MicroEnergy Credits (MEC) is dedicated to bringing clean energy to remote communities to improve their quality of life and support them in their journey out of poverty. MEC carefully selects its projects and ensures that they meet the additionality criterion so that the carbon finance is directed towards initiatives that make a genuine impact on reducing greenhouse gas emissions. The task of implementing these projects is fraught with challenges, including economic barriers and market inefficiencies that hinder the adoption of clean energy products. However, the partnership of carbon finance and microfinance institutes is the solution.
One of the fundamental principles of carbon markets is that carbon finance should only be directed towards projects that are additional to the baseline scenario or business as usual. This additionality criterion is essential to ensure that carbon finance is channeled towards initiatives that result in concrete and measurable reductions in greenhouse gas emissions. An additionality test is typically employed to determine whether a proposed project would have been implemented even in the absence of carbon finance, and thus whether the funding is required to incentivize the project's implementation.
One of the primary approaches for assessing project additionality is a barriers analysis, which is conducted by MicroEnergy Credits for each of its projects. This independent test is used to identify potential barriers to project implementation, such as technical, financial, or regulatory hurdles, and to determine whether the proposed project is financially or technically feasible without carbon finance. By conducting a thorough barriers analysis, MicroEnergy Credits ensures that its projects meet the additionality criterion, and that carbon finance is directed towards initiatives that make a genuine impact on reducing greenhouse gas emissions.
Here is an overview of the obstacles that MicroEnergy Credits generally faces while launching a clean energy program and how partnering with microfinance institutions (MFIs) can help overcome these hurdles.
Introducing clean energy products and technology is challenging, particularly during the initial project implementation stage. Some of the significant hurdles include a lack of access to upfront finance, limited awareness of clean energy products and their value proposition, inadequate supply of products in the local market, insufficient after-sales service and maintenance, and an inability to afford the clean energy products.
MEC addresses these challenges by collaborating with microfinance institutions to promote affordable, reliable clean energy products to low-income households directly. MFIs are well-suited to provide clean energy to their clients since they offer finance and education with frequent touchpoints that create awareness. They can finance upfront costs, possess local knowledge, understand local energy resources and needs. Additionally, most microfinance clients remain bank clients for many years or decade.
Historically, only a small percentage of microfinance institutions has offered microfinance for low-carbon technologies due to economic barriers. The major barriers preventing MFIs from starting clean energy product lines include the high cost of hiring additional staff, expenses for marketing and creating awareness, a steep learning curve to understand products and technologies, the lack of partnerships with local suppliers and distributors, reputational risks, scarcity of on-lending funds, and difficulty developing financial products for consumptive loans.
MEC has developed a program that empowers microfinance institutions to overcome these obstacles by using carbon finance. This approach enables low-income households and individuals to invest in clean energy products by addressing the barriers of education, price, finance, supply, and after-sales service. First, MEC works with the microfinance institution to develop an attractive clean energy product offering to its microfinance client base. Second, MEC trains the microfinance institution to implement the clean energy lending program. Third, MEC implements a robust and transparent carbon credit monitoring and tracking system to quantify and record the volume of carbon emission reductions created through the clean energy program.
Finally, the carbon finance is used to expand and sustain the clean energy program through client education and marketing, internal training and capacity building, on-lending funds to local SMEs producing the clean energy systems, aftersales service and maintenance, and lowering the interest or principal cost to the client.
This comprehensive and transparent use of the carbon funding ensures that the project is self-sustainable. For example, this is the primary reason why the cookstoves distributed through MEC’s project in partnership with XacBank in Mongolia are still in use after a decade of distribution. This is one of the few projects globally that has successfully achieved such a milestone. MEC’s carbon lending programs benefit the MFIs, local communities, and the environment at large.