People & Money

Nigeria’s Large Off-grid Market Has Developed To Cope With Chronic Electricity Reliability—World Bank

A World Bank report has said that in Nigeria, a large off-grid market has developed to cope with chronic electricity reliability issues and currently provides about 80% of energy demand.

According to the report titled “Blended finance is a tool for scaling up African energy infrastructure investments” and authored by Emmelly Mutambatsere, it says that Nigeria plans to develop 13GW of off-grid solar PV capacity by 2030. Other countries will follow suit.

The report also stated that ‘Blended finance can catalyze renewable energy investments in low-income countries’

The Energy Sector Management Assistance Program (ESMAP) projects that by 2030, nearly half a billion people could be using electricity from mini-grids.

The structure of the off-grid market and its nascence offers challenges and opportunities for private sector investments. 

Unlike grid electrification, where large utilities typically operate under robust regulatory frameworks, off-grid systems must often operate under incomplete or ill-designed regulations.

Also Read: Nigerian Solar Provider Gets Additional $10M From Nordic Lenders

“Off-grid developers serve a fragmented customer base. Risk mitigation measures, such as long-term power purchase agreements, are generally lacking.”

“In Nigeria and elsewhere, off-grid solar energy providers face competition from a well-established diesel generator industry. Diesel suppliers typically enjoy longstanding customer relationships and easy access to capital. In contrast, off-grid solar projects often experience financing gaps, even in sun-rich locations.” It stated

It stated that Financing barriers for pioneering solar projects can range from lack of credit history to investors’ unfamiliarity with solar and battery solutions.

“Blended finance can mitigate risks on pioneering transactions and support long-term growth of the off-grid solar market in Africa.”

According to the report, Africa urgently needs to increase investment in electricity infrastructure.

About 570 million people in Sub-Saharan Africa lack access to electricity. Existing infrastructure cannot meet demand. Yet, the region currently accounts for just 4% of global power sector investments.

Achieving universal access to electricity by 2030 will require tripling annual customer increases.

Catalytic instruments like blended finance are critical for scaling up electricity investments in Africa. 
The construction of off-grid solar-powered electric facilities can expand African access to affordable clean energy.

Blended finance, which combines concessional public funds with commercial funds, can be a powerful means to direct more commercial finance toward impactful investments that are unable to proceed on strictly commercial terms. 

Blended finance has grown in the past decade. In 2021 it represented an aggregated financing of over $160 billion, with annual capital flows averaging approximately $9 billion since 2015.

One of the most compelling aspects of blended finance is that it uses relatively small amounts of donor funding to rebalance a project’s risk profile. 

With this small infusion of concessional funding, pioneering investments become attractive to private investors.

Private investment can be unlocked with blended finance

In emerging markets, the flow of private capital is constrained by investors’ perceptions of high risks and low returns. When investors perceive a high risk, either because of the pioneering nature of a project or a challenging environment, they tend to expect commensurately high returns. The desire for high returns can result in products or services being priced too high for consumers.

The strategic addition of blended finance to project financing structures can ease investor concerns.  Successful projects include the right combination of debt, equity or grant financing, the right seniority of investors in terms of absorbing losses and earning returns, and appropriate risk-mitigation products.

Blended finance has achieved notable success in Sub-Saharan Africa, attracting 61% of global concessional financing in 2020. Most of this financing supported climate-smart agribusiness.

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