WEF, REEEA-A proffer solutions to finance Nigeria’s clean energy sectors

BY PHILLIP ISAKPA  

An international and local working group made up of the World Economic Forum (WEF), Renewable Energy and Energy Efficiency Associations Alliance (also known as The Alliance) and over 40 public and private stakeholders from Nigeria’s energy and finance sectors, says it has identified what it calls “four concrete solutions that are catalytic in accelerating financing into Nigeria’s priority clean energy sectors.”

Specifically, the identified solutions with pathways to implementation, the group says in a report, are aimed at addressing the financing barriers in the country’s clean energy sector and scale national and international investment.

The background to seeking these solutions, according to the group, is in the identification of the huge funding requirement Nigeria needs if it is to make any progress in its energy transition plan. 

“Nigeria requires approximately $410 billion by 2060 to achieve the energy access and transition targets outlined in its Energy Transition Plan (ETP), starting with a $10 billion investment in the first year. This ambitious target requires the active efforts of stakeholders from the private and public sectors, nationally and internationally. The Renewable Energy and Energy Efficiency Associations Alliance (REEEA-A) and the World Economic Forum, supported by Marsh, have partnered to explore opportunities for Nigeria to unlock more investments into the clean energy sector,” the group stated.

And in a community paper jointly released by REEEA-A and WEF titled, “Mobilising Investments for Clean Energy in Nigeria”, the working group listed the four “concrete solutions” as:

• Funding more projects with local naira to enable the growth of community-based developers; 
• Revenue assurances to support and fund large-scale solar projects; 
• Technical assistance accelerator programmes for solar entrepreneurs and developers; and
• Policy recommendation to incentivize natural gas producers to prioritise domestic production.

The Community Paper seen by Business A.M. is based on the effort made at exploring opportunities to unlock investments into Nigeria’s clean energy sector, and upon which the partnership in 2022 into 2023 said it convened Nigerian stakeholders from the public and private sectors, to carry out an in-depth exercise to: – 

• Understand the Nigerian country context and the national stance on its need to accelerate investments in clean energy. 
• Explore and prioritise solutions to unlock capital for Nigeria’s clean energy priority areas. 

According to the group, this in-depth look into Nigeria is part of the World Economic Forum’s global “Mobilising Investments for Clean Energy in Emerging Economies initiative”.

The report identifying solutions to the funding issues for tackling certain priority areas, also provides details of the four outlined solutions. 

Addressing the first solution in the Nigerian case, the report states: “The availability to finance capital costs for clean energy investments in dollars is limited and currency fluctuations pose a risk to foreign investors and project developers. In addition, Nigeria’s inflation rate increased to about 16% in 2022, which contributed to low capital availability, restricting the access of developers to financing. Capital availability is limited, which limits the ability of developers to access finance. In some cases, project developers are required to wait months to turn their naira into US dollars at the central bank rate. As a result, they are forced to pay black market rates (over two times the official exchange rate) to procure essential equipment in dollars.” 

The report suggests that to improve capital availability and access in Nigeria, three elements need to be overcome: (i) currency of debt; (ii) interest rate of financing; and (iii) risk diversity. It stated that blended finance structures are crucial to building a local currency facility, drawing private investment, and attracting domestic institutional capital to aggregate clean energy and climate goal projects that have a reputation for higher perceived risk. 

It noted that a local currency facility helps reduce overall credit risk, lower capital costs and protect conservative capital from potential losses, adding that entities such as infrastructure-related guarantee firms, local banks or government agencies that understand local risk (e.g. InfraCredit, the Rural Electrification Agency (REA), Renewable Energy Association of Nigeria (REAN), Rural Off-Grid Electrification Projects (ROGEP), and REEEA-A) are best positioned to enable the blended finance instruments that build local currency financing.  

The report also identified as part of the solutions, revenue assurances to support and fund large-scale solar projects. It observed that many large-scale solar projects in Nigeria struggle with payment risk as it is not certain that the investors will receive their revenue. 

