Renewable energy is key to the development of Nigeria’s power sector especially for the replacement of fossil fuels, which have become much a talk globally for contributing to climate change.
Global investments in new renewable power have grown from less than $50 million a year in 2004, to around $288 billion a year by 2018, according to a report by Bloomberg New Energy Finance and the UN Environment Programme.
Emerging and developing markets, in particular China, have been attracting most of the renewable investments since 2015, accounting for 63 per cent of those in 2018. India, Brazil, Mexico, South Africa and Chile have also seen sizeable chunks of financing, according to the report.
Indeed, all around the world it seems that banks are becoming increasingly aware of the need to boost their exposure to clean energy, a sector that’s becoming increasingly difficult to ignore.
But despite these finance surges, there is still a vast gap between what is being supplied and what is needed.
Energy consumption patterns in the world today shows that Nigeria and indeed African countries have the lowest rates of consumption.
There are several reasons for this.
According to a report, an estimated 27.9 million households and 10.6 million MSMEs have a critical need for access to electricity in Nigeria.
One of these impediments is financing: underdeveloped financial sectors are unable to efficiently channel loans to RE energy fabricator.
Tackling energy poverty, expanding access to clean energy and meeting UN SDG 7 is ultimately highly capital intensive and requires huge long-term investment.
The insufficiency of funds has unarguably been the biggest set-back for Nigeria’s power sector.
In my chat with industry sources, a minigrid developer said there is a lack of information and awareness about the benefits and need of renewable energy on the part of the banks.
In his words, “The banks don’t understand the sector hence their reluctance. They’ve been treating the sector the way they’ve treated the oil and gas industry. But they’re not the same.
So, that lack of understanding is the biggest barrier. If they understood the sector, they’d not give the same requirement that they’ve been given the oil and gas industry.
Another major challenge has been the issue of collateral. These investments are not small investments.
As a minigrid developer, you want to do just 100 kw of electricity. Today, you’ll need about N80 million ($195,000).
A young person that wants to do a minigrid of that capacity and is asked to bring collateral worth N80 million. Where will he get it?
On the other hand, the intervention funds available are not being fair to the commercial banks.
The cbn may provide an intervention fund but they want the banks to securitize it against their reserve. This means that if there’s any loss, the banks bear it. So, this makes the banks wary”, he added.
A senior executive at one of the largest banks by asset in Nigeria said balancing the desire to lend to the sector with not losing depositors’ funds is a major concern.
“We want to lend to the renewable energy industry but at the same time, we can’t lose depositors’ money. We will still be penalized by the same central bank if we are reckless.
How do we maintain that balance that does not make us reckless and at the same time gives us the impetus to lend to the sector?
To maintain such, the most critical factor is still the knowledge of the sector.
There are various incentives out there that should reduce the level of risk. Even international organizations that are non-profit such as GIZ, USAID, Power Africa are doing quite a lot to derisk the sector and motivate the commercial banks to lend more. But the fact remains that because the sector is nascent, we are naturally careful,” she said.
Solving the financing challenge requires sector wide approach.
Developers need to adopt innovative deployment models with tailored consumer payment plans to ensure affordability.
For the banks, increasing their capacity for renewable-energy lending would appear to be a logical step to take, while placing climate change within their sustainability and risk-management frameworks.