SMEs and Alternative Power for Nigeria
Aug 09, 2019
The sound of noisy, dirty petrol-powered generators has become the background theme of Nigerian life.
The power situation in Africa’s giant is a very well documented problem. Nigerians are used to either living without—or providing their own—sources of power: an estimated $14 billion is spent on powering small scale generators each year, at a significant cost to wealth, health, and the environment.
But while successive governments have trumpeted their plans for the power sector and how important it is as a development imperative, Nigerians continue to feel the pains of a lack of electricity, with its resulting impact on productivity, education and crime.
Situation on Ground
According to the Nigerian Power Sector Recovery Programme, our erratic power supply results in more than $25 billion in annual losses to the economy, more than 6% of GDP. Over 60% of Nigerians lack reliable access to energy, and around 80% of Nigerian businesses cite electrification challenges as the most significant obstacle to doing business.
According to the US Power Africa program, Nigeria currently has an installed power capacity of about 12,500 Megawatts, less than a quarter of installed capacity in South Africa, a country with a quarter of our population. Most of this installed power capacity lies in numerous gas-fired power facilities sitting idle and unutilised. Without access to finance due to lack of cost-reflective tariffs, debt overhang and uncertainty, privatised distribution companies have been unable to carry out the massive investments required in metering and upgrading distribution networks.
The situation gets progressively worse as you go further down the supply chain, from government inability to honour vesting contracts, transmission losses, all the way to the gas suppliers who supply thermal generating plants. All this is happening in a period where our population continues to grow exponentially; the 200 millionth Nigerian is expected to be born in 2019, meaning that the energy supply gap will only grow wider.
In the face of the sector’s obvious institutional shortcomings, a new industry has emerged, powered by the can-do spirit of Nigerian SMEs, reduction in global prices for renewable energy components, policy leadership from the Rural Electrification Agency and a global sense of urgency around sustainable energy access and climate change. Renewable sources of energy such as wind, solar, hydro and biomass are now firmly in play, and an ecosystem of developers such as Rubitec or Arnergy are focusing on driving energy access to underserved rural populations.
Developers building mini-grids, solar generation and distribution serving a metered cluster of households and businesses have transformed villages such as Bisanti in Niger state, where GVE deployed a 40 kilowatt (KW) mini-grid. Utilising a pay-as-you-go platform, the project provides electricity to all 200 households in the community, keeping streetlights on along the main street of the village, ensuring the safety of women and children, with businesses staying open for longer and children being able to study at night. On a larger scale; Lumos’ Solar Home Systems in partnership with MTN, a telecommunications provider, provide instant power to more than 80,000 low-income households across Nigeria.
Like any other industry, the higher level of political and financial risks in emerging and developing countries poses a serious challenge to would-be investors in renewable energy technologies. As a result, the primary challenge for energy developers in Nigeria still remains access to suitable financing. Many of the SME’s willing to participate in the space do not have the assets, networks or sophistication to access institutional investment, and the Nigerian banking sector, heavily exposed to legacy power lending and other macroeconomic variables has not particularly proved a willing, reliable or affordable source of finance.
It is this gap that firms such as All On Partnerships for Energy Access, a Shell funded impact Investor, the EU Electrifification initiative, Persistent Energy Capital and others are looking to fill. Developers can choose from options including the REA/World Bank $350m Nigeria electrification project, the ₦1 billion All-On BOI Niger Delta Energy Access Fund, USADF – All On Off-Grid Energy Challenge, the AECF Household Solar Challenge amongst other interventions that are available for entrepreneurs.
Though much of the funding available still comes from “Impact” driven investing circles, there is an economic case for the growth of this sector. The continued provision of subsidies to fossil fuel consumption in Nigeria means that renewable energy generation may look more costly or difficult to implement than conventional fossil fuel-based technologies in the short term, particularly for large-scale production, but the thinking behind that may not be accurate. Huge, centralised grids, if you can afford to extend them, can be very unreliable, as Nigerians would testify. Building decentralised mini-grids, in small units and with added capacity as community energy consumption grows, is an ideal solution for plugging the gaps in Nigeria’s energy requirements.
A Brighter Future
If the promise of this sector is to be realised, a few things must happen. The enabling environment created by the government through sound regulation must be maintained; at the very least, arbitrary roadblocks such as the controversial imposition of a 10% duty on solar panels and components by the Nigerian customs ought to be reassessed.
Strategic arms of the government must communicate to create a holistic strategy for protecting, not stifling enterprise. Capacity building in the sector, in conjunction with the private and polytechnic institutions, to train more solar engineers and operators needs to be ramped up to produce the talent pool necessary to sustain innovation. Tax incentives that are linked to new electricity connections will also go a long way in improving project economics, and finally, regulators should also develop and circulate minimum equipment standards, to increase confidence in the industry.
There is a lot of potential for the energy sector in Nigeria. The opportunities and the Nigerian entrepreneurial spirit are ready to work. The final ingredient required is a conducive business environment which can give the industry the necessary boost to light up Nigeria.