BLOG

In recognition of off-grid solutions’ potential to deliver electricity access to rural communities in Africa, the African Development Bank (AfDB), has been working with both private and public sector actors on the continent to facilitate their rollout.

On 29 November 2018, the Board of Directors of the AfDB approved a USD 200 million sovereign facility to the Nigerian Government to finance the Nigeria Electrification Project (NEP) with the World Bank. NEP, which will be implemented by Nigeria’s Rural Electrification Agency (REA), is an innovative, private sector-led approach to catalyse development of off-grid – particularly mini-grid – solutions for Nigeria’s rural communities. The components of NEP that the Bank will finance include (i) a minimum subsidy tender program awarding upfront subsidies to private sector developers to support the rollout of solar and/or hybrid mini-grid solutions across up to 250 sites; (ii) a performance-based grant program incentivising the adoption of energy efficient productive use appliances in rural communities; (iii) Phase 3 of the Energising Education Programme (EEP): a government-led initiative that aims to install dedicated power systems  for federal universities and teaching hospitals across the country’s six geopolitical zones; and (iv) technical assistance and capacity building for a wide range of public and private sector stakeholders in the country’s off-grid sector.

Importance of a Private Sector Approach

Measures to de-risk private sector investment in the country’s power sector are a key tenet of Nigeria’s Power Sector Recovery Plan (approved in March 2017 by the Federal Executive Council). Domestic and international private sector developers offer substantial technical expertise, and are best positioned to implement renewables-based, sustainable off-grid power solutions that balance a least-cost approach with quality power supply. Moreover, the private sector is able to leverage far more financing than what the Government can currently sustainably provide. The AfDB and World Bank’s combined investment of USD 500 million towards NEP is expected to leverage approximately USD 660 million from private sector sources.  

To date, mini-grid development in Nigeria has been limited. Most operational solar PV mini-grids (approximately 40 in number, ranging in capacity from 30 kWp – 100 kWp) have been developed by domestic private sector developers benefitting from concessional financing or grants through donor-financed programmes, or tax holidays provided by the Government. These public programmes are necessary given the high upfront costs of implementing solar PV or hybrid mini-grid solutions, and unaffordable commercial financing options which translate into higher cost-reflective tariffs for consumers and businesses. Furthermore, the novelty of the mini-grid business model hinders large scale development as commercial and operational risks are perceived to be high. Concessional funding helps offset the resulting higher costs of capital.  

Why Nigeria?

NEP comes at a crucial – and perhaps the most optimal – time for the Nigerian power sector. Nigeria has the largest off-grid population on the continent with more than 100 million people lacking access to grid electricity. Most are concentrated in the country’s rural regions (where the average electricity access rate is 41.1% compared to the urban rate of 86% (AfDB). Mini-grid systems, comprising hybrid or pure solar mini-grids ranging from 50 kW to 1 MW, are deemed a sustainable solution to address rural energy access deficit in communities with productive loads and/or decent spending power. Given the heavy reliance on diesel-powered generators in rural off-grid communities, which can cost users upwards of USD 0.70/kWh[1] compared to approximately USD 0.42-0.57/kWh from mini-grids[2], mini-grid solutions represent an overall cost savings to consumers, and demonstrate consumer willingness to pay to developers.

Additionally, Nigeria boasts one of the most developed regulatory frameworks for mini-grid development in Sub-Saharan Africa, and scored  highly in AfDB’s 2018 Electricity Regulatory Index (ERI), which benchmarks the performance and development of African nations’ electricity sector regulatory frameworks against international best practice. The Nigeria Electricity Regulatory Commission (NERC) has instituted a mini-grid policy that, among other things, (i) facilitates the licensing procedures for mini-grids (mini-grids under 100 kW in capacity do not need to apply for a license), (ii) allows for setting cost-reflective tariffs, and (iii) establishes the procedures for compensation or incorporation when the grid arrives in a community serviced by a mini-grid. These regulatory measures, which were designed and implemented with the assistance and guidance of the donor community, have been favourably received by private sector developers.

Key Issues Going Forward

The electricity access deficit in Nigeria will require a multi-pronged approach using public support to leverage private financing and development. While NEP has been designed to provide optimal results, key issues around long-term sustainability require careful deliberation during implementation.

The provision of subsidies, for example, can induce market distortion effects when applied improperly. For instance, subsidies are unsustainable where they reduce tariff levels paid by consumers without addressing root causes that preclude larger scale private sector investment. Once subsidies run out and costs return to their initial highs, future private sector developers may find it difficult to convince consumers to pay higher tariffs. Taking this into account, NEP has been designed to create an environment for future private sector investment in the mini-grid space that will outlive the requirement of subsidies. Subsidies provided through NEP aim to catalyse the initial large-scale development of mini-grid solutions by reducing initial capital expenditure costs, and increase the likelihood for developers to recoup their investment over the project life cycle. As larger corporates enter the mini-grid space in Nigeria and new/existing domestic developers scale-up their operations, a track record of success and a more developed domestic supply chain will incrementally reduce investment costs, and eventually end the need for subsidies as a tool for crowding in private sector participation.

Domestic financing constraints also hinder mini-grid development in Nigeria. Because mini-grids have a limited track record, domestic financial institutions participation is limited,  and developers are unable to tap into domestic debt markets to scale up their operations. Where financing may be feasible, the tenors offered (2-3 years) normally do not match the financing requirements of mini-grids, which have longer payback periods. While foreign currency financing may be available from foreign sources and investors, it is sub-optimal as it introduces currency mismatch risks. Over the course of the NEP implementation period, the AfDB and World Bank will work with local financial institutions and development partners to improve the liquidity of the sector, and the ability of developers to access financing at adequate pricing and tenor.  

Similarly, there is limited in-country experience amongst foreign and domestic developers in implementing and operating mini-grids on the scale envisaged by NEP, which will tender out pre-determined lots of 30-50 mini-grid sites to qualifying bidders. To mitigate the risks and support a rapid scale-up of activity, the AfDB and the World Bank are investing significant resources in producing geospatial assessments, feasibility studies, and other related studies and market scoping reports which will be subsequently provided to participants in the minimum subsidy tender for mini-grids component of NEP.

Additionally, the Green Mini-Grid Market Development Programme hosted by the AfDB and financed by the Sustainable Energy Fund for Africa (SEFA), provides a free helpdesk where developers can obtain technical assistance and strategic guidance on navigating mini-grid markets across Africa, including Nigeria. The information produced through NEP and other initiatives administered by the development community is expected to significantly facilitate the rapid scale-up of mini-grid development in Nigeria.

[1] Compare to an average price of electricity of 0.1043/kWh across all sectors in the United States (US EIA).

[2] Estimates are based on African Development Bank’s own calculations and calculations determined by Rocky Mountain Institute (RMI) for their 2018 Mini-Grid Investment Report for Nigeria

By: Rhoda Limbani Mshana,Chief Power Sector Regulations Specialist, and Nicolas Miyares, Consultant, both at the Energy Financial Solutions, Policy and Regulation Department, African Development Bank.