intentionally cast a broad net by working in more than 20 countries on multiple continents as it has sought to experiment, replicate, and prove its model. This phase of experimentation revealed four main conclusions:

The demand for electricity in rural unelectrified areas is largely driven by the need for basic lighting and productive uses such as irrigating fields or operating machinery. One light bulb can keep a store open through the night or provide light for reading, household chores, and even basic security. An electric water pump can save hours of time fetching water. In addition, as globalization continues, there is increasing demand for telephone and even the Internet. When 60,000 poor people were asked to name the number one thing they wanted, they said technology and information, not food and charity. Poor people know that what keeps them poor is lack of competitiveness and knowledge.”^[2] Without electricity, there is little or no possibility these aspirations would come true.

Poorer countries tend to have the lowest levels of electrification since per-capita income and the percentage of a country that has electricity are unequivocally correlated. This is further supported by the observation that when a country’s per-capita income is less than $300, typically 90 percent or more of the population uses firewood and dung for cooking. However, when incomes have exceeded $1,000 per capita, most people are able to switch to modern fuels, which further perpetuates their ability to earn greater income.^[3]

Families in rural areas of developing countries spend approximately $10 per month on energy, which can represent between 10 percent and 40 percent of a family’s income.^[4] A billion people in rural markets have the ability to pay for energy, with many of these billion people spending $5 to $10 a month exclusively for lights.^[5] Rural customers around the world are estimated to spend between $8 and $12 per month for lighting services, including candles, kerosene, dry cells, or battery charging.^[6] These sources of energy are dirty and inefficient, and on a per-kilowatt basis they cost anywhere from five to 100 times more than modern fuels and electricity. The paradox is that the poor are spending a disproportionate share of their income on a product that richer people can get cheaper and of higher quality.

Although the cost of energy would appear to be the main driving concern of rural households, experience indicates that high quality and reliability are the most valued attributes of an energy system. Willingness to pay for electricity that is reliable, safe, and of high quality is often higher than what is currently spent on energy services.

Modern distributed energy in developing nations may take many forms, but among the most exciting is the potential for widescale adoption of renewable energy technologies. Renewable energy is characterized as an energy resource that is inexhaustible in a reasonable period of time. The global renewable resource base is considered large but is currently being utilized far below its potential. The most advanced renewable energy technologies include solar photovoltaics, wind power, biomass, geothermal, and hydropower. A main advantage of renewable energy technologies is that the majority of the cost is up front, while the “fuel” costs are for the most part free.

Cost reductions in renewable energy technologies have driven renewed interest in the potential of alternative means to generate electricity. Technological advancements and economies of production supported by increased demand have led to this cost decline, which is predicted to continue as markets for renewable energy further develop. Wind power and solar photovoltaics in particular have been growing at more than 20 percent per year, while conventional sources of energy are barely growing or declining. The learning curve^[7] for photovoltaics has been over 20 percent, resulting in an 80 percent cost reduction since 1980.^[8] Wind power, currently the world’s fastest-growing energy source, has grown at a rate of nearly 40 percent between 1997 and 2000; in locations with good wind resources, it is considered to be the lowest-cost energy option.^[9]

Given that grid extensions can cost up to $10,000 per kilometer, renewable energy technologies are often a more cost-effective and appropriate solution to meeting the energy needs of rural noncontiguous areas in developing countries. Adoption of renewable energy technologies to meet energy needs in rural areas offers an opportunity to “leapfrog” the traditional development paradigm characterized by centralized electricity generation by fossil fuel power plants. Renewables also are a good solution in many developing markets because the amount of power they provide comes in scales that are quite appropriate to the demands of the market. Depending on the size, a photovoltaic array on the roof of an individual household can provide enough electricity to power a few lights, a radio, and television.

At the heart of a revolution in distributed energy is a series of success stories developed over the past decade. E+Co is transforming how the bottom of the pyramid obtains and uses energy by emphasizing “energy through enterprise,” the delivery of clean energy through local entrepreneurs. In general, the prevailing view was one of generally large-scale, project-oriented investing implemented through government programs or grants to in-country nongovernmental organizations. Many of these projects and programs took the form of aid financing programs sponsored by multilateral institutions such as the World Bank Group for electricity grid extension or for subsidized “giveaway” programs to the rural poor. The expectation was that access to modern energy would generate a host of additional benefits, including greater economic prosperity. This prosperity would allow the government to repay the aid financing and would support further organic growth of the energy infrastructure. The fundamental flaw in many of these programs was how they distorted or ignored fundamental market forces and issues when targeting underdeveloped areas.

