Article Summary
- Clean energy investors face a number of risks in Nigeria, especially those associated with revenue losses.
- To improve capital availability, investors must overcome the currency of debt, the interest rate of financing, and risk diversity.
- Revenue assurance and natural gas development play roles in overcoming some of these risks.
In a May 2023 community paper by the World Economic Forum (WEF), some risks are highlighted as the challenges clean energy investors face in Nigeria. The WEF paper identified these risks as follows:
- Risk of loss or interruption to a business arising from government action such as confiscation, expropriation, nationalization, deprivation, currency inconvertibility and transfer risk, political violence, operating license/ concession agreement repudiation or cancellation, export embargo, forced abandonment, selective discrimination, forced divestiture, or arbitration award default
- Loss of revenues and interruption to the business due to the unavailability or inefficiency of the required transmission and distribution infrastructure.
- Loss of revenues or interruption of business due to a lack of expertise and resources to build, operate, and maintain the project infrastructure.
- Various forms of social opposition are due to the nature of technology and its associated reputational damage.
- Disruption to the project due to natural weather events, climate-related transition policies, or changes in human resource availability due to changing climate patterns and the associated liability and reputational risk of the project.
However, the WEF paper also highlights possible solutions to these risks, so clean energy investors can invest more in Nigeria’s clean energy sector. The solutions include:
Funding more projects with local naira to enable the growth of community-based developers
To improve capital availability and access, three elements need to be overcome. They are the currency of debt, the interest rate of financing, and risk diversity. Blended finance structures are crucial to building a local currency facility, drawing private investment, and attracting domestic institutional capital to aggregate clean energy and climate goal projects that have a reputation for higher perceived risk.
A local currency facility helps reduce overall credit risk, lower capital costs, and protect conservative capital from potential losses.
The WEF paper highlights InfraCredit, which provides local currency guarantees using a blended finance instrument and leverages pension funds to crowd in private capital.
Revenue assurances to support and fund large-scale solar projects
A revenue assurance fund could reduce off-taker risk by providing a level of financial security for investors by ensuring reliable and predictable revenue streams.
The revenue assurance fund can offer a stable tariff rate post-construction of the asset by providing a guarantee or insurance mechanism that protects investors from revenue fluctuations caused by changes in the tariff rate.
A guarantee mechanism would cover payment shortfalls during low electricity generation, low offtake, or low electricity usage and develop more predictable cashflows.
The WEF paper highlights the fact that the Presidency has appointed the Nigerian Sovereign Investment Authority (NSIA) to establish a Solar Stabilization Fund, which will aim to provide assurance and predictability of cash flows for these projects. It aims to help restart the 14 stalled solar PV projects and leverage carbon credits to support stalled DISCOs in solar energy projects.
Technical assistance accelerator programmes for solar entrepreneurs and developers
As the solar industry is a young market, it would benefit from the harnessing of local accelerators and training programmes to enable developers to gain practical skills in infrastructure project financing and development.
Such programmes would help reduce the uncertainty of large and small-scale projects and build more robust investment profiles, which has been a hurdle for many solar projects in Nigeria. According to WEF, the in-demand skills in this regard are:
- Project bankability
- Financial training & modelling
- Energy auditing
- Carbon financing
- Credit writing
- Dispute resolution
- Technical writing
- Solar project management & mini-grid training
- Solar plant engineering project training
- Construction & operation
The WEF paper highlights the Nigerian Energy Support Programme (NESP), which is a technical assistance program co-funded by the European Union, the German Government, and the Central Bank of Nigeria. The programme provides staff training and development to bridge the knowledge gap across the industry.
Policy recommendation to incentivize natural gas producers to prioritize domestic production
This can help align the interests and efforts of industry actors throughout the gas value chain and maximize efforts to improve the overall production process.
Industry actors would be able to maximize trade if the implementation of the pricing model outlined in the gas policy was monitored during bilateral sales while taking into consideration future and existing gas market pricing.
This recommendation is targeted at all states in Nigeria and will require federal support coupled with the private sector’s willingness to invest.