Using challenge funds and lean data approach to catalyse and measure the impact of financing for affordable and clean energy for low-income people (SDG7) in Uganda
Description
UNCDF CleanStart is a global programme focused on getting low-income people a jump-start on using clean energy. CleanStart fills a “missing middle” in energy SME financing through grant and debt to catalyse sustainable business models that reach the last-mile. <br />
The practice is: 1) challenge fund to incentivize companies to go beyond business as usual and demonstrate a viable business model for reaching the under-served market; 2) customer (beneficiary) impact and satisfaction measurement using lean data approach; 3) market research using big and small data to understand people’s purchasing patterns and market gaps.
Central to CleanStart’s approach is encouraging clean energy companies to serve rural and low-income customers in a commercially-viable way, as well as ensuring women and youth’s active participation in the energy value chain as customers, employees and employers. The Challenge Fund instrument de-risks the upfront cost that companies need to bare to trial and evolve a scalable business model that targets these under-served customers. This mechanism is an effective way to directly partner with the private sector to tackle SDG 7, as well as foster economic growth (SDG 8), gender equality (SDG 5) and alleviate poverty (SDG 1). From application, selection, through to project implementation, challenge funds generate data on market trends/gaps, enterprise development needs, and customer behaviour which informs subsequent challenge fund designs and CleanStart interventions. <br />
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CleanStart complements these supply side insights with demand side data. The objective of the lean data study is to measure the impact of the challenge fund mechanism on end-users of clean energy solutions. It aims at further understanding the income levels of CleanStart’s portfolio customers, whether companies reach low-income and rural people, and what are the socio-economic impacts of purchasing clean energy, such as a solar system, on end-users. Additionally, CleanStart corroborates these findings with market level insights by collaborating with research organizations and Big Data providers such as mobile telecommunication operators to analyse how Ugandans in general purchase and finance solar home systems. <br />
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Using these tools we are tracking the customer and entrepreneur growth journey and answering big questions such as: What impact is CleanStart having on SDGs and how? How do people move up the energy ladder? What are the synergies between energy and digital financial inclusion? How can entrepreneurs become investment ready post-UNCDF? Our goal is to have actionable insights, meaning we use the insights to improve our challenge fund design and selection process; and combine insights with training to investees on how to apply the data to product and service improvements.
To date, CleanStart globally has reviewed over 250 applications to commit grant funds to 30 companies. Launching a Challenge Fund, from market scoping stages to the selection of partners, takes 7-12 months. Companies are selected based on a competitive submission of business proposals, outlining their strategy for responding to CleanStart’s objective of fostering access to clean energy for low-income people. Long-listed companies are provided support in building their applications, which are later reviewed by an independent investment committee for a decision of support in the form of a performance-based grant. To ensure commitment by the entrepreneur and sustainability beyond UNCDF, companies must make a cost-share contribution ranging from 30%-50% of total project costs, through in-kind and monetary commitments. CleanStart signs performance-based agreements with final selected companies. The investment can run for a duration of 1-3 years during which companies’ progress is monitored on a quarterly basis, and grant disbursements are made according to milestones achievements. Examples of milestones include opening distribution hubs in certain regions, hiring staff or agents, selling a number of clean energy solutions, establishing financing or distribution partnerships. Companies are monitored in terms of their staffing, sales, portfolio health and percentage of women, low-income and rural customers. In Uganda, CleanStart requests challenge fund applicants to update their company data annually (sales, outlets, and other) so that UNCDF can efficiently design new funding windows, and deploy capital including loans and guarantees to companies based on an up-to-date pipeline of investable companies.
For the lean data impact research, we used a mix of 1) interviews with companies; 2) Interactive Voice Response Surveys with company customers; and 3) Focus group interviews with company customers. Automated phone surveys are rapid and cost effective than traditional survey methods. It requires a month for survey design, translation to local languages, running the survey and obtaining and analyzing the data. 20 questions were designed to gain insights on the level incomes of customers through a poverty probability index (PPI), customer product satisfaction and the socio-economic gains derived from having access to solar energy. The survey was conducted with 568 customers of two solar home system distributors that sell their products through pay-as-you-go that were investees under CleanStart’s first challenge fund portfolio in Uganda. The survey reached 568 respondents within 5 days and it required 3 full time days to clean and analyse the data. Non-disclosure agreements were signed with the companies to gain access to their customer database.
The lean data study confirms that the two challenge fund partners in Uganda reached people at the last-mile. There is evidence that the challenge fund directly contributes to increasing access to electricity (SDG 7 indicator 7.1.1): 61% of surveyed clients gained first-time access to electricity when purchasing their solar home system. In addition, 48% of respondents live in rural areas, which previous to PAYG financing solutions were typically excluded from purchasing solar products.
