FINANCIAL MECHANISMS TO PROMOTE CLEANER COOKING SOLUTIONS IN ASSESSMENT

EXPLORING DCA VIABILITY

Y PHOTO DR. FA BY JOHN PHOTO

August 2019

This publication was produced for review by the United States Agency for International Development. It was prepared by Dr. John Fay for Tetra Tech.

This publication was produced for review by the United States Agency for International Development by Dr. John Fay for Tetra Tech, through USAID Contract number AID- 612-TO-14-00003, Protecting Ecosystems and Restoring Forests in Malawi, under the Restoring the Environment through Prosperity, Livelihoods, and Conserving Ecosystems (REPLACE) Indefinite Quantity Contract.

This report was prepared by: Dr. John Fay SVA Services International 25 Joseph Road, Rhodespark, Lusaka, Zambia

Tetra Tech 159 Bank Street, Suite 300 Burlington, Vermont 05401 USA Telephone: (802) 658-3890 Fax: (802) 485-0282 Email: [email protected]

Contacts: Ramzy Kanaan, Chief of Party Email: [email protected] Dr. John Fay, SVA Services International, DCA Consultant Email: [email protected] Anna Farmer, Project Manager Email: [email protected] Rod Snider, Deputy Project Manager Email: [email protected]

FINANCIAL MECHANISMS TO PROMOTE CLEANER COOKING SOLUTIONS IN MALAWI ASSESSMENT EXPLORING DEVELOPMENT CREDIT AUTHORITY VIABILITY

August 2019

DISCLAIMER The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

TABLE OF CONTENTS

TABLE OF CONTENTS ...... I ACRONYMS AND ABBREVIATIONS ...... II EXECUTIVE SUMMARY...... III 1.0 OVERVIEW ...... 4 1.1 BACKGROUND ...... 4 1.2 OBJECTIVE ...... 4 1.3 METHODOLOGY ...... 4 1.3.1 QUALITATIVE INDUCTIVE APPROACH ...... 4 1.3.2 DATA COLLECTION TOOLS ...... 5 2.0 LPG MARKET BRIEF ...... 7 2.1 THE ISSUE ...... 7 2.2 RESPONSE ...... 7 2.3 CHALLENGES ...... 7 2.4 OPPORTUNITIES ...... 8 3.0 IMPROVED CHARCOAL COOKSTOVE MARKET BRIEF ...... 10 3.1 THE ISSUE ...... 10 3.2 RESPONSE ...... 10 3.3 REGULATION ...... 11 3.4 CHALLENGES ...... 11 3.5 OPPORTUNITIES ...... 12 4.0 DCA ASSESSMENT ...... 14 4.1 DCA SUMMARY ...... 14 4.2 DCA FEATURES AND TERMS ...... 14 4.3 DCA IN MALAWI ...... 15 4.3.1 STATUS ...... 15 4.3.2 TRENDS ...... 15 4.3.3 CHALLENGES ...... 16 4.3.4 OPPORTUNITIES ...... 18 5.0 CONCLUSIONS & RECOMMENDATIONS...... 19 5.1 CONCLUSIONS...... 19 5.2 RECOMMENDATIONS ...... 19 6.0 APPENDICES ...... 21 6.1 APPENDIX 1: DESK-TOP REVIEW REFERENCES ...... 21 6.2 APPENDIX II: KEY INFORMANT INTERVIEWEES ...... 23 6.3 APPENDIX III: MERA LPG RECOMMENDED PRICE BUILD UP – JULY 2018 (FIGURES REPLICATED EXACTLY AS PROVIDED BY MERA) ...... 24 6.4 APPENDIX IV: FUEL COMPARISON – TYPICAL EFFICIENCIES & COST ...... 25

FINANCIAL MECHANISMS TO PROMOTE CLEANER COOKING SOLUTIONS IN MALAWI ASSESSMENT I

ACRONYMS AND ABBREVIATIONS

CDM Clean Development Mechanism DCA Development Credit Authority FCB First Capital Bank GoM Government of Malawi ICS Improved Cookstove KG Kilogram LPG Liquefied Petroleum Gas MBA Malawi Bureau of Standards MERA Malawi Energy Regulation Authority NEP National Energy Policy PAC Practical Action Consulting PAYGO Pay-As-You-Go PERFORM Protecting Ecosystems and Restoring Forests in Malawi RBF Results Based Financing SME Small and Medium Sized Enterprise SSA Sub-Saharan Africa TBD Eastern and Southern African Trade and Development Bank UNFCCC United Nations Framework Convention on Climate Change USAID United States Agency for International Development

FINANCIAL MECHANISMS TO PROMOTE CLEANER COOKING SOLUTIONS IN MALAWI ASSESSMENT II

EXECUTIVE SUMMARY

The demand for unsustainably harvested biomass used for cooking and heating in Malawian urban centers is a major driver of deforestation across Malawi. Trends indicate this issue is likely to accelerate unless an alternative energy source for cooking can be adopted. However, introducing any new cooking technology will face numerus cultural, logistical and technological challenges that impede adoption. For any alternative urban cooking solution to reach scale in Malawi, it needs to be acceptable, accessible and affordable to the end user in relation to the current status quo for cooking, which is primarily charcoal and firewood. Identified high potential alternatives to the reliance on unsustainable biomass is liquefied petroleum gas and efficient charcoal cookstoves fueled by sustainably produced charcoal. This report explores the current status of both the LPG and efficient charcoal cooking sectors and identifies opportunities for increased adoption of both technologies. The report also assesses the potential of the Development Credit Authority and other financing mechanisms to assist in the financing of the scale up of these alternative energy approaches. This study finds significant opportunity for scaling up LPG and efficient charcoal cookstoves to mitigate deforestation by reducing the demand for unsustainable charcoal and firewood, but the sector needs targeted and systematic support to reach its full potential. There has been very limited adoption of LPG and/or intermediate or ultra-efficient charcoal stoves as switching faces both challenges and opportunities when compared to the status quo of inefficient cookstoves using illegal, unsustainable charcoal. Within the current cooking situation in Malawi, numerous direct costs and externalities are not factored into the final retail price, creating the point in time perception that legal, sustainably harvested charcoal used in an efficient charcoal stove or LPG is too expensive in comparison. However, this is an evolving, dynamic space with the cost of charcoal increasing as demand grows and supply shrinks. This provide a window of opportunity to shift cooking practices toward efficient charcoal (stove and fuel) and/or LPG. To make this a reality, developing support activities that address the acceptability, accessibility and affordability of alternative cooking approaches should be prioritized. Firstly, any change in cooking behavior must be acceptable to the cultural cooking norms practiced by the end user. Secondly, there needs to be distribution and service for the cooking device and fuel that is comparable to the existing status quo. Thirdly, the upfront and on-going cost must be aligned to the customer’s ability to pay and be cheaper overall than the current cooking option if any new cooking technology is to be adopted and sustained. Considering the nascent stage of the urban cooking sector in Malawi, this report recommends revising the current DCA offering and combining it with blended finance approaches that address the varying needs of the urban cooking sector. Opportunities to consider include challenge grants to accelerate the development of new technologies, results-based financing opportunities to co-finance and defray cost for setup and scaleup of proven technologies, grant and debt combined support packages to reach hard to reach populations, and carbon markets to incentivize the continual adoption of the new technology Additionally, there is a need to strengthen and expand the overall urban clean cooking sector. Recommended options include targeted awareness campaigns, based business planning support to entrepreneurs including support for developing bankable proposals, technical assistance to financial institutions, improved enabling environment, and support for local high-quality manufacture of cooking devices and fuel (where possible).

