Africa’s $40B Market for Cooking Fuel Is Being Cleaned Up: Q&A

By Bryony Collins, BloombergNEF. This article first appeared on the Bloomberg Terminal. 

KOKO Networks is stepping into Africa’s $40 billion market for household cooking fuel with its non-polluting bioethanol cooking technology that undercuts the cost of using charcoal by as much as 40%, Greg Murray, chief executive and co-founder of the Nairobi-based company, told BloombergNEF in an interview.

The five-year old company has installed its first 700 KOKOPoint machines in convenience stores across Nairobi in Kenya. These dispense bioethanol cooking fuel in canisters to households otherwise dependent on using kerosene or charcoal for cooking. The latter fuels currently dominate the household cooking market and are responsible for deforestation, carbon emissions and indoor air pollution, Murray said.

Customers that buy a KOKO cooker and refill their canisters through the KOKO fuel dispenser “can access fuel that is 40% cheaper than charcoal and 10% cheaper than kerosene,” said Murray. KOKO Networks has partnered with Royal Dutch Shell licensee Vivo Energy to deliver the bioethanol to each of the 700 dispensaries that are “within five minutes of every front door in Nairobi.”

In the next two to three years, the 600-strong company aims to increase its network coverage to around half of all Kenyan households. To achieve its global ambitions, the company plans to license its hardware and software to large distribution companies currently operating in the consumer goods space, Murray said.

Read the Q&A for more.

BNEF: Could you give us some background to KOKO Networks?

Murray: We’re a technology company that builds hardware and software to enable the bioethanol cooking industry to happen at scale. [Customers pre-pay for the fuel using their mobile phones and top up their portable canisters at KOKO ATMs]. We’re about five years old, with 600 staff and we’re based in Nairobi, where we make the network hardware, and in India, where we make the stoves and canisters.

Our KOKOPoint machines are installed inside convenience stores and have a primary use as an automated fuel dispenser for liquid bioethanol, [while also being] a digital media machine with video and radio for advertising purposes and an e-commerce kiosk. There is an associated network of delivery trucks.

Our main purpose is to deliver clean fuel at a price that undercuts charcoal and kerosene – which are the dominant dirty fuels used in the approximately $40 billion market for cooking fuel in urban sub-Saharan Africa.

Charcoal is the dominant baseline fuel for cooking in sub-Saharan Africa and around 2 million hectares per year are deforested specifically for [this purpose]. That’s roughly 300 times the size of Manhattan.

The wealthy segment of consumers – not more than 15-20% of the cooking market – is served by bottled LPG.

The impact of cooking with charcoal in Africa is massive – it produces 1 billion tons of carbon emissions a year, deforests 2 million hectares of land and is responsible for many thousands of deaths per year from indoor air pollution. Kerosene and charcoal produce carcinogenic fumes when burned.

In the absence of massive government subsidy, like in Brazil, Indonesia or India – where the governments have had the capacity to do that – charcoal remains the dominant cooking fuel.
About 60-70% of the market for cooking is from charcoal in Sub-Saharan Africa, 15-20% from LPG and the remainder is from kerosene.

There’s only a certain number of places where the cost of charcoal has risen to such an extent that people are forced to turn to kerosene.

Q: You are rolling out some 700 KOKOPoints in Nairobi – how does your business model work?

A: We work with the big fuel companies. In the case of Kenya, it’s a partnership with Vivo Energy, which is a large, London-listed fuel infrastructure company that has the license for the Shell brand in Africa and has the largest share of the mainstream fuel business in Kenya. Their petrol stations act as a last-mile depot to serve a network of micro tankers, which are small enough to transport the bioethanol to the neighborhood convenience stores where our KOKOPoints are located.

In Kenya, we’ve gone live on our first network of 700 KOKOPoints, supported by ten Shell petrol stations and ten smart micro-tankers. Within five minutes of every front door in Nairobi, there is a KOKO-branded store with a KOKOPoint fuel ATM.

