Financing Off-grid Electrification: A multi-instrument approach

This article was written by Oluwatobi Soyombo & Abigail Jibril

Despite the funding available in the Nigerian energy sector, there is a slow rate of deployment of projects.

Access to reliable electricity in Nigeria is low with a rural electrification rate of about 39%. In 2019, the International Monetary Fund (IMF) identified that a lack of access to reliable electricity costs Nigeria an estimated US$29 billion a year. The inability of the government to provide reliable power supply has further amplified the need for off-grid systems and other clean alternatives.

To achieve universal access to electricity by 2030, Nigeria will need to connect between 500,000 to 800,000 households per year. Solar Home Systems and Mini-Grids have the potential of electrifying more households in several locations faster than conventional grid

To achieve the Nigerian electrification targets, finance is indispensable. Through the Nigeria Electrification Project, Mini-Grid Acceleration Scheme and other programmes in the country, funding is available to catalyse the sector. The World Bank, the African Development Bank and Nigeria’s Rural Electrification Authority have made major commitments to improving electricity access via a USD 550 million fund for the Nigeria Electrification Project. For the Solar Hybrid Mini-grids component of this program, the funds available are US$150million out of a total of US$350million dedicated to the program.

Despite the grants available, the industry is yet to scale at the projected levels. Here’s why:

The nature of some of the available grant facilities in the country requires developers to obtain prior debt or equity financing for project development/construction. Unfortunately, local commercial funders (bank, FIs etc)are not still up-to-date with the sector’s needs to lend at catalytic scale.

Higher perceived risk and the low debt profile of the sector results in higher costs of capital characterized by prohibitive interest rates and unrealistic loan tenures (compared with projected receivables) and higher equity requirements, which in the first place is difficult to land these days.

Prior to the launch of the World Bank NEP, investors and industry stakeholders cited the dearth of grants in the space as the reason for the slow pace of rural electrification. Unfortunately, since the launch of the programme, very few developers in the space have achieved financial close to deploy projects at scale. This is still largely due to the fact that investors are still exercising great caution in funding such large scale projects. Unless commercial capital floods the energy access space, it will be hard to meet the country’s objectives of increasing rural energy access at a meaningful scale.

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On the other hand, perhaps, it is time for grantors (including the NEP) to consider a slightly different structure to some of the grant funding available? The NEP is currently structured as a Result Based Funding. This implies, as we mentioned above, that to access the grants, companies will need to raise 100% of the debt/equity upfront, construct the projects and then claim the grants 3-months post-completion. Perhaps a Milestone Based Funding should be considered instead especially for the smaller companies in the space. This gives the companies the option of either using the first disbursement as “equity” to access debt to complete projects, or it helps get projects underway immediately until a milestone is attained to trigger another disbursement till the end of the project. The limitations of this approach are understandable, but perhaps, that is where grantors really need to proffer some more innovative approaches.

Some have also argued that giving investors even more incentives could potentially increase their willingness to fund the space. For instance, could there be a broader industry-wide credit enhancement scheme (First Loss Guarantee, Partial/Full Guarantee, Guaranteed Receivables etc) to protect investors willing to invest in the sector?

With the new 5M connections debt facility by the Central Bank of Nigeria, our hope is renewed that, for the first time since the NEP launched, participating companies who have had difficulties accessing funding can now see a much clearer path to fund their projects. This hope is based on the seeming simplicity of access presented by the backers of the program. However, like every Government-sponsored initiative, the devil is in the detail and we wait to see how it pans out. If all goes as planned (and beneficiaries succeed in their plans), we are confident that this could potentially open up the space for more commercial capital to flow.

We conclude this piece by re-emphasizing that, ceteris paribus, lack of access to commercial capital could as well be the giant factor standing between the current low electrification rates and the end of energy poverty in Nigeria.