FINANCIAL MECHANISMS TO PROMOTE CLEANER COOKING SOLUTIONS IN MALAWI ASSESSMENT III 1.0 OVERVIEW

1.1 BACKGROUND The Protecting Ecosystems and Restoring Forests in Malawi (PERFORM) project’s ‘Wood fuel Supply and Demand Analysis’ conducted in 2019 indicates urban demand for firewood and charcoal is driving forest cover loss across much of Central and Southern Malawi. The use of charcoal as the primary cooking fuel in urban households increased rapidly from 44.6% in 2011 to 62% in 20161 and continues to increase in urban areas at over 10% a year2, with few alternatives that can compete with illegally produced charcoal for low-income households to switch away from their wood fuel- based cooking approaches to alternative fuel sources. This assessment explores the potential of financing mechanisms to reduce risk to the lending institutions and demonstrate long-term viability of lending into the improved cooking sector, with a focus on improving the Development Credit Authority (DCA) guarantee. The primary focus is on supporting the introduction and scaling of market-based solutions that increase the adoption of charcoal alternatives in Malawi including:  Liquefied petroleum gas (LPG);  Improved charcoal cookstoves; and  Sustainably produced charcoal. The potential to reduce demand for unsustainable wood fuel in urban cooking across Malawi via innovative financing aligns with the stated goal of the PERFORM project to assist Malawian institutions and communities to manage forest and soil resources more efficiently, equitably and sociably.

1.2 OBJECTIVE The overarching objective of this assignment is to identify mechanisms to support the reduction of deforestation from unsustainable consumption of wood fuels in urban Malawi. Therefore, the aim of this report is to identify financing mechanisms, with a specific focus on the DCA guarantee mechanism, that could assist to unlock Malawi-based private sector financing to support the improved cooking (stoves and fuel) sector by reducing risk to the lending institutions and demonstrating long-term viability of lending into the improved cooking sector.

1.3 METHODOLOGY

1.3.1 QUALITATIVE INDUCTIVE APPROACH A qualitative, inductive research approach is proposed for this assessment to identify, assess and inform USAID on the challenges and opportunities related to the use of DCA guarantees to support improved urban energy (primarily cooking) solutions. A qualitative approach is proposed because this assessment focuses on subjective business experiences which are inherently complex and impacted by multiple perspectives3. Qualitative research facilitates numerous points of view since meaning is derived from participant perspectives.

1 National Statistics Office, 2016 2 Drigo, 2019 3 Baxter & Jack, 2008

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Further, an inductive approach, which is exploratory and uses collected data to arrive at conclusions is useful for this assessment because conclusions and subsequent recommendations can be drawn from themes derived from the overall collected data4.

1.3.2 DATA COLLECTION TOOLS Three types of data collection were employed in this assessment including:  Detailed desk-top review;  Key informant interviews, including company site visits; and  Observations and discussions at cleaner cooking industry events and client feedback sessions.

DOCUMENT REVIEW This research includes a detailed desk-top analysis of documents pertaining to Malawi and regionally regarding improved urban cooking solutions and relevant financing mechanisms, including guarantees. This includes relevant Malawian improved cooking policies, reports and clean cooking projects focused on LPG, efficient charcoal and sustainable charcoal initiatives. Appendix 1, ‘Desk- top Review References’, lists the relevant documents reviewed during this assessment.

KEY INTERVIEWS Concurrently, key informants were identified in collaboration with the PERFORM team, and semi- structured interviews were conducted with representatives from government, financial institutions, private sector (including participants in LPG, efficient charcoal and sustainable charcoal production in Malawi) and other development partners. Potential enterprises that could benefit from a DCA guarantee were visited to better understand their approach, challenges and financing needs. Throughout the interview process, additional data sources were identified by utilizing the method of snowballing which identifies further relevant information such as key stakeholders and exemplary projects by asking the interviewee. Appendix 2, ‘Key Informant Interviewees’ lists all interviews conducted.

CLEAN COOKING SECTOR OBSERVATIONS To triangulate the assessment research, observations and discussions were conducted during cleaner cooking sector events, including participation at the Cleaner Cooking Camp (10-12 June 2019) and the National Cookstove Steering Committee meeting (13 June 2019). Lastly, two client feedback meetings were held with USAID/Malawi, firstly to review initial finding (13 June 2019), and secondly to present and discuss the assessment conclusions prior to finalizing the overall report (3 July 2019).

ASSESSMENT PROCESS Figure 1 below illustrates the sequencing of how the methodology for this assignment was carried out, including: 1) assessment preparation (17-31 May 2019); 2) data collection, including desk-top review, key informant interviews and observations (03-14 June 2019); 3) data analysis/interpretation and report drafting (14 June-02 July 2019); and 4) presentation of findings, discussion and corresponding revisions to finalize the assessment report (3-19 July 2019).

4 Yin, 2015

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FIGURE 1: ASSESSMENT PROCESS

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2.0 LPG MARKET BRIEF

2.1 THE ISSUE

LPG Utilization across Africa: The largest African “For LPG to be adopted at consumer markets for LPG are in North Africa. The annual scale, the cost cannot be LPG consumption rate per capital in SSA is 2.3 kilogram (kg) compared to 55 kg per capita annual consumption in North higher than the alternative Africa5. The largest LPG markets in Sub-Saharan Africa (SSA), fuel.” per capita annual utilization in kg is Senegal (10.1 kg), Ivory - KopaGas Representative Coast (8.6 kg), Angola (7.8 kg), South Africa (5.7 kg), Ghana

(5.4 kg) and Sudan (5.3 kg)6 . The higher utilization of LPG in these countries is due to long-term government support and subsidies. However, supply deficit owing to low and erratic production capacity of refineries and increased cost for LPG resulting from inadequate transport, distribution, and storage infrastructure are some of the biggest constraints to the growth of the LPG markets7. LPG Utilization in Malawi: In Malawi, there has been significant year on year growth of LPG importation from 200,000 to 900,000 kgs since 2013. Based on best available information, this study estimates total household utilization of LPG to be 0.4% in Malawi8. Much like the case in the rest of SSA, LPG consumption in Malawi is largely amongst middle to high- income urban households9. Typically, LPG users in Malawi previously used electricity as their primary means for cooking supported by charcoal, and often switch to LPG due to the erratic supply and/or increasing cost of electricity.

2.2 RESPONSE According to the Government of Malawi’s National Charcoal Strategy (2017), LPG is the most promising alternative to urban charcoal use in the medium and long term. LPG associated businesses could greatly expand the sector and increase urban adoption through a better regulatory and business environment, reducing urban dependence on charcoal for urban energy. Through improved access to finance, the formalized private sector could greatly expand LPG distribution, marketing and sales, thereby reducing urban dependence on informal, illegal charcoal that is currently used for urban energy.

