Off-grid Nigeria: Unleash the Sun
The article below was printed in the July 2017 edition of PV Magazine. An online archive can be found on the pv magazine website.
[caption id="attachment_3462" align="alignnone" width="3408"]
Solar home systems like Lumos can provide affordable, reliable electricity to off-grid and on-grid customers in Nigeria. Source: Lumos Global.[/caption]
With the largest unelectrified population in Africa, Nigeria holds great promise for off-grid solar companies. Progress on electrifying the country can be accelerated by improving government policies.
Nigeria has the second largest unelectrified population in the world. Nigeria’s electrification rate stands at 57.7% according to the World Bank meaning 77 million Nigerians live without electricity today. Compared to other large economies in Africa, Nigeria has greater scope to improve its policies governing energy access according to the World Bank’s Regulatory Indicators for Sustainable Energy (RISE) report. Nigeria’s policies on energy access ranked 46 out of 55 countries globally; whereas, other large economies in Africa like Kenya, Uganda, Tanzania, and South Africa occupy ranks three through six.
Improving the policy environment in Nigeria presents a major opportunity to realize the government’s electrification goals. The government has mandated that Nigeria’s electrification rate reach 75% by 2020 and 100% by 2030 with at least 30% of power coming from renewable energy by 2030.
If the growth rate of the electrified population continues as it has over the last five to ten years, Nigeria will electrify only around 65% of the population by 2020 and 75% by 2030. To boost the electrification rate, the government must improve policies and streamline regulations to catalyze the growth of the off-grid solar sector.
A vast solar market
Nigeria has a vast off-grid market with large growth potential. According to the Global Off-Grid Solar Market Report for the second half of 2016, there were 150,000 solar home systems and pico-solar products sold in Nigeria. Over the same time period, four times that number of solar products were sold in Kenya. With an unelectrified population over twice the size of Kenya’s, Nigeria’s off-grid solar market remains largely untapped.
Beyond the 77 million Nigerians without electricity, there are millions of Nigerians with electricity that could also be served with a solar home system or solar lantern. According to a 2013 opinion poll, around 80% of Nigerians use alternate sources of electricity. The GIZ in Nigeria estimates that between 8 and 14 GW of decentralized diesel generator capacity is currently installed in the country.
The intermittency of the national grid provides an opportunity for solar home systems providers. Lumos, a pay-as-you-go (PAYG) solar provider, offers solar home systems larger than most competitors to attract on-grid as well as off-grid customers. Eitan Hochster, Director of Business Development at Lumos, told pv magazine, “millions of Nigerians rely on inferior electricity sources outside the grid, like kerosene lamps and diesel generators. These alternatives are expensive, inefficient, polluting, and noisy. We at Lumos are providing more reliable, higher quality, and cleaner electricity to customers, all while saving them money: two hours of electricity from a generator is the same price as 24-hours of electricity from Lumos.”
Solar products like those sold by Lumos can provide more affordable and reliable access to electricity for both on-grid and off-grid Nigerians.
[caption id="attachment_3463" align="alignnone" width="2048"]
Solar home system and solar lanterns can provide electricity access to the 77 million unelectrified Nigerians. Source: Solar Nigeria.[/caption]
Mobile money and PAYG solar
The high upfront cost of solar home systems is a barrier to many customers. PAYG companies allow customers to spread that upfront cost over several years. Often, PAYG companies use mobile money to process payments for their energy services.
The low penetration of mobile money in Nigeria has put higher barriers to entry for new PAYG entrants. According to a 2014 survey conducted by Enhancing Financial Innovation & Access, there were 0.8 million adults in Nigeria using mobile money, representing less than 1% of the population. This compares to around 27 million mobile money subscribers in Kenya – 58% of the population.
The low penetration of mobile money in Nigeria is largely due to the “bank-led” expansion of mobile money as opposed to the “telecom-led” expansion in Kenya. The telecom companies that have made mobile money widely available in Kenya are restricted from operating mobile money services by themselves in Nigeria. Only Nigerian banks are able to provide the mobile money services, but the banks have been focused on their wealthier, traditional clients. Nigeria banks are less interested in the lower margins they receive from mobile money transfer and have pursued the business less aggressively than telecom companies in Kenya.
