Market Creation

Table of Contents
1.Issue in brief 2.Trends and History 3. Current Best Practice 4. Areas of Research 5. Resources/Web links 6. Organisations/ People 7. Documents

[top] [end]1.Issue in brief

There is growing confidence in markets to help close the development gap and to unleash the economic potential of poor communities. The strength of co-operative frameworks between private sector stakeholders and governments lies in building on the core competencies of the different sectors and in their ability to result in functioning and sustainable markets, which do not rely on continuous government intervention. New concepts of development highlight the need to catalyse greater foreign and domestic private investment in developing countries and illustrate that corporate growth strategies can directly address development goals as well as improve the "bottom line" of corporations.

In the past efforts to disseminate improved cook stoves have mainly been propelled by donor agencies, with government support. The approaches have followed two main streams; user-builder focused approach and a commercial-market approach. Under the user-builder approach, cook stove proponents have tried to disseminate improved cook stoves by encouraging potential users, particularly in rural areas to build their own stoves. A major advantage of this approach is the potential to reach larger areas and particularly the poor who do not have an income to purchase cook stoves commercially. A major problem with this approach has however been the inconsistent quality of the stoves due to the inevitable involvement of persons that are not necessarily skilled in stove production and because the production takes place in a highly segmented market that is not easy to track.

The commercial-market approach has targeted training selected artisans to build stoves and sell them in their respective communities. Whilst this approach has resulted in higher quality stoves and has created employment for the stove builders, it has in many cases served a more limited number of households (Karekezi and Turyareeba, 1995). An example of this type of market is the charcoal-burning ceramic-metal stove used in urban Kenya, the Kenyan Ceramic Jiko. Less common are commercial 'mass-produced' approaches, where rural communities or artisans are not involved in the construction of stoves (although they may support the stove supply chain).

Commercial, market based approaches, are seen by many as the key to the creation of sustainable benefits for communities in the long term.

A market is a social arrangement that allows buyers and sellers to discover information and carry out a voluntary exchange of goods or services. A simple 'market model' is shown in the figure below with the main market stakeholders shown in bold, together with common barriers to renewable energy markets shown in octagons, and typical project activities to overcome the barriers around the borders.

[top] [end]Barriers

[top] [end]Institutional policy and policy framework

Many countries do not have comprehensive policies to support energy efficiency in biomass dependent households. This relates to targets, mechanisms for the implementation and monitoring of activities to promote biomass energy stoves in households. Broad policy statements that commit regional agencies and national governments to promote biomass energy efficiency are made in regional and national policy documents. However, these do not target specific sectors and are therefore "floating policies" which sectors do not feel obliged to implement. At most, development agencies concerned with the environment and the welfare of low-income households have promoted improved cooking stoves at the household level. This leaves out various institutions, which use hundreds of tonnes of fuelwood and charcoal per day. Of particular importance are purchasing decisions of institutions that frequently come under Ministries of Energy. Targeted awareness raising in the Ministries related to energy or environment is necessary.

This barrier can be tackled if supportive policies and legal frameworks for sustainable biomass energy households are developed and strengthened.

Lack of energy consciousness among mainstream policy makers and planners in the domestic sector often means that energy costs are overlooked and any cost cutting measures in this sector do not give this due regard. Furthermore, there is often a lack of co-ordination between central ministries responsible for environment and energy, health and finally trade. Economic and environmental benefits from biomass energy conservation that the departments of environment and energy are aware of are therefore not often articulated to the other agencies although in most cases these agencies are looking for cost cutting measures.

[top] [end]Lack of awareness of the technologies and their benefits

Low-income households have low awareness of energy efficiency, particularly biomass energy efficiency. In most cases, the information is not available to sectors outside the energy sector and obtaining it can be costly and time consuming - if one is aware of it and where to obtain it. In a few cases where this information is available, it is not in the appropriate format - (language, technical content etc) and potential consumers are often unable to effectively use the information due to low education levels or lack of training. In other cases, the information is available in the "grapevine" and is inaccurate.

[top] [end]Technology unavailability

The lack of energy efficiency awareness also permeates the artisanal sector and so very few artisans have the capacity to produce quality efficient biomass energy technologies for households, and market them. As a result of the lack of awareness on technology supply and the demand side/end user side, the technologies are not available on the market. Thus even the few end users that desire to institute energy efficiency measures are unable to access the desired energy efficient biomass technologies.

[top] [end]Lack of demonstrated effectiveness

Being a "new technology" for people that were not previously aware of energy efficient biomass technologies or are deterred by the poor quality energy efficient technologies made by untrained professionals, the technologies remain unproven and therefore a risky investment. The fear of investing in unproven technology is compounded by the low-income status of households and cash constrained institutions. This barrier also applies to producers of the technologies. Since energy efficient biomass technologies are "new" on the market, producers are not sure that there is a market for these technologies and may not want to invest in stocking them.