2.3 CHALLENGES Ultimately, affordability, accessibility and acceptability of LPG “Breaking down payments are key variables that determine adoption10. All three of these to bite-sized chunks is key variables must be clear to the potential customer otherwise to adoption of LPG” adoption will remain limited. - EnviroFit Representative MERA recommends the retail price of LPG per kg, as of April 2019 the cost was MK2,044.22 ($2.69 USD), significantly higher than the global average price of $0.63 USD per kg11. See Appendix III for the breakdown of the cost of LPG per liter in Malawi. Affordability itself has numerous drivers, such as LPG regulation, proximity of Malawi from the LPG source and resulting transport costs, storage, last mile distribution, market acceptability and understanding of use. See Appendix IV for an estimated comparison of hardwood charcoal efficiently but illegally produced (efficient), hardwood charcoal inefficiently and illegally produced (traditional)

5 Rockall, 2016 6 Holmes, 2011 7 LPG Business Review, 201 8 World Bank Data, 2017 + key stakeholder estimates 9 PAC, 2017 and 2018. 10 PAC, 2018 11 Per Global Petrol Prices, 15 July 2019: https://www.globalpetrolprices.com/lpg_prices/

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and Kawandama Hills Plantation charcoal legally and efficiently produced (sustainable) versus LPG regarding cost per useful energy unit at final consumption stage of cooking. This shows that LPG at current pricing is cost competitive versus traditional charcoal used in a baseline ‘jiko stove’ (i.e. the current status quo), but not cost competitive versus any type of charcoal used in an intermediate or ultra-efficient cookstove. However, it is important to note charcoal prices have been on an upward trajectory, which is anticipated to continue due to large and increasing demand for charcoal and limited supply of biomass to produce charcoal. Furthermore, LPG in Malawi is extremely expensive relative to the global average and has potential to decrease with greater volume of LPG sales. LPG safety regulation in Africa follows a European standard which is generally higher than that of South America and Asia. While this is good for maintaining safe use of LPG, it makes LPG even more expensive and accessibility more difficult than it is in Europe. Regional gas storage facilities are important for ensuring safe storage of large amounts of LPG for easy onward transmission to the consumer. Shorter distances from the storage facility to consumer’s home may also go a long way to forming a denser network of distributors and consequently, users. With more players in the LPG value chain, regulation can be better defined and contextualized over time (KopaGas representative). LPG regulation in Malawi is guided by the National Energy Policy (NEP) 2018 whose goal is to “enhance access to affordable, reliable, sustainable, efficient and modern energy for Malawians by 2030”. However, one of the key criticisms of the NEP is that it inadequately enforces the regulation of biomass and charcoal licensing – keeping their pricing low. The regulation can also do more towards promotion of LPG through education to allay the safety fears of many Malawians. Also, LPG regulations such as licensing and high duty and VAT on LPG and associated cooking devices such as tabletop stoves undermine the affordability and access of LPG. Further, the number of LPG importers and distributors remains low due to high standards and certification for LPG canisters. However, currently there is an on-going effort within MERA to streamline LPG licensing and regulation to create a more enabling environment for potential market actors, and subsequently higher adoption of LPG in Malawi12. There is also the business regulatory environment which according to the experience of 265 Energy can do more to attract and support young entrepreneurs as opposed to the current situation where banks are solely focused on recovering their investment at high rates of return. Consequently, many young entrepreneurs rely on support from friends and family, and with the high upfront costs of entry in the LPG sector, this remains prohibitive. The LPG value chain is complicated in any market, but in an underexploited market such as Malawi, there are limitations on accessibility that are a function of storage and distribution, both of which limit supply because of the high storage costs and limited LPG supply from gas producers. LPG suppliers need to supply at significant volumes in order to reduce cost. For example, in Tanzania KopaGas shared their experience around accessibility: “All of our customers are within 10 km of the port due to the logistics, the more rural you move the harder and more expensive it gets.” The knowledge and understanding of LPG (i.e. acceptability) in Malawi remains low. A study by Practical Action Consulting (PAC) highlighted limited knowledge of LPG efficiency and safety among potential users13. Perceptions that LPG is unsafe and more expensive than other cooking fuels further hamper uptake. To demonstrate the levels of consumer discomfort with LPG, a representative of 265 Energy said: “You could literally give LPG for free and many would not take it because they think it will blow up their house.”

2.4 OPPORTUNITIES

12 Per discussions at USAID feedback session on 3 July 2019 13 PAC, 2018

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Despite the challenges to LPG businesses, the opportunities remain vast. There are opportunities to improve the regulatory environment, incentivize LPG uptake, increase awareness of LPG’s benefits and introduce new distribution approaches.

The regulatory environment is still largely under-developed, consequently, regulations to fill the gaps are extrapolated from Europe where the market is more mature, which promoted LPG safety but keeps barriers to entry high. Additionally, the current regulation follows much of what applies to the distribution of gasoline, which is a different type of fuel than LPG. A representative from KopaGas reflected on his experiences in Tanzania: “Tax needs to be removed to make it a viable alternative, storage facilities put in place, then it is necessary to develop distribution, but without the gas we have no market.” Similar conclusions and recommendations are made by PAC: “The private sector should increase investment in development of a nationwide distribution network for LPG to reach all towns and cities across Malawi.”14

The overwhelming dependence on charcoal and firewood is another area in which changes can be affected to steer consumers more towards LPG. Energy investments should initially target higher income brackets within Malawi’s growing urban areas where 62% of households use charcoal, most of which is unsustainably harvested and inefficiently produced and burned using inefficient charcoal cookstoves15. There is the opportunity to generate carbon credits for fuel switching to LPG from biomass fuels on the voluntary carbon market, and it is currently being explored to be added to the United Nations Framework Convention on Climate Change’s (UNFCCC) compliance market called the Clean Development Mechanism (CDM). While the carbon market is an opportunity to financially incentivize cleaner cooking, it is extremely uncertain as there is currently limited demand for either the voluntary or compliance credits, and further uncertainty of the role of carbon markets as part of the international response to climate change after 2020.

A significant investment in awareness on time savings, convenience, safety and improved health can also positively affect the uptake of LPG. For example, laboratory tests and data analysis found LPG to be the most efficient cooking fuel in comparison to electricity, Kawandama Hills Plantation charcoal, local charcoal, and firewood16. Awareness messaging should also focus on the health hazards of exposure to fumes. Of significant importance also is that the messaging should be targeted at the users of LPG. As a representative of 265 Energy shared, “Change is gradual in the households, partly because current gas users are not the cooks, the helpers cook which decreases adoption.”

Distribution approaches that make sense of consumer preferences and behaviors can open up the LPG business sector to approaches such as Pay-As-You-Go (PAYGO) which may make the upfront costs of cylinders and stoves more manageable as the costs would be spread over time. The 265 Energy experience shows that LPG businesses are an opportunity for employment across the value chain. However, this should be coupled with appropriate training and certification of distributors and customers both.

14 PAC, 2018 15 USAID, 2018 16 PAC, 2018

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3.0 IMPROVED CHARCOAL COOKSTOVE MARKET BRIEF

3.1 THE ISSUE The Malawi National Charcoal Strategy 2017-2027 estimates that nearly every Malawian household (97%) relies on firewood or charcoal as their primary source of cooking and heating fuel. With alternative fuel sources underdeveloped, firewood and charcoal continue to form a significant part of Malawi’s energy mix. World Bank data estimates that firewood remains the most used cooking fuel at 79.5% of households, but charcoal use has been increasing steadily to 18.3%17, and is now the most used in urban areas at 62%. Within this context, the demand for charcoal and firewood, of which much is unsustainably harvested and produced, is driving deforestation and forest degradation in Malawi. This is undermining agricultural productivity and food security, water security, and hydroelectric generating capacity, increasing Malawi’s vulnerability to climate shocks. The number of Malawians using firewood is estimated to have increased from 11,571,500 in 2005 to 14,877,442 in 2017, representing a percentage increase of 28%. For the same period, the number of Malawians using charcoal is estimated to have increased from 1,072,500 to 2,643,505 representing a percentage increase of 146%. In absolute terms, 4,876,947 more Malawians are estimated to have used charcoal and firewood in 2017 than in 200518. This increase highlights that the increasing population remains reliant on biomass for its energy needs, which in turn increases deforestation and forest degradation in the country.