To deal with the low penetrations of mobile money, Lumos has innovated around the problem. Lumos has partnered with telecom companies to process payments through airtime, the phone credit system on the telecom’s network. Once set up, the airtime payment system works similarly to mobile money. This partnership is a barrier to entry that protects existing PAYG companies by requiring new entrants to negotiate a similar partnership with telecom companies.
Unpegging the naira
To allow customers to spread the cost of a solar home system across a few years, PAYG companies need large amounts of working capital to finance their systems. As in most markets, financing remains one of the main challenges facing PAYG companies in Nigeria.
The mismatch between the company’s costs in US dollars and the revenues they receive in Nigerian naira puts PAYG companies at risk of fluctuations in the local currency. A year ago, Nigerian companies underwent a dramatic shock when the naira was unpegged from the US dollar. Over two months, the naira lost 36% of its value. Despite the shock, the Nigerian off-grid solar market continued growing in sales volume demonstrating its resilience.
Receiving debt in local currency from local banks eliminates this currency risk, though banks in Nigeria as in most of Sub-Saharan Africa are hesitant to lend to off-grid solar companies.
Through a partnership with MFX Solutions, Sunfunder, an off-grid lender, has started offering debt to off-grid solar companies in local currency, though it hasn’t stated which currencies it will offer. “Local currency loans have been a top need for our customers,” said Ryan Levinson, SunFunder’s Founder and CEO in a statement. “We’re excited to be able to provide new financial solutions and even more value to the sector.”
New minigrid regulations
Less developed than the solar home system market, yet equally promising is the market for solar-powered minigrids in Nigeria. The government has approved a new set of regulations governing minigrids that will accelerate village electrification. The regulation drafted in late 2016 has been approved by the legislature and are being reviewed by the Ministry of Justice before becoming law.
The regulation dramatically reduces regulatory burdens on minigrid operators by allowing them to operate without a distribution company license for projects below 1 MW. The regulation also provides a firm legal footing for minigrids to operate within Nigeria.
While a boon to the minigrid industry, the regulation should be further refined with amendments. Analysis by Nextier Power, an advisory firm, highlights areas where the regulation should set limits on the priority given to grid extension and better specify the options open to minigrid operators if connected to the national grid.
Under the regulation, minigrid developers must receive written consent from the distribution companies who operate the national grid when developing a minigrid within the distribution companies’ five-year grid extension plans. However, the regulation does not include measures to prevent distribution companies from creating sprawling grid extension plans to deny or slow minigrid development in large areas of Nigeria.
The regulation should establish penalties if the distribution companies do not extend the grid within the five-year window of the extension plans. It should also require distribution companies to justify their grid extension plans with the necessary financial resources. Nigerian distribution companies are widely seen as insolvent making this justification necessary.
Without these safeguards, the distribution companies could deny communities access to electricity from minigrids by creating wide-ranging grid extension plans that shut out competition from minigrids.
[caption id="attachment_3464" align="alignnone" width="3648"]
New regulations passed in Nigeria will accelerate minigrid development. Construction crews for Renewvia, a US-based minigrid developer, are constructing a solar project in the Niger Delta. Source: Renewvia.[/caption]
Minigrid, meet national grid
When the national grid has been extended to an existing minigrid, the regulation states that the minigrid operator can convert to an interconnected minigrid, or sell the assets it does not want to the distribution company. Specifying the legal rights of the minigrid operator when the grid arrives is critical to providing long-term assurances to minigrid developers and investors.
Currently, the regulations do not concretely specify how the minigrid assets will be evaluated and compensated if they are sold to the distribution company. Achieving a satisfactory return even when a minigrid is connected to the national grid is necessary to keep private sector interest in minigrid development.
Making reforms to the regulation to give more priority to minigrid developers will better accelerate electrification efforts. To have any effect on the minigrid industry, the regulation still needs to be passed into law.
