In 2016, Nigeria caught the attention of the global solar industry, following serious efforts by the Nigerian government and the private sector to promote on-grid solar power development and to ameliorate the country’s severe and now worsening power crises. Since then, performance - in terms of real progress in project development - appears to be falling below expectations. However, Nigeria arguably remains one of the top potential destinations for solar investment in Africa.
For decades, power generation has relied almost exclusively on hydro and gas-based generation systems. But the widespread global advancements in solar technology and the regional solar power awakening in Africa have inspired sincere efforts on the government’s side and massive interest from local and international investors. Relatedly, Nigeria has one of the highest levels of solar irradiance in the West African region, as well as massive power supply deficits. Both those conditions combined make a strong case for affordable and sustainable power generation from alternative energy sources, such as solar. This context inspired several regulatory and policy changes in Nigeria in the last few years and culminated in the signing of 14 on grid solar Power Purchase Agreements (PPAs) in 2016, between the Nigerian government and several private investors.
Beyond PPAs
This major milestone was greatly cheered by stakeholders and observers, but it’s been over 18 months since the PPAs where signed and some stakeholders believe that on-grid solar power development has not progressed as expected in Nigeria. As of yet, none of the 14 proposed projects has reached Financial Close (FC), which is largely due to delays on NBET’s part, revolving around providing a framework that satisfies the needs of banks and Institutional investors. Since Nigeria plans to generate about 10,000 MW from renewable sources by 2020, the success or failure of the fourteen PPAs (which would add a still relatively meager 1,200MW) could be symbolic for future on-grid investments. Should they all become successful, Nigeria could earn itself a great reputation as a top investment destination for solar power developers and financiers. Such a reputation will prove to be critical for attaining the country’s 10,000MW ambition and essential for attaining overall sufficiency in the power supply.
Consequently, what are the core attractions of the Nigerian market for a solar on-grid investor? What are the main constraints for current on-grid solar developers? And how will the attractions and the constraints help to shape future solar investments in Nigeria?
Martin Haupts is the CEO of Phanes Group, an international solar energy developer, investment firm and asset manager headquartered in Dubai, UAE, with a local footprint in sub-Saharan Africa through its office in Nigeria. With respect to the major issues within the Nigerian solar space and how the country compares within Africa, Martin says that a successful pilot on-grid solar project would benefit and encourage investment. According to him, “If you consider that regional counterparts such as Ghana, Mali, Senegal and Burkina Faso have passed the ‘proof of concept stage’, then a pilot, on-grid solar project in Nigeria - a country of 180 million people - is desirable.”
“Even though the pace of activity within the on-grid solar space in Nigeria since the 2016 PPAs has been slow, there is capacity and capability on the part of the regulators. In spite of the excellent structure on paper - which is bankable - there are still a few questions to be answered within the sector.”
In 2017, the Nigerian government adopted a World Bank supported power sector development framework called the ‘Power Sector Recovery and Implementation Plan’ (PSRIP), which includes strategies for attracting solar investments and expanding on grid solar power capacity in Nigeria. But in essence, the current state of the market highlights a conspicuous disconnect between the all-important “core project execution” and the trio of; (a) good intent from the government; (b) excellent development framework/plan and (c) the world class PPAs/terms.
Martin says “Even though the pace of activity within the on-grid solar space in Nigeria since the 2016 PPAs has been slow, there is capacity and capability on the part of the regulators. In spite of the excellent structure on paper - which is bankable - there are still a few questions to be answered within the sector.”
The Hurdles
The delays - and almost failure in some cases - of the 14 PPA can be traced back to a variety of challenges, from technical concerns to country-specific fiscal challenges that limit the ability of a certain class of developers to successfully close financing deals. Constraints also include investors’ questions relating to the governance of the Nigerian Electricity Supply Industry (NESI). With respect to governance and administration within NESI, Martin says that “there is still a lot to be done in terms of the structure and functioning of the Nigerian Bulk Electricity Trader (NBET) and the distribution companies.”
Rightly, the state of infrastructure and the financial status of most of the Distribution Companies (Discos) is a major clog in the wheel of the Nigerian electricity value chain. Which introduces a number of risks, including the so called “liquidity challenges” that ultimately affect generation companies in the upstream sector. Discos’ inability to meet their financial obligations exacerbated by poor metering systems and power theft constraints NBET in a number of ways.
"In January 2018, Nigeria announced a World Bank-financed 20 year transmission infrastructure development plan which will hopefully remove some of the barriers in that part of the value chain."
Also, the poor state of the transmission infrastructure for example has been a source of concern for many developers. This has led to situation where a good portion of the generated power is simply not being transmitted and utilized –eventually - due to poor wheeling capacity. While these are legitimate present day concerns, they are poised to get better in the short to medium term, should the Nigerian government and power sector leaders match recent words/plans with action. In January 2018, Nigeria announced a World Bank-financed 20 year transmission infrastructure development plan which will hopefully remove some of the barriers in that part of the value chain. The plan hopes to enhance the transmission infrastructure’s wheeling capacity from its present capacity of 7,125MW to 10,000MW by the year 2020 and on to 28,000MW by 2035.
Nigeria apparently needs to do more work to remain an attractive destination for solar investment. The country’s ability or inability to provide the needed support for the successful completion of the 14 proposed on-grid solar projects will be a crucial test for its future solar development plans and ambitions. If efforts, policies and contracts do not ultimately transform into tangible and well executed projects, investor interest and enthusiasm could wane, the country’s immense solar potential will be greatly underutilized and geometrically growing need for energy access would only get worse in the coming years.