3.2 RESPONSE

Acknowledging the potential of improved cookstoves (ICS) “Innovative financing to reduce the adverse health and environmental impacts related to current cooking practices, the Government of approaches are required to Malawi (GoM) developed a Cook Stoves Road Map, which sell highly efficient, higher cost targets the increase in clean and energy efficient stoves charcoal cookstoves beyond from 500,000 in 2016 to 2,000,000 households by 2020. wealthier customers”. Following the launch of this initiative, a National Cookstove - BURN Representative Steering Committee (NCSC), chaired by the Department of Energy Affairs and supported by various development partners, was formed to coordinate the efforts towards achieving the Government’s commitment of increasing the uptake of improved cookstoves. Efforts until recently have been solely focused on the ‘Chitetezo’, which is the basic clay liner wood stove. A number of other improved stoves have been introduced historically on the Malawi market primarily via individual initiatives by private sector players. The three types of charcoal stoves are the following: 1. Basic Jiko Charcoal Stove – small functional improvements in fuel efficiency over the traditional, inefficient ‘mbaula’ charcoal cookstove that is typically made from scrap metal. The Jiko stove is locally made with clay lining and a metal casing. This stove was introduced in Malawi during the 1980s. The price range for the Jiko is between $3 USD and $5 USD. 2. Intermediate Charcoal ICS – primarily rocket style, portable designs with focus on improved fuel efficiency estimated at 30%-40% when compared to the Jiko. Intermediate Charcoal ICS are just starting to be developed locally in Malawi. There have been significant advances in Eastern Africa with locally made intermediate ICS stoves, and with a stronger focus on charcoal ICS,

17 World Bank Data, 2017 18 USAID, 2018

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continual improvements in the intermediate ICS are possible in Malawi. The intermediate ICS retail price is estimated between $8 USD - $10 USD. 3. Ultra-Efficient Charcoal ICS – rocket style, portable designs (round and square) that have fuel savings of approximately 60% when compared to the Jiko. Currently available only via importation from Kenya (duty free) or China (duty applied). The most well-established brands for ultra-efficient ICS are EnviroFit, Burn Jikokoa and EcoZoom Jet. The cost for the ultra- efficient ICS is estimated between $30 USD - $65 USD. Currently only Envirofit is being distributed in Malawi.

3.3 REGULATION There are currently and estimated 225 local groups in Malawi engaging approximately 4,000 people in the production of local ICS, mostly wood stoves. However, only five (5) are semi-industrialized. VAT applied to locally produced ICSs puts downward pressure on the sustainability of the businesses involved in the cookstove production due to extreme price sensitivity and creates an incentive for such businesses to operate in the informal market. Import duties on cookstoves are less important given that only a tiny fraction of the cookstoves sold on the market are imported from abroad or outside the newly established Free Trade Zone market. The tax regime for cookstoves includes an import duty of 25% added on top of the total landed cost of the imported product. VAT of 16.5% is then calculated on the total landing cost of the products, including the import duty, which results in a tax over tax rate estimated at 48% for stoves imported from outside of the free trade zone (Kuphika Kwapheka representative).

In 2012, concerned by the negative impacts of traditional cooking on women, the Ministry of Disability, Gender and Social Welfare signed on as a partner to the Global Alliance for Clean Cookstoves (GACC). The GACC is aiming to reach 100 million households with improved cookstoves by 2020 and the Government of Malawi (GoM) pledged to contribute 2 million towards this target. It has been estimated that this target could be further facilitated if taxes and import duties are removed from improved cookstoves19.

3.4 CHALLENGES Identified challenges that affect adoption of a charcoal ICS in Malawi are tied to the affordability (e.g. upfront and on-going versus the status quo), accessibility (e.g. distribution and service reach), and acceptability (e.g. cultural and social norms)20. These factors are explored further in the following:  Limited ability to pay for a higher cost, more efficient ICS and fuels is a significant obstacle to broader adoption of ICSs in Malawi. Even where households are willing to adopt ICSs and fuels, they often lack the ability to pay for the ICS due to insufficient disposable incomes and a lack of savings. The upfront costs of intermediate and ultra-efficient ICSs are estimated to be 3- 20 times more expensive relative to the traditional Jiko, which serves as a major deterrent to adoption.  Reduction of fuel expenditure is a powerful motivating factor for adoption of an ICS, however time savings, convenience, smoke reduction, durability, and safety are also key considerations identified.  Accessibility to ICS and sustainably harvested fuels vis-à-vis the status quo is limited. Improving ICS and sustainable fuel accessibility requires significant investment in improving last-mile distribution and service channels to replicate the ubiquitous availability of low-cost stoves (e.g. Jikos) and illegally harvested and unsustainably produced fuels.

19 DAI, 2017 20 Kapfudzaruwa, 2017

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 Sustained adoption and use of an improved ICS or fuel due is often impacted by stove and fuel “stacking”, where end users retain traditional cooking solutions for use alongside clean or improved solutions to accommodate both diverse household cooking needs and tradition/culture involved with cooking21. In Malawi, the hierarchy for low income households of stacking is as follows: Wood - Charcoal - Electricity – LPG while for middle to high income households, the stacking is as follows: Charcoal- Electricity – LPG. Very few exclusively use one alternative source.  Consumers’ willingness to adopt (initially or sustained adoption) new cooking solutions is often influenced by limited consumer exposure to new technologies and low awareness of their benefits limit demand. Additionally, cooking is a deeply tied to culture and changing that is a long-term process whereby incremental change is important to retain cooking practices and norms.  New technologies inability to fit with consumers’ cooking preferences (due to the reality or perception or inappropriate design), lack of consumer trust in stove performance and durability, concerns about the accessibility of fuel supply and after-sales support; and the behavioral (e.g., risk aversion, present bias) and cultural obstacles reduce the likelihood of sustained adoption of new ICS technologies. In general, acceptability, accessibility and affordability of any new ICS must be carefully considered to reach sustained adoption at scale.

3.5 OPPORTUNITIES Most charcoal using households use the Jiko as their primary stove, therefore significant opportunity exists to increase the utilization of the intermediate and ultra-efficient charcoal stoves in urban Malawi. The key drivers of the opportunity for advancing and increasing the uptake of ICS in Malawi relate to cost drivers of cooking, improving stoves, local production capabilities and smart subsidies and incentives for adoption of an ICS. Firstly, there is an extremely high return on investment via fuel cost savings for adopters of efficient charcoal stoves. It is estimated that charcoal prices in urban areas of Malawi have doubled in the past 4 years, and continual increases are expected at 10% a year as supply continues to decrease22. As a result, increasing charcoal pricing will create financial incentive on charcoal reliant households to switch to intermediate or ultra-efficient ICS use. Secondly, there is a strong local manufacturing base established from a long-term focus on promoting the wood fuel ‘Chitetezo Mbaula’. This coupled with continual improvements on intermediate and ultra-efficient charcoal stoves due to a renewed focus on improving efficiency on charcoal-based cooking, creates an opportunity for intermediate charcoal ICS to be manufactured in Malawi. This further opens the potential for Malawi to become a regional leader in efficient charcoal, locally made stoves for export. There is also an opportunity to lobby government to reduce or eliminate VAT and incentivize the production of locally certified and produced ICSs. Thirdly, considerable opportunity exists for results-based financing (RBF) subsidies from government or development partners, and a more limited opportunity exists within the international (CDM compliance and voluntary) carbon markets to incentivize the adoption and continual use of charcoal efficient stoves. RBF subsidy schemes can accelerate private sector engagement in promoting cleaner cooking. The scheme could pay a uniform, transparent subsidy for the distribution and verified use of cleaner cooking technology to low income, urban households. For example, the subsidy could provide $20 via a once off, limited time switch to cleaner cooking subsidy to facilitate the necessary behavior change. While this type of approach is similar to what carbon market is in theory supposed