When asked by pv magazine why Nigeria’s off-grid policy is insufficient, Okafor Akachukwu, Energy and Environment Editor of The Initiative for Policy Research and Analysis (InPRA), stated “While there are many complex and complicated reasons why the policy environment is so deficient, some specific reasons include: lack of an independent regulator. The work of the regulator is heavily interfered with by vested political interests. The regulator is also highly underfunded and policy makers are ignorant of their responsibilities.”
Trailblazing developers
The slow action on minigrid policy has left many interested investors and developers waiting on the sidelines. There are a few bold developers that are pushing ahead despite the uncertainty. Renewvia, a minigrid developer based in the USA, is in the process of developing around 65 minigrids throughout Nigeria. Renewvia was recently awarded a grant from the US Trade and Development Association to fund 30% of the feasibility studies for 25 minigrids. Renewvia will finance the village minigrids initially from their own balance sheet with some equity from outside investors. Trey Jarrard, CEO of Renewvia, told
Renewvia, a minigrid developer based in the USA, is in the process of developing around 65 minigrids throughout Nigeria. Renewvia was recently awarded a grant from the US Trade and Development Association to fund 30% of the feasibility studies for 25 minigrids. Renewvia will finance the village minigrids initially from their own balance sheet with some equity from outside investors. Trey Jarrard, CEO of Renewvia, told
Trey Jarrard, CEO of Renewvia, told pv magazine, “we believe very strongly in the economic and development opportunity that these minigrids represent.” Jarrard continued, “there are many investors from big development banks to local banks interested in shovel-ready projects. By being an early player in the market, we hope to capitalize on this opportunity.”
When asked by pv magazine if Renewvia was concerned by the policy uncertainty, Jarrard responded, “the Nigerian government has demonstrated a genuine interest in having private companies play a major role in rural electrification. As one of the first developers with projects in the ground, we hope to influence the maturation of the regulatory policy in the microgrid development space.”
If the government wants to reach its ambition electrification targets, it needs to catalyze growth in the off-grid solar sector through improve policy. Despite the uncertainty, pioneering companies are taking calculated risks to capitalize on the economic and social opportunities. In Nigeria, those opportunities are vast.
[caption id="attachment_3462" align="alignnone" width="3408"]
Solar home systems like Lumos can provide affordable, reliable electricity to off-grid and on-grid customers in Nigeria. Source: Lumos Global.[/caption]With the largest unelectrified population in Africa, Nigeria holds great promise for off-grid solar companies. Progress on electrifying the country can be accelerated by improving government policies.
Nigeria has the second largest unelectrified population in the world. Nigeria’s electrification rate stands at 57.7% according to the World Bank meaning 77 million Nigerians live without electricity today. Compared to other large economies in Africa, Nigeria has greater scope to improve its policies governing energy access according to the World Bank’s Regulatory Indicators for Sustainable Energy (RISE) report. Nigeria’s policies on energy access ranked 46 out of 55 countries globally; whereas, other large economies in Africa like Kenya, Uganda, Tanzania, and South Africa occupy ranks three through six.
Improving the policy environment in Nigeria presents a major opportunity to realize the government’s electrification goals. The government has mandated that Nigeria’s electrification rate reach 75% by 2020 and 100% by 2030 with at least 30% of power coming from renewable energy by 2030.
If the growth rate of the electrified population continues as it has over the last five to ten years, Nigeria will electrify only around 65% of the population by 2020 and 75% by 2030. To boost the electrification rate, the government must improve policies and streamline regulations to catalyze the growth of the off-grid solar sector.
A vast solar market
Nigeria has a vast off-grid market with large growth potential. According to the Global Off-Grid Solar Market Report for the second half of 2016, there were 150,000 solar home systems and pico-solar products sold in Nigeria. Over the same time period, four times that number of solar products were sold in Kenya. With an unelectrified population over twice the size of Kenya’s, Nigeria’s off-grid solar market remains largely untapped.
Beyond the 77 million Nigerians without electricity, there are millions of Nigerians with electricity that could also be served with a solar home system or solar lantern. According to a 2013 opinion poll, around 80% of Nigerians use alternate sources of electricity. The GIZ in Nigeria estimates that between 8 and 14 GW of decentralized diesel generator capacity is currently installed in the country.