Making solar energy affordable to low income people has been one of the opportunities given by PayGo financing. Across the sample, 7% of customers belong to the lowest incomes (below USD 1.25 per day), 27% are low income (below USD 2.50 per day) and 66% are medium income (above USD 2.50 per day). The SHS better reach low income people in rural areas, among which 10% belong to the lowest incomes, 32% are low income and 57% medium income.
Fuel substitution (SDG 7 indicator 7.1.2) indicates a sustainable adoption of clean energy for household electricity needs. 44% of respondents stopped using traditional fuel for lighting after purchasing their SHS. The full substitution of traditional fuel with solar is higher for rural respondents, with 51% now only using solar. However, fuel stacking remains a phenomenon with 30% of respondents still using one additional fuel, being mostly candles. 26% of respondents use two additional fuel sources for lighting, with a majority of them using a mix of candles or torches, and grid electricity. This indicates that either energy needs are not met with current solar home systems (SHS), or that the output of SHS deteriorates over time. Another explanation found in a focus group conducted in 2019 is that customers use candles as a buffer when SHS are disconnected between mobile money top-up and the activation of the SHS, and when customer assistance is closed during evenings.
The study also captures positive externalities linked to access to affordable and clean energy. People perceive that the SHS primarily saves them time (38%) and money (27%). The perception of money savings increases with the duration of ownership of the SHS, from 25% for customers having purchased their SHS less than a year to 31% for SHS owners for more than a year.
In the case of the lean data pilot, agreeing on the content of the survey through a participatory process with companies helped align UNCDF goals of measuring socio-economic impact and companies wanting to gain insights on customer behaviour. Customer confidentiality and potential negative impact of the survey on customer relations were risks that were both mitigated by signing non-disclosure agreements and by UNCDF taking ownership of the survey when interacting with customers. At the end of the day, what is most helpful is the trust and relationship that UNCDF has built with the partners over the years. Companies know that their data will not be used against them, and that UNCDF is a funder but also a partner and their success is our success, and we are open to failures and mistakes as long as these are identified and flagged in advance.
Not all businesses will succeed. In fact, typically 25% of companies fail, 30-40% succeed and 35% overachieve their targets. However, when projects do take off, there is big scale and leverage potential which contributes to sustainability. In Nepal, CleanStart’s partner financial institutions had little to no prior experience in energy lending prior to the CleanStart partnership. A year after completion, all partners are continuing to expand their energy lending portfolio building on their CleanStart experience. In Uganda, with CleanStart, d.light, a solar PayGo company, launched its solar PayGo business in 2016. 9 months into the partnership, d.light leveraged $5million in grants including that from UNCDF CleanStart to raise an additional $17.5 million in debt and equity to expand the solar PayGo business globally.
Furthermore, the lean data research also serve as a sustainability measure for the investments. For CleanStart it has proven to be a cost-effective monitoring tool to measure customer profiles and satisfaction on a recurring basis. These insights are fed back to companies, and will give helpful hints on what business models tweaks can be made for enhanced uptake and usage. For example, the Uganda pilot showed that PayGo repayments may be less about income, and more about customer education and service improvements such as longer opening hours during evenings for customer care; seamless payment to unlocking process; and quality of sales agents.
Lastly, CleanStart organizes Thinkshops and trainings with private and public sector actors in Uganda to share insights gathered about the entrepreneur and customer journey to inspire others in the market. UNCDF also supports industry associations such as the Uganda Solar Energy Association on market intelligence; policy advocacy; and capacity building of its members so that the overall business environment enables incubated business models to grow and be replicated by others.
The challenge fund mechanism is a powerful tool to catalyse private sector investment in the achievement of SDGs. The lean data pilot in Uganda demonstrates the socio-economic impact that our investments are having, and suggests ways that we can incentivize private companies to do more. <br />
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We are finding recurrent messages in our analysis of the data we collect from challenge funds, customer impact of portfolio companies (lean data) and market research. These include the need to do more to reach the low-income segment, including targeting even lower income customers, expanding last-mile distribution points and agents, and improving customer care; the interest from customers to upgrade to larger clean energy products that can power TVs and appliances; and the need to support small, local SMEs to improve their business management skills to take their businesses to the next level. <br />
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UNCDF CleanStart will continue to follow the customer and entrepreneur journey so that ODA can be relevant and catalyse private sector engagement in delivering SDGs in a meaningful and sustainable way.
For an overall description of UNCDF CleanStart’s contribution to the SDGs: https://spark.adobe.com/page/miuisSL0Zoler/
Blog on challenge funds: https://spark.adobe.com/page/TjFTMuDNclvFN/
Blog on Energy Ladder Research: Why do low-income people adopt clean energy? : https://spark.adobe.com/page/ipuqiDQY7qBzV/
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Emily Gamble, M&E and qualitative analyst