Winock Energy | Challenges Obstructing the Potential of Nigeria’s Utility Scale Solar Industry
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Challenges Obstructing the Potential of Nigeria’s Utility Scale Solar Industry

In previous years, Solar Energy was not an option for commercial electricity project developers because of the cost of Solar components. However, because of competition, the price of components have dropped rapidly while capacity has remarkably increased.

For example, the price of Solar cells have reduced from 99% between 1976 and the date of this post.

Average Global Solar Price Per Watt between 2019

The increase in commercial affordability of Solar components has led to a sharp growth in bankability of Solar projects globally. For instance in Germany, around 67,200 new PV installations were completed in 2017 with a total output of 1.75 GW.

In light of the abundant sunshine, the power of Solar is already being harnessed in Africa where companies like Access Power and Yingli Solar are deploying large scale utility projects successfully in North Africa and companies like Bboxx and M-kopa have been successful with Solar home systems in East Africa.

Despite the increase in affordability of Solar, some countries still lag behind in adoption due to controllable market forces. One of such countries is Nigeria.

Nigeria has a population of 190 million, which represents around 20% of Africa’s total population and around 30% of the 600 million that lack access to stable and clean electricity in Sub-Sahara Africa.

Currently, Nigeria’s national grid has an average generation capacity of 4,000 MW causing majority of its residents to rely predominantly on expensive, polluting and deadly diesel and petrol generators that emit on average 23,000 kg of CO2 annually.

Nigeria is blessed with around 300 days of sunshine annually therefore the electricity supply problem can be solved quickly and affordably.

 

 

By contrast, South Africa has a population of 56 million and a power generation capacity of 52,811 MW, of which around 20% of this is from low carbon sources.

Nigerians have been adopting Solar Rooftop and mini grid solutions through companies like Lumos providing Solar home systems and companies like Arnergy providing mini grid supply, however the adoption rate pales in comparison to the size of the existing demand.

Season entrepreneurs like Richard Branson have openly alluded to the opportunity available for investing in mini-grid Solar energy in Nigeria. Below are three reasons why the rate of adoption of Solar is slower than needed in Nigeria:

1. Unsupportive Government Regulations

In 2016, the Goodluck Jonathan led Nigerian government signed 14 power purchasing agreements  (PPAs) with Utility scale Solar project developers to supply electricity to the grid. This event was celebrated as a step in the right direction by global observers, but since signing, none of the projects have started.

The lack of progress in the development of the projects has been largely due to hostile regulatory clauses in the proposed contract. For example, two critical issues are:

  • The Nigerian Bulk Electricity Trading (NBET) Plc,  manager and administrator of Nigeria’s electricity pool, has failed to provide a satisfactory framework that is fair for the banks and institutional investors that are backing the developers.
  • The  Finance Ministry has failed to provide a sovereign guarantee in a foreign currency in case circumstances that are within the government’s control lead to loss of revenue during the lifetime of the project.

 

Today, it appears that the government’s electricity regulator and finance ministry will not budge on the clauses therefor some of the project developers have started to shop for buyers for their PPA while others have since moved on to other countries.

2. Poor Access to Finance

According to a study conducted by Nigeria’s Renewable Energy Agency (REA), Nigerians businesses alone spend around $14 billion annually on inefficient petrol and diesel generators thereby resulting in an opportunity to create an off-grid market of $10 billion annually to complement the grid.

In the same report, REA states that 10,000 mini grid installations of 100 kw capacity each are required annually in order to meet just 30% of the current demand in the next 10 years. However, access to finance generally in Nigeria has recently been poor because of the FX risk which was triggered as a result of the fall in global oil prices in 2015 .

Conclusion

Given the obvious opportunity in the Nigerian Solar market, any investor should be highly interested in investing in Solar projects in Nigeria, however the negative perception of regulatory and macro economic conditions in Nigeria is a major deterrent to investors.

Nonetheless, saavy investors who are aware of the high returns in Nigeria that can be generated in Nigeria are able to greatly mitigate the risks because:

  • Nigeria’s power regulator is lax in regards to independent power supply hence there is a thriving market of willing buyers and willing sellers for those that understand Nigeria’s business landscape. This is why off-grid Solar is making a headway.

 

  • FX risk has been present since Nigeria’s independence; Naira was much stronger than Dollar in 1960 but today is exchanging at $1=₦360, nonetheless this has not stopped companies such as Cola Cola, Hilton, British Airways and Indomie from becoming highly successful in Nigeria. In fact, Nigeria is Hilton and British Airway’s most profitable markets globally. The solution to the FX issue is to hedge with companies such as TCX Fund.