“The electricity distribution companies (DISCOs) integral to implementing large-scale solar projects suffer from revenue collection issues and infrastructure delays. For example, 14 large-scale solar projects have been given the directive to be built, yet they have been stalled for several years due to off-taker risk. A revenue assurance fund could reduce off-taker risk by providing a level of financial security for investors by ensuring reliable and predictable revenue streams. The revenue assurance fund can offer a stable tariff rate post-construction of the asset by providing a guarantee or insurance mechanism that protects investors from revenue fluctuations caused by changes in the tariff rate. A guarantee mechanism would cover payment shortfalls during low electricity generation or low off-take or electricity usage and develop more predictable cash flows,” the report explained in detail.  

With regard to technical expertise shortages, the report recognised the fact that many large and small-scale clean energy projects rely on foreign expertise for technical assistance and financing advice, noting that training is currently provided by public offices such as REA and REAN, and technical assistance is provided by development finance institutions (DFIs) and foundations intermittently. 

“It is key to build this capacity internally and ensure the development of local know-how over the long term. As the solar industry is a young market, it would benefit from the harnessing of local accelerators and training programmes to enable developers to gain practical skills in infrastructure project financing and development. Such programmes would help reduce the uncertainty of large and small-scale projects and build more robust investment profiles, which has been a hurdle for many solar projects in Nigeria,” it stated. 

It suggested as approaches, scholarship programmes for participants to access existing training and/or subsidise training fees; intern or exchange programmes with international bodies; private and locally-led training institutions; and accelerator programmes, noting that “these would help create the enabling environment for developers to access learning and mentoring systems and key functions, such as advocacy support on financing and regulatory matters, market intelligence and corporate structure advisory, bid management and technical tender support, technical access to project engineering, access to capital providers and financing solutions, and process standardisation and quality assurance certification guidance. It would be helpful if the curriculum that is developed is merged with international training institutions to ensure standardisation across global standards,” the authors of the report suggested.

On policy recommendation as a solution to incentivize natural gas producers to prioritise domestic production, the report noted that although in possession of one of the largest gas reserves globally, Nigeria’s reserves are largely untapped, with only about one percent following through reserves to production. 

“Several obstacles affect the development of exploration and production nationwide. The lack of investment in gas infrastructure has led to inconsistent gas pricing due to irregular supply and currency pegs. Policy actions can help align the interest and efforts of industry actors throughout the gas value chain and help maximise efforts to improve the overall production process. In addition, standardised pegged pricing for three separate key sectors outlined in the National Domestic Gas Supply and Pricing Regulation of 2008 has been loosely implemented and needs to take into consideration current actual pricing. Industry actors would be able to maximise trade if the implementation of the pricing model outlined in the gas policy is monitored during bilateral sales while taking into consideration future and existing gas market pricing,” the authors of the report stated. 

Besides, it noted that apart from focusing on the domestic gas markets, there is an opportunity for the government to enable an increased understanding of the need for gas and its benefits, such as using natural gas as a cleaner cooking source in households. 

The authors of the report noted that this particular recommendation is targeted at all states in Nigeria and thus “will require federal support coupled with private sector willingness to invest,” adding that Nigeria Liquefied Natural Gas (NLNG) has been a significant player in exporting natural gas to the global market while supporting domestic markets through significant investments in gas production and local distribution infrastructure.

On a broader note, the report observed that developing nations often face wider obstacles than developed nations, such as poor infrastructure, higher levels of poverty, and weaker power transmission and distribution networks, leading to an inability to adapt to climate change and transition at the desired effectiveness and pace. 

Nigeria’s growing population, it stated, has led to increased energy demand. The nation possesses an abundant and untapped source of renewable resources that, if harnessed, can provide up to 60 percent of the required energy demand by 2050, according to the International Renewable Energy Agency (IRENA). The country is also uniquely positioned to grow a sustainable energy system supported by renewable and energy-efficient resources to achieve energy security and affordable access while realising climate change mitigation measures. This is because investments in renewable energy and energy-efficient sources are viewed as more cost effective than relying on conventional sources.