The renewable energy sub-sector has immense potential of contributing significantly to the nation’s energy sector. However, the sub-sector can be metaphorically equated to a sleeping giant because of the nation’s inability to harness the low-hanging benefits of the renewable energy technologies because of the lack of funds/investments, innate risks involved and government’s inability to derisk the sub-sector. In this interview with NKECHI ISAAC, the president of Renewable Energy Association of Nigeria (REAN), Dr. Segun Adaju proffers solutions on how government can save the sector and help renewable energy players reach financial closure. The excerpts.
What’s your background in the renewable energy sector?
Segun Adaju: A renewable energy expert and consultant. I come with over 12 years of experience in the renewable energy sector. I run a company called Consistent Company and I am also the president of Renewable Energy Association of Nigeria.
I bring my over 20 years banking experience into the sector in trying to create financing solutions because 50 per cent of all the challenges we have in that sector is around finance, right from the project development to consumer finance and the rest.
What is the major challenge in Nigeria not developing the renewable energy to contribute to power sector development?
For me as a private sector player, I see the major challenge as access to finance, although there are so many other challenges that also tilt into finance. So, there are other challenges that make access to finance more difficult but if we are able to crack the code of access to finance, we would have solved more than 50 per cent challenge that we have in the country in developing the sector. So, finance for project development, equipment importation, up to developing the project, up to end-user finance, for example a solar system might cost about a million naira and you are expecting the end user to pay up front but he might want a financing structure that will make it affordable so he prefers power as a service.
So, as a project developer, you need bulk money, you need to get the one million times the number of people you want to do project for and roll out while you wait for the customer to pay over the period of three/four/five years. In fact, in the big project, power payment agreement can go on as far as 20/25years. So, you need bulk money to do the project now and wait 20 years to recover your money, that’s the challenge I mean.
In 2016, the Federal Government gave concession to about 14 companies to contribute solar power towards the development of the renewable energy sector, what is the update on this project?
You are correct, in 2016 14 companies were licensed by the Nigerian Electricity Regulatory Commission (NERC) to generate solar that will be connected to the national grid across several parts of Nigeria, Kaduna, Katsina, Enugu and they were expected to have reached financial closure by now and break ground but they haven’t in the past five years. A leading problem is what we call financial closure, so, they have been unable to bring the business to a point where investors are willing to put money because of various risks.
For instance, the power purchase agreement signed with NBET, they want some kind of partial risk guarantee that will cover them in case NBET cannot pay or the PPAs asking federal government to give them a guarantee in form of protocol option agreement. However, the government and NBET refused to sign the agreement because they reckon, they are going to assume too much risk. Or even if they sign the agreement, they want the risk to be denominated in naira and meanwhile 95 per cent of the 14 companies’ transactions are done in dollars. So, they are being asked to take the foreign exchange risk.
So, what is the way forward for this project?
The way forward for me as a banker, financial advisor in the renewable energy space is to look for a financing framework that will work. A typical example was a case study of what the African Finance Cooperation and the Green Climate Fund were trying to put together called the Nigerian Solar IPP Programme. That was supposed to derisk about 400 megawatts out of the 1,125. The structure was to have funding from African Development Bank (AfDB), African Finance Corporation, Green Climate Fund in partnership with local financial institutions that will also put their own risk in naira and then they are able to seal that deal and make it happen.
The other is to alleviate/assure investors that the fear they have about the ecosystem is not conducive for investment, sanctity of contract is a suspect and they are not guaranteed, that is they generate electricity they will not get paid given the credit risk rating of NBET. So, if we want to move forward, we must be able to derisk that sector and ensure investors bring money and they can see the pathway to recover their investments. If that is done, we will be able to get over this challenge.
How can government do by way of derisking the sector?
Well, number one is respecting the sanctity of contract as I mentioned above. As long as we see government reneging in contract, changing the rules midway it will be difficult to get investors’ interest in Nigeria. We also have to make the system look very structured around institutions instead of around persons. Nigeria somehow is still revolving around people instead of structured institutions. So, if we are able to get that done people will be interested in bringing investments into the sector and Nigeria generally.
We also expect that government should make available a partial risk guarantee by signing the protocol option agreement with these guys, investors can also derisk in naira for dollar. If you’re saying if NBET defaults federal government should pay and then FG and NBET can sign an agreement that clearly states they will pay in dollars. De-risking the sector is what we need to do and government has a lot of roles to play in that.
Nigerians are largely ignorant of how using cleaner energy can mitigate the effect of climate change caused by human activities. What is your association doing in terms of educating the people on the importance of clean energy?
REAN since 2016 has tried to do a lot of stakeholder engagements, awareness creation, partner with investors, development partners and funders just to try and create awareness on the value of renewable energy technologies. Of course, we are also limited by funding because the association is made up of companies in the renewable energy sector and most of them are still more focused on developing the business but I agree there’s a lot of awareness we need to make because a lot of people believe that solar does not work. So, we need to create a conversation that shows clearly that solar works.
What are the opportunities available in the sector and how can Nigeria and Nigerians tap into these opportunities?
The opportunity is huge, let’s look at the market size alone. For instance, Nigeria has the biggest market in Sub-Saharan Africa for renewable energy because we have the highest number of people not connected to the national grid or who don’t have access to energy. So, we have massive renewable energy technology and resources that can be deployed in Nigeria – wind, biomass, small hydro, solar, so, the market is huge.
Number two, we already have a model somehow that people are running on that we can ride on. For instance, people are powering themselves with generators and they are producing three or four times what the national grid is producing. So, if you have business models that can replicate what people are already used to then we can scale.
Financing companies and banks also need to start playing into that field. For instance, banks finance leasing for generators, cars, furniture, freezers, fridge, television, why can’t they think of that model also and replicate it in solar. They can learn about it if they don’t understand the sector because they learn about a new market before venturing into any, learn the risks involved and de-risk it.
In term of contribution to the nation’s GDP, what do you think the renewable energy sector, particularly solar can bring to the table?
Firstly, there will be increase in productivity. One of the challenges we have in Nigeria is very low productivity across almost all the sectors. Let me take agriculture for example, the yield from one hectare of cassava farm in countries like Kenya, Israel is far higher than what we get per hectare here in Nigeria because our method of production is either crude or not modern. We don’t have energy to process and do some many other things like irrigation or even greenhouse farming. So, energy can boost productivity and that alone can also increase our GDP.
Energy can help create more jobs. So, there is increased productivity, you can hire more people, increase income, reduce unemployment, those are value propositions. Education can be definitely improved when you have light for people to read, study, access materials online and the rest. In fact, energy access is win-win, if we’re able to crack the code it would significantly add to our GDP.