Using Liquid Petroleum Gas in Mozambique Households

Overview: Why this is the ideal moment to introduce gas to the low-income families of the City of Maputo

In Mozambique, 75% of the family households depend on biomass energy for cooking. It is estimated that each year about 16 million is used to produce charcoal with an estimated wood value of more than $700 million, but generating only about $ 300 million in the local charcoal market.

In 2011, the fastest growing cities of Mozambique (Maputo, Beira and Nampula) consumed 8 million 60kg bags of charcoal, leading to price increases of up to 200% Although the northern region still has abundant biomass resources to meet demand in the next 25 years, supporting biomass energy needs in the southern region, where more than 30% of the population lives, has entered a critical phase, especially when it comes to low-income families.

The forecasts for Mozambique make clear that even with a real investment of US$ 2 billion by 2020, more than 60% of the population will still have no access to the electricity grid, thus remaining dependent on biomass energy in meeting their energy needs. In view of these prospects, conditions of accessibility and production will become more difficult and more expensive, thus leading to consumer price increases. Within the context of an energy policy that is committed to the goals of the PARPA – the Action Plan for the Reduction of Absolute Poverty – investments in energy sources other than biomass are strategic.

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Maputo: An Attractive Market

In 2011, the city of Maputo consumed 3 million bags of charcoal, generating a US$ 70 million market. From an environmental impact point of view, the impact on forests of the charcoal demand in Maputo is enormous, so much so that nowadays the charcoal sold in the city is produced in areas up to 400 km away, while 10 years ago it was produced in the province. The reason? There are no more forests left.

Obviously, great difficulties in producing and distributing charcoal has an impact on prices, it increases them. Between 2010 -2012 the price went from 250 Mts per bag of charcoal to the current 650 Mts, and nothing prevents the price to continue to rise. Although charcoal is still convenient in Maputo, sold at several distribution points in various quantities at an affordable price, the monthly consumption per household in the peri-urban areas hovers around 650 to 750 Mts per month . This new price level and the expenses of low-income families, create a real market opportunity for the introduction of alternatives to charcoal, among which gas appears to be the most preferred and desired option</span>.

According to a recent study by SNV in partnership with FUNAE and the City Council in the Mafalala neighbourhood, 63% or 1.800 families already are aware that gas is an ideal alternative for cooking. In this neighbourhood, 30% of the families already combine with charcoal with gas, and everything seems to indicate that this is a trend.

According to the study, families who traditionally consume charcoal, now would be able and really wish to pay for gas, something that only a few years ago would have been unthinkable. At present the potential market of gas consumers in Maputo, i.e. capable of buying gas in sustainable market bases, would be around 100.000 families, or 36% of the charcoal consumers.

That is why, according to the study and the vision of the authors, turning low-income families and individuals into gas customers, poses not only a great institutional or government challenge, but offers above all an important market opportunity for the private sector.

The Key Players

The effective introduction of a structuring project that allows for a real change in the energy base supporting the low-income families of the city of Maputo, depends above all on effective participation and coordination among the key players in the sector.

The challenge of redefining the current business model, which caters for or focuses on a minority of middle and upper class people in the city of Maputo, requires from all players a real desire for transformation.

Standing out among the key players with the ability to influence the success of such an initiative are:

• PETROMOC – Petróleos de Moçambique: State enterprise that supervises, regulates and sets standards affecting the gas segment in Mozambique. PETROMOC has already expressed interest in supporting this idea, since serving low-income families by facilitating their access to gas is an activity defined in their Corporate Strategy.
• FUNAE – National Energy Fund: Executive branch of the Ministry of Energy, which is realizing a programme in the area of biomass and will lead this initiative.
• CMM – Maputo City Council: The Municipality has a great interest in facilitating its population to have access to clean energy sources and thus ensuring that these families can achieve a better quality of life.
• EC – European Commission - As a major financier of the sector, it is expected that the EC will play an active role in financing a project whose objective is to reduce the pressure on biomass and to introduce a sustainable alternative, namely gas.
• WB - World Bank - The Bank is preparing an important pilot initiative that will be conducted in some key countries in Africa, called the “Africa Clean Cooking Initiative”.
• Companies form the Mining and Energy Sector: Companies in the energy sector are investing more than US$70 billion in the country. In theory nothing prevents these companies to fund a project that brings gas to 16 million people who use biomass in this country.
• SNV - Netherlands Development Organization - It is an active partner of FUNAE and the Municipality, which has contributed above all to the sustainable development of biomass, acting as an adviser.

The Case for Supply and Demand

Demand - (An Expanding Market that Needs Gas)

Based on market information, it is clear that at present over 100 thousand families in Maputo are in the process of constituting a new consumer market for gas. Taking also into consideration that biomass energy expenditure of family households is growing rapidly, this number tends to increase.

Right now, there does not exist a well-developed mechanism that distributes gas to low-income families in peri-urban areas. In the last decade several projects have been launched to promote cooking techniques using efficient stoves and alternative energy sources. These projects generated low demand, insufficient to bring about sustainable change.

