Microfinance for Clean Energy

Posted: February 5, 2023

Microfinance has proven to be a powerful tool in enabling clean energy leaders, who can collectively make a significant impact not only on local communities but also on the environment at large.

In pursuit of this goal, MicroEnergy Credits (MEC) partnered with XacBank to leverage carbon microfinance to transform the energy landscape of Ulaanbaatar in Mongolia, which experiences harsh continental weather with winter temperatures averaging 20°C. Many households in Mongolia spend up to 90% of their income on coal to stay warm, resulting in high levels of air pollution and negative impacts on public health.

To address these challenges, MEC and XacBank collaborated to introduce innovative products such as efficient furnaces and home insulation through a microfinance program. Despite significant obstacles, the program has successfully transformed lives in Mongolia. In 2007, the penetration of improved efficient cookstoves in Mongolia was only 2.1%. (ASTARE, The World Bank, 2009). In 2008, MEC and XacBank conducted original research to determine a viable alternative for low-income households to heat their homes without burning the high levels of coal that were the standard practice.

The Mongolian energy landscape

After conducting market research and engaging with local technology developers, they established that efficient coal furnaces and efficient home insulation would be two innovative products that could reduce pollution, expenses, and carbon emissions by over 50% on a lifecycle basis. However, the high upfront cost of purchasing the new stove or home insulation was a significant obstacle. The microfinance program provided a solution to this challenge, enabling low-income households to access these innovative products and transform their lives.

The project had a focus on low-income households residing in Ulaanbaatar's Ger District, which is similar to slum areas found in other cities. These households cannot afford permanent houses and instead live in mobile dwellings called gers (yurts) located in yards or unofficial areas around the city. These dwellings lack access to municipal heating networks and often lack basic amenities such as electricity and plumbing. The residents of the Ger District are typically pensioners with very low fixed incomes, facing greater barriers than middle-class households in Ulaanbaatar. Daily payments are a struggle, and clean energy investments are a luxury they cannot afford.

Microfinance is the solution

There were many barriers to overcome, however, microfinance made it possible to overcome the high upfront cost to end users of purchasing the new stove or home insulation. Despite requiring significant changes to their existing microfinance offerings, XacBank was willing to provide financing for the project. However, the commercialization and market acceptance of new technology required substantial costs, including establishing a network of demonstration and marketing centers for end users to see the products, place orders, and finally get the product installed.

Following the success of the MEC program's initial pilot in 2009, additional agencies such as the World Bank, the Millennium Challenge Corporation, and the Government of Mongolia joined to support the project. With their help, the project was able to import stoves from Turkey, reducing the timeframe to develop the local supply chain and enabling faster scaling. As per a UNDP report, by 2016, the penetration of ICS had reached 54% due to MEC's carbon program interventions. The clean stove distribution activities had total sales of 142,434 stoves by 2015, covering over 90% of the Ger area households at that time.

All these developments led to a sharp reduction in pollution. Between 2010-2015 PM2.5 concentration sharply reduced from over 80 mg/m3 to less than 25 mg/m3.  This is a 69% reduction in air pollution in Ulaanbaatar.  Since 80% of air pollution was emitted from ger area stoves, the sharp reduction in from 2010-2015 is attributable to the clean stoves. (Enkhbat, et al., 2020).

Microfinance – a lifetime partner with keen awareness of the real issue

In a nutshell, it is noteworthy that a microfinance institute effectively provided a valuable service to households by mitigating pollution and meeting their daily needs. The remarkable aspect of this achievement is that it was accomplished by a microfinance institute, rather than an environmental or governmental entity. This demonstrates that a microfinance institute has keen awareness of the issues plaguing the low-income individuals and can propose and implement viable solutions. The microfinance institute's pivotal role in assisting impoverished populations is due to its thorough understanding of their lifestyles and its unwavering commitment to support them.

An additional distinguishing characteristic of microfinance institutions is their unwavering dedication as a lifetime partner to their beneficiaries. Unlike donor-driven initiatives which often have predetermined timelines and donor exit strategies, microfinance institutions such as XacBank remain a reliable source of support. In the case of XacBank, it remained a steadfast financial institution committed to supporting low-income individuals, continuing to provide monitoring and after-sales services for over 15 years after the initial project implementation, further exemplifying its status as the people's bank. Unlike governments, whose policies and priorities may shift with time, microfinance institutions maintain their steadfast commitment to their partners, ensuring the continuity and sustainability of projects. It is precisely this lifetime partnership and commitment to supporting marginalized communities that sets microfinance institutions apart and makes them a critical player in extending clean energy solutions to the most disadvantaged segments of society.

MicroEnergy Credits is the most trusted name in social impact carbon credits.

Our mission is to empower every microfinance community with access to affordable and innovative clean energy solutions, while moving towards a world free of both poverty and climate change.