The intermittency of the national grid provides an opportunity for solar home systems providers. Lumos, a pay-as-you-go (PAYG) solar provider, offers solar home systems larger than most competitors to attract on-grid as well as off-grid customers. Eitan Hochster, Director of Business Development at Lumos, told pv magazine, “millions of Nigerians rely on inferior electricity sources outside the grid, like kerosene lamps and diesel generators. These alternatives are expensive, inefficient, polluting, and noisy. We at Lumos are providing more reliable, higher quality, and cleaner electricity to customers, all while saving them money: two hours of electricity from a generator is the same price as 24-hours of electricity from Lumos.”
Solar products like those sold by Lumos can provide more affordable and reliable access to electricity for both on-grid and off-grid Nigerians.
[caption id="attachment_3463" align="alignnone" width="2048"]
Solar home system and solar lanterns can provide electricity access to the 77 million unelectrified Nigerians. Source: Solar Nigeria.[/caption]Mobile money and PAYG solar
The high upfront cost of solar home systems is a barrier to many customers. PAYG companies allow customers to spread that upfront cost over several years. Often, PAYG companies use mobile money to process payments for their energy services.
The low penetration of mobile money in Nigeria has put higher barriers to entry for new PAYG entrants. According to a 2014 survey conducted by Enhancing Financial Innovation & Access, there were 0.8 million adults in Nigeria using mobile money, representing less than 1% of the population. This compares to around 27 million mobile money subscribers in Kenya – 58% of the population.
The low penetration of mobile money in Nigeria is largely due to the “bank-led” expansion of mobile money as opposed to the “telecom-led” expansion in Kenya. The telecom companies that have made mobile money widely available in Kenya are restricted from operating mobile money services by themselves in Nigeria. Only Nigerian banks are able to provide the mobile money services, but the banks have been focused on their wealthier, traditional clients. Nigeria banks are less interested in the lower margins they receive from mobile money transfer and have pursued the business less aggressively than telecom companies in Kenya.
To deal with the low penetrations of mobile money, Lumos has innovated around the problem. Lumos has partnered with telecom companies to process payments through airtime, the phone credit system on the telecom’s network. Once set up, the airtime payment system works similarly to mobile money. This partnership is a barrier to entry that protects existing PAYG companies by requiring new entrants to negotiate a similar partnership with telecom companies.
Unpegging the naira
To allow customers to spread the cost of a solar home system across a few years, PAYG companies need large amounts of working capital to finance their systems. As in most markets, financing remains one of the main challenges facing PAYG companies in Nigeria.
The mismatch between the company’s costs in US dollars and the revenues they receive in Nigerian naira puts PAYG companies at risk of fluctuations in the local currency. A year ago, Nigerian companies underwent a dramatic shock when the naira was unpegged from the US dollar. Over two months, the naira lost 36% of its value. Despite the shock, the Nigerian off-grid solar market continued growing in sales volume demonstrating its resilience.
Receiving debt in local currency from local banks eliminates this currency risk, though banks in Nigeria as in most of Sub-Saharan Africa are hesitant to lend to off-grid solar companies.
Through a partnership with MFX Solutions, Sunfunder, an off-grid lender, has started offering debt to off-grid solar companies in local currency, though it hasn’t stated which currencies it will offer. “Local currency loans have been a top need for our customers,” said Ryan Levinson, SunFunder’s Founder and CEO in a statement. “We’re excited to be able to provide new financial solutions and even more value to the sector.”
New minigrid regulations
Less developed than the solar home system market, yet equally promising is the market for solar-powered minigrids in Nigeria. The government has approved a new set of regulations governing minigrids that will accelerate village electrification. The regulation drafted in late 2016 has been approved by the legislature and are being reviewed by the Ministry of Justice before becoming law.
The regulation dramatically reduces regulatory burdens on minigrid operators by allowing them to operate without a distribution company license for projects below 1 MW. The regulation also provides a firm legal footing for minigrids to operate within Nigeria.