Today the market is completely different, with high prices of charcoal, and average spending per family of between 650 Mts to 750 Mts per month, thus even exceeding the costs of LPG and electricity. This is the right time for the introduction of gas in Maputo.

From an economic point of view, meeting the demand of low-income families in Maputo, in addition to respecting the right to clean energy sources, offers a market opportunity that could translate into profits for companies that invest in inclusive business models targeting the Base of the Pyramid.

Supply – (Gas bottles on Site with the Right Price)

Due to the current market structure focused on the upper middle class segment and the industrial market, gas supply and the gas distribution system in particular do not include the effective attendance of low-income families.

Low-income families spend up to 1/3 of their income on dirty and precarious energy sources, proportional values ​​that are much higher than those spent by a Maputo middle class family. (Estimated at 600 Mts per months).

At present there is no supply designated for the low income population, so that people from this consumer segment who have the means and the wish to change to a new source of energy cannot do so. While other industries such as telecommunications can leverage their performance by attending the low income population, offering a wide variety of prices and sales outlets, the energy sector has yet to explore these models. It is evident that a couple of years ago an effort in this direction would not have been feasible from a financial point of view, but today the reality is different.

Making consumers embrace the technological change, through buying a bottle of gas (3kg / 9kg) and a gas stove, is the main impediment at the moment.

What Can Be Done

Demand

The demand is already there, but it is possible to expand people’s knowledge about the advantages of gas as compared to charcoal. It is necessary to organize awareness campaigns.

As far as demand is concerned, it appears there are no big challenges, apart from the need to get to know this segment better.

The segment of low-income consumers who already have the capacity to change to gas, consists of at least 100 thousand families and tends to grow because, on the one hand there is an increase in the number of jobs and incomes in the city, while on the other hand the charcoal prices are increasing as well.

A large number of charcoal consumers are able to sustain the consumption of gas or a combination of gas and other energy sources. The challenge consists in developing a supply adapted to this segment.

Supply

The development of a supply adapted to the reality of the Consumer Pyramid Base in terms of Product, Price, Sales Outlet, Form of Payment and Promotion is the biggest challenge we face.

However, the question is not whether the private sector would be able to serve this segment, but whether the Pyramid Base segment currently would or would not fit in the business strategies of companies distributing gas.

Meanwhile, the information contained in this technical note indicates that there exists an emerging demand sufficiently robust for distribution companies to start “trials” to serve this segment.

There is evidence to acknowledge that the subsidized distribution of gas bottles of 3kg, or even the subsidizing of the current 9kg bottles, would be an important step.

Further details about what can be done will emerge from the multi-sectoral dialogue and the desire for cooperation among the different players.

Financing Modalities

Obviously, funding is an impediment when it comes to implementing a project of this nature. From the point of view of the private sector, companies will have to make a major effort to adapt supply to the profile of the low-income segment. At the demand side, consumers interested in more modern and cleaner cooking methods also need incentives to change from the current system to gas.

In all cases funding is necessary. There are at least four feasible ways to finance a pilot programme that will lead to the widespread use of gas in Maputo and soon in other cities such as Nampula and Beira. Ideally, these financing modalities of should function in combination and / or be complementary, creating synergy and a greater ability to making an impact and be successful.

1. The Private Sector: As the main interested party the private sector, by means of direct investments, is able to mobilize resources for the development of a supply directed towards the low income segment. Meanwhile, it may be necessary to introduce new bottles, new control, distribution and payment modalities.
2. The Public Sector Mediation by FUNAE and the CMM can facilitate access of the private sector to financing through national and international funds, licensing and support to marketing and distribution strategies.
3. Multilateral and Bilateral Organs: The European Commission, the World Bank, the African Development Bank, among others, have an ongoing series of initiatives linked to the Charcoal / Biomass and Renewable Energy economy. This project can connect to these organs, sources of financing for grants that will enable pilot initiatives.
4. Carbon Credit: Traditional ways of cooking are responsible for the generation of an average of three tonnes of carbon per family per year. Considering a potential market of 100 thousand families, it would be possible to obtain carbon credits on the CDM market equivalent to 300 thousand Euros per year. This is US$ 10 per ton.
5. Corporate Social Responsibility (CSR): Companies of repute with robust CSR programmes may view this initiative a real opportunity to contribute to the fight against poverty in Mozambique. The gas industry only will invest more than US$ 70 billion. It is possible to imagine 0.5% of this amount being directed towards a national fund to support the Propagation of Gas for domestic use, it would be perfectly possible to realize a national programme that places Mozambique on a new energy platform, not only as an exporter, but also serving its own population.
   

Further Information

For further information about this initiatve, contact the authors:

• João Munguambe – Head of Economic Development - Maputo City:joao.munguambe@cmmaputo.gov.mz
• Mario Batsana – Head of Biomass - FUNAE - mariobatsana@funae.co.mz
• Federico Vignati – Head of Renewable Energy - SNV – fvignati@snvworld.org