Derisking the Nigerian Renewable Market to improve funding accessibility for Renewable Energy Investment

Introduction

In order to achieve the so-desired energy transition towards clean energy sources to address climate change, there is need to ensure improved climate finance and by inference renewable energy investment across the world for mitigation and adaptation actions. Climate finance, which include public and private funding is particularly important to drive up deployment of renewable energy technologies globally, an energy solution that evidently addresses greenhouse gas emissions from fossil fuel utilization systems. This is consequently important to ensure that the 1.5oC temperature target of the Paris Agreement is achieved.

In line with the stipulations of Article 9 of the Paris Agreement, developed country parties are obligated to provide financial resources that would assist developing country parties get adequate preparation for mitigation and adaptation. On this note, there is supposed to be huge capital flow from developed nations (Global North) to developing nations (Global South) at a significant rate, especially considering the fact that the window of responding to climate change to closing quickly. Unfortunately, this is not the case; report from International Renewable Energy Agency shows that there is a disproportionate distribution of funding towards the Global North, with limited financial resources given to the Global South.

For instance, data shows about only 2% of global renewable investment (an arm of climate finance) was spent in Africa, showing that Article 9 has not been implemented effectively. It is therefore inferred that countries in the Global South remain largely unprepared to effectively mitigate climate change, even though they contributed the least to emissions recorded globally. In the wake of the COP28 where it was resolved that there needs to be increased financing towards alternative energy sources especially in the power sector that has remained a focal point in energy transition, it is therefore pertinent to ensure that the Global South (in this case Nigeria) get its slice of the pie going forward.

Consequently, this article examines how to re-align the Nigerian renewable power sector to get improved private investment by de-risking the market. This is to ensure the market gets necessary funding from private financing mechanisms between now and 2030, to finance low carbon technologies.

The Current Dynamics of Nigeria’s Renewable Energy Market

The renewable energy market in Nigeria (especially its power sector) can be considered to be at its infant stages, thereby less attractive when compared to those in developed economies. This position is attributed to the fact that there is limited interest from the private sector to invest in the country’s renewable energy sector, as there are hurdles and challenges that prevent favorable market dynamics and investor confidence; the use of private investment as the yardstick of renewable energy market viability is due to the fact that they make up 75% of total renewable energy investment between 2013 – 2021. This depicts private investment as the go-to financing mechanism that control global investment dynamics. Meanwhile, recent findings from IRENA stated that the bulk of private investments in the renewable energy sector went to advanced economies due to the presence of mature technologies, market dynamics that favor profitable financial returns and government policies that create suitable business climate for renewable energy projects.

This is rather not the case in developing countries. Specifically, in the Nigerian scenario, which is similar to other African countries, there are risks that prevent inflow of private investments. Even in cases where such investments are made, it is given at a higher cost due to prevalent market risks. These risks pertain to issues of economic instability where the country’s macroeconomy is plagued by staggering currency devaluation, increasing importation tariffs, huge vulnerability of Nigeria’s economic systems to external shocks and lack of consistency in policy development and implementation by successive governments amongst others. Collectively, this makes investors wary of putting their funds into the country’s renewable energy market.

There is also the dimension of huge debt profiles facing the Nigerian power sector which affects profitability, making the sector less attractive to private investors. Recent report shows that Nigeria’s power sector currently faces huge legacy debts of about 3 trillion Naira, which do not provide good optics for most private investors, that prioritize investment profitability over the environmental impact of such projects. It is important to note that such debt results from unreliable consumer purchasing power (which is linked to unfavourable macroeconomic trends in the country) that makes electricity distribution companies unable to pay generating companies for electricity supplied–a problem that could potentially face the evolving renewable energy market. With such possibility, private investors are bound to be wary of investing in Nigeria’s power sector.

Cumulatively, this has created an energy market where the cost of capital is high as there are risks that can facilitate project failure and loss of investments. In this case, the Nigerian renewable energy market (and other developing countries that face similar market challenges) pays higher for capital, which makes the country a less competitive destination for private investment. This challenge depicts the irony of climate finance investment flow, where bulk of the finance is directed towards developed economies (that have contributed the most to climate change) with less market risks, leaving developing economies with limited resources to mitigate against or adapt to the realities of climate change. Consequently, this defeats the stipulations of Article 9 of the Paris Agreement.

De-risking the Nigerian Renewable Energy Market: What are the Options?

Due to the limited private capital that is available to the Nigerian renewable energy market due to market risks, the onus therefore lies on the government to derisk the market using public finance to facilitate just and inclusive energy transition. In this case, public finance in the form of donations, grants, concessional loans, export credit agencies and market-rate financing from development finance institutions can be used to provide subsidies to renewable energy projects, reducing their cost and improving financial viability of such projects.

Also, in lieu of the fact that there is unpredictable customer demand for renewable electricity generated and electricity tariff in the country, it is important to provide a fixed price system (Feed-in-Tariffs) for renewable energy power projects. This is bound to provide projected stable revenue stream, that addresses revenue risks for renewable energy projects in the country. With such risks removed, the market becomes more attractive to private investment. There is also the option of exploring feed-in-premiums where public finance can be used to provide additional premium to renewable electricity producers, allowing them to competitively participate in the power sector. With such support, market risks are eliminated and private investors can be endeared to Nigeria’s market.

Another dimension of addressing the risks is to fund infrastructure such as construction of national and regional transmission lines and energy storage facilities (that are critical to decentralized electricity system functionality) using public finance. With the presence of such infrastructures that support grid expansion and flexibility, private investors would perceive the Nigerian power sector as one that can easily be decentralized and integrated into renewable electricity production systems. In this case, the cost of investment drops as private investors would not need to commit scarce resources to building such infrastructure.

Im summary, the prevalent risks in Nigeria’s renewable energy market can be addressed using the limited public finance that the government can get from development finance institutions, concessional loans, grants and other financing instruments. In other words, Nigeria can change the dynamics of the flow of private renewable energy investment to facilitate capital inflow in the country. This is bound to enable energy transition in the country in line with the Paris Agreement.

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