Customers buy a KOKO cooker, with a KOKO smart fuel canister through the screen on the KOKOPoint – which is delivered to the shop for them to collect. They then dock their canisters into the KOKOPoint, and a chip inside the canister pops up for them to enter a pin in order to calculate the amount of credit left in their account. Customers can top up their balance using MPesa on their mobile phones. [MPesa is a mobile phone-based money transfer and micro-finance service].

From our 700 fuel ATMs in Nairobi, customers can access fuel that is 40% cheaper than charcoal and 10% cheaper than kerosene.

Q: How much does it cost to buy the cooking stove and canister upfront?

A: $65 – customers can pay it overtime or upfront. Our customers are urban so far and mostly in the $150-300 income per month per household bracket, so have pre-paid electricity in their homes, TV and smartphones, but they are still cooking with charcoal or kerosene.

Q: How much does it cost to fill one canister with bioethanol?

A:
It’s about $2. We currently price it at 95 cents per liter, and one canister holds 2.3 liters. A canister would last an average family of four about 1 week as cooking fuel. Cooking with charcoal would add about 40% to that cost, [bringing it to about $1.30 per liter].

Q: How have you come to an agreement with shopkeepers to house your KOKOPoints?

A: We have an operating lease with shopkeepers – they own a part of the fuels business, e-commerce business and media business. There is a maximum capacity for each KOKOPoint of about 500 customers due to limited tank size and space within each shop. From an agent’s point of view – they pay a security deposit and earn revenue, from which their rental fee is deducted. We finance the ATM to them to make it more affordable than buying it upfront.

Q: What kinds of product can be bought through the e-commerce business?

A: Right now, only the KOKO kit of cooker and canister can be bought,but [we will offer other goods and services in time through thee-commerce platform].

Q: What is the purpose of the radio and TV on the KOKOPoint?

A:
It’s a TV screen that plays advertising during the dispense process and the radio plays news and ads. We’ve been able to lower the cost of fuel by opening up our platform to other advertisers.

Q: Where does the bioethanol come from?

A: Most of it comes from Kenyan molasses-based ethanol plants, with some also from Ugandan and Tanzanian plants. The molasses is a waste product from sugar refineries that can be used to make alcohol, and the low-grade product can be used as cooking fuel. It produces no emissions when burned, just water vapor.

Charcoal is a major driver of food insecurity in Africa, because deforestation has a major impact on water cycles, which has a major impact on food production. So replacing charcoal with bioethanol for cooking is a positive thing for food security. There is a need to grow additional capacity to enable the bioethanol cooking industry in Africa to expand using local content. The Kenyan government has launched an ethanol cooking fuel industry master plan, which will be finished in September, to unlock more finance for expanding small holder-based ethanol production.

Q: Are there any subsidies for ethanol in Kenya?

A: There are no subsidies for ethanol. LPG is subject to no VAT or import taxes, and we have been working with the government to extend these exemptions to ethanol fuel. Clean cooking stoves in Kenya are already exempt from VAT and in this year’s budget, they have also proposed exempting the fuel from VAT. Ethanol is a new industry and it takes some time for governments to get behind it.

Q: KOKO has just launched in 700 shops in Nairobi. Where do you plan to expand your business from here?

A: Right now, we have network coverage just in greater Nairobi, which is about 13% of Kenya’s population. We plan to build out greater network distribution across the rest of urban Kenya and the arterial roads connecting those towns and cities – growing coverage to about 50% of Kenyan households over a 2 to 3 year period.

We are also exploring ways of expanding our business into more rural areas, but there we present more of a time-saving than cost-saving opportunity, because people collect wood from the forest for cooking fuel rather than buying charcoal. There are hundreds of cities worldwide that needs these networks, but we don’t think we can build them ourselves fast enough. [So we plan to partner with distributor companies that serve the [fast moving consumer goods] industry and also with fuel companies that want to overlay this fuel onto their existing network. We will license our hardware and software technology to partners like these.]

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