Five Trends Shaping the Clean Cooking Market
As with any nascent industry, the outlook for clean cooking can be tough to untangle. Having spent the better part of a decade and nearly $25 million providing venture grants and technical assistance to promising companies, the Clean Cooking Alliance (CCA) has a unique vantage point.
Since its founding in 2010, CCA has had the privilege of working with, and learning from, entrepreneurial teams that are transforming the sector. We continue to see exciting advancements across the ecosystem, particularly among the 33 high-potential companies we partner with under CCA’s Venture Catalyst.
Since launching in 2020, the Venture Catalyst is supporting entrepreneurs to build innovative and scalable companies that help accelerate clean cooking access. It has helped companies develop the first pay-as-you-go (PAYGO) magnetic induction cooker, expand into favorable new markets like Nigeria and the Democratic Republic of the Congo (DRC), and create technologies to reduce verification costs for carbon programs, among many other projects.
Based on the impressive progress by our portfolio companies, here are five trends we believe are currently shaping the clean cooking market:
1. Increased product development with a focus on the real-time tracking of consumer usage data through metered technologies
Several companies across various fuels and technology types have developed clean cooking devices with an ability to track usage data. While metered LPG canisters first emerged about five years ago, we now have metered biogas, electric, and gasifier stoves in the market. CCA has helped catalyze the development of several of these products through the Venture Catalyst and other programs over the last five years.
Apart from the business model application of using such metered technologies to offer PAYGO solutions to consumers, another significant implication is to leverage such technologies for usage verification for carbon programs. Gold Standard has recently approved a new methodology that allows verification using metered devices. Some companies are also exploring how to leverage real-time tracking to get instant credits from carbon buyers. We also expect that the Internet-of-Things (IoT) data approach to carbon credits will allow buyers and sellers to connect more directly through distributed ledger technologies like blockchain smart contracts, though successful proof points in the clean cooking sector may still be a few years away.
2. Increased ability by companies to leverage carbon markets
Carbon credits for clean cooking have been activated through both voluntary and regulated markets for more than 12 years. The Energizing Finance report highlighted an addition of an average of USD 20 million in carbon finance per year during the 2016-18 period, predominantly towards improved cooking solutions. These carbon programs have been dominated by improved biomass stoves. However, there is an increasing trend to register carbon programs for other clean cooking solutions beyond improved biomass stoves. More than 50% of the Venture Catalyst portfolio have active carbon programs or are in the process of setting up new programs.
We expect a significant increase in demand for carbon credits going forward. The Taskforce on Scaling Voluntary Carbon Markets (TSVCM), sponsored by the Institute of International Finance (IIF) with knowledge support from McKinsey, estimates that demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. Newer markets, such as the Korean Emission Trading Scheme (KETS), have also allowed clean cooking companies to get significantly higher prices than those typically available in voluntary markets.
Companies are also diversifying in how they use the carbon revenues. For example, KOKO Networks has been subsidizing the high entry price of ethanol stoves in their “tool-and-fuel” business model, thereby reducing the price entry barrier for low-income households. Greenway has partnered with its last-mile microentrepreneurs and agents– who are mostly women– to share a portion of carbon revenues with them, thus creating healthy economics through the value chain.
In the next two years, we expect more clean cooking carbon programs to be registered, new methodologies that significantly reduce the verification costs to emerge, and pilots that test the monetization of other impacts such as health to increase in number. Overall, this will drive much needed capital to the clean cooking sector. However, we are also cautious of clean cooking companies becoming overly reliant on carbon revenues where some business models may become unviable in absence of attractive carbon prices.
3. Raising capital remains a challenge for most companies
As highlighted in several industry reports, including CCA’s 2021 Clean Cooking Industry Snapshot, fundraising in the clean cooking sector remains a challenge. With the exception of a handful of companies closing relatively large ticket equity and debt deals in 2019-21, the majority of the companies trying to raise capital have been unsuccessful.
In our discussions with various investors, we have realized there is still a knowledge gap in the understanding of various business models, technologies, and fuels in the sector, especially for new investors. There is also a need to expose more investors to the sector. CCA and other partners are developing market intelligence to address this gap. As a sector, we also need to take more responsibility in sharing information, being rigorous in how data is presented, and bring more visibility to unit level economics. There is also a need to separate viable businesses from philanthropic projects and give investors the ability to make the distinction.
The risk return profile of the majority of companies requires blended finance structures to de-risk several high-potential business models. CCA’s Spark+ Fund, a hybrid debt and quasi-equity blended finance initiative developed jointly by CCA and Enabling Qapital, has the potential to prove out the investment case for these business models once launched. To attract debt investors to the sector, we believe that leveraging carbon credit revenue as collateral in addition to accounts receivable should be increasingly explored.
4. Product diversification across fuel types has been a key growth strategy for several companies
In our portfolio, we have observed several key players expanding to other technologies and fuels to increase their customer base and enter new markets. BURN Manufacturing, traditionally a charcoal stove manufacturer, has recently launched electric pressure cookers for grid-connected consumers in Kenya. BBOXX, known for its solar home systems, has added LPG solutions to their product portfolio in DRC and Kenya. ATEC, originally a biodigester company operating in Cambodia and Bangladesh has added magnetic induction cookers as an offering to their grid-connected consumers.
As we noted in “Leveraging Off-Grid Solar Infrastructure for Modern Cooking,” it is reasonable to expect that existing off-grid solar companies such as BBOXX have advantages upon which they can capitalize integrating solutions such as PAYGO LPG in their portfolio. This is due to their existing last-mile distribution networks, established partnerships with telecom companies and experience leveraging mobile money payments, and the ability to invest in product research and development given more robust balance sheets and better access to finance.
For companies that started as manufacturers of clean cooking products, the key motivation to expand the product line is to leverage existing resources such as manufacturing infrastructure, distribution networks, or existing PAYGO intellectual property.
5. Consumer financing initiatives need more catalytic support
For several companies, the strategy to finance products for their consumers includes the following solutions (or a combination of the following solutions):
a) in-house installment of payment plans or partnering with financial institutions to implement payment plans,
b) the use of PAYGO technology to align payment with usage.
Though both approaches are nascent and growing in our sector, consumer financing through in-house financing or partnerships has a much wider application for last-mile distributors. Typically, partnering with financial institutions to finance clean cooking products has been difficult due to small ticket sizes and “non-productive use” classification of loans. A few pilots that leverage the bundling of products or use guarantees have been conducted with mixed results. CCA’s Haiti Clean Cooking Fund is conducting a pilot in Haiti that provides consumers with product loans backed by credit guarantees. Biogas, with a higher price tag, has seen relatively higher success than other clean cooking products.
In-house financing comes with its own challenges for clean cooking companies as they have to develop credit teams, processes, and systems along with risk management guidelines. A few companies are focusing more on making their credit departments robust while also exploring transitioning their credit book off-balance sheet of the operating companies. We expect more such initiatives to emerge in the sector however, there will also be a need for catalytic funding to establish proof of concept.
As we get closer to 2030, we need to see greater and bolder actions from private sector stakeholders in order to reach universal access. While trends around product development and diversification, and the carbon market potential offer opportunities for sector growth and reduced risk, there is a need for significant capital across the entire risk-return spectrum to be able to prove scale in the sector.