Often, with grid extension projects in areas where people were subsistence farming, the government or a nongovernmental organization would install power lines and lights, and then expect to charge a monthly bill at the same rates as for people in the city. Of course, the farmers had no significant disposable income, so the project would eventually fail.^[10] In other cases, nongovernmental organizations would get a grant to install a certain number of solar panels at no cost in a region. This would be fine until the panels stopped working because of faulty installations, worn-out batteries, or other problems. Before then, the nongovernmental organization would have filed a final report with details on how many installations had been accomplished, how many households had been served, and so forth, and would have moved on to the next grant proposal. Many of these programs just were not sustainable in any kind of business sense.

In contrast to the top-down structured plans of the multilateral institutions and aid agencies, E+Co proposed to seek out and invest in entrepreneurs in developing markets who would develop new products and services to meet the energy needs in their communities. Since many of these entrepreneurs would not have significant business or even energy experience, the investment would be coupled with significant support services provided on a nonprofit basis.

Rather than focusing broadly on growth finance across multiple industries, E+Co was designed from the outset to accomplish a specific mission: the provision of clean, modern energy to the world’s poor via locally developed, market-based solutions. By focusing on energy, E+Co expects to have substantial social, environmental, and economic benefits that will reinforce continued growth in each community in which it invests. Well beyond accomplishing a major feat of economic and social development, this strategy has important implications for the growth of E+Co and its investment portfolio. If successful, E+Co and its investors will realize a real return on their seed capital and create substantial opportunities for follow-on investments by commercial institutions.

By targeting the entrepreneur, E+Co shifts the focus away from technology, demonstrations, and donor programs to enterprise, markets, and competitive growth. A key metric of success is the ability of the businesses to grow to a point at which they are self-sustaining or are able to access larger, commercial sources of investment. E+Co’s approach identifies market opportunities and business models through direct interaction with entrepreneurs and then provides them with the tools, training, and capital to mature their concept into successful, commercially viable businesses.

Figure 1. Modern energy is the key link to eliminating poverty, by stimulating social benefits and economic development in an environmentally sustainable manner.^[11]

The initial relationship between the entrepreneur and E+Co or its partners is an opportunity to evaluate each other’s goals and expectations. Contact between an entrepreneur and an E+Co representative typically begins with a training session in a given region publicized through local partners. During this “market opening,” E+Co staff and local partners present success stories, describe the E+Co investment process, and provide general comments about opportunities that could qualify for potential investment. Basic business planning resources are distributed. During this and subsequent events, serious entrepreneurs are identified and engaged in more detailed discussions with investment officers who eventually select a limited number to participate in a more formal and detailed program of Enterprise Development Services. Roughly one in five entrepreneurs that E+Co has any substantial contact with are selected to receive significant support; one in 20 may actually receive an investment.

The scope of E+Co’s investments, although sometimes beginning at only a few thousand dollars, should not be confused with microfinancing, which is generally designed for incremental economic activity such as short-term working capital for the purchase of individual livestock. Although the average E+Co investment is just more than $110,000, it varies widely by region with the mean investment in Africa being less than half that amount. E+Co also provides substantial support in attracting and negotiating follow-on investments for portfolio companies and in assisting them in raising their stature in their community. In many cases, the investment triggers increased access to commercial capital, better vendor financing terms, and increased positive attention from government policy officials.

Operating in an area between traditional development programs and commercial capital, E+Co’s strategy incorporates elements of both approaches to investing. In combining these styles, the firm has pioneered several innovative strategies to meet its needs for investment capital, operational funding, and increased organizational impact in providing access to modern energy. As a provider of quasi-commercial capital, E+Co cannot earn true market rates of return on its early-stage investments. Therefore, to create a pool of investment capital, E+Co has targeted the philanthropic community to generate low-interest loans or outright grants from foundations, socially oriented investors, and corporations seeking a triple bottom-line return.^[12]

E+Co’s ideal investments are companies that have successfully penetrated the market with unique, defendable strategies and are now in a position to expand their business through next-stage growth capital. One such example is Tecnosol in Nicaragua. Tecnosol sells and installs distributed solar PV, wind, and hydroelectric power systems to mostly rural unelectrified populations throughout the country. Despite generally unfavorable economic conditions and a chronic shortage of working capital, the company has still been able to double its sales each year.

