Leveraging finance for the Nigerian off-grid solar market

When I asked a table of Nigerian bankers whether corporate debt to finance solar off-grid and mini grid companies would find favor in local capital markets, they literally laughed at the idea. No, they said very clearly, there’s no mandate for green here, certainly not among the funds they represented, and off-grid solar was new and untested anyway.

Such reluctance of many local financial institutions (FIs) to invest has been a major impediment to the Nigerian solar off-grid market which lags compared to other African countries such as Kenya.

Consider:

• Over 80 million Nigerians lack electricity access — including nearly 60% of those in rural areas -- more people than any other African country.
• Nigerians spend an estimated $14 billion annually on small-scale diesel generators to offset poor or non-existent grid supply.
• Over 80% of Nigerian businesses cite electrification challenges as the most significant obstacle to doing business.
• Erratic power supply results in more than $25 billion in annual losses to the economy, more than 6% of GDP, according to Nigeria’s Power Sector Recovery Programme.

We recently visited Nigeria to analyze barriers to finance in the off-grid solar market. We’ve developed a taxonomy of finance models in the mini grid and off-grid solar sector to apply to Nigeria and partnered with the recently approved $350 million World Bank Nigerian Electrification Project (NEP). The NEP will leverage private sector investments in solar mini grids and standalone solar systems to provide electricity to 2.5 million people and 70,000 MSMEs, as well as publicly-funded reliable electricity to seven universities and two teaching hospitals.

In meeting with dozens of investors and solar companies in Nigeria, our team discovered a market in transition and poised for growth. On the investor-side, several FIs were planning to enter the market at scale while others were taking a wait-and-see approach. Overall, awareness and interest of local banks was definitely on the rise.

On the company side, almost all firms were bullish on the sector. Some firms, such as Lumos, have established operations with a visible brand and plans to scale. Others were start-ups with more innovative approaches, such as One Watt Solar which plans to apply blockchain technology to their offerings.

What role for the World Bank Group?
While solar mini grids and off-grid solar have potential to address Nigeria’s energy access deficit, market failures impede growth, and those most in need of access – the rural poor – will likely never be served on commercial terms. The World Bank estimates that in many rural areas, only 5-10% of the population can afford electricity offered at market prices.

However, by employing Maximizing Finance for Development (MFD) principles, the World Bank Group could help the sector grow in a timely way that ensures development impact through private sector leadership and leveraged commercial finance.

Among activities being considered through coordinated IFC and World Bank efforts are:

• Technical assistance to companies to build capacity for smaller local firms, the Nigeria Climate Innovation Center (NCIC) – part of the World Bank’s global network of CICs – was launched in August to provide technical assistance to companies and market development services.
• Targeted concessional financing. the Nigerian Rural Electrification Agency – supported by the World Bank NEP – will issue tenders for companies to provide solar mini grid and off-grid solar services and IFC can advise on the tender – including looking at structures from Scaling Solar – to maximize private participation.
• FI Capacity Building. Training, knowledge and capacity building for local banks will allow them to understand and enter the growing solar market.
• Quality Assurance Standards drawing from the World Bank Group’s Lighting Global program, quality standards for the Nigerian market will comfort both customers and investors on these relatively new products.
• Insurance Product to enable international debt. IFC is developing a credit insurance product to mitigate FX risk through securitization of receivables to bring foreign capital to the market.
• Design of Local Capital Fund for Solar Market. An open and transparent process to design a specialized fund could provide the vehicle for local capital investments in the sector.
• On-lending/risk-sharing Facilities to FIs with subsidized Solar Financing Carve-Outs. DFIs including IFC could provide on-lending/risk sharing facilities to banks for investment in the sector.

While the mix of World Bank Group finance and services provided is still being coordinated, there is an enticing model of combined interventions using MFD principles to drive private sector innovation and investment to address the development challenge of energy access.