21 Kammila et al, 2014 22 Drigo, 2019

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to provide, the lack of demand for carbon credits, costs and technical expertise required to access the carbon market creates uncertainty for market actors to engage in the sector. As a result, an RBF facility would further a shift in urban cooking behavior by incentivizing verified changes toward cleaner cooking behavior. Lastly, cultural and technological barriers to some of the improved cook stoves can be overcome by designing appropriate and innovative techniques like social marketing that try to connect the new technologies better to what people want in order to influence positive behavior change. Social marketing brings us close to understanding the audience we want to influence behavior, with what actions and at what time.

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4.0 DCA ASSESSMENT

4.1 DCA SUMMARY FIGURE 2: STANDARD DCA PRODUCTS USAID’s DCA uses risk-sharing agreements with local financial institutions to mobilize local private capital to businesses in emerging markets that cannot access to grow their businesses. To date, DCA has provided over 600 partial credit guarantees between financial institutions and USAID in 80 countries that has unlocked financing of up to $5.5 billion USD to 350,000 entrepreneurs in 80 countries around the world23. The primary objective of DCA is to reduce risk to unlock lending to underserved markets and sectors, and to demonstrate the long-term commercial viability of lending in emerging markets. Of the 186,545 loans guaranteed by DCA from 1999 to 20 March 2019, the majority of loans guaranteed have been in the agriculture sector (76,751 loans guaranteed) and trade/commerce sector (66,636 loans guaranteed), while the energy sector (429 loans guaranteed) and the forestry sector (187 loans guaranteed) have been significantly less24. The standard DCA guarantee can be structured in the following ways:  Loan guarantee with single identified lender and identified borrower;  Portfolio guarantee with identified lender and numerous borrows in an identified sector;  Portable guarantee commitment agreement with an unidentified lender and an identified borrower; and  Bond guarantee between investors and trustee with an institution issuing bonds.

4.2 DCA FEATURES AND TERMS25 DCA has general features and standard terms that include the following:  Loan Backed by the full faith and credit of the US Treasury.  Typically, a 50% pari passu guarantee (i.e. dollar for dollar) with share recovery on pro-rata basis of loan principal.  Guarantee typically used for term loans.  Local and/or foreign currency eligible.  Loan maturities eligible up to 20 years.  Pre-approval not required loan under portfolio guarantee.

23 Per DCA: What We Do: https://www.usaid.gov/what-we-do/economic-growth-and-trade/development-credit-authority-putting-local- wealth-work 24 Per DCA Data Set: Loan Transactions: https://data.usaid.gov/Economic-Growth/Development-Credit-Authority-DCA-Data-Set-Loan- Tra/dt8c-833c 25 Per DCA 2018 Overview One-pager: https://www.usaid.gov/sites/default/files/documents/1865/DCA_One-Pager_2018.pdf

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 Guarantees can be paired with USAID or other technical assistance projects that strengthen borrower’s ability to repay or support financial institutions to lend in a new sector.  Lenders can claim losses after reasonable collection efforts were conducted, 90 days after final letter of demand is sent to the borrower and after the loan has been written off.  Fees: One-time, up-front fee based on facility size and utilization fee that is a semi-annual fee based on the value of the loans placed.

4.3 DCA IN MALAWI

4.3.1 STATUS Since 1999, 1,459 loans have been guaranteed in Malawi, of which 98.7% are loans in the agricultural sector. To date, no loans in the energy sector have been guaranteed, and only four past loans in the forestry/wood sector have received a partial loan guarantee from DCA. Currently the only bank with a DCA Loan Portfolio Guarantee is First Capital Bank (FCB). The portfolio guarantee is available until 2020 and has been reduced to $7.4 million USD from an initial $15 million USD. In March 2019, the DCA portfolio guarantee agreement with FCB was amended to include alternative energy value chains. Within the section on ‘Qualifying Borrowers’, the following text has been added: "Non-sovereign entities whose primary activity is in off-grid alternative energy value chains (including, but not limited to, solar, wind, liquid petroleum gas (LPG) (including LPG cookstoves), micro hydro, geothermal) including manufacturers, distributors, retailers, installers, companies involved in the maintenance of alternative energy technologies, financial intermediaries, and Special Purpose Vehicles (SPVs) backed by alternative energy value chain assets. For the avoidance of doubt, Qualifying Loans must not support illegal charcoal production, distribution, or sale. In addition, qualifying loans must not support the manufacture, distribution, sale or use of firewood cookstoves not certified by the National Cookstoves Steering Committee or charcoal cookstoves that are not included in the Cleaner Cooking Catalogue, which can be found at the following link: http://catalog.cleancookstoves.org/stoves." Furthermore, on a regional basis in the energy sector, the Eastern and Southern African Trade and Development Bank (TDB), formerly the PTA Bank, has developed a $50 million USD loan facility from Standard Chartered. The loan is for up to eight years and USAID is providing a DCA partial credit guarantee to enable the loan. Per this agreement, TDB is able to make loans from the loan facility to USAID-supported power projects in 13 Eastern and Southern African countries, including Malawi26.

4.3.2 TRENDS The FCB DCA loan portfolio guarantee has experienced low “Uptake has been low, DCA utilization. Loans provided by FCB have been mainly climate guaranteed loans must make smart agricultural related or women and youth led small and financial sense and haven’t had medium sized enterprises (SMEs). The typical loans have many proposals that meet this been seasonal agricultural loans with a 9 to 12-month tenor, requirement” with an interest rate between 23-33% in 2018. The size of – First Capital Bank DCA supported loans can be as low as MK5 million, however, the typical FCB loan size for loans with the partial Representative DCA guarantee has been MK35-MK75 million.

26 Per USAID DCA Project Stories: https://usaid-credit.exposure.co/powering-projects-across-east-and-southern-africa

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There have not been any energy sector loans provided or applicants identified by FCB since the agreement was amended to include alternative energy value chains. Aside from a small number of solar irrigation and commercial and industrial rooftop solar lending inquiries, the five (5) interviewed Malawian financial institutions have not received loan applications from LPG or efficient/sustainable charcoal related businesses. However, both FCB and other financial institutions interviewed expressed interest in exploring potential applications from the LPG or efficient charcoal (e.g. stove distribution, stove manufacture, sustainable charcoal production) sectors27.

