Nigeria’s Renewables Market: Opportunities and Development for Solar PV


Since the deregulation of the electricity sector in 2005 through the Electric Power Sector Reform Act (EPSRA), Nigeria’s energy market has made attempts to diversify its oil dependent energy sector. However, it was the recent economic crisis that forced the Federal Government of Nigeria to review the sector more intensively and initiate steps towards opening opportunities in renewable sources, particularly solar.

 The government has big ambitions documented in its “30:30:30 electricity vision” that aims to generate 30 GW of installed on-grid electricity capacity by 2030, of which 30% of total energy capacity is to be covered by renewables. The largest source and potential to meet its target lies with solar energy, spurring the Federal Government to initiate significant developments in regulatory and legal frameworks to improve investor confidence and private investment in the market. These ambitions have led to the realisation of 14 signed Power Purchase Agreements (PPAs) (listed below) in 2016 with local and international utility-scale developers that are expected to add 1,200 MW of solar capacity to the grid.

The volume of developers in the country’s first round of solar PPAs is not a surprise when the excess demand and solar potential of Nigeria are put into perspective. Nigeria boasts one of the largest populations in Africa with an estimated 182 million people (as of 2015). Of said 182 million, approximately 60% of the population don’t have access to stable or any electricity, and those that do only have a per capita electricity consumption of 151kWh per year; in comparison, Ghana has a per capita electricity consumption 3 times higher than Nigeria and South Africa’s electricity consumption is 30 times higher (Heinrich Böll Stiftung Nigeria, 2017). Nigeria only has an installed generation capacity of 12,000 MW, and to meet the electricity demand for the total population Nigeria’s power ministry estimates that about 40,000 MW is required. The excess demand thus offers ample opportunities for solar expansion that will improve the social and economic conditions of Nigeria.

In addition, Nigeria holds abundant solar resources, lying in a high solar radiation belt with an average solar irradiation of 2011 kWh/ m2 per year. With a horizontal irradiation of 7 KWh/m2 per day the North possesses the most potential for large-scale solar PV projects in the country. Although on a smaller scale, the south itself has promising potential with an irradiation of 4 kWh/m2 per day and several residential, social and commercial off-grid projects being implemented. High irradiation levels in Nigeria have researchers believing that if just 1% of land area was covered by PV modules (approx. 920 km2) Nigeria could potentially produce about 207,000 GWh per year (Heinrich Böll Stiftung Nigeria, 2017); equivalent to 4.66 million barrels of oil per day.

Nigeria has the potential to lead in utility scale solar power in Africa, given its well- structured regulatory frameworks, the standard of which is mostly absent in many other African countries.“Justin Woodward, COO, JCM Power (Solarplaza 2016)

The Federal Government of Nigeria have made strategic steps to support the development of Nigeria’s burgeoning solar market. The first of these was the incorporation of the Nigerian Bulk Electricity Trading (NBET) in 2010 as part of the Federal Government’s roadmap for power sector reform towards full implementation of EPSRA. With a capitalisation of USD 800 million, the NBET is responsible for buying power from Independent Power Purchasers (IPPs) and the reselling of power to the distribution companies. They enter PPAs with power generators and are positioned as a credit-worthy counterpart for generation projects.

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A renewable energy Feed-in-Tariff (Re-FiT), was also introduced by the Nigerian Electricity Regulatory Commission (NERC) in 2012 to reduce costs associated with negotiating and signing PPA’s for small renewable generators (30 MW or less). The Re-FiT regulations provide market stability through guaranteed long-term power pricing schemes, quick access to the grid and streamlined licensing procedures. It also determines the procedure for auctions of larger projects (above 30 MW), reducing negotiation timelines to a maximum of 6 months.

The added benefit of the introduction of RE-FiTs is the government’s obligation to purchase 50% of power generated by renewable plants, whilst electricity distribution companies (Discos) are obliged to source the other 50%. Tariff costs in general have significantly lowered over the years, but the tariff system for renewables adds a competitive edge to match the country’s energy demand.

In 2015, a Power Production Tax Credit was established for power generating companies. These include 5-year tax holidays guaranteed for renewable energy enterprises and manufacturers from date of commencement, and extends to dividend income derived from renewable investments. Importers of renewable and energy efficient equipment and materials are also eligible for a 0% customs duty for 2-years.