While a boon to the minigrid industry, the regulation should be further refined with amendments. Analysis by Nextier Power, an advisory firm, highlights areas where the regulation should set limits on the priority given to grid extension and better specify the options open to minigrid operators if connected to the national grid.
Under the regulation, minigrid developers must receive written consent from the distribution companies who operate the national grid when developing a minigrid within the distribution companies’ five-year grid extension plans. However, the regulation does not include measures to prevent distribution companies from creating sprawling grid extension plans to deny or slow minigrid development in large areas of Nigeria.
The regulation should establish penalties if the distribution companies do not extend the grid within the five-year window of the extension plans. It should also require distribution companies to justify their grid extension plans with the necessary financial resources. Nigerian distribution companies are widely seen as insolvent making this justification necessary.
Without these safeguards, the distribution companies could deny communities access to electricity from minigrids by creating wide-ranging grid extension plans that shut out competition from minigrids.
[caption id="attachment_3464" align="alignnone" width="3648"]
New regulations passed in Nigeria will accelerate minigrid development. Construction crews for Renewvia, a US-based minigrid developer, are constructing a solar project in the Niger Delta. Source: Renewvia.[/caption]Minigrid, meet national grid
When the national grid has been extended to an existing minigrid, the regulation states that the minigrid operator can convert to an interconnected minigrid, or sell the assets it does not want to the distribution company. Specifying the legal rights of the minigrid operator when the grid arrives is critical to providing long-term assurances to minigrid developers and investors.
Currently, the regulations do not concretely specify how the minigrid assets will be evaluated and compensated if they are sold to the distribution company. Achieving a satisfactory return even when a minigrid is connected to the national grid is necessary to keep private sector interest in minigrid development.
Making reforms to the regulation to give more priority to minigrid developers will better accelerate electrification efforts. To have any effect on the minigrid industry, the regulation still needs to be passed into law.
When asked by pv magazine why Nigeria’s off-grid policy is insufficient, Okafor Akachukwu, Energy and Environment Editor of The Initiative for Policy Research and Analysis (InPRA), stated “While there are many complex and complicated reasons why the policy environment is so deficient, some specific reasons include: lack of an independent regulator. The work of the regulator is heavily interfered with by vested political interests. The regulator is also highly underfunded and policy makers are ignorant of their responsibilities.”
Trailblazing developers
The slow action on minigrid policy has left many interested investors and developers waiting on the sidelines. There are a few bold developers that are pushing ahead despite the uncertainty. Renewvia, a minigrid developer based in the USA, is in the process of developing around 65 minigrids throughout Nigeria. Renewvia was recently awarded a grant from the US Trade and Development Association to fund 30% of the feasibility studies for 25 minigrids. Renewvia will finance the village minigrids initially from their own balance sheet with some equity from outside investors. Trey Jarrard, CEO of Renewvia, told
Renewvia, a minigrid developer based in the USA, is in the process of developing around 65 minigrids throughout Nigeria. Renewvia was recently awarded a grant from the US Trade and Development Association to fund 30% of the feasibility studies for 25 minigrids. Renewvia will finance the village minigrids initially from their own balance sheet with some equity from outside investors. Trey Jarrard, CEO of Renewvia, told
Trey Jarrard, CEO of Renewvia, told pv magazine, “we believe very strongly in the economic and development opportunity that these minigrids represent.” Jarrard continued, “there are many investors from big development banks to local banks interested in shovel-ready projects. By being an early player in the market, we hope to capitalize on this opportunity.”
When asked by pv magazine if Renewvia was concerned by the policy uncertainty, Jarrard responded, “the Nigerian government has demonstrated a genuine interest in having private companies play a major role in rural electrification. As one of the first developers with projects in the ground, we hope to influence the maturation of the regulatory policy in the microgrid development space.”
If the government wants to reach its ambition electrification targets, it needs to catalyze growth in the off-grid solar sector through improve policy. Despite the uncertainty, pioneering companies are taking calculated risks to capitalize on the economic and social opportunities. In Nigeria, those opportunities are vast.