[top] [end]High costs of energy efficient technologies

Because there are very few energy efficient biomass technologies for large-scale cooking and baking on the market in many countries, the few technologies available tend to be expensive. Despite the fact that over time, energy efficient biomass technologies offer considerable energy savings that can translate into cash savings, low-income households, by their nature, are frequently survivalist and view these costs in real time (current costs) and not in terms of future benefits (savings). Costs for energy efficient stoves for the household sector such can be too high for most households, especially if they are not completely sure of the benefits and have other competing demands for the income in their homes. The cash benefits are further distorted by the fact that in certain areas, particularly rural areas, biomass is collected free of monetary costs. This is a hidden cost, which distorts pricing and results in high discount rates and seemingly long pay back period. In other cases, fuelwood is bought but is not considered a core input (eg. food processors and vendors often consider food and not wood, as their core input) and due to low business skills, the fuelwood is not accounted for and so its actual cost to the enterprise is hidden, thereby hindering investments in biomass energy efficiency.

The above-mentioned barriers can be tackled if supply and demand for energy efficient biomass stoves and ovens for productive uses in households created.

[top] [end]Limited financing for producers and end users

The current high cost of energy efficiency technology makes it a necessity for some producers to finance their investment through credit. However, most of the producers have problems accessing credits. On the one hand, financial institutions often hesitate to provide financing in sectors that do not have a proven track record and energy efficiency in these countries have not been sufficiently promoted and known to create credibility and a track record. On the other hand, producers, particularly those in rural areas, are associated with high transaction costs and when the pay back period is not clear, financial institutions shy away from the sector. Furthermore, very few producers, have the necessary knowledge, such as business plan development, which are required by lenders. Public institutions frequently are not allowed to take commercial credit so innovative approaches are required.

This barrier can be tackled if financial and business models are replicated.

[top] [end]2.Trends and History

During the 1940s and 50s stove development work focused on the four-fold problem of health, cleanliness, fuel economy and forest economy (Kristoferson & Bokalders 1991; Karekezi 1992:91). Smoke removal from the kitchen was often the primary concern for development organisations (Ahuja et al 1987:248). This focus led to the development of large-mass, mud stoves with chimneys. These were assumed to be fuel-efficient, but often used more fuel than open fires (Baldwin 1987). Dissemination methods favoured donor led stove programmes with "stoves-as-gifts" in many cases.

In the 1970s development workers became acutely aware of the global fuelwood? crisis (Aprovecho Institute 1984). Studies by Dr Sam Baldwin in West Africa, published in Vita News (1984) set the direction for much of the stove development work in subsequent years. He described a number of ideas which at the time were revolutionary. The large-mass mud stoves promoted by many development organisations increased fuel consumption, were time-consuming to build, and were easily broken. Low mass, metal or ceramic chimney-less stoves on the other hand were low in cost, fuel-efficient, and allowed for rapid production (Baldwin 1984; Ouedraogo et al 1983:1-3). Efficiency soon became the principal concern of development organisations (Bialy 1991:3; Joseph 1991:145) - thus technical and scientific issues relating to efficiency became the focus of intensive research (Karekezi 1992:91). At the same time increasing attention was given to markets, and the roles that the private sector, NGOs and government were to play in the creation of these markets.

Current trends focus increasingly on the creation of markets, overcoming of market barriers and the role of the various stakeholders: private sector and NGOs to develop the markets, and government to provide "supportive policies" as a "fundamental aspect of an enabling environment". The focus is "...to reduce barriers to the operation of markets for bioenergy and to establish conditions that make it easier for markets to serve communities and groups that currently lack access to energy services" (ESMAP 2005).

The Programme for Biomass Energy Conservation (ProBEC) programme is an example of such a market-based approach in the SADC region. ProBEC promotes the use of improved biomass energy technologies and techniques for the household and small scale business as well as agro-industries so as to reduce the negative impacts of biomass usage and maximize its benefits.

ProBEC uses participatory approaches to introduce biomass energy technologies in communities and have delivered integrated solutions that have included the use of energy efficient devices, profitable production and marketing of these devices (under the commercial approach), efficient woodfuel use and kitchen management (ProBEC, 2004). Apart from using this multi-strategy approach to improve acceptability, the integrated approach ensures the delivery of sustainable and multiple benefits for the beneficiaries and well as spreading the benefits to different levels including micro or project level benefits reaching families and village small scale businesses and national benefits. The use of more efficient technologies also contribute to the reduction of CO2 emissions, which contributes to global climate change mitigation efforts and contribute to the reduction of fuelwood related deforestation.

Among the benefits of the ProBEC efforts are the creation of job, particularly in the rural areas through local production and marketing of stoves, which then result in the generation of additional incomes for households of stove producers, the empowerment of women due to their active involvement in stove programs and due to the incomes that they earn from selling stoves, the reduction of IAP which contributes to improved health for women and children and the reduction of the drudgery of collecting fuelwood due to the use of stoves that have improved efficiencies. The BEC measures have proved to reduce ARIs by 50% and fuelwood consumption by 40-60% (ProBEC, 2004).

