RBF closure story 2
Boosting the market for clean energy technologies in Peru
Climate-friendly solar water heaters are on the rise in remote areas
Óscar Yance was born in Huancayo, the capital of Junin Region in central Peru. Located in the Andean mountains at over 3,000 metres above sea level, Huancayo is relatively cold, but sunny. Yance saw a business opportunity in these conditions: using solar water heaters, sunlight could be used to heat cold water. Having worked at a microfinance institution with a green portfolio, Yance was familiar with the technology. Solar water heaters have been used in Peru for over 30 years – however, until 2015 their use was almost entirely limited to the city of Arequipa and its surroundings. Reasons for this were manifold starting from low quality products, to lack of promotion and lack of access to consumer financing. This changed in 2016, when EnDev initiated its results-based financing (RBF) project to bring solar water heaters to rural areas by offering financial incentives to private companies. The RBF mechanism shifts the focus from inputs and activities towards results, so that payments are made only once independently verified outcomes have been achieved, instead of making payments up-front for project inputs. The project also brought microfinance institutions on board: banks were offered incentives for each loan issued for the purchase of solar water heaters, making it easier for potential clients who could not afford an upfront payment. Yance saw his chance. He started importing solar water heaters from China and sold them locally,
Market expansion feasible
Twenty-five other Peruvian entrepreneurs have, like Óscar Yance, benefitted from the RBF scheme between 2016 and 2018. For each verified solar water heater that they sold and installed, the entrepreneurs received an incentive payment from the project. Each urban sale had to be matched by at least one rural sale in order to be eligible for incentives. Over the course of the project, this was increased to at least two rural sales. Sales anywhere in the country were considered eligible for incentives, except those made in the city of Arequipa. This allowed companies to broaden their customer base in easy-to-reach urban areas, while at the same time requiring them to move into rural areas in order to receive incentives. Growth in urban areas led to increased awareness about the benefits of solar water heaters throughout the country, and take-up in rural areas increased as a result.
As the RBF project continued, the incentives were reduced year-on-year; entrepreneurs received less money for each sale, as it was assumed that the businesses had grown stronger and were more sustainable. Expanded businesses sold more units and, despite reduced incentives, project partners continued to benefit from the project, resulting in a further strengthening of the market. Now that the project has come to an end, businesses are more confident that a stable market has been established and can continue to market to rural communities.
The project also supported the creation of market linkages between the different actors: EnDev supported importers in finding wholesalers and retailers to establish sustainable local distribution structures in rural areas. Some wholesalers or retailers have become importers and now generate higher profit margins. Two other companies have successfully started exporting to Bolivia.
Results in a nutshell
A massive transformation of the sector has been achieved. Between 2015 and 2018, the project recorded sales of around 4,130 solar water heaters in 18 of 25 Peruvian regions. In comparison, only 5,000 units were sold in the previous 30 years in Arequipa alone. With approximately five family members per household, over 20,600 people had benefitted from the technology by the end of 2018. The project did not only benefit people and regions, but also the environment: within two years, forests equivalent to twenty football fields had been saved and almost 5,500 tonnes of carbon dioxide emissions had been cut – this is equal to the emissions produced by 3,667 cars per year.
Within the RBF project, 31 companies have sold solar water heaters in rural areas and received incentives. Six microfinance institutions participated and gave loans for solar water heaters. More than 100 new jobs have been created, 40 percent of them for women. While 439,000 euros has been disbursed as incentives, more than twice this figure has been invested by the project partners – taking the total amount mobilised across the country to more than 1.7 million euros. In some cities, the number of shops selling solar water heaters has increased from four in 2014 to more than 20 in 2018, an increase of 400 percent.
Learn more about the project here
Lessons learned and ways to improve
The design and implementation of the RBF project in the Peruvian energy sector generated valuable lessons. For those in other projects or organisations active in the same field, these lessons provide guidance for the roll-out of future RBF projects. Read here about our experiences and conclusions:
1. Put the right actors in the driver’s seat. At the outset of the project, it was assumed that the lack of access to microcredit for consumers was one of the barriers preventing the growth of the solar water heater market. However, internal processes of microfinance institutions were found to be slower than those of the providers. Only 10 percent of sales in the first and second phases of the RBF project were enabled by loans, hence incentives for banks were stopped in the final phase. We learned that rural markets cannot be developed by microfinance institutions alone, and require an energy company pushing and marketing its product in the rural market.
- Companies are the drivers for rural market development. Make sure that companies are put in the driver’s seat to market their products in rural markets. Microfinance institutions can complement companies’ activities, but have to be actively engaged by the respective companies in order to establish a direct relationship and gain sufficient familiarity with, and certainty about, the product in order to include it in their loan portfolio. It takes time for companies and microfinance institutions to build these relationships on their own. Be sure to include structures and processes in your project to facilitate and accelerate this process.
2. Be clear on target areas Clear geographical targeting for RBF incentives can be effective to develop rural markets: with the explicit focus on rural areas, the project was able to move companies into new areas. With the incentives acting as a kind of guarantee, companies were willing to take the risk and invested in outreach in rural markets to promote solar water heaters – and were rewarded for it. As a result, these companies and their products are now represented in 18 of Peru’s 25 regions.
- Be sure that the incentives encourage companies to move into the desired geographical locations.