4.3.3 CHALLENGES There has been a significant challenge for the DCA to both the financial institution and the potential borrower that has resulted in low utilization of the DCA guarantee. Challenges impact all sectors that are eligible to access DCA, including the alternative energy value chains. An overarching challenge is that the DCA is embedded within the local financial system, which is fraught with distortions and over-regulation that makes lending to perceived higher risk private sector initiatives prohibitive from both sides. The opportunity cost for lending to the private sector is very high, because the alternative is high-interest, risk-free rate on government issued treasury notes and bonds. This is a recurring challenge impacting both the lender and borrowers across emerging economies and serves to reduce lending to the private sector as it is perceived to be high risk when compared to the alternatives28. Alternatively, market players consulted consistently highlighted that local lending was not a viable option due to collateral requirements (which particularly applies to deposit taking financial institutions), high interest rates and were not aware of any guarantee mechanism on offer. This assessment has identified four (4) key challenges that impact the lender and borrower in differing ways. The four challenges and the impact on the lender is as follows: 1. Awareness: limited to no marketing of the DCA guarantee to potential applicants because of the perception that potential borrowers may not pay back if aware their loan is guaranteed by USAID. 2. Loan Terms: benchmarks and opportunity cost for lenders impacts the offered interest rate, collateral, loan size and term, and fees of each DCA supported loan. – Lending must maintain cost of lending hurdle within a specific risk adjusted range, which limits ability to significantly reduce interest rates. – Required collateral is typically 100%+ of the value of the loan principal. Collateral required is typically cash on hand or assets such as land. Unfortunately products are not often considered as viable collateral. The result is, as an example, borrowers may need additional cash collateral in a savings account with the bank to satisfy the collateral requirement. This is internal bank policies driven by risk-adverse regulatory protections for deposit-based lending. – Borrowers applicable for DCA guaranteed loan have tended to be higher-risk clients that request small loan amounts, resulting in a need to work through aggregators to offset fees associated with smaller loans. Agricultural lending to date has been short-term and aligned with seasonality of agriculture revenues, which does not align with other sectors including alternative energy. – Fees associated with accessing a guarantee can impact the overall cost of the loan. This can reduce earnings due to a maximum lending rate set at the base lending/policy rate plus a set margin (+10%).

27 Introductions were facilitated during this assessment between the financial institutions and cleaner cooking market actors in Malawi. 28 Dougherty & Dogandjieva, 2015

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3. Risk Assessment: any loan, including those with partial guarantees from DCA, is required to undergo the regular risk analysis process as “it is still the bank’s money". Requirements includes borrowers to be a registered business with two to three-year track record, audited financials (can be replaced with management accounts for small businesses), off-taker agreement or similar, and credit bureau check for the business. Often times loan applicants are not deemed creditworthy, particularly SMEs and those that are eligible for DCA supported guarantees. 4. Macro Environment: regulation and governance impacts lending risk, specifically volatility within the exchange rate, limited liquidity in the financial sector, strict deposit based lending protections, and the risk-free rate, as well as government interventionist policies (e.g. maize export ban or high duties on renewable / efficient energy products) can significantly increase risk to lender.

Alternatively, the four identified challenges are perceived by and impact the borrower when attempting to access a DCA partial loan guarantee in a different way as compared to the lender. The four challenges to the borrower include the following: 1. Awareness: due to limited marketing of the DCA by the banks, potential customers are not aware of the opportunity and do not perceive local lending as an option for their business. 2. Loan Terms: borrowers tend to view terms to access funding as too high cost and not fit to purpose for their needs, to elucidate: – Interest Rate: typical range of interest rates offered by banks are perceived to be too high for alternative energy businesses (manufacture / importation / distribution / biomass planting / etc.), and borrowers feel a guarantee should significantly reduce the interest rate on the loan. – Collateral: many of the alternative energy businesses are small scale businesses (e.g. stove producer groups), that are not able to offer viable collateral aside from the product being financed. Limited collateral from borrowers applicable for a DCA guaranteed loan, therefore, while DCA is beneficial, it is not sufficient for most potential borrowers. – Loan Size and Duration: Loans for alternative energy businesses range in size from very small at start-up scale to large when scaling. Furthermore, the payback period is typically much longer for manufacturing/importing, marketing, distributing, and collecting payments over time than agricultural lending. Furthermore, sustainable charcoal development business models require a long-term approach to develop biomass resources (e.g. tree or bamboo planning) that does not facilitate high-interest lending. – Fees: a fee to access a DCA loan guarantor, is viewed by borrowers as a further deterrent to local lending as it is used as part of the rationale for the perceived high interest rate. 3. Risk Assessment: borrowers view the process to apply for a loan as a significant challenge to accessing finance, typically funding is most needed at the start of the business when a successful track record is not yet established, and timelines to complete a risk assessment are perceived as excessively long. 4. Macro Environment: the potential of currency movements is particularly difficult for any company importing goods to Malawi if accessing international hard currency (e.g. USD or Euro) lending. This makes it very attractive for companies to lend in local currency if favorable terms can be accessed. Additionally, duties and import taxes (e.g. efficient charcoal stoves produced in China), and perceived excessive regulation (e.g. LPG sector) make growing energy alternatives very difficult as a commercial business. Overall, the DCA challenges have negatively impacted the utilization of the partial guarantee mechanism in Malawi and decreases the accessibility and affordability of potential alternative energy

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opportunities. The result is that in the current structure and implementation of the DCA guarantee, the potential utilization of a DCA guarantee, in terms of volume of loans, loan amounts and total market demand for DCA supported local lending to the LPG, efficient charcoal cookstove and sustainable charcoal production is minimal.

4.3.4 OPPORTUNITIES In exploring opportunities to increase usage of DCA to support alternative energy for sustainable urban cooking solutions, addressing the differing challenges from the narratives of both the lender and the borrower is necessary. Key identified opportunities that may help to unlock increased DCA supported lending include the following:  Enable DCA beyond FCB, to include all interested local banks for loan portfolio guarantees. This could serve to provide competition amongst financial institutions that could result in more attractive terms companies interested in accessing local lending. Additionally, changing the DCA structure from the current one-size fits all to a sector-based approach would also increase its viability. For example, a cleaner cooking sector DCA targeting lending to stove manufacturers, distribution companies and aspiring PAYGO LPG companies, will require a higher percentage, between 80%-100% guaranteed, as opposed to current 50% guaranteed.  Increase awareness of guarantee mechanisms within the alternative energy sector by hosting general informational sessions for the private sector in general, and targeted outreach to alternative energy association groups including but not limited to the Cleaner Cooking Camp, the National Cookstove Steering Committee meetings and Solar Stakeholder meetings. The focus of the outreach could be to make possible borrowers aware of exactly how a guarantee works and which banks could be interested in providing loans to increase inquiries and subsequently utilization of partial loan guarantees supporting the clean cooking sector in Malawi.  Explore the viability of the portable guarantee mechanism: – Explore aggregating within the efficient charcoal (improved cookstoves and production) in Malawi as the identified borrower to create viable volumes to develop the guarantee and attractive for financial institutions (locally or internationally) to engage. – Significant potential for portable guarantee within the LPG sector as investments to establish are large and the sector is at an early but growing stage in Malawi. – Blend local bank guarantees with RBF schemes can help to de-risk the loan which will be necessary for upfront costs of product manufacture, purchase, distribution and servicing. The RBF funding serves to increase revenue to the company, and decrease the risk associated implementing a cleaner cooking business.  Engage with other guarantee mechanisms in Malawi with a focus on reducing cost of lending. Opportunities exist to explore collaboration with OPIC guarantee (Agriculture related via EcoBank), Shared Interest (one guarantee with Export Development Fund to date but exploring further guarantees) and European Investment Bank (guarantee in development).  Engage with the National Cookstove Steering Committee to provide assistance to local companies to develop business plans and bankable applications that advance the cleaner cooking (e.g. LPG and efficient charcoal) sector beyond the current focus on firewood efficient cookstoves (e.g. ‘chitetezo mbaula’).

