How Pre-Payment and Microfinance Can Build “Micro-Power Economies”

INENSUS is a young, off-grid energy company based in Germany that develops solar/wind-hybrid microgrids for developing countries’ remote rural regions. The company’s “Micro-Power Economy” model, currently being employed in Senegal, centers on supporting both income-generating as well as household energy activities to truly catalyze local village economies.

Arc Finance recently caught up with Jakob Schmidt-Reindahl, managing director of INENSUS’ Senegal operations, to discuss the company’s clients, pre-payment approach, and role that microfinance plays in helping to realize the micro-energy economy.

Arc Finance: What is INENSUS’s background and history as a company? How did you get into microgrid development in Senegal?

Jakob Schmidt-Reindahl: INENSUS was actually founded in Germany in 2005. We started the company as three young engineers to mainly focus on small-scale wind energy. In fact, this is still our core business in Europe and Germany. However, we saw a big opportunity in off-grid Africa, and in December 2008, I founded INENSUS West Africa in Dakar, the capital of Senegal. It’s a joint microgrid development venture with a Senegalese power generation company called CSI MATFORCE. In the beginning of 2009, I moved to Dakar and I’ve been here ever since, setting up the company and preparing and executing our pilots. We did the installation and commissioning for our first project in the beginning of 2010. Since then, we’ve been testing and operating that system. We’re finally preparing to scale up. We now have the financing to fund projects in thirty villages over the next twelve months, and are getting ready to start this fall.

AF: What is the specific profile of the clients and communities that you are targeting?

JSR: The areas in which we work are totally off-grid. From our perspective, we want to focus on working in villages that are too far to be connected at any point in the next several years. These villages have an average population of 1,000 people. Some villages are smaller and others are larger; however, we’re hoping to get an average of 1,000 so that we reach a total of 30,000 people in the 30 villages. There are about 12-14 people per household, which means there are between 60 to 70 households, connections, or lines per village.

Our target market is not the poorest of the poor. We’re talking about villages and people with simple lifestyles and no electricity; however, they generally do have some income. Often, our clients will farm or, if they’re close to the sea, fish. They typically have relatives that work outside their village and send money back home. Some money comes in from Europe or other parts of the world.

AF: Microgrids come in all shapes and sizes, and can be powered by a number of generation technologies. What types of systems does INENSUS develop?

JSR: They are all solar-hybrid AC systems – 10 kilowatts of photovoltaics and another 10 in diesel. That’s the basic setup that we have in place, however, every single system is designed for site-specific conditions. Some of the systems use wind, but that’s very limited because the only good wind sites here are close to the sea. There will be maybe five to ten villages with wind turbines.

AF: INENSUS’s vision revolves around the creation of “micro-powered economies.” Can you explain the meaning and origins of the term?

JSR: The “Micro-Power Economy” business model is meant to make private investments viable or credible in this market. At the moment, there are not many approaches worldwide that really work on a private level. They are often charity projects or things in that realm. A key to commercial viability is to support the income-generating activities of our end-users as well as their household demand. Therefore, we build systems to empower a range of different end-users with different load profiles, systems that can be extended modularly with growing power demand.

First, we connect all of the households in a village because that is the most important need in the beginning. All of the villagers want lights in their houses and in the street. After that, they want information; they want to connect radios and televisions. We work off those initial needs and desires. After that, people either have ideas about things they want to do or have the money to afford more energy, so they’ll order more power capacity, which we measure in “blocks.” We determine present and future demand at the outset, and that directly informs our system design. We meet with every single household in a village and inform them about the block system, and provide them with cost estimates and a clear picture of the level of service that they will receive with different block purchases – how many lights, what else they can plug in, etc. Based on these interviews, we get a clear sense of demand, and determine the appropriately-sized system for the specific village.  Through our pilot, we learned that users are usually conservative in their own projections. If they can afford three blocks, they will start by buying two blocks just to see whether it works.

AF: What is the role of microfinance and the institution that you partner with? What exactly is it financing, and how does this tie into your greater vision?

JSR: Our partner in the pilot project is Pamecas [Union des Mutuelles du Partenariat pour la Mobilisation de l’Epargne et du Crédit], one of the largest MFIs in Senegal, with over 80,000 active borrowers.  Often people have a misconception about where microfinance comes into our model or what purpose it serves. To be clear, Pamecas is not financing consumption in our villages, meaning they do not provide credit so that our customers can buy electricity each month. That would be a risky arrangement for all parties involved. Rather, the MFI finances productive, income-generating investments that grid-connection makes possible.

We go to the village with our partner MFI and they explain the whole system to the community. There are 800 different MFIs in Senegal, but none of them are really working in these remote villages. I think it’s strange, but maybe it’s an obvious choice because of the difficulties involved. It benefits the MFI to cooperate with us because once we provide power to the entire village, the villagers suddenly become interesting, potential clients to the MFI. In our experience, the MFI is happy to get involved because the partnership enables it to build its client base and the repayment rate, so far, is very high.

