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The Business Case for Solar Financing in Nigeria

Financing in Nigeria’s off-grid sector is mainly by donor agencies through performance based grants and subsidies as commercial banks look away. In this piece, ISAAC ANYAOGU examines how the Federal Government can derisk lending to the sector, other reforms required to strengthen the business case for lending to renewables.

Nigerian commercial banks are so flushed with cash made from exchange rate revaluation gains that the country’s apex bank is asking them not to spend it all in one place. But the barely considered off-grid energy space could provide lenders with a profitable yet impactful proposition.

The off-grid space in Africa’s biggest economy has become too important to rely on hand-outs as financing strategy. For over a decade now, the chief source of financing has come from donor agencies through performance based grants and subsidies while commercial banks have watched with disciplined detachment.

Opportunity dressed as problems

Source IEA

More than half of Nigeria’s 200 million people are not connected to the country’s creaking grid. Despite vast natural gas resources, Nigeria has an electrification rate of around 60 percent behind Ghana with over 85 percent of its people connected according to the International Energy Association (IEA) data.

A 2018 World Bank study shows Nigeria as having the world’s second largest deficit in access to electricity, that is, after India. The Bank’s Sustainable Energy for All (SE4ALL) database shows only 54.4 per cent of Nigeria’s population had access to electricity in 2017. In a country where a majority (51 per cent) of the population lives in rural areas, less than 40 per cent of rural dwellers have access to power, compared to 83.6 per cent of the urban population with access.

Even in urban areas where electricity access supposedly exists, perennial problems in power supply include gas supply shortages, limited distribution networks, limited transmission capacity, electricity theft, a large metering deficit, and high technical and commercial losses result in hours of blackouts daily.

Apart from the huge financial cost of over $14 billion spent annually on generators, there is the air and noise pollution the generators constitute, increasing the carbon footprint of the country and posing major health risks to people. Lack of adequate power supply results in over $25 billion in annual losses to the economy (6 percent of GDP).

Nigerian lenders have traditionally seen opportunity in on-grid electricity. Some of them financed the acquisition of the utilities in the 2013 electricity privatisation exercise, where many got their fingers burned. Now they are calling their debts and saddled with adding utilities as part of their portfolios.

It is understandable why on-grid electricity investments appear attractive. The framework for investments, cost recovery, fiscal and regulatory terms are clear and opportunities to scale are present. Remarkably, Nigeria’s off-grid energy sector is shaping out with similar opportunities hence the need for greater introspection by lenders.

Solar market opportunity

Nigeria is far from achieving Sustainable Development Goal 7, which seeks universal access to affordable, reliable, sustainable, and modern energy by 2030.

Experts say based on the sustainability objectives of access, affordability, and elimination of CO2 emissions, solar is the most appropriate means of providing regular, cleaner, and cheaper electricity for rural communities in Nigeria.

“Solar energy in Nigeria holds the key to inclusive economic development. It is not just about harnessing renewable energy of the sun; it is also about contributing to access to energy for every Nigerian,” said Michel Deelen, Consul General of the Kingdom of the Netherlands in Lagos.

Economic development in rural areas is the basis upon which existing solar projects are developed. The economies of most rural areas are based on subsistence farming, and these farmers require reliable and affordable energy to power their activities. Off-grid solar companies can provide them with energy solutions that are cost-effective and reliable.

Already some companies are innovating on the concept of energy for productive uses. ColdHubs, founded by Nnaemeka Ikegwuonu deploys a “plug and play” modular, solar-powered walk-in cold room, for 24/7 off-grid storage and preservation of perishable foods.

It addresses the problem of post-harvest losses in fruits, vegetables, and other perishable foods. ColdHubs is installed in major food production and consumption centers (in markets and farms). Farmers place their produce in clean plastic crates, which are stacked inside the cold room.

This extends the freshness of fruits, vegetables, and other perishable food from 2 days to about 21 days. The solar-powered walk-in cold room is made of 120mm insulating cold room panels to retain cold. Energy from solar panels mounted on the roof-top of the cold room is stored in high-capacity batteries; these batteries feed an inverter, which in turn feeds the refrigerating unit.