A unique strategy used by ProBEC is the integration of non-energy development efforts including HIV/AIDS awareness in its program interventions. This contributes to reaching remote communities, with HIV/AIDS messages, in particular, rural women who rarely have the time and opportunity to receive HIV/AIDS information messages broadcast on radios or read about them. ProBEC strategies also integrated nutrition and food security information and encourage diet diversification.

ProBEC identifies 8 key elements in successful scaling up of Improved Cookstoves. These are:

Training & knowledge dissemination
Producers & production structures
Quality management & monitoring
Marketing strategy
Users & market opportunities
Financing mechanisms & subsidies
Policies
Other donors & organisations

Since the early 2000s, the Shell Foundation is working to create strategic programmes that improve and empower local communities, and then share that expertise and experience across the developing world. The Shell Foundation currently has two main programmes: the Sustainable Energy Programme and the Sustainable Communities Programme. The Sustainable Energy Programme works with partners to increase the access of low-income communities in developing countries to efficient and affordable energy services and to reduce the environmental impacts of energy use.

[top] [end]3. Current Best Practice

A number of key factors encourage market growth in efficient use of biomass energy such as investments in technology research, development, and demonstration (RD&D), primarily by industrialized nations; supportive policy and regulatory frameworks; energy security issues; environmental and climate change concerns; and local and regional development opportunities that these technologies offer. Large global companies have entered the markets for biomass cooking stoves and the traditional finance community is gradually mainstreaming biomass energy into its' lending portfolios.

Although there are multiple advantages of improved household energy technologies such as stoves in developing countries, there are several market barriers that make these technologies to look inferior compared to other forms of energy. These market barriers focus on market processes, and decisions made by investors and consumers, including policy, technology, skills, and finance. Moreover, these barriers focus on the desirability of facilitating the adoption of cleaner and more efficient energy technologies, but by way of policies consistent with the underlying objectives and constraints of a market system - i.e. they are economically efficient.

Three perspectives on market creation have been identified recently that provide useful insight into market creation approaches, and an analytical framework (IEA, 2003). These are: 1. The research, development and demonstration (deployment) perspective, which focuses "on the nature of innovation, industry strategies and the learning process associated with new technologies". Through R&D in private industry which is stimulated by investments in a new technology, and the process of learningbydoing technical performance is improved and costs reduced. Market transformation projects can play a role in this process by supporting government policies and implementing programmes that support initial deployment of new technologies (typically 'demonstration projects'). 2. The market barriers perspective characterises the adoption of a new technology as a market process and focuses on the frameworks within which decisions are made by investors and consumers. The emphasis in this perspective is on understanding barriers and legitimate project actions to reduce them. 3. The market transformation perspective focuses on what needs to be done in practical terms to build markets for new energy technologies. It emphasizes the behaviour and roles of market actors, how their attitudes guide decisions and how these attitudes can be influenced.

As emphasized by the IEA (2003), "The strength of the research, development and deployment perspective is its vision of the future; the market transformation perspective encourages sensitivity to the practical aspects of crafting policies to get results; and the market barrier perspective leads to policies that work efficiently and generate net value."

Based on GTZ's experiences in the field of household energy over the past 20 years, the following factors have been identified by GTZ as best practice in the creation of stove markets:

For technologies to be accepted, it is essential that products are of high quality, are affordable, reliable and attractive, and deliver appreciable benefits.
Supportive conditions, such as facilitated access to loans for producers, tax reductions for the purchasing of raw materials etc., foster dissemination.
Only a commercial approach is sustainable in the long run, although under particularly difficult circumstances (for example natural disasters) a self-help approach may be chosen temporarily.
A functioning networking system optimises knowledge transfer and South-South exchange. The learning effect of visiting each other's projects is often greater than that achieved in a course situation.
Integrated household energy projects that complement other development themes generate synergies and are thus more cost-efficient and deliver results more quickly.
A participatory approach that also takes gender equity issues into account improves the prospects of technology acceptance.
It is essential to perform economic analyses; their clear findings help to mainstream the issue within development policy.
Integrated strategies are important for sustainable use of biomass. Such strategies usually involve interplay among the following components:
deployment of technologies providing enhanced energy efficiency (improved stoves)
profitable manufacture and marketing of these stoves
more efficient fuelwood management (drying, wood chopping, etc.)
improved household management (shortened cooking times, better ventilation at the hearth).

[top] [end]4. Areas of Research

While there is increasing emphasis on the creation of markets, the way to do this in a developing country context is still a subject of much discussion and debate. Key areas of research include:

Understanding the role of donors in fostering markets.
Understanding the role of governments in creating sound policy frameworks in the bioenergy sector.
The use (or not) of subsidies in creating markets (or destroying them)

[top] [end]5. Resources/Web links

[top] [end]6. Organisations/ People

[top] [end]7. Documents

Categories: Leading Issues| Market Creation| Scaling Up

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Page created: 12 February 2007; Last edited: 03 July 2007; Version: 5
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Pagename: MarketCreation @HEDON: JVDA