AF: Tell us about some of the income-generating activities that microcredit has helped support.

JSR: Well, for example, many women have bought freezers to sell ice cream or cold drinks, which is a productive activity that doesn’t consume much electricity. A tailor who operates two sewing machines has multiplied his income by six. But this is just the beginning. A lot of people want mills and other machines, and farmers might ultimately use the electricity to cool their vegetables before bringing them to the market. We’re also really interested in developing an irrigation system for the fields that are close to the village, and we see microcredit potentially playing an important role in making that happen.

AF: The common currency of INENSUS’s micro-powered economy is the “energy block.” Can you explain what these are and how clients purchase and use them?

JSR: An electricity block is a standard, commodified unit of energy combined with a certain power limit that our customers purchase in order to gain a fixed amount of service. Each block grants customers 50 watts of power capacity that can be consumed for up to twenty-eight hours per week, which makes it four hours per day on average. In terms of energy usage, that winds up being 1.4 kilowatt-hours per week.

Blocks are both time-based and usage-based. We sell blocks every four weeks. Since blocks are in one-week increments, the balance of 1.4 kW hours per block is available for one week and expires after one week once activated. If you don’t use it, it is gone. In other words, it doesn’t rollover to week two, or three, or four. At the same time, if you use up all of your kWhs before the end of the week, then the meter cuts you off until the beginning of the next weeklong block.

The customers can order as many blocks as they need and can afford, and they always pay the same price per block. The beauty of these blocks is that they nicely reflect the cost structure of renewable energy-based power systems, with the main part of the investment being determined by making available a certain power capacity independent of the actual consumption. The blocks are cost-covering and allow long term planning for both the power station operator and the customers; they also enable the scalability of the approach.

AF: How are blocks purchased and transferred to clients?

JSR: Each client has a chip card, which is almost exactly like a credit card. Every four weeks, one of our recharge agents goes to each village with a small device to recharge the balance on the each client’s chip card. He goes to that village on a fixed day and at a fixed time that everyone has agreed on, and sets up a table where customers form a line. He has a list of all of the customers and the blocks that they have agreed to purchase. They pay cash and he recharges their chip card. If the customers don’t have the money, then their cards will not be recharged and they will not be able to reactivate their meter, and therefore will not have electricity. If they want to buy balance again 4 weeks later, they will have to pay a kind of a “reconnection fee” to compensate the operator for the loss.

AF: Payment flexibility is so essential for low-income, rural energy users who often have inconsistent incomes. How does your block approach accommodate this need?

JSR: First, our model is based on pre-payment. This means that customers pay upfront for energy use, and that access is discontinued when that prepaid amount expires. This is the system that has driven mobile phone penetration across emerging markets in Africa and globally, and we are confident that it will also drive energy access. We also create flexibility through our energy block-trading mechanism. If there are clients who want to upgrade or increase blocks – which we’re already seeing – then they can buy additional ones from the excess over-capacity. However, that is ultimately limited, so the other alternative is to buy blocks from households or users who find that they regularly have excess power at the end of each week or month and therefore want to sell a block or blocks.

The INENSUS recharge agent can also easily change the programming of cards. So let’s say there are two customers in a village who want to change their orders. One has ordered four blocks, but realizes at some point that this amount is too much or too expensive; so, he decides that he would be better off with just two blocks. He’s actually obligated to pay for all four blocks if that’s what he signed up for. But if there is another customer who has realized that he ordered less than he needs and can actually afford to buy more blocks, the two customers can trade blocks through the recharge agent. It’s all very simple and can be carried out quite quickly during the normal recharge activity.

AF: If the energy block is the blood of micro-powered economy, then your metering technology would seem to be the brain.

JSR: Exactly. The meters that were developed by INENSUS are the technical core component of the whole business model because they really tie together all of the major elements – pre-payment, automatic disconnect, demand-side management – as well as overload and tampering protection. It’s also incredibly convenient for users. They just swipe their cards in the meter to recharge, or to check their balance, or to see how much power they have used and how much they have left. So in this way, the meter also has a demand management function, which is meant to give feedback to end-users and help them make decisions about their own power use. In addition, the meters can be programmed in a way so that single customers get disconnected automatically in case of an overload in the grid. This kind of demand-side management prevents the power system from severe damages in the case of overloads.

Meters are mounted on the wooden polls of the village distribution grid and allow connections of up to three customers with separate accounts. They are out in the open, and everyone can see them. This transparency helps discourage any tampering, since neighboring customers have an incentive to prevent anyone from stealing power given that there is a finite amount being shared by all paying users. This really increases security.

All of these measures reduce the risks for investments in this market. After all, it is the aim of our “Micro-Power Economy” business model to attract private investments for rural electrification markets in developing countries and to assure long-term economic viability of the investments contributing to sustainable development.