Tecnosol has been able to succeed primarily on the strength of a market strategy that allows it to reach deep into rural markets with a clearly differentiated and well-publicized offering. Tecnosol also has been able to leverage universal and regional knowledge in the field of rural and especially solar-based power business through close consultation with E+Co and its partner’s broad experience base. This has allowed Tecnosol to significantly advance the sophistication of its business plan and has opened opportunities for new sources of capital (in particular, a major loan from E+Co). The combination of a superior market strategy and access to both dedicated business advisory support and growth capital is allowing Tecnosol to find new avenues for growth to better serve the large market for electricity in rural areas of Nicaragua. The company has installed more than 3,500 PV systems, 20 wind systems, and a few small hydroelectric systems. Growth has been highly organic and has benefited from a reputation for good quality and service. As the firm’s reputation has spread, so has its growth.

Tecnosol’s business model is to sell renewable energy systems to customers primarily on a cash basis. In addition to complete packages for solar, wind, and hydroelectric systems, the company also sells accessories, including lighting systems, electric fencing, refrigerators, fans, water pumps, and water purification devices. If requested by the customer, the company will also place custom orders for various other electrical devices. Although margins on these additional requests are sometimes quite low, they are part of a strategy of providing complete service to meet the needs of the customer.

Tecnosol focuses primarily on customers who can more easily afford renewable energy systems, which mainly includes farmers and landowners. As pointed out by an E+Co investment officer, “Tecnosol taught us a lesson. It is not always necessary to go after the poorest people first—there are often many customers who are willing to pay higher amounts even in what would be considered underdeveloped areas.”

A common means of accessing the capital needed to buy a system in such areas is through the sale of livestock. One interviewed customer, who was quite pleased with his purchases, described how he sold 6 cows for an illumination system and 10 cows for a water-pumping system. Even then, the addition of electricity to his property resulted in real monetary savings (about $40 per month in labor for carrying water and about $8 per month in the cost of kerosene candles^[13]) and an overall increase in property value. To meet the needs of a range of potential customers, Tecnosol offers prepackaged systems for a variety of levels of affordability, including a small 14-watt PV system for the poorer people.

Tecnosol provides a full-service installation on all energy systems and gives verbal and written instruction to the customer on proper system maintenance. Two other smaller companies sell renewable energy systems in Nicaragua, but Tecnosol distinguishes itself by focusing on quality and customer service. Technicians travel any length to reach a customer (on horse if necessary), and if any problem is reported, a technician is always available to solve the problem. One lesson of previous rural electrification companies around the world is that quality is a key value driver in many rural markets because many people are skeptical the new technology will function as advertised, especially when compared to traditional solutions such as buckets (for carrying water), candles, and wood. Because word of mouth through existing customers is a primary driver of new buyers, quality and service satisfaction takes on an added importance. To support this spread of information, the company also uses a variety of media, including radio, newspaper, and market fairs to advertise its products throughout the country. Tecnosol offers eight main packages for its customers, anywhere from a basic lighting system to a complex system for water pumping or refrigeration.

In what is an increasingly common revision of policy in many developing nations, the government of Nicaragua acknowledges it does not have the capacity to meet the energy needs of most people in the 50 percent unelectrified population in the country. As stated by Gioconda Guevara, the director of energy policy for the National Commission of Energy:

As a response to the success of the private sector in serving the energy needs of rural communities, governments and multilateral institutions have started to adopt policies and build programs that support further expansion of private businesses for delivering energy services.

Companies selling and installing solar photovoltaics, wind, microhydro, and biomass power systems to unelectrified regions of developing countries are proving a lower-cost, cleaner, and faster way to deliver energy compared to traditional approaches. The historical perception of the energy problem as a “development issue” has been altered by a new approach that emphasizes local entrepreneurship in meeting the energy needs of underdeveloped communities. E+Co has effectively demonstrated that business models, technologies, and willingness to pay are not the limitations in meeting this energy need. The main challenge is bringing the necessary investment to scale up currently profitable enterprises and to build new businesses in unserved markets. This new paradigm emphasizes market forces, sustainable business, and replication over technology demonstration, donor gifts, and individual projects.

Addressing the energy problem at the bottom of the pyramid involves elements relevant to both developing and developed countries:

A new energy future is being sculpted in both developing and industrialized countries reflecting these themes. This future entails energy being generated from renewable sources and delivered close to the site where it will be consumed. Although technologies that are allowing this transition to take place have been formulated largely in the north, developing countries are taking the lead in their dissemination. The results from this phenomenon could significantly impact the way the energy sector evolves. Through both economies of scale in manufacturing and an approach that emphasizes locally managed and controlled energy delivery, the success of energy enterprises using renewable energy technologies at the bottom of the pyramid might prove to be the most important innovation in the energy sector for years to come.