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5.0 CONCLUSIONS & RECOMMENDATIONS

5.1 CONCLUSIONS It is the conclusion of this assessment that there is significant opportunity for LPG and efficient charcoal cookstoves to mitigate deforestation by reducing the demand for unsustainable charcoal, but the sector needs targeted support to reach its full potential. A strong focus on improving efficient charcoal is required because it is a main cause of deforestation, and there is an urgent need to reduce charcoal consumption while not removing the primary, viable cooking options for the majority of low-income urban households. Efficient charcoal can thereby serve as a bridge until viable fuel switch alternatives are available at scale. The urban clean cooking sector in Malawi is at a nascent stage, and trendlines point to improved willingness to adopt new technologies to meet cooking demand in the future as the cost for status quo cooking approaches (e.g. using illegal, unsustainably produced charcoal on an inefficient stove) continues to increase. However, the main question is when will be the tipping point that results in widespread adoption, and how can this be sped up before the corresponding environmental damage is non-reversible? Further, it is the conclusion of this assessment that the DCA mechanism, in the current structure and implementation, is not viable to support sustainable urban cooking solutions in Malawi at scale. Potential utilization of DCA guarantees within the urban cooking sector, in terms of number of loans, loan amounts and total market demand is estimated to be negligible in its current form. Lack of awareness of the DCA opportunity, loan terms (e.g. high interest, collateral requirements, size and length, fees), lending procedures and risk assessment (per regulatory and internal processes), and an overall challenging and volatile business environment all reduce the viability of the DCA to support alternative urban cooking solutions in Malawi. The findings of this assessment indicate for the DCA to be more effective in supporting alternative urban cooking solutions, the following is required: 1. Increased awareness of the potential of guarantees to financial institutions and potential customers in the clean cooking sector; 2. Increased accessibility beyond one portfolio guarantee (e.g. CDH, EcoBank, , EDF), and explore expanding beyond local banking structures to provide guarantees for international funders (e.g. crowdfunding entities including SunFunder, Lend-A-Hand, Trine) interested in supporting the alternative energy sector in Malawi; 3. Collaborate with other guarantee offerings and financial mechanisms to unlock overall financing for cleaner cooking players (e.g. Shared Interest, OPIC, EIB); 4. Explore increasing flexibility to include a DCA portable guarantee eligible for the clean cooking sector or developing a loan guarantee for borrower portfolios to enable small-scale lending by lower income customers via reducing the upfront cost for either ultra-efficient charcoal stoves or the necessary LPG equipment including tabletop burners, cylinders, meters. With an improved DCA offering, there is potential to utilize a guarantee mechanism particularly by local stove manufacturers to expand production and marketing; new entrants in the emerging sustainable charcoal sector for marketing and logistics; and distributors of LPG for both equipment purchases and distribution set up. The potential loan values in the clean cooking sector are variable, estimated to be as low as $50,000 USD (e.g. local stove manufacturers) or as high as $5,000,000 USD equivalent (e.g. pay as you cook LPG distributors).

5.2 RECOMMENDATIONS

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The recommendations derived from the assessment focus on systematic and targeted support to increase affordability, accessibility and acceptability of alternative urban cooking approaches in Malawi. Firstly, it is recommended to explore additional blended financing mechanisms (in addition to DCA guarantees) that have potential to increase the adoption of alternative urban cooking options and reduce deforestation, including the following opportunities:  Challenge grants to accelerate the development and piloting of new technologies. Challenge grants can be effective to provide the private sector with an opportunity to trial and distribute their minimum viable product at reduced rates, in order to develop marketing, distribution and service levels and conduct a proof of concept. As an example, a challenge grant could spur technology change (both locally developed and imported) by introducing efficient charcoal solutions to households via innovative distribution approaches. This will in turn drive a significant reduction in deforestation until future fuel switch approaches, such as new LPG distribution models, can be identified, piloted and implemented on a large scale with mass appeal, e.g. Energy & Environment Partnership (EEP), Development Innovation Ventures (DIV).  RBF opportunities to co-finance and defray cost for setup and scaleup of proven technologies, e.g. Power Africa’s Solar Home System Kick-Starter Program for Malawi, Beyond Grid Fund Zambia Programme.  Grant and debt combined support packages to offer products and services in hard-to-reach, underserved communities, e.g. Africa Enterprise Challenge Fund (AECF). For example, the grants can be provided on an RBF basis, paid upon verification of distribution and on-going use of the cleaner cooking technology promoted, while the loans can be provided for upfront costs of developing the manufacture, distribution and/or servicing to the target low-income, urban customers.  Carbon markets, e.g. compliance (e.g. CDM for efficient charcoal) and voluntary (e.g. Gold Standard for LPG) to incentivize the on-going utilization and adoption of the new cooking technology. While this is in theory available, the current state of the carbon markets makes it unlikely to have a material impact on supporting cleaner cooking (i.e. LPG or efficient charcoal) in Malawi. Additionally, the following general approaches are recommended to strengthen the overall sector:  Targeted marketing campaigns on the benefit of efficient charcoal and LPG cooking approaches.  Broad based business planning support to potential local entrepreneurs to improve the bankability of their companies and activities (e.g. PFAN, Finance Catalyst), as well as capacity building on credit management.  Technical assistance to all interested local financial institutions to improve awareness of guarantee options and to develop a pipeline of lenders.  Improved regulation and business environment for clean cooking, including but not limited to enforcement of illegal charcoal, removal of import duties/VAT on necessary equipment and licensing of distributors.  Coordinated support local manufacturing entities by government and development partners, specifically for capital expenditure to improve mechanization, training for improving production efficiencies and overall support to distribution (e.g. similar to EnDev support for rural firewood stoves).

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6.0 APPENDICES

6.1 APPENDIX 1: DESK-TOP REVIEW REFERENCES Baxter, P., & Jack, S. (2008) Qualitative Case Study Methodology: Study Design and Implementation, The Qualitative Report, 13(4), 544–559. Bruce N.G., Aunan K., Rehfuess E.A. (2017) Liquefied Petroleum Gas as a Clean Cooking Fuel for Developing Countries: Implications for Climate, Forests, and Affordability, Materials on Development Financing, No. 7, March 2017, KfW Development Bank, Frankfurt, Germany. DAI (2017) Energy Africa – Malawi Technical Assistance to Model and Analyze the Economic Effects of VAT and Eariffs on PicoPV Products, Solar Home Systems and Improved Cookstoves. Department of Energy (2019) Petroleum Products Act, 1977. Act No. 120 of 1977. http://www.energy.gov.za/files/esources/petroleum/June2019/LPG-Regulation.pdf. Accessed 26 June 2019. Dougherty, J., & Dogandjieva, R. (2015) The Elephant in the Room: Financial Inclusion for the Missing Middle, Innovations, MIT Press Journals, 10(1-2). https://www.mitpressjournals.org/doi/pdf/10.1162/inov_a_00235. Drigo, R. (2019) Woodfuel Integrated Supply/Demand Overview Mapping (Wisdom) Malawi: Analysis of Woodfuel Demand, Supply, and Harvesting Sustainability, Protecting Ecosystems and Restoring Forests in Malawi (PERFORM) through USAID. Holmes, C. (2011) Regional Outlook: Sub-Saharan Africa, WLPGA East Africa Summit, Nairobi, Kenya, 6 July 2011. Kammila, S.; Kappen, J.F.; Rysankova, D.; Hyseni, B.; Putti, V.R. (2014) Clean and improved cooking in Sub-Saharan Africa: A Landscape Report (English). Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/164241468178757464/Clean-and-improved- cooking-in-Sub-Saharan-Africa-a-landscape-report Kapfudzaruwa, F., Hart, T. & Fay, J. (2017). Improved Cookstoves (ICS) in Africa: Explaining the Adoption Patterns. Development Southern Africa. doi: 10.1080/0376835X.2017.1335592 LPG Business Review (2016) Understanding LPG in West Africa. http://www.lpgbusinessreview.com/2016/07/26/understanding-lpg-in-west-africa/ Accessed 27 June 2019. Malawi Ministry of Natural Resources, Energy and Mining (2017) National Charcoal Strategy, . MERA (2019) Review of the retail price of Liquefied Petroleum Gas, April 2019. National Statistics Office (2016) Integrated Household Panel Survey. Integrated Household Panel Survey 2010-2013-2016 (Long-Term Panel, 102 EAs), World Bank. Practical Action (2017) Final Quantitative Report on cost and efficiency of cooking fuels in Malawi. http://conrema.org/wp-content/uploads/2019/01/Final-quantitative-report-on-the-cost-and- efficiency-of-cooking-fuels-in-Malawi.pdf Practical Action (2018) Qualitative and Quantitative Research on LPG in Malawi: A Synthesized Final Report, November 2018. Republic of Malawi (2017) National Charcoal Strategy 2017-2027. https://afr100.org/sites/default/files/Restoration_Malawi_Charcoal-Strategy_lowq.pdf Accessed 27 June 2019.