There are also local companies deploying solutions as manufacturers and distributors of power solutions for domestic, industrial, and telecom applications. Nayo Tropical Technology (NTT) is building expertise in research and development, manufacturing, marketing, and distribution of power solutions products and systems.

Opportunities abound in the solar energy market in Nigeria. The Federal Government seeks to expand electricity access by 90 percent, with 30 percent of total energy coming from renewable sources by 2030.

The government seeks to develop 10,000 minigrids to cover underserved areas, 5 million solar stand-alone systems for households and SMEs, and 1 million single solar lanterns.

According to the World Bank, Nigeria is one of the top 5 countries with the most planned mini-grids, with favourable developments in costing, design, geospatial planning, income-generating appliances and machines, companies and utilities, business models, and regulations and policies.

The Nigeria Rural Electrification Agency (REA) is implementing the largest mini-grid program in Africa targeting 850 mini-grids by private firms out of an estimated potential market of 10,000 sites.

The African Development Bank could soon disburse a previously approved $250 million for rural electrification projects, according to Adebayo Adelabu, the minister of power.

“AfDB also confirmed readiness to disburse a previously approved $250million fund for the Nigeria Electrification Project (NEP) under the Rural Electrification Agency (REA) and extended support to Northern Nigerian states through the $20billion 10,000MW Northern Africa Desert to Power fund,” Adelabu said at a conference in Korea last week.

Nigeria is deploying minigrids at scale. Regulatory frameworks that are specific to mini grids, such as streamlining the registration process and the introduction of the multi-year tariff order (MYTO) model, The model allows for shaping tariffs over the regulatory price control period (in this case, 5 and 10 years). The regulatory framework also supports private sector investment with a comprehensive national electrification strategy and implementation plan.

The Nigerian government doesn’t always have a remarkable reputation for making remarkably reputed policy decisions but the off-grid space is a rare exception. Nigeria’s mini-grid policy has become the blueprint for other African countries.

Deelen said there is growing international interest to invest in solar opportunities in Nigeria. “That is why the Netherlands is prioritizing business development, innovation and investments for solar energy with national and international stakeholders.

“But in order to reach the full economic potential for Nigerian and international companies, bottlenecks and challenges in the market need to be addressed. This means tackling issues like infrastructure, regulatory barriers, and affordability head-on.”

Driving growth

Anayo Okenwa, founder of Nayo …. said the place to start is fixing issues related to financing.

“Commercial banks in Nigeria are not optimised to lending renewable energy infrastructure, they are more adept to lending trading where they can repatriate capital in three months,” said Okenwa.

Commercial banks demand stringent collateral and often do not accept the equipment as collateral. There is a capital mismatch, with commercial banks offering short-term financing for projects whose gestation period is between 15 and 20 years.

Okenwa proposed that sovereign guarantees by the federal government would have been helpful, but as the government is reluctant to offer that, institutional support through an infrastructural bank like InfraCredit with dedicated financing for off-grid projects would suffice. In exchange for a single-digit interest rate and a longer repayment period, the government can take an equity stake in the project.

Beyond financing, the government should establish clear and consistent policies and regulations for mini-grid development that directly affect issues slowing down deployments, including licensing, tariffs, tax, importation, and quality standards, said Folusho Alabi, vice president, Africa at Ashipa Electric, Corp.

“This includes providing access to land for mini-grid infrastructure, potentially simplifying land acquisition and tenure issues,” Alabi said.

He said Nigeria should incentivise exploitation of its vast lithium deposits to develop batteries.”Research and Development is therefore key and Government needs to invest in research and innovation in renewable energy technologies to reduce costs and improve efficiency.

Also, investments are required for training and capacity-building programmes for local technicians, undergraduates, and graduates, thereby ensuring the sustainability of mini-grid operations. Other policies, including tax holidays and zero clearing/duty burden at the ports, will go a long way in reducing the capital expenditure on mini-grid projects and eventually the cost of power to the customers, Alabi said.

The new rules by the Nigerian government to raise the licensing threshold for mini-grids from 1 MW to 5 MW could spur more investors into the sector; hence, it is critical for cohesive regulatory terms to fix other issues in the sector.

Source : Business Day