Progress in Nigeria’s regulatory framework for renewables has produced positive results and attracted investments totalling over USD 1.76 billion from international developers

Developing large or medium utility scale projects in Nigeria are capital intensive with long pay back periods, but there is fast progress in costs declining. An IRENA (2016) study on solar PV estimated total installation costs in Africa for 2016 ranged from USD 1,200 per kW to USD 4,900 per kW. Narrowed down to West Africa, project sized between 1 – 100 MW are expected to have total installed costs of USD 1,200 to USD 2,100 per kW by 2018 compared to a range of USD 1,600 to USD 5,900 per kW reported in 2016. I assume that along with the regulatory developments in the market Nigeria will equally benefit from the trend of declining investment costs. Regarding PPA prices, the 14 PPA agreements signed with the NBET will last 20 years and sell the power generated at USD 0.115 (EUR 0.0978) per kWh. From a consumer’s point of view the NBET-agreed tariff seems high but it has proven to be price competitive to the daily costs incurred by consumers who rely on generators. The USD 0.115 per kWh tariff and 20-year agreement are expected to encourage more market entry from project developers interested in Nigeria’s electricity sector.

Bankability and credit-quality are supported through the various forms of credit enhancement products the Nigerian market offers, including the NBET whom provide payment security. The World Bank and African Development Bank, additionally offer partial risk insurance in Nigeria’s power market. The World bank, IFC and MIGA launched the Power Sector Guarantees Project (PSGP), a package of loans and guarantees supporting energy projects, in Nigeria which has to-date approved power projects totalling approximately over USD 1 billion. This however is limited as DFI assistance with guarantees is arguably only accessible to 3 out of 10 projects they are approached with.

A financing hurdle lies in determining levelised cost of electricity (LCOE). Lack of LCOE data subsequently makes O&M costs likely to be high and vulnerable to several factors. Labour costs in Nigeria are low, and the same can be said for the number of skilled labour trained to operate and maintain solar PV facilities. The absentia of skilled labour and Nigeria’s vulnerability to devaluations affects the affordability of solar PV as asset managers will be compelled to procure solar components and talents using foreign currency at prohibitive costs. Nigeria also possesses several hazards that can easily damage equipment, making capital items more expensive if repairs or replacements are required. Other factors to be considered for influencing the cost of O&M include security concerns in the north from militant and hostile local communities.

Poor financial incentives, fiscal economy and existing infrastructure remain bulwarks to PV development

Nigeria still has several challenges to overcome to make the solar PV market a success. Major drivers behind this are the need for better financial incentives and transmission upgrades.

Despite the trend in falling capital costs in recent years, they remain relatively high in Nigeria. Solar project financing has largely been led by foreign financiers due to high interest rates and strict guarantee requirements. In 2016, commercial bank rates ranged between 23% – 29% whilst rates from the Central Bank of Nigeria stood at 11% per annum (RECP 2016). Nigeria’s Bank of Industry has presented intentions to commit to providing loans at rates of 7% or below, but are still far from being realised for renewables at both provision of finance and uptake.

The progress of potential and newly approved PPA projects, even those that have passed credit committee with DFIs, are held up by the fiscal challenges of the country. The effects of the recession still limit government’s ability to provide direct guarantees, which in turn limits investors hedging options. As a result, some investors are forced to, or wilfully opt to, wait for the power sector recovery plan to produce positive effects.

Poor transmission infrastructure and an unreliable network system are also bottlenecks to the success of solar PV in Nigeria. The existing grid presently cannot accommodate the estimated 6,000 MW of power being generated. Obsolete substation equipment, high technical and non- technical losses, and service providers’ inability to effectively evacuate power generated by the Gencos put major constraints on utility scale solar PV. The saving grace in this challenge is the Federal Government’s acknowledgment of the inefficiencies in the grid, and commitment in upgrading of the transmission network with USD 1.5 billion raised in 2014. The upgrades are expected to develop a grid that has the capacity to efficiently evacuate all power generated, increase reliability to at least 99.9% through the creation of network redundancies, and reduce transmission losses to less than 5%.

Key ingredient for success in Nigeria’s solar PV venture is the government’s commitment to strengthening and enabling the market

Nigeria has large solar irradiation levels, and if fully realised could successfully meet the country’s underserved energy demand. The ongoing market trend in cost reductions act favourably for the developing country and potential investors as solar PV technology becomes more affordable. But the key ingredient to solar PV success in Nigeria is the government’s commitment to the market. Improvements in the standard of regulations that govern solar power projects are proving critical in reducing the risk-return profile of projects and have enhanced the country’s attractiveness to investors. The entry of international developers and planned projects are also expected to carry a positive knock-on effect for future investors. The challenges highlighted for solar PV appear high in the short term, but with the government acting as a counterparty investors are still willing to unlock the potential Nigeria holds. If the Federal Government continues with its current momentum, the solar PV market in Nigeria will continue to grow stronger.

Source: IWIN

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