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Rockall, J. (2016) The Role of LPG in Supporting African Development Presentation, WLPGA, IGU EXC Workshop, Gas Development Opportunities in Southern Africa, 7 April 2016. USAID (2018) Development Credit Authority, Malawi Energy. A concept for partial loan guarantees to bolster Malawi’s energy solutions. https://www.meramalawi.mw/index.php/news/pressrelease/185-review-of-the-retail-price-of- liquefied-petroleum-gas-lpg-april-2019. Accessed June 26, 2019. Vigolo, V. (2018) Drivers and Barriers to Clean Cooking: A Systematic Literature Review from a Consumer Behavior Perspective, Verona, Via Cantarane, Rome, Italy. World Bank (2014) Clean and Improved Cooking in Sub-Saharan Africa, Washington D.C. World Bank (2017) State of Electricity Access Report, World Bank, Washington, D.C. World Bank Data (2017) Main Cooking Fuel: Charcoal (2017) and Wood (2017), last updated 26 April 2019. Yin, R. (2015) Qualitative research from start to finish (2nd ed.). Guilford Publications.

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6.2 APPENDIX II: KEY INFORMANT INTERVIEWEES Name Title Organization Financial Institutions Patrick Kabambe Banking & Agriculture First Capital Bank James Chiumia Relationship Manager Standard Bank Malawi Casey Cline Director of Impact Investing Shared Interest - USA and Operations Edward Mtututsa Head of Credit Export Development Fund Mercy Sekani Branch Manager City Centre EcoBank Branch Eugine Chinkhandwe Commercial and Consumer EcoBank Banking Pempho Chalamanda Business Development CDH Malawi Manager Titus N. Waithaka CEO M-Finance Zambia LPG Talha Ugradar Managing Director Delta Gas Mfundo Mvundula CEO 265Energy Tiwonge Nyangulu Project Coordinator Total Malawi Sebastian Rodriguez CEO & Co-Founder KopaGas Tim Bauer VP Sales and Business Envirofit International Development Improved Charcoal Giel De Pooter Director Kuphika Kwapheka Grant Blumrick Director AfriBam Tanya Clarke Founder & Director Kawandama Hills Plantation Alfred Chisale Founder Dziwani Investments Peter Scott CEO BURN - Kenya Mark Connor New Market Expansion BURN - Kenya Conor Fox Carbon Developer Hestian Stoves Consultants Arthur Wengawenga SAEP Country Manager Deloitte Admore Chiuma Consultant/Entrepreneur Practical Action/Green Impact Tech Lloyd Archer Energy Consultant United Purpose Christa Roth Cookstove Consultant GIZ Government & Dev Partners Mathias Stumpf Team Leader GIZ – EnDev Project Ms. Shamiso Nandi Najira CDM Focal Point Environmental Affairs Department Chimwemwe Yonasi CDM Focal Point Environmental Affairs Department

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6.3 APPENDIX III: MERA LPG RECOMMENDED PRICE BUILD UP – JULY 2018 (FIGURES REPLICATED EXACTLY AS PROVIDED BY MERA)

Recommended Jul-18 New Price Jul-18 Malawi Kwacha Value/Kg

Ruling Exchange Rate 53.82

Landed cost of product 761.20 FOB 512.37 Road Freight 237.80 Handling Charges/Ins 7.10 Product Losses 3.79

Overheads 383.10

MERA 42.37 Energy Regulation 0.50 Levy 3.81 MBS Coss 35.06 Price Stabilization

Duty free cost 1,186.66

Duty

Cost plus duty 1,186.66

Gross Margin 409.16 Distribution Margin 169.02

Selling price before REL 1,764.66

Rural Electrification 4.5% 97.04

Selling Price before VAT 1,862.50 VAT 16.5% 307.31

Maximum Retail Selling 2,169.82 Price

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6.4 APPENDIX IV: FUEL COMPARISON – TYPICAL EFFICIENCIES & COST

Typical Efficiencies (Source: Bruce et al., 2017)

Cost Per KG

Efficiently Produced Hardwood Charcoal (Efficient) KGs Cost (MK) Cost/KG Useful Energy/KG Daily Purchase 1 500 500 9 50 kg bag 12.8 5500 430 9

Inefficiently Produced Hardwood Charcoal (Traditional)

Daily Purchase 1 500 500 6 50 kg bag 12.8 5500 430 6 Kawandama Hills Plantation Charcoal (Sustainable) Wholesale 15 4000 267 4 LPG

Regulated Price 1 2170 2,170 27.3 Global Average 1 512 512 27.3

Cost Per Useful Energy at Final Consumption Stage of Cooking Estimates (MJ/kg)

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Baseline 30% savings 60% savings

Intermediate Ultra- Efficient Charcoal Jiko ICS Efficient LPG LPG Pricing Daily Purchase 56 39 22 79 Malawi Pricing 50 kg bag 48 33 19 19 Global Average Traditional Charcoal

Daily Purchase 83 58 33

50 kg bag 72 50 29

Sustainable Charcoal Wholesale 67 47 27

Notes:

 Charcoal and LPG pricing as per July 2019.  Efficient and traditional charcoal assumed to have the same cost, due to variable quality of charcoal on offer in the market coming from informally produced charcoal that lacks any quality control.  50 kg bag of traditional charcoal has varying weight of useful charcoal due to amount of charcoal dust included, 12.8 kg is an estimate that varies per each bag.  Sustainable charcoal assumed to have the same useful energy per KG as efficient fuelwood as per the Typical Efficiencies table.  All sustainable charcoal (e.g. 15 kg and 5 kg) in each bag is assumed to be fully usable.

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.

U.S. Agency for International Development 1300 Pennsylvania Avenue, NW Washington, DC 20523 Tel: (202) 712-0000 Fax: (202) 216-3524 FINANCIAL MECHANISMS TO PROMOTEwww.usaid.gov CLEANER COOKING SOLUTIONS IN MALAWI ASSESSMENT 27